What can save techs?

What can save techs?

Nasdaq down 10.5% on the week

NEW YORK (CBS.MW) – The tech sector had a horrible week, losing the leadership of one of its key groups – the chip sector.

The hemorrhaging in the telecom sector following Nokia’s warning Thursday, and the selling that hit stocks Friday on news that economic growth remains healthy and that the Fed may still need to tighten the screws spread to virtually all areas of the market. The few green spots flashing on screens Friday were in the usual safe-have names – like the drug and gold stocks. Not a pretty picture.

“This is a tough market. There never seems to be any real follow-through,”said Frank Gretz, chief technical strategist at Shields & Co.

What’s also troubling, Gretz pointed out, is the increase in volume on the downside – which wasn’t the case last week. This suggests real selling from institutions.

“Largely due to the influence of the weak tech sector, after breaking out both the Nasdsaq and the S&P 500 now have pulled back into the base patterns from which they broke out. That’s never a good sign,” Gretz pointed out.

The reaction to the week’s earnings reports – good or bad – was to sell on the news. The Nasdaq managed only one upside session this week and the Dow Industrials two.

Earnings misses and earnings warnings were just another reminder for the market that slower economic growth down the road will inevitably take a bite out of profits. But on Friday, Fed worries came into play following the release of a hefty increase in second-quarter gross domestic product.

“The market had become enamored with the notion that the Fed was done tightening,” said Joe Liro, equity strategist at Stone & McCarthy Research Associates. But Friday’s strong gross domestic product number raised the tightening bar, he said.

“Fear of the Fed has moved from the back burner to the front of the stove,” Liro remarked. And the stocks that are getting hurt the most are those with the fat price-to-earnings ratios, he added.

A lot will be determined by next week’s July employment numbers, according to Liro. More strength in next week’s economic data, including the National Association of Purchasing Management Index, would rub salt on the market’s wounds, he said. View Economic Preview, economic calendar and forecasts and historical economic data.

Market observers agree that the kind of damage suffered by the major averages this week will take time to heal.

The Nasdaq fell 10.5 percent this week and is down 10 percent for the year. The index is off 28.6 percent from its high of 5,132 set on March 10 but is up 20.4 percent from its 2000 intra-day low of 3,042 reached on May 24.

The Dow fell 2.1 percent on the week and is down 8.6 percent for the year.

Earnings watch

Two busy reporting weeks just ended and 81 percent of the S&P 500 companies reported, First Call said. And all but four Dow companies have unveiled their quarterly results.

Huge earnings gains for the major oil companies pushed year-over-year earnings growth for the S&P 500 to 22.1 percent, up from 16.9 percent at the start of the week, First Call said. The final earnings growth number for the second quarter is estimated to come in at 22 percent.

Of the companies that reported, a mere 9 percent came in below the Wall Street consensus estimate, while 27 percent met expectations and 64 percent beat them, First Call said. Even in the first quarter, which saw amazing earnings, 11 percent of the S&P 500 companies missed estimates.

Expectations for third-quarter S&P 500 earnings growth stand at 17.7 percent. And third quarter negative pre-announcements are so far running about the same as in the second quarter, according to First Call.

“The problem is that this time more of the negative pre-announcements are coming from major companies,” the earnings compiler said.

Friday’s trading activity

The tech sector tanked Friday in a third straight session of painful losses as a stronger-than-expected gross domestic product report rattled investors. The Nasdaq closed at its lowest level since June 1.

Market participants also remain concerned about future revenue growth following a string of high-profile earnings warnings this week.

“It’s going to take time to repair this damage,” said John Zaro, managing member at Bourgeon Capital Management. “The market appears to be crumbling in a number of places, [like the] chip and telecom sectors.”

“Nobody wants to make big bets. It’s hard to have conviction in this kind of environment,” Zaro added, noting that the market is entering a difficult time of the year, when liquidity tends to dry up.

The networking sector was the hardest hit area within technology, followed by Internet and computer hardware stocks. But the chip sector — the market’s sore spot over the past couple of weeks — ended marginally higher.

“It’s encouraging that the semiconductor index held its 200-day moving average Friday. We think the group is oversold but it will take time to repair the damage,” said Todd Gold, technical analyst at Gruntal & Co.

“The market’s bullish case has been injured,” Gold continued.

