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Yesterday's FOMC injection springs a leak

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Stocks continue to hover near their lows of the session with the Dow Industrials (INDU) 8,595 -2% falling 175 points with just 3 of the 30 components showing gains versus 27 showing a loss.

Banking giant JP Morgan (NYSE:JPM) $20.65 -6.57% leads the Dow losers list and weighs on the KBW Bank Index (BKX.X) 750 -3.2% despite the company's quick denial regarding rumors about $70 billion derivatives losses. The source of the rumor seems to be a gold website, which would appear to have an interest in writing bullish gold stories.

A quick look at the December Gold futures (gc02z) 320.80 +0.91% has this contract act key near-term resistance of 320, which is the 80.9% retracement level if retracement were taken from the December 11, 2001 lows of $274.80 and the May 2002 relative highs near 330. Just recently, this contract dipped to 61.8% retracement of 309.60 and rebounded strong.

"Gold bugs" portend good things for gold with an aggressive Fed easing eventually raising concerns for inflation. On the other side of the coin, inflation bears say that the high rates of productivity has inflation tame.

Also putting some pressure on banks again today is perhaps what we discussed in yesterday's 01:00 intra-day update regarding an aggressive Fed cut. While we set up a potential bullish trade that could have been taken if the Fed had NOT cut rates or cut just 25-basis points, we mentioned that some market participants feared a 50-basis point cut as being a negative for some banks.

Technology stocks are under some selling pressure after last night's earnings from Cisco Systems (NASDAQ:CSCO) $12.33 -4.86%. Shares of the networking giant are holding up well despite a cautious outlook as the company reported last night that gross margins are expected to swell to an impressive 66-68% range. This is hint that CSCO continues to dominate its competition with superior products that are still holding higher price points at lower manufacturing costs.

Other networking components aren't fairing as well on a relative strength basis today with the broader Networking Index (NWX.X) 127 falling 9 points, or 6.67%.

The Semiconductor Sector (SOX.X) 307 -6.79% is matching the lower trade in networking as programmable logic chipmakers such as Altera (NASDAQ:ALTR) $11.45 -13.25% and Xilinx (NASDAQ:XLNX) $19.67 -14% lead the sector lower. Wachovia is saying that they see a sluggish outlook for communication IC/PLD suppliers ALTR, BRCM, MRVL, and XLNX given CSCO's cautious Q2 rev outlook coupled with the increase in raw material inventory. Moreover, firm says CSCO highlighted its intention to replace PLDs with ASICs in order to further reduce its component cost base, which would adversely impact ALTR and XLNX since they supply about 50% of the PLDs into CSCO.

Sector action is negative with only the Morgan Stanley Health Provider Index (RXH.X) 304.31 +1.42% and Gold/Silver Index (XAU.X) 70.29 +0.5% showing gains.

Volume is light at both the NYSE and NASDAQ. NYSE volume is just over the 800 million mark, while NASDAQ volume has just broken the 1 billion level.

Breadth is weak with the NYSE showing decliners outnumbering advancers by a 2 to 1 margin, while NASDAQ breadth is negative with decliners outnumber advancers 7 to 3.

New highs versus new lows remains bullish at both the NYSE and NASDAQ with 15 stocks trading new highs on the big board versus 14 new lows, while NASDAQ is also positive with 29 stocks trading new highs versus 25 stocks hitting new lows.

Jeff Bailey

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