The Waiting is the Hardest Part

With apologies to Tom Petty, market participants used the uncertainty of the unprecedented Presidential election to peel off shares of stocks that had staged a recent comeback. At first, it appeared that the markets were dropping simply because (you have probably heard this cliché) markets hate uncertainty. In the face of not knowing who the next President will be, bids became weak across the board. However, this excuse probably only explained a small portion of the drop.

The acceleration of selling into the close today, especially among technology stocks, was most likely due to profit concerns among some key technology stocks. Technology stock players survived Cisco Systems' (CSCO) earnings release on Monday but now they have to sweat out other industry leader's reports. Dell Computer (DELL) will announce their earnings on Thursday after the close and Hewlett-Packard (HWP) and Applied Materials (AMAT) will not report until the middle of next week.

Another key issue that technology stock traders were concentrating upon was the announcement from Cisco Systems (CSCO) that the Company was experiencing a large inventory buildup of parts, particularly semiconductors. Although this was the only negative in an otherwise glowing quarterly report, the inventory buildup suggests that there is evidence of a troubling slowdown in technology product demand.

The NASDAQ (COMPX) dropped 184.06 points, or 5.4%, to 3231.73 as it wiped out a large chunk of recent gains. Selling was light at first but became more intense as we approached the closing bell. Volume was solid with 1.67 billion shares traded. Breadth was ugly as decliners trumped gainers by a 25 to 13 margin.

Volume leaders were down across the board. Microsoft (MSFT) fell $1.06 to $69.44. Oracle (ORCL) slipped $1.75 to $24.81. Cisco Systems (CSCO) dropped $4.63 to $52.13. Intel (INTC) was another leader in the loser column, falling $3.50 to $42.69. Sun Microsystems (SUNW) suffered a downfall of $11.13 to support at $100.31. Two Cisco Systems suppliers were hit particularly hard today. Applied Micro Circuits (AMCC) lost $7.56 to $61.31 and Broadcom (BRCM) was slammed $24.69 to $151.81. Ciena (CIEN) was crushed $13.38 to $89.94. PMC Sierra (PMCS) was yet another semiconductor loser as it dropped $19.19. Bringing up the rear on the Most Active list was Cisco Systems competitor Juniper Networks (JNPR), which had another one of its volatile days falling $22.50 to $188.19.

Winners were few and far between. Andrx Corporation (ADRX) was a notable exception with a gain of $6.06 to $94.25. Winstar Communications (WCII) bucked a weak sector and gained $3.12 to $25.50 after a good earnings report that showed solid revenue growth and the infusion of new capital.

The Dow Industrials (INDU) was noticeably stronger than the NASDAQ despite the drops in Intel and Microsoft. The INDU fell 45.12 points to 10,907.06. Value investor buying in some key cyclical stocks, as well as buying among stocks that figure to benefit from a Bush victory buoyed the Index. Volume was slow with 895 million shares traded. There were 15 decliners for every 13 advancers.

Merck (MRK) was quite strong with a gain of $3.94. Philip Morris (MO) is another supposed Bush beneficiary that rallied. Shares of MO were $1.44 higher and closed at $36.69.

Some of the losers in the Dow include; American Express (AXP), which lost $3.06, Citigroup (C) slipped $1.69 to $53.06 and IBM fell $2.19 to $100.00.

On the broader NYSE, Quest Diagnostics (DGX) was a big winner with a gain of $10.50 to $114.00. Pharmaceutical leaders were also strong. Eli Lilly (LLY) picked up $3.19 to $90.44 and Glaxo-Wellcome (GLX) gained $2.63 to $59.69.

Not surprisingly, technology stocks were the big losers on the NYSE. Storage solutions leader EMC fell $8.94 to $88.63. Analog Devices (ADI) was beaten down $7.00 to $46.94 and Corning (GLW) continued its severe correction with a drop of $6.75 to $61.50.

The closely watched market indices did not fare well. The S&P 500 (SPX) lost 22.55 to 1409.3. The S&P 100 (OEX) dropped 12.98 to 743.32. The NASDAQ 100 (NDX) was hit quite hard with a stunning loss of 221 points to 3059. The Russell 2000 (RUT) could not avoid the trend on the day, as it too fell 5.33 to 500.68.

There were two sectors that were strong today. The Pharmaceutical stocks (DRG) rallied to a new high with a gain of 9.46 to 431.56. Oil and Gas stocks (XOI) picked up 2.06 to 517.24. The downside was led by Semiconductors (SOX), which coughed up recent gains by dropping 50.8 to 664.8. Biotechnology stocks (BTK), which had been quite strong recently, corrected by 17.34 points to 744.86.

