Tech Stocks Pummeled, Again

Lehman Brothers threw a wrench in the gears of the technology stock rally today by issuing a negative statement about Cisco Systems (CSCO). Shares of the closely followed technology leader dropped after Lehman Brother's analyst Tim Luke lowered his 12-month price target for Cisco Systems to a range of $60 to $65. His previous target price had been $90. He expressed concerns about the possibility that Internet companies will slow down their technology spending.

The comments had a chilling effect on the technology sector, particularly those companies that manufacture the equipment necessary for building the Internet infrastructure. Shares of CSCO fell $2.63 to $48.06, as it slipped below the important $50.00 support level. Many market watchers believe that as Cisco goes, so goes the broader NASDAQ. If this is true, then the NASDAQ may have a hard time rallying if Cisco cannot get its act together.

For the day, the NASDAQ (COMPX) dropped 87.03 points to 3191.33. At its worst levels, the NASDAQ was down 129.12 points. Volume was light with only 1.17 billion shares traded. Decliners clipped gainers by a 23 to 15 ratio.

There was some value buying over on the NASDAQ, as the winners on the most active list were former favorites that have been knocked well off their highs recently. Worldcom (WCOM) gained $2.81 to $24.88, Dell Computer (DELL) sneaked $0.88 higher and Applied Materials (AMAT) bounced higher $1.50 to $49.63.

Learning Tree (LTRE) was a big winner after Merrill Lynch upgraded the stock to Near Term Buy from Near Term Accumulate. LTRE was up $9.63 to $42.00 on nearly five times average daily volume.

Internet Infrastructure stocks were among the hardest hit NASDAQ components. JDS Uniphase (JDSU) fell again despite posting solid earnings last week. Shares of JDSU fell $5.94 to $71.31. Juniper Networks (JNPR) also went along on the Cisco smash, as it dropped another $14.63. Ciena (CIEN) was also crushed to the tune of $13.69 to $90.69.

Traders looking for an excuse to sell fiber optic stocks got one today, as an industry report issued by telecom analysts Ryan, Hankin & Kent confirmed suspicions that the sector will begin to see a decline in its growth rate. According to RHK, North American sales estimates are calling for $20.6 billion in 2000, which compare nicely to 1999 sales of $12.3 billion. The 67.5 percent growth is expected to slow next year, which is calling for total sales of $29.3 billion, which is "only" an increase of 42%.

The Dow Jones Industrials (INDU) powered higher all day and finished with a nice gain of 245.15 to 10,835.77, which was only 30 points off its high for the day. Volume on the broader NYSE was only 770 million shares. Winners outpaced decliners on a 16 to 12 basis.

The Dow was driven by gains in Microsoft (MSFT), which was up $1.38 to $69.06. Citigroup (C) highlighted a good financial sector, as it picked up $1.31 to $51.56. Alcoa (AA) surged $3.25 to $28.25, as it led a very strong day for cyclical stocks. Meanwhile, International Paper (IP) moved up $2.75 to $36.00 and DuPont (DD) rallied $2.69 to $45.00.

Wellpoint Health Networks (WLP) was one of the strongest NYSE stocks, as it extended HMO gains from last week. WLP was up $7.50 to $121.50. Delta Airlines (DAL) led a very strong transportation sector soaring $4.44 to $47.69 due to OPEC's agreement to release an additional 500,000 barrels of oil a day, which, in theory, should relieve some of the oil price pressure.

Corning (GLW) led NYSE losers, dropping another $5.00 to $71.00 as investors continue to pound fiber optic companies. Storage solutions leader EMC Corp (EMC) was also notably weak falling $4.38 to $84.44. Keithley Instruments (KEI) rounded out a bad day for technology companies, as it fell $6.00 to $50.88.

Most of the broader indices were able to rally despite the drop in technology shares. The S&P 500 (SPX) enjoyed a solid gain of 19.05 points to 1398.65. It was closely followed by the S&P 100 (OEX), which picked up 6.6 points to 732.78. The Russell 2000 was also a winner with a 2.87 point gain to a close at 482.72.

There was a relatively minor takeover this morning that may, nevertheless, help to heat up the Internet sector. Primedia (PRM) a publisher of 250 consumer and trade magazines and the operator of the Channel One network that beams into classrooms around the country will buy About.com (BOUT) which hosts some 700 Web sites. Primedia believes the deal makes sense because it will save them millions in start up costs and save years of time. Primedia further believes that the deal will be accretive to earnings within twelve months. About.com shareholders will receive 2.3409 Primedia shares for each BOUT share and at the time of the announcement the deal places a market value for About.com at $690 million. Shares of BOUT traded as high as $28.75 before settling in with a small gain of $0.31 to $24.19. PRM dropped $3.81 to a close at $11.44.

Treasurys saw a bit of a divergence, as the 10-year note lost 1/8 to close with a yield of 5.73%. Meanwhile the 30-year bond rallied a quarter point to establish a new yield of 5.75%.

In an economic report released this morning, the Commerce Department said consumers increased spending in September by 0.8% to $6.866 trillion. Spending accelerated from the 0.5% rise in August. Although some of the increase can be attributed to higher fuel costs, the numbers are a clear indication that consumers continue to spend at a healthy pace. With incomes only rising by 0.4%, the report implies that consumers are dipping into savings to satiate their shopping appetites.

On the economic calendar, look for the September New Home Sales report at 10:00 AM EST. Sales are expected to come in at 900K, which would be a slight increase over August.

Finally we can see the light at the end of the tunnel. November could not come any quicker. The NASDAQ is still in a decided slump, as it appears that institutional investors continue to doctor their performance by dumping just about any stock they have a profit in. Thankfully, this window dressing should end tomorrow. There has been a little buying among the value stocks but this is likely to be a short-term trend. Once the market starts moving higher, fund managers will be jumping all over each other to snatch up the latest "hot" stock in order to keep their returns in line with their peer's. This lemming like behavior has characterized the market for several years now. Value investors have been a dying breed for at least ten years and managers are unlikely to outperform their peers by concentrating on these stocks. At the very least, momentum buying has been rampant at the end of the past few years and there is no reason to think it will not happen again unless we are entering a completely different kind of market trend.

Despite today's sell off, the NASDAQ is still in a consolidation mode, as it appears to have made a significant bottom. There is major support just above 3000. The MACD is still positive. Be careful, though, because this indicator will issue a sell signal if we get some more weakness, otherwise you could probably buy into strength, as the NASDAQ is most likely to test resistance of 3500.

Today's powerful Dow rally has actually made this index just a little bit overbought in the very short term. The round number of 11,000 is clearly the major resistance. It does not seem likely that we will fly through this resistance right away. A couple of days of consolidation with mild pullbacks could be exactly what the doctor ordered to help this index gather enough strength to make its next move. The MACD is very strong and as long as it stays in buy signal territory you can probably buy mild dips. 11,500 could easily be seen in a week or two. Keep an eye on support just above 10,500.

Good Luck! And may all of your trades be winning ones!