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A technology focus this focus this morning

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News abounds in the technology arena this morning and most of the news looks to be having a negative impact on stocks futures as S&P futures (sp02u) currently trade down 7 points at 929.50, NASDAQ futures (nd02u) are lower by 12 points at 969 and Dow futures (dj02u) are off 55 points at 8,780.

Shares of Nortel (NYSE:NT) $1.23 are trading down 13 cents, or 12%, at $1.10 after the network equipment maker warned that Q3 revenues from continuing operations will fall approximately 10% sequentially, compared to previous guidance of up 10%. Nortel cited further reductions in spending by telecom service providers in the U.S. The company also announced further reductions in its workforce. This news also has fellow telecom equipment makers under some early morning selling pressure with Alcatel (NYSE:ALA) $5.54, trading down 7% at $5.15, Lucent (NYSE:LU) $1.89 trading down 6 cents at $1.82 and Cisco Systems (NASDAQ:CSCO) $14.02 pulling back 1.2% at $13.85 in pre-market trading.

A bright spot for technology this morning has shares of biotech bellwether Amgen (NASDAQ:AMGN) $45.12, trading higher by 49 cents (+1.08%) in the pre-market after announcing the European Commission has approved Arenesp/Nespo for the treatment of anemia in patients with solid tumors receiving chemotherapy and Neulasta/Neupopeg for the reduction in the duration of neutropenia in chemotherapy patients.

All total, traders are looking at a lower open for stocks as futures are below fair value. Fair value for the S&P 500 today is $0.28. That price will not change during the session. HL Camp & Company has their computers set for program buying at $1.92 and set for program selling at $-1.24. Fair value for the NASDAQ-100 today is $1.60.

If you would like to learn more about how "fair value" is calculated and its uses, please feel free to visit www.programtrading.com for an explanation.

Bearish things can happen this time of year

There's an old trader's axiom that says "September is when leaves and stocks tend to fall. For blue chips it's the worst month of all."

How prophetic is that when the Stock Trader's Almanac points out that the last two days of August have been "murderous" five years in a row for the Dow Industrials (INDU), the quintessential "blue chip" average of 30 large cap stocks all considered to be bellwethers of various parts of the U.S. economy.

This year is also a midterm election year, in which market history has shown, tends to be a little more bearish for the month of September. While September is the worst month for the Dow Industrials and S&P 500 Index, only two decent midterm Septembers have been experienced in the last ten years.

Here's a quick look at three charts of the most recent midterm election years. I've taken data from August 1 to October 31 simply to give us some realization of trend and market action leading up to, during, and after the month of September.

These are very simplistic charts with only the 50-day MA (intermediate term moving average) and 200-day MA (longer-term moving average) overlaid.

Dow Industrials Chart - Aug 1 - Oct 31 1990

September of 1990 was a good midterm election month to be bearish the Dow Industrials as this major market average fell 6.1% for the month. Similar to September 1998 (shown further below), the Dow traded lower into the latter part of August, but rebounded just prior to September 1st. However, by months end, the Dow lost a rather impressive 162 points over the month, or roughly 6.1%.

Dow Industrials Chart - Aug 1-Oct 31, 1994

September of 1994 was also a midterm election year, when the Dow Industrials and S&P 500 have tended to trade weaker. It is perhaps interesting to note that both the 50-day MA and 200-day MA were trending higher into the month of September. The Dow still lost about 70-points or 1.7%. Not too bad for a bull, but perhaps the "trend is your friend."

Dow Industrials Chart - Aug 1 - Oct 31 1998

September of 1998 was actually a bullish September for the Dow Industrials as long as a trader wasn't bullish 3 or 4 sessions prior to the August 31st close. The Dow got "clocked" to the downside by 512 points on August 31 and had lost nearly 350 points in the two sessions prior. Perhaps the Dow was just a little "oversold" on a short-term basis. Maybe it wouldn't "hurt" to have just one bearish position on ahead of this weekend.

What do you think the Dow Industrials will do this September, which is a midterm election year? My "historical" prediction is that the Dow Industrials (INDU) 8,824 will finish the month of September down 4% and close pretty close to the 8,430 level.

Stocks that are Dow components that may well be "out performers" to the downside should my prediction come true are General Electric (NYSE:GE) $31.95, target $29.50, stop $33, Boeing (NYSE:BA) $37.03, stop $40.25, target $31.50 and Walt Disney (NYSE:DIS) $16, stop $18, target $12.50. I'm stopping at these three names for now as it is late on Tuesday evening as I write. However, each of these stocks currently has a "sell signal" associated with their point and figure charts, and relative strength versus the Dow Industrials is weak.

Note: For purposes of disclosure... I currently hold a bearish position in General Electric (GE) in the Sept. $32.50 puts (GEUZ) with cost basis of $1.30. I will be leaving on vacation at the end of this week and should GE trade $30 or close to that level, I will most likely close out 1/2 of this position, so I can concentrate on the forest and the creatures within it during my vacation.

Jeff Bailey
Senior Market Technician
Option Investor


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