Bond traders were sitting on their hands waiting for the final election results. Buying conviction was also a bit stifled ahead of a round of Treasury refunding later this week. The 10-year Treasury note was up 1/32 to a yield of 5.855% and the 30-year Treasury bond managed a 6/32 gain to a yield of 5.88%.

With everybody focused on the Presidential elections result, it turned out to be an extremely slow news day for individual issues. Among the more important announcements were some earnings reports.

Federated Department Stores (FD), which is better known by its flagship department store holdings, Macy's and Bloomingdale's, reported a monster loss for the third quarter. The Company blamed slow sales and problems with its Fingerhut division. Federated bit the bullet and took a huge restructuring charge related to Fingerhut which resulted in a $3.32 per share loss. If you ignore the restructuring charge, Federated actually had a pretty decent quarter with profits of $0.26 a share, which beat estimates by a full six cents. However, the Company earned $0.59 a share in the same quarter a year ago. Shares of FD were down only a quarter to $34.19.

Media giant News Corp (NWS) reported earnings that were in line with expectations after the close. The consensus estimate among analysts was that News Corp would earn $0.14 in the first quarter. The Company reported strong numbers from its cable networks and film studios. Heavy competition from the other networks hurt the Company's Fox Entertainment Group. Fox reported profits of only five cents and analysts were looking for seven cents in profits. Ahead of the releases, the parent company NWS was down $2.38 to $43.13 and the tracking stock FOX, fell $0.13 to $21.06.

Pixar Animation Studios (PIXR) enjoyed a blowout quarter. After the market closed, the Company reported profits of $0.18, which was eleven pennies ahead of consensus estimates. The maker of the "Toy Story" movies as well as "A Bug's Life" cited unexpectedly strong profits from its film library for the surprising results. In addition, Pixar guided analysts higher for its year-end results. The Company's fiscal year ends in December and analysts had been calling for profits of $1.39 a share. Pixar believes that it may reach profits of $1.45. Shares of PIXR were down $1.44 to $31.31 during regular trading.

Biotechnology high-flyer Protein Design Labs (PDLI), reported better than expected losses after the close. The loss of $0.13 a share was three pennies better than the anticipated loss. PDLI broke even in the same quarter a year ago. The stock has been very strong recently because of the potential of the antibodies it has developed for the treatment and prevention of autoimmune diseases, inflammatory conditions and cancer. It currently has a product that is doing well in Zenapex, a treatment for kidney transplant rejection. The Company also stated that the Data Safety Monitoring Board for its Phase III trial of the SMART M195 antibody has passed the interim analysis and the board recommended the continuation of the international trial. The antibody is a promising treatment for acute myeloid leukemia. Shares of PDLI were down $8.25 to $132.38 during today's trading.

We may see more of the same during tomorrow's market action. The Presidential race will not be settled until at least Thursday night. There is a strong possibility that the results will not be conclusive for several days. The markets are very unlikely to rally in the face of this indecision. That said, some money, perhaps "smart" money has already anticipated a Bush victory and these people are trying to get the jump on more patient investors by bidding up pharmaceutical, oil and tobacco stocks. All three of these sectors are perceived to be beneficiaries of a Bush administration.

The NASDAQ is pretty sick after today's 5% plus drop. Although there is excellent support just above 3000, one has to seriously question whether last week's rally was just a pop up within a bear market. Technology stocks are languishing and despite all of the cash out there, nobody seems to want to own the big names. The continued disintegration of bids tomorrow could result in a test of support at 3150. Another drop would be unfortunate for bulls because it would likely trigger a sell signal in the MACD. This technical indicator has been pretty accurate in predicting short term trends recently. If we can hold here, then it appears likely that the NASDAQ would be able to test the 3500 level again, once we get this Presidential mess behind us.

The DOW Industrials look technically stronger than the NASDAQ mostly because it has less technology exposure. "Bush" stocks like Merck and Philip Morris, as well as cyclical stocks, are just about the only things people are buying right now. This trend could continue for the next couple of days. The DOW is building a nice consolidation range between 10,700 and 11,100. A break to either side of this range, will likely result in an exaggerated move in the direction of the initial breakout. But, again, this is unlikely to happen until the Presidential race is concluded. The MACD is very strong but appears to be slowing its ascent. The RSI tells us that the DOW does have room to move higher before indicating an overbought condition.

If you have to buy, your best bet is probably to stick with what is working right now. This includes selected biotechnology, oil, drugs and major cyclical stocks. The NASDAQ stocks can probably be picked up if support at 3150 holds. Some of you may wish to confirm that the major support of 3000 holds before going long. Remember, we are at the start of the best time of year for stocks. Perhaps today's weakness is a short term aberration due to the election uncertainty.

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

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