Stocks Plunge On Inflation, Earnings Worries

Blue chip stocks sold off sharply and the Nasdaq hit a new closing low as inflation and earnings worries continued to mount.

The ISDEX http://www.wsrn.com/apps/ISDEX/ lost 9 to 306, and the Nasdaq dropped 49 to 2268, a new closing low. The S&P 500 lost 23 to 1255, and the Dow plunged 205 to 10,524. Volume rose to 1.2 billion shares on the NYSE, and 2 billion on the Nasdaq. Decliners led 20 to 10 on the NYSE, and 26 to 10 on the Nasdaq. For earnings reports, visit our earnings calendar at http://www.wsrn.com/apps/earnings/internet.xpl and reported earnings at http://www.wsrn.com/apps/earnings/ireported.xpl. For after hours quotes and news, visit our after hours trading site at http://www.afterhourstrading.com.

After the close Brocade fell after topping estimates but lowering forward guidance, which could put the storage sector under pressure on Thursday. Portal Software beat estimates by a penny with 4-cent earnings.

The Consumer Price Index for January rose 0.6%, 0.3% higher than expected, and the core rate of 0.3% came in 0.1% higher than expected. At the same time, news that the Federal Reserve held an emergency meeting yesterday to consider changes to interest rates provided an early boost for stocks, fueling hopes that the Fed may announce another intermeeting rate cut.

Merrill Lynch downgraded Sun , off 2 3/4 to 19 1/2, ahead of the company’s analyst meeting tomorrow night (not tonight, as we reported in the Midday Report). One piece of anecdotal evidence hurting the stock was a report that the market is being flooded with used Sun servers from failed dot-coms.

VA Linux dropped 1 1/2 to 5 3/4 after missing estimates and announcing 25% layoffs. Agilent lost 3.80 to 40.20 after topping estimates but guiding future expectations lower.

Leading Internet stocks rose, led by Juniper , up 1/4 to 75, Broadcom , up 1 1/4 to 65 5/8, and Ariba , which bounced 1 1/8 to 19 1/8. i2 rose 15/16 to 34 1/8 on a CIBC WorldMarkets Strong Buy rating.

CS First Boston defended Openwave , off 6 3/4 to 44 1/4, which continued to fall despite a deal with AT&T Wireless .

E.piphany slipped 9/16 to 23 13/16 after announcing an agreement to acquire Moss Software and the intellectual property of Radnet. Prudential rated the stock a Strong Buy, but Adams Harkness downgraded it to Market Perform from Buy.

TMP Worldwide rose 3 1/4 to 52 3/4 after topping estimates.

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The Nasdaq is barely holding around its early January low of 2251-2300, the point where the Fed first cut interest rates. As we said yesterday, we did not want to see a close below the January 2 closing low of 2291, and we got that today. It’s possible the Nasdaq could still bounce at 2251, and it’s certainly very oversold after a three-day, 11% drop. But given the technical damage the last two days, we suspect at this point that any rally will be a weak one. The next strong support on the Nasdaq below 2250 is in the 2000-2100 level. Breadth was quite negative today, volume was high and new highs/new lows continued to deteriorate, all negatives. To the upside, we want to see the Nasdaq get back above its 1990 logarithmic trendline at 2388 (first chart) broken yesterday, hope

fully by Friday. Above that, the index needs to get back above its September downtrend line (second chart) at about 2450. Not a pretty picture, but it could be enough to get the Fed to cut interest rates again. We hope. Cisco closed at our long-term downside target of 25 1/4 today, but could overshoot that to the downside unless the market environment improves.

The S&P 500 took out 1275 support today; the next strong support is the index’s early January low of 1254. Below that, the next support is likely 1233. To the upside, the S&P needs to get back above its September downtrend line at about 1290.

The Dow has now broken any uptrend from October it once had. Next support is 10,500, then 10,300. The Dow too is very oversold, but given the weakness in financials, the Dow’s leadership since August, even the old industrials look weak to us here. To the upside, we want to see the Dow take out 11,000 resistance; a close above 11,007 would also be bullish under Dow Theory, the oldest school of technical analysis, particularly if the Dow Transports can get back above 3000 and stay there.

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