Today's rally no coincidence?
CNBC Market Dispatches 05/08/02
Markman notes Nasdaq rebound corresponds with a key moving average, and he points to midday Thursday as crucial. Cisco soars. Traders skeptical.
A rare triple-digit victory for the Nasdaq Composite Index and a super-powered rally in the Dow Jones Industrial Average have all investors asking one question: Can it last?Test your skills. Pick 4 stocks and win a vacation.
Many on wary Wall Street just aren’t sure the day’s impressive gains amount to anything more than a one-time emotional reaction to the long-term downward market cycle that has pushed the major indexes lower for weeks. In any event, it’s going to take more than today’s market trigger -- a strong profit report from Cisco Systems (CSCO, news, msgs) -- to produce a sustained stock surge.
Markman: Nasdaq turnaround no coincidence
MSN Money’s resident market watcher and columnist Jon Markman filed this report on the prospects for the market in the days ahead.
When the Nasdaq Composite rallied after days of extreme selling pressure back in the fourth week of September 2001, the turnaround came about at the index’s 10-year moving average. That is, buyers of large-cap technology companies came in to support their stocks at the average prices paid in the last 10 years, which at the time was an index level of 1,566. (See my story, “Is this a once in a decade opportunity?”)
So perhaps it is not a coincidence that the Nasdaq turned around again today at the same 10-year moving average, which after several months of good performance had risen to 1,643. The Nasdaq fell to a low of 1,577 on Monday, but the Tuesday rally brought it back to that level of very long-term support where the most veteran investors -- people who wait patiently for catastrophic levels of decline -- return to the market and buy stocks to hold for many years.
Skeptics of today’s rally point to the fact that shares of many of the companies with the worst fundamental stories and the worst charts rallied 10% or more. That is an indication of “short covering” -- market jargon for the buying that transpires when traders who were betting against a stock by borrowing shares and selling them suddenly start buying the shares back. In this case, traders aren’t buying because they suddenly love the fundamental story, but rather because they’ve made good profits and want to realize and protect them.
For a short-covering rally to last, it has to, well, last. It would be a very good sign, for instance, if investors follow through on today’s rally by buying more tomorrow. If the rally fades by tomorrow at 12 p.m. ET, though, bears will probably be emboldened and begin to short again. If the rally continues, on the other hand, bears will be forced en masse to capitulate, and buy back even more shares of the stocks they shorted.
Bret Rekas, a hedge-fund manger in Minneapolis who is short as many stocks as he is long, told me today that he had already begun to cover many of his shorts last week as the decline started to “become ridiculous” even for stocks with decent fundamental prospects. He is particularly sanguine about Sun Microsystems (SUNW, news, msgs) and Oracle (ORCL, news, msgs), which he believes were punished to extreme levels due to executive departures and fears about their telecommunications-related businesses. These companies have no long-term debt to speak of, and many billions of dollars in recurring revenue quarterly, and are likely to double from current single-digit levels before a year goes by, he believes.
Terry Bedford, a hedge-fund manager in Toronto, said that speculators should focus on the most oversold networking-complex stocks like Riverstone Networks (RSTN, news, msgs) and Extreme Networks (EXTR, news, msgs) for short-term opportunities. Bedford doesn’t care much for their fundamental prospects, but notes that these are the types of stocks that tripled in short order after the September 2001 rally got going, and could at least double again from Tuesday’s levels.
Fleckenstein: The thrill of defibrillation
MSN Money contributor Bill Fleckenstein offered this sober take on the day's Wall Street festivities.
Today's explosion was the tech rally that I have been expecting since April 24, when we entered the market’s no-news period. Recently, on May 3, I got head-faked and threw in the towel on the prospect of a rally, since it looked as if everything was going to sink. However, today's action leads me to believe that this rally will endure at least until Applied Materials (AMAT, news, msgs) reports next Tuesday, and possibly until Dell Computer (DELL, news, msgs) reports next Thursday. Who knows, maybe it will go on a little longer.
In any case, let's keep in mind that the earnings report from Cisco was in essence nothing special -- just the catalyst that came along to release the pent-up demand for a party. People should understand that all we are seeing is a rally, not the birth of the long-awaited tech bottom that has been called so many times. Throughout the history of the Nasdaq, nearly all of the biggest-percentage rallies have occurred since it peaked out at 5000. Nimble traders may want to go along for a scalp. But let's be clear: the rally should not be confused with an end to the decline in tech stocks.
