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Give back of yesterday's gains

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The major market averages have given back all of yesterday's gains on what looks to be a round of profit taking at this point. One of my "key" sectors that I wanted to monitor for a break above an important near-term (1-week or 2) level of resistance is the very economically sensitive and better performers to the upside this year in the deeper cyclicals as depicted by the Morgan Stanley Cyclical Index (CYC.X) 494.97 -1.53%.

Over the past couple of years (believe it or not) this is a group that I felt equity bulls would focus on thought of a recovering economy.

While this group of stocks isn't the ONLY sector I would monitor for strength weakness to get a read on the MARKET'S perception of the economy, it is one of my more "key" groups. This is the group of stocks that would eventually show future bottom line earnings growth, which in turn would have budgets increasing for eventual technology spending increases.

As such, it is my belief (as most other investors) that the MARKET is forward looking and never wrong. With that thought in mind, I've recently discussed the importance of a potential break above the 505 level of horizontal resistance as a sign of renewed optimism of more robust economic growth. Suffice it to say, today's lower trading still leaves this group "suspect" and perhaps the broader market averages ability to make a continued move higher.

Earlier today I discussed the chart of the CYC.X in the OptionInvestor.com market monitor at 09:27:09 if subscribers are interested.

As the morning session unfolds, we have seen a "pickup" in buying in the shorter-end of the Treasury market as the 5-year YIELD ($FVX.X) 3.291% drops by a greater degree than YIELD in the 10- year ($TNX.X) and 30-year ($TYX.X). This type of action hints of a more "cautious" move in my mind.

Sector action today is just the inverse of yesterday's action with all sectors in the red except for gains in the CBOE Internet Index (INX.X) 77.38 +2.16% and Gold/Silver Index (XAU.X) 64.23 +0.51%.

Internet sector gains are lead by shares of INX.X component and penny stock CMGI Inc. (NASDAQ:CMGI) $0.83 +43%. Action looks to be short covering as I can't find any news on the wires to explain today's bullishness. On August 20th, there was news that Equilibrium, a provider of imaging servers for the enterprise and majority-owned CMGI Inc. (CMGI) had announced that Microsoft (NASDAQ:MSFT) $52.45 -1.46% had selected Equilibrium's MediaRich (TM) Image Server to extend the functionality of Microsoft's Commerce Server 2002.

Equities trading above $5.00 that are among the most actively traded this morning have the NASDAQ-100 Trust (AMEX:QQQ) 25.39 -3.01%, Cisco Systems (NASDAQ:CSCO) $14.61 -3.17%, Intel (NASDAQ:INTC) $18.31 -4.4% and AOL Time Warner (NYSE:AOL) $13.00 -7.53% trading lower.

AOL weakness is attributed to potential charges by the SEC and its investigation into AOL giving false "upbeat forecasts." The Wall Street Journal reported that another large write-off of intangible assets, potentially ten of billions of dollars worth, could be on the horizon for AOL. Separately, the Financial Times reported that the SEC is set to examine a series of upbeat forecasts made last year by AOL executives as they sold about $500 million in shares between February and June of last year.

Jeff Bailey
Senior Market Technician
Option Investor


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