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September 21, 2004

Monday's Action

The Dow and S&P were weak on Monday in the face of earnings warnings from Colgate Palmolive, New York Times, and PMC Sierra. Colgate fell 11%, NY Times fell 2%, but PMC actually rose 4% and kicked off a rally in the NASDAQ led by semiconductor stocks. The NASDAQ rally was a surprise but doesn't change Northlake's expecation for near-term weakness....

As we have written, there appears no doubt that 3Q earnings will be weak in light of weaker economic activity over the summer. However, the stock market reaction is contingent on what is already embedded in prices. Nearly everyone expects weak earnings, so the possbility exists that bad news will not be greeted by lower prices.

Yesterday's reaction in PMC Sierra shares is a good example as semiconductor stocks have been the worst performers the last few months, thus bad news was greeted with a sigh of relief that it wasn't even worse. The NASDAQ has a lot of overhead resistance and most tech stocks are rallying into declining trend lines so we do not expect much further upside without a strong upside breakout on heavy volume that clearly reverses the trend.

As we await the Fed meeting beginning today, we expect more bad earnings news from non-tech companies will ultimately be the arbiter of the broad market direction. We expect that to be lower over the next few weeks. Consequently, we have raised cash in the model portfolio to its highest point since Northlake was established in June 2004.

Posted by Steve Birenberg at September 21, 2004 07:45 AM in Market