Traders Disgorge Much of Tuesday's Gains

Traders, who seemed to feast endlessly on tech stocks on Tuesday, found themselves feeling dyspeptic on Wednesday. It seems there was a rotten apple in yesterday's cornucopia of perceived tech values.

More specifically, there was a rotten Apple (AAPL). The maker of Technicolor desktop computers that everyone loves and no one uses reported earnings that would make pop-diva Madonna blush. After Tuesday's close, the company confessed that significantly slower sales in October and November (in other words the Christmas season) would lead to fiscal first-quarter revenue of $1 billion, $600 million shy of what many Wall Street analysts had predicted.

What's more, as many of us who are familiar with an income statement know, what starts at the top usually ends at the bottom. Apple executives went on to state that they expect their company to post a loss for the quarter of $225 to $250 million, which translates to a loss of $0.62 to $0.69 per share. A definite no-no considering analysts surveyed by First Call were expecting Apple to post a profit of $0.03 per share. The computer maker's shares finished the session down $2.69 to $14.31, a price not seen since June 1998.

Considering the recent mood of the market, it's not surprising that Apple's unpantsing would shock the entire desktop industry, which it did. Compaq (CPQ), Dell (DELL), IBM (IBM), Gateway (GTW) and Hewlett-Packard (HWP) all finished the day down.

However, the biggest loser in this perceived PC slowdown might be Intel (INTC). The chipmaking giant fell $4.25 to $31.75, a price not seen since July 1999. Exacerbating the sell-off was Salomon Smith Barney analyst Jonathan Joseph, who told his clients that his analysis suggests that Intel's fourth quarter could be its worst in over a decade.

Since many of these PC-related issues reside on the Nasdaq Composite Index (COMPX), it was inevitable that the tech-heavy index would finish the day in the red. In fact, the COMPX returned a third of Tuesday's 274-point windfall by closing down 93.30 points, or 3.23 percent, to 2,796.50 on heavy volume of 2.27 million shares.

Unfortunately, there was no sanctuary to be found in the Old Economy, for it had earnings tribulations of its own. Bank of America (BAC), the nation's largest bank, reported it expects fourth-quarter earnings of $0.85 to $0.90 cents per share, far short of the First Call estimate of $1.17. The bank attributed the loss to higher credit costs due to loan delinquencies and lower returns from investment banking, venture capital and asset management. BAC's shares closed down $3.19 to $38.00.

Like Apple, Bank of America didn't suffer alone. Its earnings shortfall took a toll on the Dow Jones Industrial Average's (INDU) financial components. American Express (AXP), J.P. Morgan (JPM), Citigroup (C) and General Electric (the company's financial unit is responsible for more than half's its earnings) all finished the day in the red.

Losses in the INDU's financial issues added to the losses in its PC-sensitive issues totaled to a completely miserably day for the blue-chip barometer. The INDU closed down 234.34 points, or 2.15 percent, to 10,664.38 on big NYSE volume. Nearly 1.4 billion shares traded on the Big Board, the eighth- busiest day on record and 23 percent more than the three-month daily average.

In stock news, more specifically Splittrader stock news, Quest Diagnostics (DGX) continued to impress. The medical diagnostic services and equipment provider moved higher by $2.19 today after moving higher $5.19 yesterday. Quest is now trading at $120.75. If it can hold this price level, it could build a base to moved further to $140, which is why its on our Current Play list.

Another Splittrader favorite (though it hasn't been promoted to play status) is Brocade Communications (BRCD). This split candidate moved higher $1.19 to $191.00, which is impressive considering the $28.00 run it had yesterday. Brocade is definitely in split announcement territory at current levels (last split announcement was at $150 back in February). Nevertheless, for us to put Brocade on our Current Play list, it needs to hold $191.00 over the next few trading sessions.

In economic news, productivity growth for the third quarter of 2000 was revised down to 3.3 percent from the preliminary release of 3.8 percent. In addition, unit labor costs were revised up to a 2.9 percent increase relative to the previous quarter, which reflects an even larger bounce from the drop in costs registered in the previous quarter. Offsetting this negative data, though, was the Fed's Beige Book report on economic conditions, which revealed additional evidence of a slowdown in the economy.

Now for the million-dollar question, was yesterday's rally just a bull-trap? I don't think so. I've been conservatively bullish over the past two months (our play picking over that period will attest to that). Still, I'm probably more bullish than I've been over the past month, particularly in the COMPX issues.

If you'll look at the COMPX chart below, you'll notice that the index has rallied nicely from the November 30 low, and not just because of yesterday's 10 percent surge. The COMPX was moving up on higher highs and higher lows over the subsequent three trading sessions since it was supposedly circling the drain at 2,550. Additionally, the COMPX may be building support near 2,800, which is close to the 62 percent Fibonacci retracement from the November 15 high.

If the COMPX can at least hold 2,750, I believe a move above 3,000 is entirely possible within the next five trading sessions.

As for the Old Economy issues, I think the INDU could be range-bound between 10,350 and 11,000. However, looking longer-term, I like the possibility of the INDU catching support on an uptrend developing back from October 16.

Of course, the wildcard in any trading scenario is Fed Chairman Alan Greenspan, who on Tuesday acknowledged (finally) that the U.S. economy has lost momentum. If Greenspan truly believes that the market is slowing, we could be looking at an interest rate cut in the near future, which could put the market back in extended-rally mood. Let's only hope.

S.P. Brown
Editor