The 3000 Fixation

It would be nice to be able to blame the Presidential candidates for this most recent market slide. If this recent round of selling was only due to the growing dispute regarding the outcome of the Florida vote, one could be very confident that the markets would recover nicely once this silliness is behind us.

Unfortunately, there are real fundamental factors that are crippling this market. Technology stocks are particularly weak. This group has been leading the bull market for the past decade. The latest round of selling we witnessed today was due to some very disappointing earnings from a technology leader. Hewlett-Packard (HWP) stated that it earned only $0.41 in the latest quarter, which was a full ten cents below consensus estimates according to First Call. The shortfall was attributed to margin pressures, higher than expected expenses, unfavorable currency conditions and the Company's business mix. The news hit technology stocks hard. The news just added to the malaise caused by Dell Computer's (DELL) announcement last week that their growth rate will decline in the coming year. HWP was down $5.00 to $34.13 today.

The 3000 level was very important psychological and technical support for the NASDAQ. People simply like round numbers. The NASDAQ had dropped to the 3000 level four times since March. Each previous drop to the 3000 level resulted in a nice bounce. Now that this support level has failed it is now the major resistance level.

The early selling was impressive today and the subsequent rally was equally impressive. The NASDAQ bottomed at 2859. Sideline cash that was perhaps wagering that we had experienced yet another capitulation bottom was put to use. The NASDAQ was actually positive with less than a hour left in the trading day. Profit taking slammed the NASDAQ in the last half an hour and the Index closed the day down 62.27 and, unfortunately for Bulls, the NASDAQ closed at 2966.72, well below the critical 3000 level.

Volume was impressive with 2.01 billion shares traded. However, market breadth was decidedly negative with decliners trumping gainers by a 26 to 14 margin. There were 83 new lows and only 16 new highs on a day when the overall Index itself made a 52-week low.

The most active list was dominated by familiar technology names. A few of them managed to close higher. Among them were Intel (INTC), which picked up $1.19 to $38.19 and Dell Computer (DELL), which gained $1.13 to $24.13. Applied Micro Circuits (AMCC) also stemmed its recent declines by rallying $1.13 to $62.63. Internet infrastructure leaders were decidedly weak. Juniper Networks (JNPR) fell over $6.00 to $164.55, Ariba (ARBA) dropped $9.38 to $91.38 and Network Appliance (NTAP) moved lower by $5.75 to $84.50.

There were a few NASDAQ technology stocks that not only enjoyed the late rally but also managed to hold on to their gains. EXAR (EXAR), a semiconductor company, gained over $4.00 to $34.72. Filenet (FILE) picked up $3.69 to $34.88. Plexus (PLXS) gained $4.00 to $53.38 and Xilinx (XLNX) crept $3.63 higher to a close at $63.38.

There were some huge losers that failed to get close to breakeven levels for the day. Several of the biggest losses were seen in the biotechnology sector. Protein Design Labs (PDLI) was crushed $29.50 to $95.50. IDEC Pharmaceuticals (IDPH) coughed up $30.19 to $169.50. Myriad Genetics rounds out the top three point losers. MYGN fell $25.63 to $97.50. Other losers in this sector included Abgenix (ABGX), which declined $13.13 to $65.88, Affymetrix (AFFX) a big percentage loser with a drop of $9.44 to $69.19 and Millenium Pharmaceuticals (MLNM) that dropped $10.94 to $60.94.

The Biotechnology sector was crushed because a "dot.com" virus has invaded their ranks. The buzz about the decline claims that these stocks are way overpriced on exuberant expectations, just like dot.com stocks were last year. Be careful trading in this very volatile sector. All you have to do is look at how many dot.com stocks have gone from triple digit prices to single digit prices to understand the risks of investing in companies that do not have earnings.

The DOW Industrials (INDU), which includes the tech wreck du jour, Hewlett-Packard, fell 85.7 points to 10,517.25. Just like the NASDAQ, the Index rallied from its intraday low. The low print for the day was 10,370.12. Volume was decent with 1.12 billion shares traded. Losers did outpace winners 17 to 11. There were 36 new highs today and 83 new lows.

In addition to Hewlett-Packard, some of the DOW's losers included; Philip Morris (MO) down $2.25 to $34.63, Honeywell (HON) lost $2.75 to $50.63, General Electric (GE) declined $2.44 to $51.44 and Walt Disney ((DIS) dropped $1.19 to $30.44.

Helping the DOW were retailers Wal Mart (WMT), which was up $1.63 to $45.31 and Home Depot (HD) was a winner with a $1.13 gain to $37.38.

Some of the strongest stocks on the overall NYSE were beaten down technology leaders. Texas Instruments (TXN) gained $3.56 to $42.31 and Micron (MU) picked up $2.25 to $32.38. Shares of Motorola (MOT) also tried to get going in the right direction with a gain of $1.06 to $22.81.

