I Wish Upon A Star Tonight

  • May 17, 2001
  • Goran Yordanoff

Star light, star bright,

First star I see tonight,

I wish I may, I wish I might,

Have the wish I wish tonight.

Hewlett Packard reported earnings last night, and once again guided estimates
lower. CEO Carly Fiorina told shareholders, “There is increasing global
uncertainty…We’re moving through a bottom. We don’t see it
getting
substantially worse, but we don’t see it getting better in the near term. I
don’t know whether you call it crawling along or bottoming or moving through
a trough. We don’t know how to predict the future, but that’s how we see
the
environment.”  This folks, is the kind of double-talk that Wall Street
is
manipulating and using to persuade unsuspecting people to commit any cash or
investments they may have to the stock market. Nevertheless, this gobbledygook was again spun by Wall Street as a “don’t miss the
train!”
story, and the stock rallied 16%.  

The street reacted somewhat rationally to news of Juniper
Networks guiding down their numbers for the quarter. The company
formally stated that they were not changing guidance but that there is a risk
of a 10% decline in revenues. Can someone email me a reason why that
statement shouldn’t be construed as a change of guidance? You can count on
Scott Kriens (Juniper’s CEO) to argue that the world isn’t round and actually
have much of Wall Street believe him.

In the beginning of the “valuations don’t matter” era, stocks like
Juniper
and Brocade were bid up to $50-100 billion dollar valuations, and
price/earnings ratios rose near the 1000 area because of their incredible
revenue growth. I can clearly remember a very prominent television
personality (a retired fund manager) whose name rhymes with Kramer telling us
that you “had to buy” Brocade when it was priced at $260 a share
because
their revenue growth was unlike any other company in the industry and it was
sustainable for a long time to come. (Funny, people give me a hard time
because a few shorts I picked didn’t work out but don’t give guys like this
any trouble when their “can’t lose” long play loses 90% of its
value-what
gives?)  Naturally, Wall Street took a few quarters of hyper revenue
growth,
projected it somewhere around 80 years into the future and extrapolated the
“new economy” valuations for these companies. Fast forward to
2001. These
companies no longer have the revenue growth they once had, in fact their
revenue growth is now negative. Why should their valuations are present
levels present buying opportunities when their businesses continue to
digress? The fact remains that until the economy bottoms and begins moving
back up, I refuse to make any long term commitments from the long side. I
am
not in the business of hoping or dreaming.  I am in the business of making
sound business decisions based on a rational and well informed method of
though and evaluation. If I am wrong and the market has actually begun a
new bull, it will be the first time in the history of the United States financial
markets that a new bull market began from a position of extreme
overvaluation. The fact remains that the S&P 500 still trades at a 25+
price/earnings multiple with a dividend yield of 1.125%. This ain’t a
screaming buy, folks. In fact, it is still grossly overvalued and will
eventually revert to the mean. When that time comes, we load the boat.

After the bell, Dell
(
DELL |
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PowerRating) guided Q2 revenues down 2%-5% sequentially. The street
had expected revenues to increase by 3%. Dell also warned that its Q2 EPS would be in the $0.15-$0.17 range versus consensus estimates of $0.18. Yet
more proof that the fabled “2nd half recovery” isn’t quite
materializing. I
feel like a broken record saying this every single week, as more and more
evidence mounts against any type of bottom, much less recovery in the 2nd
half of this year. In addition,
(
PALM |
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their
proposed merger with Extended Systems
(
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economy and market conditions, and warned for the 4th quarter. PALM
basically
cut in half the revenues they expected to earn next quarter, slashing their
numbers from $300-315 million to $140-160 million. That is more evidence
that recovery is close at hand? In after hours trading, PALM was trading at
$5.50, down from its close of $7.05. Quick, does anyone remember where it
opened on its IPO? 

The title to my column tonight pertains to the current candlestick formation
on the NDX 100 Index that has contained the index from breaking above its
“not-so-surprise” rate cut high of 1981 on April 20th. The chart
below shows a detailed account of the trading action since that time. Although both
Carolyn and I have shown this chart many times, our traders feel that it is such
an important formation that, should it remain in force, will create
outstanding opportunities from the short side. Long trades would be
initiated should the highs of this formation be exceeded. As such, it is
an important fulcrum for future Nasdaq direction.

(Chart displayed is for the Nasdaq composite and not the NDX 100 as intended.
Chart formations are the same, disregard the levels shown on left side of chart
and reference those given within chart commentary.)


As this chart clearly illustrates, the index has gone absolutely nowhere in
one month. Yet during this time, we have heard claims of a great
breakout by the markets and how the “train has left the station.” 
As the chart shows, the train is still undergoing maintenance at the depot.

As such, the gap of the evening star formation shown above is from 1962-1914. This will be a crucial area of resistance for the
Composite to
penetrate
before any more upside is possible. With the QQQ volatility index [$ QQV|$QQV]
today touching the sub-50 zone, it does not appear possible that this will
happen. With the inability of the NDX to penetrate this level, combined
with
the extreme overbought readings currently in place, a substantial pullback
should lie somewhere in the very near future. 


Long Watch:  Biotechs were the speculative stocks du jour today. 
(
PDLI |
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did
extraordinarily well. Alternative energy stocks also lifted into orbit. Names like
(
BLDP |
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(
FCEL |
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(
PLUG |
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Short Watch:  Should this evening star formation hold as resistance, the
entire tech family will be suspect to a significant pullback. 
(
RFMD |
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PowerRating),
(
EMLX |
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PowerRating),
(
BRCD |
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(
DIGL |
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Have a good night.

Goran