In the meantime, the broader market saw minor advances in the defensive drug, gold and utility sectors. Biotech and brokerage stocks suffered the biggest losses.

“We’re not seeing broad-based strength in any group,” Gold noted.

The Dow Jones Industrial Average slipped 74.96 points, or 0.7 percent, to 10,511.17.

Downside leaders were Intel, Alcoa, American Express, AT&T and General Electric. Moving on the upside were shares of Coca-Cola, 3M, Johnson & Johnson and Microsoft.

Microsoft (MSFT) bucked the downward trend in the tech sector, adding 5/16 to 69 11/16. The software kingpin got a boost from optimistic comments coming out of its annual meeting before analysts on Thursday. Chairman Bill Gates touted the company’s current software lines, as well as its promised “Net” family of products. See Software Report.

General Electric (GE) lost 1 9/16 to 50 15/16. Robert Wright, president of General Electric’s NBC television unit, was promoted to be a vice chairman of the parent company. Wright will continue to run NBC. Read the full story.

The Nasdaq Composite tumbled 179.23 points, or 4.7 percent, to 3,663.00 while the Nasdaq 100 Index plunged 204.32 points, or 5.5 percent, to 3,477.31.

A number of tech stalwarts took a beating Friday, including Intel, down 5.7 percent, EMC Corp., off 5 percent, Cisco Systems, down 7.6 percent, and Sun Microsystems, down 4.3 percent.

The Nasdaq’s breakout a couple of weeks ago was yet another fakeout, Gold noted.

“We may have the opportunity for a bounce back from oversold conditions since we came down so hard so soon,” he continued, adding however that it’s an open question whether the market will generate sufficient follow through to keep the averages going in the coming weeks.

In the meantime, the day’s share of merger news failed to inspire investors. Nortel Networks (NT) announced it’s purchasing Alteon WebSystems (ATON) in a stock deal worth $7.8 billion.

Under the terms of the agreement, Nortel will pay a fixed rate of 1.83 shares for each share of Alteon. Investors reacted with disappointment that a premium was not paid. Alteon tumbled 14, or 9.8 percent, to 129 while Nortel fell 5 1/2 to 73. See full story. Merrill Lynch’s Broadband Holdrs (BDH), of which Nortel is a component, fell 6.2 percent.

The Standard & Poor’s 500 Index fell 2.1 percent while the Russell 2000 Index of small-capitalization stocks slipped 2.3 percent.

Separately, Trim Tabs said equities saw inflows of $7.6 billion in the week ended July 26 compared with inflows of $7.4 billion during the previous week. And equity funds that invest chiefly in U.S. stocks ad inflows of $6.9 billion versus inflows of $7.4 billion during the prior week, Trim Tabs said.

Meanwhile, volume stood at 980 million on the NYSE and was very heavy at 1.77 billion on the Nasdaq Stock Market.

Volume on the Nasdaq has been above 1.7 billion over the past three trading sessions as the index declined heavily — a negative sign for the market. Losers pounced on winners by 19 to 9 on the NYSE and by 28 to 11 on the Nasdaq.

Inside the GDP

Second-quarter gross domestic product came in at 5.2 percent compared to the 3.6 percent increase expected by a survey of economists conducted by CBS MarketWatch.com
. But first-quarter GDP was downwardly revised to show a 4.8 percent increase from the previously reported 5.5 percent. Read the story.

The GDP numbers were buttressed by inventory growth and government spending, while consumer spending slowed. Reassuring to the market was the tame growth in prices, as seen by the mild 2.2 percent rise in the domestic purchases deflator.

“The [softer] consumer spending numbers conform to Fed Chair Alan Greenspan’s recent statements about the economy,” noted Peter Kretzmer, senior economist at Banc of America Securities.

“If this level of consumer spending is maintained, Greenspan will be comfortable,” Kretzmer said. He continues to forecast a 25-basis-point rate hike at the August 22 Federal Open Market Committee Meeting.

Liro of Stone & McCarthy Research Associates said the only area within GDP that showed signs of slowing was consumer demand. But the climb in investment spending, he added, was eye-popping.

Specific issues

The semiconductor sector was the only bright spot within the tech sector Friday. That’s not surprising considering the Philadelphia Seminconductor Index ($SOX) has fallen a whopping 21 percent over the past couple of weeks, relinquishing its leadership role within the market.