NYSE biotechnology stocks were leaders on the downside. PE Biosystems (PEB) suffered a huge decline of $17.31 to $95.00. Genentech (DNA) was slammed $9.25 to $70.19. Traditional pharmaceuticals such as Forest Labs (FRX) also joined the list of biggest decliners with a drop of $8.25 to $121.56. Eli Lilly (LLY) was down $4.13 to $86.13.

The major Indices were generally lower. The S&P 500 (SPX) fell 14.75 to 1351.25. The S&P 100 (OEX) also lost ground as it dropped 6.96 to 712.16. Smaller stocks can run but they could not hide, as the Russell 2000 (RUT) dropped 4.35 to 476.55. The top NASDAQ stocks, represented by the NDX, were a little bit better than the broader NASDAQ with a loss of 53 points to 2837.

The Biotechnology Index (BTK) was stricken with a selling virus, as this index was crushed 78.46 points to 630.78. Meanwhile, Semiconductors (SOX) enjoyed a little bounce of 27 points to 651.2. The Pharmaceutical Index (DRG) suffered from profit taking as it dropped 13.86 points to 418.02. Bank stocks (BKX) were noticeably weak with a decline of 16.28 to 847.02.

Some of the cash vacating the stock markets zipped over to the treasuries. The 10-year Treasury note picked up 11/32 to a yield of 5.76. The 30-year bond also gained with a rally of 12/32, dropping the yield to 5.84.

There were a few major deals announced today which is often the case on the first day of the trading week.

Tyco International (TYC) agreed to purchase Lucent's (LU) power systems business. The division which makes back-up batteries and other power components will be purchased for $2.5 billion in cash. TYC was lower today by $1.25 to $52.94 and LU managed to gain $0.88 to $22.75.

Pork producer Smithfield Foods (SFD) wants to expand to cows, as it issued an unsolicited bid to purchase the largest beef processor IBP (IBP) for $25 a share, including the assumption of $1.4 billion in debt. The deal would be worth approximately $2.7 billion. The offer is larger than a takeover bid offered by a unit of investment banker Donaldson Lufkin & Jenrette. IBP moved $1.44 higher to a close at $22.31 while shares of SFD were hit $3.63 as the stock closed down at $28.00.

Avis Group Holdings (AVI) agreed to rejoin the Cendant (CD)family. The former parent of the rental car company will pay $33.00 a share for its wayward child. Avis admitted that royalty fees paid to Cendant for use of the Avis name was hindering growth. AVI gained $1.88 to $31.88 and shares of CD slipped a half point to $11.50.

The retail sector will be in the spotlight tomorrow as several of the biggest names in the industry will be reporting earnings. Before the market opens, two DOW components, Wal Mart (WMT) and Home Depot (HD) are expected to report their results. Also on the schedule is Target (TGT), Staples (SPLS), Williams-Sonoma (WSM) and J.C. Penny (JCP). Sak's (SKS) will report after the close. Other notable companies reporting after the close include, Network Appliance (NTAP), Sycamore Networks (SCMR), BEA Systems (BEAS) and Analog Devices (ADI).

Today's low and subsequent rally established a new support level on the NASDAQ of 2859. You have to go back to October of 1999 to find the next support level of 2632. If the market tests this support it will have successfully corrected the entire NASDAQ explosion that produced exclamations of "irrational exuberance". Hard core bears probably will not be satisfied until the NASDAQ drops to the October 1998 low of 1357. These support levels tell us that meaningful lows are usually established in October. The fact that we are making new lows in November is most likely due to an extension of the bear market because of the Presidential election controversy. The NASDAQ has reached a very oversold level according to the RSI. The market has typically staged at least a bounce rally in the past when this has occurred. The MACD has turned negative again. This indicator has been very good in determining short-term trends. That said, this is an options expiration week. Usually there is a bullish bias during expiration weeks and one can expect a short-term rally. Some of the sideline cash will likely be put to work, especially if we close above the important 3000 resistance.

The DOW accelerated its declines once it broke below the 10,700 support. This Index had been consolidating nicely but election concerns ruined that base and HWP just added fuel to the fire. Technically, the DOW is stronger than the NASDAQ but it is unlikely to rally as strong as the NASDAQ this week because the RSI is neutral. Therefore, the DOW probably will not enjoy the strength of an "oversold" rally. Nevertheless, a rally back up to 10,700 is definitely possible. Support at Friday's low of 10,273 will probably hold if we get any more selling tomorrow. Like the NASDAQ, the DOW's MACD has just turned negative. This indicator has to reverse quickly or we could see a pretty anemic market after we get the expected bounce due to options expiration. The DOW's week could also be strongly influenced by the earnings releases from Home Depot and Wal Mart.

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