Is the bulk of the selling behind us? (page 1 of 2)

US Stocks

In what is now a nearly nine-month bear market, it is important to realize that we can have a bounce like last Tuesday's, but it does not mean an end to the downtrend in prices. The markets may continue to rally but it would still be vulnerable to bad earnings news, either in the form of December warnings or January disappointments. We are not out of the woods with this market until it is clear that the inventory corrections now going on in the semiconductor and the telecommunications-equipment sectors are being played out.

Whether the Fed will oblige by becoming more accommodative depends on the state of the economy, the oil price, and the presence of systematic risk. Given the latest batch of data, relief in the form of lower interest rates will not be forthcoming soon. Last week's performance of Intel and Motorola in the face of further earnings revisions gave the appearance as if the selling has stopped. Perhaps only for the two stocks, as both prices have corrected substantially from their year high. And the warnings were not just for the upcoming quarter but included the next fiscal year as well. There is no guarantee that investors will be as forgiving if they continue to be disappointed. From current levels, the upside would be limited to 11,000 for the DJIA, which is less than 3%, certainly not worth the risk. For aggressive clients, we would only recommend buying the spiders SPY for the S&P500, and DIA for the DJIA.

US Technology Stocks

Valued investors "bottom-picked" selected stocks last week and bought up the NASDAQ Composite Index (+10.3% week-on-week) to close the week higher at 2917. While the move last week was encouraging, we remain conservative for the week ahead and believe the market will continue to be volatile because of profit-taking. Sentiment, though improving, will continue to be hampered by macro-driven events like the uncertainty about economic growth conditions in the US for 2001, and the unprecedented delay in concluding the presidential election. For the week ahead, we believe NASDAQ will be trapped in a trading range between 2900 and 2600. Though we believe the risk is high for the index to retest 2600, the positive conclusions are (1) aggressive selling may be approaching exhaustion and (2) the potential for the index to bottom at 2600 improves with each failed test to take prices lower.

We continue to like the fiber-optic component segment of the technology space. Ciena Corp's (CIEN US, $114.00) strong 4Q figures and positive business outlook ahead should help alleviate negative sentiment that has been clouding the segment's stock price performance. CIEN reported 4Q00 EPS of $0.14, beating consensus estimates of $0.12 a share. 4Q00 revenue grew 23% sequentially and 103% year-on-year to $287.6 million. CIEN also raised revenue guidance for 2001 based on the company's excellent ability to execute and the continued focus into high growth product markets like (1) the long-distance optical transport market, (2) metropolitan optical transport segment and (3) intelligent optical switching arena. Furthermore, CIEN's new optical switch product (CoreDirector) continues to gain significant traction and has strong potential to support enhanced revenue growth ahead.

As highlighted over the last 2 weeks, we continue to dislike the PC segment and avoid all PC-related issues. Intel Corporation (INTC US, $34.00) warned last week that they would not meet 4Q00 sales targets and also reduced its forecast for "interest and other income" by 29%.