InvestmentHouse Newsletter 23.10.00

[reg]

[Brigitte]

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10/23/00 Investment House Daily
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Investment House Daily Subscribers:
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TONIGHT:
- Monday went just as planned: light selling on very low volume. The
stage is being set for a strong confirmation; will it come?
- Optical stocks set to rumble on GLW's earnings, but LU warns yet again
and leads to selling in the sector.
- Barron's takes another shot at CSCO, resurrecting an old standby: if you
can't argue with their business, attack the accounting methods.
- Subscriber Questions
- Team Trades
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Today was just what we wanted.
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In the market wrap-up, we heard the same old comments we hear every time
the indexes cannot post unanimous gains: 'disappointed at no follow
through from last week,' 'moving sideways,' 'traders wanted more.'
Indeed, we even heard one analyst near the close saying the markets were
'tired.' Some cannot see the forest for the trees; others are trying to
look at the forest, but they are not sure what they see. We all know that
the indexes just don't go up every day. As for 'being tired,' a two-day
rally tired the market out? This was a fascinating statement because we
remember such statements back in June after the market had gapped higher
early in the month but before it raced up mid-month. The market did not
hold the breakout at that point, but it was just the first attempt coming
off of the bear. The point: we are again seeing the market set itself up
for a good move just as many of the analysts on the television are shaking
their heads with disappointment, not looking for much. That pessimism is
good; those looking for the 'V' bottom feel they did not get it and are
once again disappointed. As the market tends to surprise most people, we
view the 'disappointment' as a positive.
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Indeed, in the bigger picture, we wanted the indexes to take a low-volume
breather. Yes, the Dow was up today, but let's face it: the big moves in
the last 10 years have been Nasdaq-led, and that index and the S&P 500
have to be our focus now as we try to break up and out of this bear
market. Looking at those two, we got what we were looking for today: some
light selling that did not get out of hand. Indeed, the Nasdaq managed a
36-point upside move in the last hour off of its session low. What we are
seeing are stocks taking a breather but refusing to sell off. That may
change of course; we could always resume selling on higher volume, the
fate of all attempted reversals since May. Still, so far we are seeing
good action in the stocks and indexes. Instead of letting emotion control
us, we are watching what the market is telling us. Things have improved,
and we are watching to see if it will tell us it is time to move up now.
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Market swallows some bad news without too much indigestion.
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LU was out spreading its cheer once again, warning the day it was to
announce earnings that the fourth quarter still looked bad, but it had
sacked its CEO. That news appeared to outweigh continued good earnings
from other optical stocks such as GLW. The optical stocks all took a hit
on the session. LU then beat the reduced third quarter expectations after
hours (0.18 versus 0.17), but how much could that help given the earlier
warning about the fourth quarter? We may have to look for JDSU and SDLI
later this week on Thursday to get things rolling in this sector once
again, but we viewed today's weakness as a buying opportunity.
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Let's see, it was Monday so there must have been some negative news from
Barron's. Yes, over the weekend Barron's questioned Cisco's accounting
methods, raising the issue whether Cisco's earnings properly reflected all
of its expenses. Cisco took a hit on the news, but did recover and was
positive early in the session before the overall selling dragged it lower.
This is really nothing revolutionary as Cisco's accounting methods were
questioned a couple of years back (remember the pooling agreements?) as
some just could not believe the company could continue to grow earnings
given its size and its continuous acquisitions. Yes, Cisco has obviously
hoodwinked investors and the SEC for years, and the house of cards will
come tumbling down. It could not possibly be that Cisco has possibly the
best corporate management team in the world. Give us a break. When you
cannot find any chinks in the business armor, try to go after the
accounting. Frankly, we are sick of this type of 'journalism' that
requires finding at least one negative story a week about a major company.
It would have been appropriate if Cisco had been able to hold positive in
spite of this 'news.'
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PC shipments strong in third quarter.
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Two PC watchdogs found strong third quarter PC shipments at 18% and 15%
growth, respectively. 33 million units were shipped in the third quarter.
Moreover, fourth quarter shipments are expected at 20% and 18.6% growth,
respectively. Both like the looks of things in 2001 when faster PC's and
growing Windows 2000 popularity should lead to an increase in PC
replacement. Positive news for Dell, Compaq and HWP (that had the fastest
growth by far of the three), but some are concerned that the high third
quarter shipments may be based on cramming units into the pipeline. We
doubt that since CPQ learned its lesson a couple of years ago about
loading the pipeline to make a quarter look good.
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THE MARKETS
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Again, just what we wanted on the day with some low-volume selling. Good
earnings from GLW, and more after hours from SANM. Even LU 'beat' its
lowered estimates by a penny. Good earnings helping offset negative news
as the stock market took a breather. It even managed a move up at the
close. We are still looking for confirmation of last week's reversal
rally, and right now the market is setting itself up they way it should.
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Overall market stats:
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VIX: 26.98, -0.44. Volatility was basically flat as the Dow rose and the
Nasdaq and S&P 500 traded lower. Again, The VIX showed us that spike into
the upper thirties last week, and that is what we needed.
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Put/Call ratio: 0.48; -0.02. Put buyers remained flat as well after
spiking higher last week on the selling spree. As we noted over the
weekend, after the spike higher, it does not tell us much as we wait for
confirmation of the reversal that started when the ratio shot higher.
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Remember: these are secondary indicators that we use to confirm moves.
They are not leading indicators. They can be wrong as sentiment is an
ethereal concept.
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NASDAQ: The Nasdaq moved up 40 points early in the session, but that move
was on very low volume and it faltered at 3523.69 about an hour and
one-half into the session. That led many commentators to state that the
index was 'grinding' at 3500, and that it would move laterally. While
that is somewhat the scenario we are looking for, i.e., moving sideways
right under resistance before giving us confirmation, we don't cast it in
such pessimistic tones: if this market is going to rally off of last
week's reversal, the strongest move will come if it gives us confirmation
by Wednesday or Thursday of this week. That means the index could move
sideways for another 2 days before moving up 1.5% on rising, above average
volume; while we want to see the market move sideways during that time, we
would not call two more sideways days 'grinding.' Indeed, if the index is
unable to break this resistance relatively soon on a strong move, we have
a high probability of heading back down to re-test 3000.
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Stats: Down 14.45 points (-0.4%) to close at 3468.69. Nice, slow selling.
Volume: A light 1.69 billion shares (-22%), coming in below average for
the first time in 11 sessions. Even with the selling, up volume topped
down volume 896 million to 747 million. That shows us there j