The following chart illustrates the brutal truth: The 10 biggest rallies in Nasdaq history have all come since March 2000 -- and were followed by continued decline.
DATE Nasdaq Close 1-day Chg. Chg. Since
1/3/2001 2616.7 14.2% -35.2%
12/5/2000 2889.8 10.5% -41.3%
4/5/2001 1785.0 8.9% -5.0%
4/18/2001 2079.4 8.1% -18.4%
5/30/2000 3459.5 7.9% -51.0%
10/13/2000 3316.8 7.9% -48.9%
10/19/2000 3418.6 7.8% -50.4%
12/22/2000 2517.0 7.6% -32.6%
5/8/2002 1696.3 7.5% ???
4/18/2000 3793.6 7.2% -55.3%
Scanning the Top 10 lists
A scan across our horizon of Top 10 lists reveals just how dramatic some of the day’s gains were. The list of the session’s most actively traded shares was full of big-time tech names posting very hefty percentage gains: Intel (INTC, news, msgs) rose about 10%, beleauguered Sun Microsystems (SUNW, news, msgs) climbed 12% and MSN Money parent Microsoft (MSFT, news, msgs) jumped 10%.
Among networking companies, Cisco’s impressive share gains -- some 24% -- weren’t the day’s biggest. That honor went to Extreme Networks (EXTR, news, msgs), up 30% in Wednesday trading.
So what kind of stock could lose on a day like today? Try Dynegy (DYN, news, msgs). The energy firm lost 15% as U.S. regulators intensified their investigation of a natural gas deal involving the company. The lesson: Even in a new day, the old Enron days can still haunt some stocks.
The Cisco trigger
What, exactly, triggered this buying storm?
Cisco’s profit report after the bell last night showed net income of 11 cents a share, two cents better than expected. Sales were flat and slightly below forecasts -- but investors focused on the improved profit margin. After all the pain in the tech sector lately, the Cisco report was enough to spark the surge.
“The market was so oversold, it was like a coiled spring,” said investment pro Art Cashin, from the floor of the New York Stock Exchange. But he added, “I’ve got to tell you, the mood on the floor is a little bit skeptical.”
The element that excited investors was Cisco’s expanding profit margin. In the most recent quarter, the network-equipment maker managed a gross margin of 63% -- even better than its seemingly optimistic target.
Ironically, though, it’s Cisco’s improved profitability that also raised skeptics’ eyebrows. Cisco has put its suppliers over a barrel, forcing them to keep prices low for fear of losing the sector’s biggest player as a client, BusinessWeek reporter John Byrne pointed out on Squawk Box this morning.
Cisco wouldn’t have that kind of clout if business prospects were improving across the telecom and Internet industries. Even CEO John Chambers -- between the lines, anyway -- sounds uncertain.
“We're hitting on all cylinders and ready for the turnaround when it occurs,” he told CNBC last night. “We saw some good signs but it’s too early to call the turn for sure.”
That “too early to know for sure” theme crops up a lot these days in CEO interviews. Lucent Technologies (LU, news, msgs) chief Patricia Russo said about the same thing in Monday-night talk with Maria Bartiromo.
Intel to hit $45 a share?
To the litany of opinions on whether today's rally marks the start of the long awaited tech recovery, add that of Jonathan Joseph, semiconductor analyst at Salomon Smith Barney.
In comments on CNBC, Joseph suggested it just might. Cisco, he said, presents evidence that technology spending is finally starting to rise. Stocks are "bouncing back, and we are beginning to see an increase in (information technology) spending," he says. "It's very slow but will pick up speed."
Of course, he also acknowledged that his firm was among those calling a tech bottom last fall. That turned out to be a bit early. The Philadelphia Semiconductor Index did hit serious lows following Sept. 11, trading below 360 in October. It then rose sharply, reaching 637 in March. But the index slumped again, falling below 460 just this week.
"We knew we were going to be early," Joseph told CNBC. But he noted that in relative terms, "semiconductors have still outperformed other tech stocks."
Where will stocks go now? Expect shares to rise, Joseph said. He projects Intel will hit $45 within 12 to 18 months -- a big jump even from about $28, the level the chip bellwether hit in today’s rally.
-- CNBC on MSN Money staff
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