Everyday is Groundhog Day for the Chips

Traders woke up, stuck their heads out from under their blankets, looked around and decided, yes, we like the semis today. Yesterday, recall, they hated them. It's day-to-day, shadow or no shadow for the chip stocks. Traders did not see their shadows today (spring is coming for the chips) namely because Intel (INTC) reported in its Wednesday analyst meeting that it is on track to achieve long-term revenue growth of 18%. Intel also soothed edgy traders by saying that they are on target to meet their projected sequential growth rate of 4-8%. The stock finished up $1.81 to $46.69.

Just yesterday traders reacted to warnings out of Altera (ALTR) that the company will be hard pressed to meet their 12-15% growth estimates for the fourth quarter. I've said it many times in these pages before that the semiconductor stocks need to perk up before the NASDAQ can make any sustainable climb. Until semiconductor traders stop making like Punxsutawney Phil, the NASDAQ will most likely remain stuck in a choppy range.

In other news today, Oracle shares (ORCL) took a wild ride amidst swirling rumors that Jeff Henely (CFO) and Larry Ellison (CEO and worlds 2nd richest man next to Mr. Gates) were leaving the company. ORCL recouped most of its intraday losses, but still closed down $1.81 or 5.78%, to $29.56 after the rumors were firmly denied by a company spokeswoman. To add to the controversy, the NASDAQ may move to cancel trades made earlier in the day, reportedly not in relation to the rumors.

As it turns out, we aren't the only ones unsure about where to put our hard earned cash in this crazy market. Trim Tabs, the mutual fund research firm, reported today that cash positions within U.S. mutual funds at the end of September 2000 topped 5%. The last time cash breached 5% of assets was in November of 1998. Cash positions within mutuals peaked in September of 1988 (the last market bottom) at 5.9%. When this green hits the market, and it has to (most funds, per their guidelines, don't allow cash positions much over 6%), be ready with your list of stocks to buy. As the old saying goes, "A rising tide lifts all boats".

Tuesday's Happenings:

We saw some solid action out of the indicies today. As I look out my office window and back to my screen, I see much of the same (reds mixed with greens). I didn't want to use this over- used term, but we are seeing "divergence" again in the markets and the different sectors. This is actually healthy action as money is being shuffled around, trying to find the sector that will lead this market higher. The sectors that win will end up being the beneficiaries of that pile of green discussed above.

Turning to the indicies, we saw the NASDAQ (COMPX) post solid gains of 95.63 or 2.87%, to finish above the key level of 3,400 at 3,429.02. The semis and the biotechs, along with the forgotten internet shares helped lift the high tech index. Advancers beat decliners 2515 to 1454 on good volume of 2.2 billion shares. Mark this NASDAQ gain in your "confirmation day" column. We need to see more up days on good volume, coupled with down days on lighter volume. Add to this more advancers beating decliners and we have the formula for a strong NASDAQ.

The DOW (INDU) took "a timeout" after playing too hard the last few days. The DOW finished lower by 18.96 or 0.17%, to 10,880.51. The old economy stocks kept the DOW from tasting the rarified air above 11,000 for a third straight day. The oils, basic materials and tobacco stocks cooled off while the techs within the DOW kept the index near breakeven all day. Dow laggards included Exxon Mobil down $3.88, Alcoa (AA) off $1.31 and General Motors (GM) off $1.88. The leaders included Wal-Mart (WMT) up $1.75, IBM up $3.38 and Citigroup (CI) up $1.38.

The S&P 500 was turned back at resistance again at around 1430, but finished up 7.10 on the day to close at 1428.32. If this level is broken to the upside expect the next resistance to come in at the 200-dma, at around 1440.

In the pits, treasuries dealers kept their cards close to their chests, not wanting to place big bets ahead of the payrolls report to be released Friday morning. Today's better than expected productivity report was cheered but in another report, unit labor cost were up 2.5%, coming in above estimates of 1.5%. This is a key figure that is watched closely by the Fed. However, Friday's payroll report will give us more evidence as to whether the 6 rate increases are doing their job on the manufacturing sector. Expectations are for 181,000 jobs to have been created in October, down from the 252,000 added in September.

Sectors and Stocks On the Move:

PSINet (PSIX) imploded 56% or $3.73 today to close at $3.00 a share. PSIX went with the old one-two punch. They first brushed investors with a right jab announcing that they would miss earnings for the fourth quarter and then finished them off with a hook, saying that PSINet's COO was to quit. This was a $60 stock in March, before people started to question internet stock valuations! PSINet is the equivalent of an internet conglomerate. It has its hand in every cookie jar having to do with the internet business; from the incubator side, to the ASP side of the business. The only problem is that the company's (famously stubborn) CEO William Schrader has been so busy with acquisitions that he didn't realize that his hand had swelled and is now stuck in the cookie jar. Instead of taking on risky projects, he should have sold the business when it was being courted by companies that could have used PSINet's portfolio of internet businesses.

Other movers on the day included the Biotech sector (BTK.X). The index surged 36.63 to 785.92. This index has almost put in a double since the first of the year and looks poised to continue it volatile trek higher. Affymetrix (AFFX) vaulted 32.22% or $19.36, to close at $79.44 after a U.K. appeals court said that it ruled in the company's favor in a patent dispute. Other biotechs are breaking out of bases left and right (GENZ, BMET, MLNM) and it just remains to be seen if they can hold their advances without petering back into their bases.

Looking Forward, Always Forward:

For all you chartists out there, the recent NASDAQ volatility and up and down swings as of late, have produced interesting chart patterns in some big name tech stocks. These are the marquee tech stocks that led us out of Purgatory in the fall of 1998 and never looked back. I speak of the likes of Sun Microsystems, EMC Corp. (EMC) and yes, the redheaded stepchild Cisco (CSCO). In each chart we see a well-formed double bottom. If the necklines of these double bottoms are breached, we could see some bullish trends emerge again in these leaders that could spill over to the rest of techland.

Double bottoms outline key levels where buyers step in and support the stock. If we are seeing more and more of this money on the side lines come into the market, the big buyers will no longer be able to wait until key stocks come back to support levels to buy these stocks. They will have little choice but to step up and buy as the stocks as they move up on greater volume.

Of course, we still need to keep a keen eye on economic reports, earnings (CSCO reports Monday after the bell) and, I'll mention it this last time, the health of the semiconductor group. If we also get more confirmation days in the NASDAQ, see these necklines get breached and no more earnings or revenue warnings, than get ready to jump back into the fray. If you got burned in this market downturn, you are not alone. The worst thing you can do, however, is rub salt into your wounds by not getting back into the market when the time is right. We are entering what have traditionally been the best months to be in the market. When the market tells you it is time, you cannot let fear or greed get in the way.

Trade Smart!

Craig Seidler
Assistant Editor