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Digestion, with minimal indigestion

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Stocks are rather unchanged this morning and appear to be digesting yesterday's gains. A weaker than expected book-to-bill ratio in the semiconductor industry finds the Semiconductor Index (SOX.X) 357 -2.25% as this morning's sector loser, but not bad considering the group has jumped 20% from the 300 level in the past six sessions. Today's sector decline looks more like that of profit taking than that of mass exodus on a weaker book-to- bill number.

On the flip side of things, retailers as depicted by both the S&P Retail Index (RLX.X) 289 +1.37% and Retail HOLDRs (AMEX:RTH) $75.35 +1.7% along with the Networking Index (NWX.X) 149.27 +1.42% lead sector gainers. Recently I had profiled a bullish trade in the Retail HOLDRs (RTH) in the January 75 calls. While the sector was hit lower in recent sessions, today's trade right back near $75 has bulls still optimistic not only as it relates to the technicals of the RTH, but the holiday shopping season which many predict as being dismal. CNBC sent one of their crew to a mall in New Jersey, interviewed a couple of "mall rats" and they were going to spend less this holiday season. Reasons cited were stock market losses and cuts in pay at their jobs.

But today's action isn't without some carnage. Shares of storage networker Brocade Communications (BRCD) $5.32 -26.92% are hammered lower after the company reported Q4 earnings that met expectations, but guided lower for upcoming Q1 of 2003. The company said it now expects Q1 revenues (Jan) in the range of $120-$125 million and net income per share of break-even, which excludes restructuring and acquisition-related charges. Analysts were expecting the company to show Q1 performance of $157.5 million and $0.08 respectively. The company also its President and COO Michael Byrd will be stepping down at the end of fiscal Q1 to spend more time with his family, but will serve as an adviser to a new CEO until the end of BRCD's fiscal Q2.

It's notable that shares of BRCD trade below trend on their point and figure chart and have not given a "buy signal" since giving a double-bottom sell signal at $18 in July. While a rising tide tends to lift all boats, every boat has an anchor or two and one anchor appears to have the letters BRCD stamped on it.

Shares of Electronic Data Systems (NYSE:EDS) $16.70 +7.81% have jumped higher this morning on speculation that Dow component IBM (NYSE:IBM) $84.45 -0.51% may be looking to gobble up the company. This rumor has been circulation for several months, but appears to be impacting today's trade in EDS.

Marginal buying in Treasuries has turned to marginal selling as the session progresses. This has the benchmark bond's YIELD ($TNX.X) rising back above the 4.15% level at 4.165%. It is notable that the turn higher in Treasury YIELDS did find the major indexes recovering from their lows of the session. On a near-term basis, traders will be monitoring YIELDS for breaks above yesterday's relative highs, to perhaps spur a round of continued short covering in equities.

Jeff Bailey

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