Can stocks survive Intel’s woes?

Can stocks survive Intel’s ills?

Market also eyeing oil and the euro

NEW YORK (CBS.MW) – A turbulent start Friday ended on a positive note for the Dow Industrials and on a not-too-shabby note for the Nasdaq. Stocks, in fact, managed to find buyers amid the turmoil created by Intel’s revenue warning.

“People were bargain hunting and diversifying into other areas of the market Friday,” said Mike Sheldon, chief strategist at Spencer Clarke.

“The terrific performance put on during the second half of the day leads me to believe that we’ll see some follow-through next week,” Sheldon said. “It was a very impressive turnaround, enough to make investors take notice.”

Todd Gold, technical strategist at Gruntal, said the Nasdaq’s close above the 3,800 mark on high volume suggests that a short-term bottom is in place – which should limit the market’s downside momentum.

“The open was horrible and we bounced back. This suggests the market has a lot of support at these levels,” said Sam Stovall, senior investment strategist at Standard & Poor’s. But he believes the major averages will remain volatile throughout the third-quarter earnings season.

“What guidance will companies give for the fourth quarter and beyond? That’s the real question,” Stovall said.

The market remains in a “tug-of-war environment,” Sheldon said. He believes the semis will continue to churn until investors become more comfortable with the group’s growth prospects.

In the meantime, a drop in oil prices Friday gave frazzled investors renewed optimism and its beneficial effects were felt by many of the old-economy companies within the Dow, which scored healthy gains. President Clinton ordered the Energy Department to release 30 million barrels of crude oil from the strategic petroleum reserves into the market. Ahead of the news, the November crude oil contract shaved $1.32 to $32.68, its second straight session of losses. How much of the news has already been factored into prices remains to be seen.

The Dow Industrials was down 0.7 percent on the week and is off 5.7 percent for the week. The Nasdaq was nearly flat on the week, ending off a mere 0.8 percent. The index is down 6.5 percent for the year.

Earnings and data watch

The week’s string of profit warning produced a breakout from the business-as-usual pattern, according to First Call. Negative pre-announcements now stand at 206 – up about 25 percent from the same time last year.

Despite the warnings, First Call notes that analysts have trimmed only 2.1 percentage points from the 18.8 percent third-quarter growth rate expected on July 1. That growth rate currently stands at 16.7 percent.

Among the companies reporting next week: Palm, Cabletron Systems, 3Com, Micron Electronics, Tibco, Marriott, Safeway and Family Dollar Stores.

On the economic front, next week will see a cluster of generally second-tier releases, including August existing home sales, August durable goods orders, September consumer confidence, August personal income and personal consumption expenditures and the final revision to second-quarter gross domestic product. View Economic Preview, economic calendar and forecasts and historical economic data.

Friday’s trading activity

In a day marked by breathtaking swoons and remarkable comebacks, the Dow Industrials was able to brush off a plunge in Intel in the wake of its sales warning. Many investors used the early nosedive as a buying opportunity, helping the Nasdaq shave the lion’s share of its losses.

Further, investors avoiding tech stocks put their cash to work in other areas of the market, with traditional defensive areas getting the best play: utilities, drugs, and consumer stocks. Biotech stocks also put on a nice show and financials managed a respectable advance. Within technology, Internet and computer hardware stocks ended in the black.

A tumble in crude oil prices Friday also provided the market with a positive backdrop.

The Dow Jones Industrials Average ($DJ) advanced 81.85 points, or 0.8 percent, to 10,847.37.

Investors flocked to the Dow’s old-economy names, with McDonald’s, Boeing, Coca-Cola, Merck and Philip Morris witnessing hearty advances. The euro’s climb following a concerted central bank intervention Friday offered good support to many of the multinationals.

But the blue-chip barometer’s biggest upside mover was Hewlett-Packard (HWP), which added $8.63, or 9.1 percent, to $103.63. The company announced a buyback of up to $1 billion in shares and said it’s on track to meet earnings estimates for the fourth quarter.

The Nasdaq Composite ($COMPQ) subtracted 25.11 points, or 0.7 percent, to 3,803.76 while the Nasdaq 100 Index ($NDX) slipped 16.97 points, or 0.5 percent, to 3,701.18.

Even prior to Intel’s announcement, market internals were horrible, noted Gold of Gruntal & Co. “Intel kicked the market when it was already down — it accelerated the downside already in place,” he added.

Robin Griffiths, chief technical analyst at HSBC Securities, expects more downside potential over the next two to three weeks before a rally sets. He views fallouts as a buying opportunity.

Griffiths said the market’s tech leaders have been exceeding the speed limit and are slowing down, creating a short-term bottleneck that should clear in October.

The Standard & Poor’s 500 Index ($SPX) edged down 0.1 percent while the Russell 2000 Index ($RUT) of small-capitalization stocks climbed 0.9 percent.

