RECAP & STOCKS TO WATCH FOR MONDAY, 2-26-01
For the week, the Dow lost 359.95 points to finish at 10439.87, while the Nasdaq fell 165.54 points to close at 2260.09. The S&P dropped 56.09 points this week to end at 1245.47. Volume for the week was average, as many traders and investors are remaining on the sidelines given the uncertainty in the economy.
This past week brought another round of earnings warnings and analyst downgrades. The two biggest companies in the spotlight were Brocade (BRCD) and Sun Microsystems (SUNW), with both companies issuing profit warnings. For most of the week the Nasdaq was in the red, and trying to play catch-up. We did see strong moves off the lows Thursday and Friday, but it was likely nothing more than short covering. The Dow was also under pressure for most of the week, as the blue chips finally showed signs of breaking down. Friday, the Dow looked to be in trouble, but thanks to comments from an economist that stated that we have a 60% chance of seeing the Fed cut rates next week, the major indexes finished well off their lows of the day.
The indexes were also pressured due to the nervousness surrounding the well being of the US economy. Wednesday's CPI report scared many traders, as we again saw signs of rising inflation. After Wednesday's report, many investors brought back a term from the 1970's - stagflation, which is an economic condition where growth is slowing while inflation is rising. Before we start to use the term stagflation to describe the current economy, we must keep in mind that things were much worse in the 70's than they are now. In the 70's, unemployment was roughly double what it is now, and inflation was also a much larger threat. With that said, we don't think that the current economy is in near as bad a shape as it was in the 70's. At the same time, the mere threat of another stock market like the 70's brought a great deal of fear to many investors this week.
This past week also brought another round of earnings warnings and analyst downgrades. The two biggest companies in the spotlight were Brocade (BRCD) and Sun Microsystems (SUNW), with both companies issuing profit warnings. For most of the week the Nasdaq was in the red, and trying to play catch-up. We did see strong moves off the lows Thursday and Friday, but it was likely nothing more than short covering. The Dow was also under pressure for most of the week, as the blue chips finally showed signs of breaking down. Friday, the Dow looked to be in serious trouble, but thanks to comments from an economist that stated that we have a 60% chance of seeing the Fed cut rates next week, the major indexes finished well off their lows of the day.
On Friday, the Nasdaq Composite finished up 17 points, after being down as much as 88, to close at 2,262. Volume was 2.24 billion shares, with decliners beating advancers by 21 to 17. Blue chips slid as the Dow closed down 84 points, after being down as much as 232, to finish at 10,439. Volume on the Big Board was 1.23 billion shares with decliners beating advancers by 17 to 13.
The Nasdaq Composite has fallen 18% in February, down an amazing 56% from its all-time high set in March 2000, and is lingering at levels not seen since December 1998.
Moving forward, we would expect to see more of what we saw this past week, unless the markets get a positive catalyst, such as a rate cut, to rally off of. In addition, we may have seen some short covering, due to the fact that many traders don't like to hold short positions over the weekend. With the threat of inflation now becoming a bigger factor this past week, we find it hard to believe the Fed will be able to cut interest rates before March 20, when they are scheduled to meet. If Mr. Greenspan does cut interest rates, it will become quite obvious that he is targeting the equity markets, something he claims he does not do. The biggest event on the agenda for the upcoming week will likely be Microsoft's court case, where oral arguments will begin early in the week. Also on the agenda are a few economic reports that are worth noting, such as Consumer Confidence and New Home Sales on Tuesday, and the NAPM Index on Thursday. In the near future, every economic report will likely be watched quite closely because of the growing concerns over the slowdown in the economy.
Overall, we expect the week ahead will likely be another extremely volatile one. This month has been very challenging for most traders, but we encourage everyone to hang in there. At some point in the near future, we feel that the markets could give us a very nice buying opportunity. For now, we’ll continue to focus on risk reduction while trading the markets.
From a technical standpoint, the Nasdaq Composite has support at 2,200, with strong resistance at 2,300. A break above 2,300 could trigger another round of short-covering. The Dow has support at 10,300, with resistance at 10,700. Support on the Semiconductor Index (SOX) stands at 600 and 550, with resistance at 650 |
