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Stocks holding gains, but who'd have thought...

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Stocks are holding earlier gains as the broader market average head into the afternoon with gains evenly distributed across the major averages of 1%. But who would have thought on a day when the markets trade bullish that one of the most coveted among big technology lovers in Cisco Systems (NASDAQ:CSCO) $14.88 -4.0% would not be participating? Perhaps not such a surprise as telecom stocks have been weak as has the broader networking sector as depicted by the Networking Index (NWX.X) 241 -0.38%.

This morning's downgrade by Wachovia and cutting of earnings forecasts by the firm for Cisco (CSCO) hasn't helped the stock. Wachovia's cutting of earnings estimates comes from the firms channel checks and recent events in the networking and telecom space on fears that recent bankruptcies in the telecom sector may have a negative impact on the networking markets. Wachovia reduced earnings estimates for fiscal year 2002 and 2003 to $0.28 a share and $0.33 a share from previous $0.31 and $0.33 respectively. Consensus estimates have been for Cisco to earn $0.32 and $0.47 respectively.

Today's thoughts from Wachovia may well play into commentary found here in recent months of some of the "perceived risks" associated with the networking sector. Traders should now have a very good understanding of how important the telecom industry may be in our scenario that we should expect some type of rebound in telecom stocks and their earnings, before the MARKET begins to believe that some capital expenditure budgets can begin to grow in order to build out networks to meet any type of pickup in demand. So far, these concerns are still with the market and the technicals have depicted these concerns.

Transports on the move!

For bulls that have been avoiding many technology stocks and vying for some of the more boring and cyclical stocks, they like what they see from the Dow Transportation Average (TRAN) today as this group of stocks clears the 2,840 level and moves to a post September 11th high.

These are excellent technicals to monitor from here. For bears that pound the "economy stinks drum" it will take a lot of conviction on their part to short this group of stocks.

I for one am what some may call a "weak" trader in that I hate to short strong technicals. I just don't have the connections and the inside information on the economy to know what the MARKET is truly thinking, so I play the trends and what I see on the supply/demand front.

If I think like a bear and don't believe in an economic recovery, then I'm shorting away and most likely getting plenty of up ticks as this group of stocks moves higher and somewhat against the bearish trader.

Transportation Index Chart - Daily Interval

On our bar chart, the key level of resistance was the 2,840 level and that looks to be cleared today. We'll monitor the close, but a close above that level should remain bullish. There's still a lot of work to be done for further upside action and the bigger picture from the point and figure chart speaks a thousand words with a trade at 2,850 looming large. The MACD on the daily bar chart looks to be turning higher just above the zero level and in very good position for a strong move higher.

Transportation Index Chart - $50 box

The supply/demand picture is that of obvious resistance just below the 2,850 level. We've been "early" in our bullishness for this group, but it was bullish on the thought that the economy was showing some signs of recovery and this is a sector that most often leads in an economic recovery phase. If bears have conviction, they'll be shorting or selling this strong rally. If they're not sure, then we should see a trade at 2,850 and that opens up the potential for a strong and potential quick move to the 3,000 level. For me, I'm thinking strong move to 3,000.

Greenspan testimony

There were not as many surprises from Mr. Greenspan's testimony as there was from today's mix and match economic data. For premierinvestor.net subscribers it should be knows that today's new home sales numbers came out rather late and showed a -14.8% decline at 823,000, which was much lower than the economist's expectations for 939,000.

Mr. Greenspan's testimony was that of modest growth, but still advising caution as it is still to soon to say the economy is set for a healthy rebound.

As we've seen in just the past couple of days, we get some stronger than expected numbers from existing home sales and durable goods and at the same time get weaker than expected numbers from consumer confidence and new home sales.

For today, the market has responded rather favorable toward some stocks. But as in Cisco's example, traders need to be selective and disciplined with their stops. This goes for both bulls and bears.

Jeff Bailey
Senior Market Technician
Option Investor

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