Separately, volume was incredibly heavy at 1.18 billion on the NYSE and at 2.13 billion on the Nasdaq Stock Market. It was the heaviest trading day on the Nasdaq since mid-April. Market breadth remained negative, with losers beating winners by 15 to 14 on the NYSE and by 22 to 18 on the Nasdaq.

In other news, Trim Tabs said all equity funds enjoyed inflows of $13.5 billion over the week ended Sept. 20 versus zero inflows in the previous week. Equity funds investing chiefly in U.S. stocks reported inflows of $12.1 billion compared to inflows of $500 million in the prior week.

Intel’s blues

Bellwether Intel announced late Thursday that its third-quarter revenue will fall below its previous expectations due to waning demand in Europe. The stock (INTC) tumbled $13.55 to $47.94.

Intel said revenue would be 3 to 5 percent higher than the $8.3 billion it recorded in the second quarter and that gross margins are expected to be 62 percent, which is below previous expectations of 63 to 64 percent.

The Intel damage puts a lot of overhang on the market and limits the amount of rebound tech stocks can have going forward, according to Tom Peterson, publisher of the newsletter Bulls Eye Research.

Intel’s reach is an extremely broad one. Peterson notes that the stock is part of one out of every four mutual fund portfolios, is a highly-weighted component of the Dow, Nasdaq and S&P 500 and is an important part of indexed funds.

“Now we are really altering investor psychology away from blissful acceptance of hype towards healthy skepticism and perhaps even negative sentiment,” Peterson commented.

A litany of downgrades descended on Intel, with Goldman Sachs, Salomon Smith Barney, Deutsche Banc Alex. Brown, CIBC World Markets, and Chase H&Q among the firms slashing their ratings on the company.

The closely-watched Philadelphia Semiconductor Index ($SOX) tumbled 5.9 percent. Among other chip stocks suffering heady losses: Advanced Micro Devices (AMD), down $1.68 to $25.88, Micron Technology (MU), off $10.50 to $52, and Motorola (MOT), down $1.50 to $31.50.

Micron received a downgrade from Prudential Securities to an “accumulate” from a “strong buy” and was also lowered by Salomon Smith Barney to an “outperform” from a “buy.” And AMD saw its rating sliced by Prudential, Chase H&Q, and Deutsche Banc Alex Brown.

Sector movers

H-P’s bounce helped to contain the PC sector’s losses and the Goldman Computer Hardware Index ($GHA) eked out a 0.2 percent gain. Dell Computer (DELL) remained the largest downside mover in the group, falling 5.3 percent to $35.94.

Aside from H-P, another upside mover in the PC group was Compaq Computer (CPQ), which added 6.3 percent to $29.63 after releasing a statement addressing concerns over European PC demand in the wake of the Intel warning.

“Our worldwide momentum is clearly continuing and European demand is currently tracking within our expectations,” Compaq said in a release. See full story.

Drug and biotech stocks were on a roll as investors allocated the cash taken out of techs into these areas of the market. The Nasdaq Biotech Index ($IXBT) climbed 5.2 percent and the Amex Pharmaceutical Index ($DRG) gained 3.5 percent.

Within the biotech group, genomics-related stocks were on fire, with Celera Genomics (CRA) up 17.4 percent to $100.06, Millennium Pharmaceutical (MLNM), up 13.7 percent to $148.44 and Human Genome Sciences (HGSI) up 13 percent to $174.19.

Surprise joint intervention

In a move that startled market participants, the European Central Bank, U.S. Federal Reserve and Bank of Japan joined together for the first time to prop up the beleaguered euro early Friday.

The central banks said concerns over the potential implications of the euro’s recent drop on the global economy prompted the move.

The euro has been cited By U.S. companies time and time again during the current pre-announcement season as reason for profit shortfalls. This recently established link between U.S. earnings and the falling euro is likely to have pushed the Fed into action, observers say.

The unexpected move comes ahead of the Group of Seven Industrialized Nations gathering in Prague this weekend.

“The timing was exquisite as those expecting intervention were expecting it after the G-7 meeting – not before,” observed Alan Ruskin, chief economist at 4Cast.

Treasury Secretary Larry Summers, who confirmed the joint intervention, reiterated the well-known mantra that a strong dollar remains in the best interest of the U.S.

In recent action, the euro climbed 1.9 percent against the dollar at 0.8766 after reaching an intraday peak of 0.9006. Euro/dollar fell as low as 0.8440 on Wednesday. The dollar flexed its muscles against the yen, climbing 1.2 percent to 107.86.

Treasury action

Government prices struggled after the dollar’s drop against the euro. But falling oil prices limited the damage.

The 10-year Treasury shed 3/32 to yield ($TNX) 5.84 percent and the 30-year Treasury bond subtracted 11/32 to yield ($TYX) 5.92 percent.