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Stocks under pressure

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Stocks remain under selling pressure this morning as the Dow Industrials (INDU) hovers near its session lows at 10,537 (- 0.69%) with Dow component Microsoft (NASDAQ:MSFT) $62.26 -3.21% the leading the decline. Losses are somewhat offset by gains in International Business Machines (NYSE:IBM) $108.05 +2.67%. Breadth for the Dow Industrials (INDU) is currently negative with 26 down and 4 stocks higher (IBM, XOM, PG, AA).

Broader technology remains under pressure as the NASDAQ Composite (COMPX) is trading off 37 points at 1,892 (-1.92%) with shares of WorldCom (NASDAQ:WCOM) $7.96 -11% leading the most active list with 58.7 million shares traded. Also on the NASDAQ most active list are shares of Cisco (NASDAQ:CSCO) $16.67 -4.3%, Sun Microsystems (NASDAQ:SUNW) $9.77 -2.59% and Intel (NASDAQ:INTC) $32.79 -1.88%.

Sector weakness is broad with the Networking Index (NWX.X) leading declines at 261.55 -6%. Also outperforming to the downside are the telecom related sectors which include the Fiber Optic (FOP.X) -4.7% and Wireless Telecom (YLS.X) -4.7% sectors.

Modest strength and gains can be found in the health maintenance stocks as depicted by the HMO Index (HMO.X) 487 +0.21% and other healthcare-related stocks in the RHX.X 306 +0.26%. Gold/Silver stocks and the XAU.X 63.54 +1.58% lead the sector gainers.

The last two sessions has been rather interesting in the shorter- term 13-week notes ($IRX.X) as YIELD here now rises above the Fed Funds 1.75% rate. This is a notable change to the recent past and action depicts that of a MARKET that believes the Fed most likely does not cut rates further and should begin raising rates in the future. For several months, the 13-week YIELD moved well ahead of Fed policymakers and now looks to be forecasting higher interest rates from the Fed.

13-week Treasury YIELD Chart - Daily Interval

The Fed/FOMC sets interest rates, but the MARKET determines YIELDS. In the past two sessions and again today we see the very short-term 13-week YIELD edge higher. This is MAJOR divergence from the past as this note actually traded a low YIELD of 1.54% back in mid-January. Many economists are also starting to change their tune regarding interest rates from the Fed as they predict a Fed Funds rate of 2% at the August 13th FOMC meeting. The Fed usually raises rates in order to stem liquidity in the market to help control economic growth and keep inflation from getting out of control.

With today's "warnings" from the telecom sector, "growth" seems to be unimaginable. However, subscribers that have been with us awhile get the feeling that we may have been on the right track all along. One of our "warning's to traders" has been that many of the telecom equipment stocks and even the telecom service providers may be many months away from a recovery as bandwidth has become a commodity and will take time for demand to build as the economy recovers. According to telecom equipment provider Lucent (NYSE:LU) they're pushing potential "recovery" in their business back into next year.

Who can blame them? Both Qwest (NYSE:Q) and WorldCom (NASDAQ:WCOM) are preoccupied right now with SEC inquiries into their accounting methods.

Jeff Bailey
Senior Market Technician
Option Investor

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