elliott wave analysis
SEATTLE - 17 March 2002 - by M.A. Nystrom
The first quarter of 2002 comes to a close at the end of this month, and many companies will be releasing their results in April. The bulk of the news comes toward the middle of the month, a period which CNBC calls "earnings season." In my erstwhile days as a stockbroker, we called it "sweeps week" because of the media circus which surrounds it. Everyone is watching very closely, and something exciting nearly always happens.
The drama should begin shortly, as companies start with their "pre-announcements" - advertisements for the successes or tragedies which lie ahead. The biggest and bluest of the chips will be talking earnings, results, and forward looking statements about their businesses and the outlook for economic conditions ahead. We'll find out not only how the quarter went, but how the results compare to last year, if they beat or exceeded analysts expectations, and most importantly, how the market responds.
At the time of this writing, both the S&P and the Dow are up over 20%, with the Nasdaq up 30% + from the post-attack lows of September 2001. The recession has been declared over by official government statisticians (now they're pondering whether it even occurred). Greenspan, the market's favorite quasi-governmental voice recently chimed in with agreement: The recession is over.
Chronicles believes that the jury is still out on the state of the economy. We believe that the official verdict will be rendered during sweeps week by the companies which are actually doing business in the economy itself.
As we noted in Chronicles 1.1, there is a problem with the official government figures on the economy, namely the source: The government. More importantly, the government at war. The first casualty of war is the truth, and the government has a vested interest in painting the picture of an economy that is healthy and robust - not only to America's enemies, but to its citizens as well. War is a psychological game, and the morale of the troops on the frontlines of this battle - the consumers - must be maintained.
While the government would very much like for this recession to be over, it is the companies doing business in the economy which have the best gauge of where the economy currently stands. And these companies will have added incentive to be completely honest in their assessments to shareholders in the wake of Enron.
How are things likely to shake out?
We've gotten some previews this past week from the telecom sector. Nokia and Lucent both fell after announcing weaker than expected revenue for the current quarter. Lucent fell to a new post-attack low. Nortel Networks also got hit after Moody's lowered their credit rating to near junk status. It's stock is also a hair's breadth away from its September low. Meanwhile the SEC is investigating Worldcom and Qwest for "accounting irregularities," and we all know what that means.
The market, however, dismissed these issues as "industry specific" to the telecom sector, and continued on in rally mode.
On March 1, Oracle warned that it would not meet its previous earnings target of 10 cents per share, and the stock got clobbered, falling over 12% in one day (1). When the numbers were finally released two weeks later, the company revealed that earnings fell 10% on revenue which was down 17% from the previous year. But more telling, Oracle's CFO predicted that sales will decline 25-30% in the upcoming quarter - traditionally the company's best period. The stock promptly fell another 12% (2), bringing the total loss to 26% in just 2 weeks. This for a stock that had been trading near its post attack highs, apparently oblivious to any problems prior to the March 1 bombshell.
The company, of course, blamed the economy, saying macroeconomic factors were "80 to 85" percent responsible for the drop in its software licensing revenue. "Customers aren't doing big deals," said the CFO. "They aren't sure their businesses are going to grow." But investors, analysts, and the market in general blamed Oracle itself, saying the problems are "company specific" - that Oracle is losing business to the likes of IBM and Microsoft. These arguments held sway, and the markets continued to rally.
The "company specific" and "industry specific" arguments can hold until proven otherwise. If the whole economy is rotten, we'll find out in April. IBM and Microsoft are two which will be releasing numbers during the sweeps period. Which story is true remains to be seen. But the key point to remember is that sweeps week is not necessarily about the numbers themselves as much as the market's interpretation of the numbers.
The market has rallied mightily recently, and is hanging around near its post-attack highs - just like Oracle before it dropped the bomb. Chronicles believes that the recent market rally is merely a bear market countertrend rally, or dead cat bounce, and the downtrend is likely to resume sooner rather than later.
Whatever the numbers released by the reporting companies, the market reaction is likely to be bearish. As in Oracle's case, bad numbers will mean a decline. But even if a company reports having had a decent quarter with decent prospects going forward, the news has already been discounted into the high stock prices, and a sell-off is likely. "Buy the rumor, sell the news" is a profitable strategy in bull as well as bear markets.
In other words, stocks are damned if the companies they represent do well, and they're damned if they don't. Chronicles still expects to see lower stock prices in 2002 than the lows of 2001.
17 March 2002
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Special thanks to Robert Prechter of
Elliot Wave International
, for the grand macro economic vision which inspires this website and this publication.
Special thanks to Robert Kiyosaki of
, for the grand micro economic vision which equally inspires this website and publication.
And finally, thanks to
, editor of
, for executing the vision.