Mea Culpa

Anyone who read Wednesday's commentary knows what he is due, and that's an apology. On Wednesday, I committed a faux paus by stating the Nasdaq Composite Index (COMPX) would hold 2,700 and the Dow Jones Industrial Average (INDU) would hold 10,350. No, I wasn't looped when I wrote this predication. And yes, I knew that Gateway's (GTW) earnings warning would likely roil the markets on Thursday.

Little did I know (and little did anyone know, for that matter) that Gateway's mea culpa would infect the entire computer sector like the black plague. Hardware, software and chip stocks made for the nether regions like they were on the Hades express, as a flurry of Wall Street investment houses rushed to lower their growth estimates for the PC sector.

Of course, recent political and economic turmoil didn't help matters, either.

Anyway, in case you spent Thursday in a coma (or a block of ice like that idiot magician), the COMPX traded as low as 2,523.04 that fateful day before closing at 2,597.93 on near- record volume of 2.7 billion shares, while the Dow Jones Industrial Average (INDU) traded to a low of 10,292.39 before picking itself off the canvas to close at 10,414.49 on a stifling 1.5 billion shares. For all this, I apologize. I knew the gap down would be bad; heaven knows I didn't know it would be that bad.

With Thursday's ugliness out of the way, the markets staged a strong comeback on Friday, at least through most of the session, thanks to the National Association of Purchasing Management (NAPM), which stated before the opening bell that its index of manufacturing activity fell to 47.7 percent in November, well below the 50 percent level that divides growth from a downturn. The reading is the lowest in two years. What's more, it was the fourth month that the factory sector failed to grow. The report had many traders thinking interest rate cuts, which would be godsend for stocks.

The main beneficiary of the NAPM report was the tech-heavy COMPX. (Remember when tech was supposed to be immune to interest rates?) The index bolted nearly 50 points at the open to 2,644.09 and moved as high to 2,749.06 by the afternoon. However, selling in beleaguered chip making king Intel (INTC), which is rumored to report an earnings shortfall this week, accelerated in the last hour of trading, which pulled the COMPX lower to close at 2,645.29, up 47.36 points, or 1.82 percent, for the day.

Volume on the Nasdaq was a respectable 2.2 billion, which was a 22 percent discount from Thursday's 2.7 billion.

The Dow Jones Industrial Average (INDU) also started Friday on the right foot. The Old Economy barometer moved higher by a couple points to open at 10,416.76 and continued to move higher through the morning to its intra-day high of 10,524.45. From there, the average sold off through most of the day thanks to selling pressure in Intel and, unfortunately, two Splittrader plays. Pharmaceutical giant Merck & Co. (MRK) sank $2.06 to $90.63 after Wednesday's run-up on a Goldman Sachs upgrade. Meanwhile, regional telecom SBC Communications (SBC) jettisoned $2.75 to close at $52.06 after trading to an intra-day low of $51.00, triggering our stop-loss of $52.00. Ouch!

When it was all said and done, the INDU finished off 40.95 points, or 0.39 percent, to 10,373.54, which gives me some redemption, since the blue-chip average is once again trading above 10,350. Volume on the NYSE was a stout 1.2 billion shares.

As for the broader market, the S&P 500 Index (SPX) closed Friday little changed. The index added 0.28 points, or 0.02 percent, to 1,315.23. Actually, though, the S&P 500 didn't have 500 member stocks on Friday. On Thursday, Citigroup (C) closed on its purchase of SPX member Associates First Capital, leaving the broad-based index with only 499 stocks.

In other SPX news, the three-month long route in equities has spurred a couple of prominent analysts to lower their earnings estimates on the closely followed barometer. On Thursday, Goldman Sachs' stock siren Abby Joseph Cohen backpedaled on her year-end estimate of 1,575, though she did say "valuations are the most appealing they have been all year." (Gee, could that be because they are the lowest they've been all year?) Then on Friday, Merrill Lynch analyst Christine Callies lowered her year-end SPX target from 1,575 to a range of 1,450 to 1,460. I've got one question for Ms Cohen and Ms Callies: Do you gals share an office?

Here's the longer-term market tally, and it isn't pretty. For the week, the COMPX dropped 8.9 percent, the SPX lost 2 percent and the INDU declined 0.9 percent, which means year- to-date the COMPX is off 35 percent, the SPX is off 10 percent and the INDU is off 9.8 percent. And you wonder why it's tough to make money on the long end.

