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Profit taking takes it toll

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After a gap higher at the open, the major market indexes are at their session lows with the Dow Industrials off 57 points at 8,387 after posting a 144 point gain earlier in the morning.

Technology stocks got off to a "hot start" when the NASDAQ-100 Index (NDX.X) 982 -1.3% jumped just above the 8,500 level, but has given back gains and leads the major indexes lower after Analyst Douglas Lee at Banc of America recommended investors "take profits" on semiconductor stocks, saying the recent rally has been based on bullish sentiment alone, despite worse-than- expected outlooks issues by reporting companies. The Semiconductor Index (SOX.X) 293 +0.36% is up roughly 38% from its recent lows of 211. Lee noted that most major end markets for chips have shown few signs of an uptick in recent months, and added that long-term secular growth prospects are less attractive given the industry's transition into "a more classical cyclical industry." Lee went on to say, "While we believe this rally could continue in the event that more promising signs of end market demand emerge, we believe the recent sure in stock prices and valuations has resulted in an adverse risk/reward scenario for investors."

Shares of Intel (NASDAQ:INTC) $16.90 +1.86% are the third-most actively traded stock at just over 38 million shares and have traded a session high of $17.28. Semiconductor equipment giant Applied Materials (NASDAQ:AMAT) $15.42 +6.34% is the seventh most actively traded and holds near its session high of $15.49.

Healthcare sectors are under renewed selling pressure for a second straight session and lead this morning's sector losers as the HMO Index (HMO.X) 544 -2.79% and Morgan Stanley Health Provider Index (RXH.X) 320 -4.27% trade lower after Friday's lowered guidance by Cigna (NYSE:CI) $37.50 -4.79%. This morning, UBS Warburg downgraded shares of Tenet Healthcare (NYSE:THC) $43.80 -11.17% to "reduce" from "hold" and cut their price target to $38 from $54 based on what the firm believes to be unsustainable growth in the company's revenues from Medicare outlier payments.

In the bond markets, shorter-dated maturities are seeing some aggressive buying as the 13-week Treasury YIELD (IRX.X) falls rapidly to 1.544%, which is very close to the low YIELD of 1.522% set on October 10th, which was the day many major equity indexes found their relative lows.

The 2-year Treasury December futures (tu02z) 107'070 +0.06% and 5-year December futures (fv02z) 112'260 +0.37% have broken firmly above their 50-day SMA's, while the 10-year December futures (ty02z) 113'180 +0.36% begin their move above their 50-day SMA of 113'377.

For equity traders following this action and using the Treasury bonds as a measure of cash rotation, current analysis would be that the major indexes may now be vulnerable to breaks BELOW their 50-day SMA's.

This would have the Dow Industrials (INDU) vulnerable to the 8,233 level, S&P 500 to 874, S&P 100 to 440, NASDAQ Composite to 1,267, NASDAQ-100 to 918 and representative QQQ to $22.84.

Jeff Bailey

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