Among the winners in the group: KLA-Tencor (KLAC), up 7/16 to 50 15/16 following a nearly 8-percent decline on Thursday; Rambus (RMBS), up 4 1/4 to 70 15/16; and Advance Micro Devices (AMD), up 1/2 to 70 1/2. But not all chip companies were shining as bellwether Intel (INTC) erased 7 7/8 to 129 1/8 and LSI Logic (LSI) lost 1 15/16 to 33.

Rambus announced Friday that it struck a licensing deal with Japan’s Oki Electric Industry for its high-speed memory technology. See story.

Shares of Nokia (NOK) found support after Thursday’s beating, rising 2 1/8, or 5.2 percent, to 43 3/16. On Thursday, Nokia warned that third-quarter earnings would be lower than its second-quarter results, sending shockwaves throughout the wireless telecom and tech sector. On Friday, Nokia announced that it would repurchase a maximum of 36 million of its shares at market price. The buy backs will begin on August 4 at the earliest, the company said. See full story. Among the other wireless telecom stocks, Ericsson (ERICY) added 3/8 to 18 1/8 while Motorola (MOT) shed 7/16 to 33 1/2.

Merrill lowered its 2000 earnings-per-share estimate on Nokia by 3 percent but maintained its 2001 estimates. The brokerage maintained its “buy” recommendation on the stock on the belief that the sell off Thursday was overdone.

Nordstrom (JWN) warned Friday that second-quarter earnings will come in short of the Wall Street consensus estimate. The company said soggy sales, above-plan markdowns and promotional activity are expected to results in a shortfall of about 12 to 16 cents a share. Further, the company will take a charge estimated at 4 to 5 cents a share related to an investment in an Internet grocery business in 1998. First Call had expected the company to make 55 cents a share in the second quarter. The stock tumbled 4 1/16, or 18.3 percent, to 18 1/8. See retail sector story.

Shares of Qwest Communications (Q) added 3/8 to 48 1/4. Lehman Brothers raised its 12 to 18 month price target on the stock to $90 from $70 and lifted its 5-year growth outlook on the company to 18 percent from 16 percent. Lehman expects Qwest to redeploy capital to fast growing data areas as Internet applications and hosting. See Rating Revisions. And Donaldson Lufkin & Jenrette upped the company to a “top pick” from a “buy” rating.

WorldCom stock fell 2 3/4 to 36 9/16, adding to Thursday’s 8 percent decline. DLJ cut its rating on the company (WCOM) to a “buy” from a “top pick,” indicating that it believes Qwest carries greater momentum. Merrill’s Telecom Holdrs (TTH), which includes Qwest and WorldCom, slipped 2.1 percent.

Brokerage stocks took it on the chin, mirroring the sloppy action in the broad market. The Amex Securities Broker/Dealer Index ($XBD) fell 2.4 percent. Among the biggest losers were Lehman Brothers (LEH), off 5 7/8 to 108 1/8, and Charles Schwab (SCH), down 2 1/2 to 34.

Among the bank stocks, Bank of America (BAC) lost 1/4 to 46 1/2. The company announced Friday that it’ll cut between 9,000 and 10,000 jobs across the organization. Most of the reductions will take place in middle and senior management. See full story.

Though the major averages remained deep in the red Friday, initial public offerings had quite a day. Avici Systems skyrocketed 212 percent, or 65 3/4 to 96 3/4 after opening at 90 — about triple its $31 price. The developer of high-speed data networking equipment upped its price range from $18 to $20 earlier in the week.

And Illumina surged 23 11/64, or about 145 percent, to 39 11/64. The developer of tools for large-scale analysis of genetic variation and function priced at $16 a share, above its previous range of $13 to $15. See IPO Report.

See After Hours for post-market trading activity.

Treasury focus

Government prices slipped following the release of the GDP data, with losses clustered in the long end of the yield curve. But the fixed-income market came off its lows of the session as equity prices faltered.

The 10-year Treasury note shed 9/32 to yield 6.04 while the 30-year bond fell 3/32 to yield 5.78 percent. See Bond Report.

In the currency arena, dollar/yen added 0.4 percent to 109.62 while euro/dollar continued its descent, falling 1.0 percent to 0.9224. Dollar buying picked up steam as news of stronger-than-expected GDP growth hit the screens. See latest currency rates.

In the commodity market, September crude advanced 16 cents to $28.18 while the Bridge CRB index climbed 0.39 to 219.59.