In sector news, it looks like we can add another tech parabola to the many that have been formed during the past month. The PHLX Semiconductor Index (SOX) took a beating this week thanks to its largest component, Intel. The SOX finished the week off a stunning 22 percent after Intel finished the week off an even more stunning 26 percent. Intel was pressured all week by rumors of an earnings shortfall and Credit Suisse First Boston analyst Charlie Glavin, who lowered lowering his 2000 earnings target to $1.66 per share on $37.6 billion in revenue from $1.75 on $39.3 billion in revenue. As it now stands, both Intel and the SOX are trading at October 1999 levels.

In stock news, it's no secret that trading the market conservatively has been the way to go over the past several weeks, which is one reason our In Play portfolio has been able to weather the storm with only minor damage. In fact, some of our more pedestrian issues did quite well last week. Danaher (DHR), Philip Morris (MO) and Tenet Healthcare (THC) all moved higher. However, our biggest winner was Quest Diagnostics (DGX), which moved ahead by $10 to close at $114.81. Quest provides diagnostic testing equipment and services. Out of all our plays, I thought this one could be most susceptible to a high-tech sell off, which just goes to show it's sometimes better to be lucky than smart.

Looking ahead, traders will be focused on the Federal Reserve this week, as several major economic releases will give life to speculation on the state of macroeconomic affairs and possible Fed interest rate cuts.

New home sales and Leading Economic Indicators (LEI) will be released on Monday. The market consensus is for new home sales to have fallen to a 920,000 unit annual pace in October, off from 946,000 in September. Meanwhile, LEI is expected to have declined by 0.1 percent in October, off from a 0.0 percent flat posting the previous month.

Then on Tuesday, we get factory orders and the National Association of Purchasing Management's (NAPM) non- manufacturing index. Factory orders are expected to have dropped by 0.5 percent in October, off from a 1.6 percent increase in September. The NAPM non-manufacturing index is forecasted to post a reading of 56 for the month of November, off from 58 in October.

Wednesday brings the non-farm productivity and unit labor costs. Non-farm productivity is expected to ease to 3.4 percent rise in the third quarter from a 3.8 percent rise in the second quarter. What's more, the third quarter's unit labor costs are predicted to have risen 2.8 percent, up from their prior quarter's posting of 2.5 percent.

Finally, the week's most significant economic data set will be released on Friday with the unemployment report. The unemployment rate is expected to be little change for November at 4 percent for the month, which is a 10 basis point increase from October's 3.9 percent showing.

All in all, this week's slate of economic data should help persuade the Fed that interest rate cuts are in order.

On the earnings front, look for Ciena (CIEN) to post $0.12 a share before the opening bell on Thursday and for National Semiconductor (NSM) to post $0.54 a share during Thursday's trading. As always, how these two companies guide analysts on future earnings and revenues will be much more important to traders than the actual earnings report.

As for trading this market, I'm not sure what guidance to give at this point. It seems just when the worst is over, the market gets hit with another wave of bad news. Last week, I would have sworn that 2,700 was the absolute limit on the COMPX, but then Gateway swamped the market with an earnings warning that devastated the index. Now, it appears that the 2,500 to 2,550 range is the lower limit, which is the July 1999 low, below that is the March 1999 low of 2,250.

The way the market has been acting lately, giving support levels on the COMPX has become a joke. The fact is, no one knows where the bottom is, including yours truly.

Nevertheless, I'm optimist. People are scared, which just adds to the wall of worry we need to start another rally. (Yes, I know I've been repeating the "wall-of-worry" spiel ad nauseam for the past few weeks, but I believe it.) We've got big-cap tech companies that have been bid down to levels not seen in years; look no further than Lucent (LU), Dell (DELL) and WorldCom (WCOM). These things are legitimate value plays, folks.

What's more, people are pulling their money out in droves, both institutions and individuals. According to Trim Tabs, equity funds investing primarily in U.S. stocks saw inflows of $100 million for the week-ended November 29 versus outflows of $1.9 billion in the prior week. Additionally, Trim Tabs reported that the Investment Company Institute showed that U.S. equity funds had 5.7 percent of their portfolios allocated to cash, the highest level since August of 1998, when the allocation was at 5.9 percent.

On top of this, split announcements have all but evaporated, meaning fewer companies are achieving split levels. Over the past two weeks, there were only six companies announcing 2- for-1 stock splits.

Here's another negative tidbit to ponder that comes courtesy of Barron's. If the COMPX continues to drop in December, it would mean the index would have suffered three consecutive months of losses, which would be only the third such quarterly drop in a decade.

Despite the pain, I think the recent sell-off has been a positive for the market, at least for the longer-run (okay, maybe for the next year) because much of the speculative fervor has been removed. Last year and early 2000, too many people were confusing brains with a bull market -- making money trading stocks was just too easy. The fact is, there is no confusion now. The people lacking the brains have been relegated to the sidelines, which means we are left with a more serious and better-educated trader, and that's a definite positive for the market.

S.P. Brown
Editor