WorldCom Shocks Investors

News of massive accounting fraud at WorldCom sent stocks sprawling in early trade Wednesday, but stocks rallied off their worst levels and almost ended the day in positive territory.

In a move that was widely expected, the Federal Reserve left interest rates unchanged and said that the economic recovery has begun to moderate.

The ISDEX lost half a point to 101, and the Nasdaq rose 5 to 1429 after breaking its September low of 1387 at one point. The S&P 500 dropped 2 to 973 after coming within 8 points of its September low of 944.75, and the Dow lost 6 to 9120, but finished 200 points off its low for the day. Volume surged to 2.01 billion shares on the NYSE, and 2.05 billion on the Nasdaq. Decliners led 19 to 13 on the NYSE, and 20 to 14 on the Nasdaq.

After the close, RealNetworks warned.

During the day, WorldCom was halted at 83 cents a share and never reopened after reporting that a stunning $3.8 billion in expenses were reported as capital expenditures to artificially inflate earnings. Some trades went through as low as 7-23 cents. The company will trade under the symbol WCOME beginning tomorrow.

Qwest also got whacked by accounting concerns once again, losing 57%. lost 25% on a warning.

Micron fell 3% after missing estimates, but ended three points off its low.

3Com , up 22%, and Palm , down 5%, both topped estimates.

Cirrus fell 6% on a warning.

Yahoo rose 3% on an upgrade.

Qualcomm finished up on the day after briefly setting a new 52-week low. Nokia surged 8%.

AOL fell 11% despite denying rumors that the company will warn.

Some technical comments on the market: Note: To see the charts in the text email newsletter, click on the story link at the top of the newsletter.

Everyone keeps talking about what is needed to restore investor confidence, but frankly, a lasting measure of skepticism and more individual responsibility would probably be a better outcome, especially since reform efforts appear feeble at best. Learn how to read a cash flow statement and invest only in companies generating free cash. Learn how a stock has been historically valued and buy only when it gets to the low end of that range. These are just a couple of simple, time-honored approaches to investing that were all but forgotten in the roaring ’90s. A company that spends $8.8 billion to earn $6.4 billion and makes up the difference by issuing debt is not a good investment. That cash flow statement belonged to WorldCom in 2001. A very simple test that could save investors from potential disaster.

We continue to have two scenarios here: a good bottom by early next week at the latest with a very good summer rally to follow, or an unsatisfactory bottom here with a disappointing rally to follow. We’d prefer the former, but the market is not even close to a good bottom here, and dip buyers can still be found around every corner. Interestingly, some had the 9000 level on the Wilshire 5000 (first chart below) as important support because the Federal Reserve views it as a wealth index. If you believe in the elusive Plunge Protection Team, it appears they did some pretty good work today. It seems, however, that in the last two years, big gaps down have been bought every time. Of 14 3% down gaps on the Nasdaq in the last two years, every one closed higher than the open, and two-thirds were still higher two days later, according to one analysis. It makes you long for the days of August-October 1998, when limit down futures at the open meant a 500-point drop in the Dow and a -1500 TICK, fear levels that this market could sorely use. The VIX (second chart) retested its recent high today, but once again, the selling and fear levels did not hold all the way to the close, a necessary ingredient for capitulation. We still have only one -1000 TICK on the Nasdaq and two on the NYSE, so we’re still a ways from the 3-5 that have marked good bottoms over the last couple of years. There are other signs that this bounce may not last long: the rally did not come back all the way, and the internals were terrible on the exchanges. The Dow (third chart below) came within 126 points of our 8800 target today. A close below 9000 could be viewed as a negative. We continue to look for a buying pressure (+DI) reading under 10 on the Dow, but have yet to get one. The S&P (fourth chart) bounced just above the September intraday low of 944.75. 923 is below that, and 965 is first support. The Nasdaq (fifth chart) held 1357-1387 support today. To the upside, 990 and 1000 on the S&P, 1460-1480 on the Nasdaq, and 9250 on the Dow look like tough resistance.





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