The Market's Mood Changes, and Dell Takes a Hit

SAN FRANCISCO -- My colleague and officemate Adam Lashinsky was wondering aloud why shares of Dell (DELL - Cramer's Take - Stockpickr) fell 11% Monday and, by extension, why the Nasdaq Composite fell 2.8%.

When I referred to the article in The Wall Street Journal about slowing PC sales, he replied somewhat flippantly, "We knew about that weeks ago."

Adam was heading out the door and (more importantly) beholden to TheStreet.com's (TSCM - Cramer's Take - Stockpickr) strict guidelines on stock ownership, so I didn't vocalize what I was thinking: "So did you short Dell, Mr. Smartypants?"

LashMan later clarified that Microsoft's (MSFT - Cramer's Take - Stockpickr) cautious guidance in its conference call last week really presaged the reports from Gartner Group and International Data.

But office banter aside, the question remains: Why did Dell fall 11% Monday?

In addition to the aforementioned article, Merrill Lynch cut its 2001 revenue estimates for Dell (but kept its earning estimates intact). That, and the fact Dell's shares were up nearly 25% since May 26, certainly contributed to its demise Monday. Still, discussions with market participants proved unsatisfying regarding the question of the stock's steep slide. Same with the more general one of what's changed since last Thursday -- when all was right with the long side.

"When you trip over something, you look to see what you tripped on, but sometimes it's fruitless" to find a culprit, said Doug Myers, vice president of equity trading at IJL Wachovia. "I don't know why the mood changed, but it really has. All the urgency to get stocks, the positive outlook and general optimism proved to be very fleeting."

Perhaps the profit warnings late last week from Agilent Technologies (A - Cramer's Take - Stockpickr) and Ericsson (ERICY - Cramer's Take - Stockpickr) had more of a negative psychological influence than was first believed. Or so I suggested to several sources. That, plus disappointing results at Lucent (LU - Cramer's Take - Stockpickr), sluggish top-line growth at Microsoft (MSFT - Cramer's Take - Stockpickr) and IBM (IBM - Cramer's Take - Stockpickr), and questions about the quality of Intel's (INTC - Cramer's Take - Stockpickr) investment income-enhanced earnings, etc. etc.

No one disagreed with that admittedly obvious observation.

"There's a real lack of conviction," said Michael Driscoll, block trader at Donaldson Lufkin & Jenrette. "Going forward, any rally will be met with a lot more skepticism."

But the trader also suggested it's folly to read too much into a one-day affair (try telling that to your spouse). He described the session as "a typical summer Monday -- very slow."

That comment got me thinking about George Carlin's classic "slow and sloppy" bit, which perfectly describes Monday's trading action.

Strategize, Strategize ... Come On Everybody

Investors might want to shoot the whole day down, but I like Mondays. And I'll tell you why: Wall Street's strategists release their weekly commentaries.

Edward Kerschner, chairman of investment policy at PaineWebber, suggests the long-term outlook is still favorable and the U.S. financial market environment "perfect," thanks to the budget surplus, low inflation and consistent profit growth. However, this perfection is largely priced in at current valuations, he wrote, predicting 10% to 15% gains by the S&P 500 over the next 12 to 18 months.

"The challenge, then, is to focus on those long-term drivers of the market while ignoring the near-term noise," he wrote.

Elsewhere, Paul Rabbitt, president of RabbittAnalytics.com, wrote, "The market is compressed like a jack-in-the-box and likely to pop up in very short order." Rabbitt, whose recent cautiousness was reported here, foresees the Dow Jones Industrial Average trading as high as 11,740 in the next 90 days, while the S&P visits 1600 and the Nasdaq 5000.

Meanwhile, early indications suggest the call of the week goes to Thomas McManus, equity portfolio strategist at Banc of America Securities. Monday morning, McManus reduced his recommended equity allocation to 65% from 70%, increasing bonds to 35% from 30%.

While not bearish, the strategist wrote, "There is much less fear in today's market than in 1994," to which the current environment is oft compared. "Complacency spells danger."

The Chicago Board of Options Exchange Market Volatility Index (or VIX) closed at a mere 21.39 on Friday vs. its 52-week low of 19.46, he noted. (The VIX rose 4.9% Monday to 22.44.)

The equity downgrade coincided with McManus lowering his 2000 earnings estimate for the S&P 500 to $56.50 from $57. The strategist cited the dilutive effect on the index of new additions such as JDS Uniphase (JDSU - Cramer's Take - Stockpickr) and Broadcom (BRCM - Cramer's Take - Stockpickr).

"They, like Yahoo! (YHOO - Cramer's Take - Stockpickr) and America Online (AOL - Cramer's Take - Stockpickr) before them, are bringing in a huge amount of market cap and not bringing in their fair share of the profits," McManus explained. "Their growth prospects are much greater than the S&P as a whole, but it is possible the index is becoming a riskier vehicle over time, because it's becoming populated with more very high multiple companies."

I had a bit of a back-and-forth with Don Luskin over this in the Columnists Conversation on RealMoney.com Monday, which I urge you to review if you're not already tuning in.

My point -- in a nutshell -- was that such compositional issues matter if they cause strategists to revise their expectations for the S&P 500, in turn causing institutional investors to adjust buy/sell decisions accordingly.

McManus' decision and the market's action Monday seem to back up that view (IMHO). But perhaps I'm being too Machiavellian. You tell me:

The Composition of the S&P 500...

Makes me no nevermind. The index committee should strongly consider how changes impact the S&P's P/E. It's not your father's index anymore: More tech is good. End of story. What's the symbol for "Machiavellian"?

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