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Applied Materials and Chicago PMI give market fits

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Semiconductor-equipment maker Applied Materials (NASDAQ:AMAT) $11.69 -9.85% are the second most actively traded stock in this morning's session after the semi-equipment maker warned that it has seen a first-quarter decline in new equipment orders, which are down 35% from guidance given in November of a 20% decline. The company said "Due to ongoing economic weakness and geopolitical uncertainties, customers deferred capital expenditures, causing larger order shortfall that expected."

The new from AMAT looks to have "shocked" investors, despite comments from chip-maker Intel (NASDAQ:INTC) $15.40 -2.46% saying in its recent quarterly earnings report that it was cutting its 2003 capex budget to a range of $3.5-$3.9 billion, which was well below the Street's expectations of $4 billion and well below Intel's 2002 capex expenditures of $4.7 billion.

The AMAT news was released just prior to this morning's opening bell and saw equities open lower.

Since the opening bell, stocks showed a rebound with the Dow Industrials (INDU) 7,976 +0.39% shrugging off a decline to 7,917 with a rebound back to 8,039 after economic data showed the Chicago Purchasing Manager's Index jumping to 56.0% in January, which was much stronger than the 53% forecasted by economists and well above December's 51.7% level. While economists note it would be premature to call the manufacturing slump from late summer to early fall just a hickup, the improving numbers from purchasing managers in December and January show the manufacturing sector holding ground and giving hint of modest economic improvement.

While the outlook among purchasing managers looks to have improved in the past two months, more economic data released this morning from the revised University of Michigan Sentiment numbers for January weren't as positive. The final January Michigan Sentiment Index fell a bit more than expected to 82.4 versus the preliminary 83.7 mid-month reading and was slightly below the 83.5 consensus among economists.

While this morning's announcement out of Applied Materials (AMAT) gave brief shock to many technology sectors, the major indexes have been able to hold near our WEEKLY S1 levels of support.

The NASDAQ-100 Index (NDX.X) 977.59 -0.78% and NASDAQ-100 Index Tracking stock (AMEX:QQQ) $24.30 -0.93% did trade there WEEKLY S1 levels of support as have the Dow, S&P 500 (SPX.X) 848 +0.42% and S&P 100 Index (OEX.X) 428 +0.47%, but the major indexes are holding near these support levels, and giving some hint that the Chicago PMI data holds hope for the economy.

Sector action has a mixed look, with technology groups seeing bulk of declines, but not to extremes. The Disk Drive Index (DDX.X) 69.75 -1.78% is pacing losses in technology, while the Semiconductor Index (SOX.X) 270 -1.08% has recouped roughly two- thirds of its early morning losses as many semiconductor stocks look to fill their gaps lower from yesterday's close.

Offsetting a negative tone in technology has the Drug Index (DRG.X) 292 +1.28% leading today's upside sector action, with the Defense Index (DFX.X) 148 +1.23%, S&P Banks Index (BIX.X) 277 +1.19% and Combined Telecom (IXTCX) 115 +1.25% seeing upside action.

Shares of Microsoft (NASDAQ:MSFT) $47.79 -0.97% have fallen to multi-session lows after Siliconstrategies.com reported that an Xbox slowdown is beginning to hit MSFT's supply chain, pushing out chip orders from various suppliers like Intel (NASDAQ:INTC) $15.40 -2.46% and graphic chips from NVIDIA (NASDAQ:NVDA) $10.32 +1.57%, St.Microelectronics (NYSE:STM) $18.22 +0.49%, Cirrus Logic (NASDAQ:CRUS) $2.35 +1.73% and Samsung.

While the equity markets look to show some firming on the Chicago PMI data, a quick check of the Treasury bond market has a more "defensive" look with Treasuries seeing buying across the major maturities. The March 10-year futures (ty03h) 114'070 +0.14% are looking to challenge last Friday's high of 115'000 and that may be a level to watch. If taken out to the upside, then the contract high of 115'175 could come into play. It would be my thinking that if these levels were achieved, then equities could suffer the consequences as cash continues to dry up. A break back below the 113'115 level, or yesterday's low could spur further buying in equities.

As it looks right now, it would be my opinion that bears are currently doing the bulk of today's buying in equities, perhaps taking some profits from the market's recent decline. In last night's Index Trader Wrap, I showed a point and figure chart of the Dow Industrials ($INDU) from www.stockcharts.com. Today's trade at 7,950 would have that chart reversing back lower 3- boxes, and now has a more risk averse bear's stop just above at 8,150 where a reversing p/f "buy signal" on this chart would be generated.

Jeff Bailey

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