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Heading Over the Edge

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As rhetoric heats up over the Iraq situation, the defense sector continues its slide. The Defense Index (DFI.X) set yet another 52-week low, dropping 10 points, for a loss of more than 2% as of this writing. Some of the bigger losers here are General Dynamics (GD -3.14%) and Northrop Grumman (NOC -2.24%).

The president spoke to a Governor's convention, pushing his faith-based initiatives and then highlighting the danger Iraq poses to the world. He said he would work with the UN, however with rumors that Colin Powell will be calling for a UN vote after the next Blix report, it appears we have set a timetable for an invasion. Linda mentioned this in the 9:00 update, and the continued tough talk from the President seems to confirm that assessment. He confirmed the U.S. plans for a new resolution.

One of the more befuddling sectors today is the semiconductor sector. The Semiconductor Index (SOX) remained positive for most of the day. Following news from Cisco that its new Compatible Extensions wireless chip technology will be adopted by chipmakers Intel, Texas Instruments and Intersil. CSCO is offering free licenses to include the technology on chips and IBM and Hewlett Packard have already agreed to support the technology. This seems to be the lone impetus for the bullish move in the sector. While it is not posting a large gain, it is showing surprising relative strength. It is now hovering close to unchanged.

One of today's biggest losers is Vaxgen (VXGN). The company's AIDS vaccine did not show a statistically significant reduction of HIV infection within the study population as a whole in its Phase III trial, although the trial did suggest that black and Asian volunteers did show a higher production level of HIV antibodies. The stock lost over 50% for a dollar loss of $7.17. It is trading at $5.85.

The retailers have seen a rollover, in spite of the big earnings beat by Lowe's (LOW). Traders have instead focused on warnings from J.C. Penney (JCP) and Federated (FD), which both lowered February same store sales forecasts. JCP and FD both blamed the lack of sales on bad weather that hit the east over the President's day weekend. Federated now says sales will be down 7.5-8% for the month, approximately doubling its previous forecast for a loss of 4-5%. Federated has seen steadily declining year over year same store sales, even posting a drop during the recent holiday season. JCP had been predicting flat sales, but now says it will see a decline of 2-3%. Wal-Mart's news was not quite as bad, but said its sales were tracking at the low end of previous guidance for 2-4% growth. The Retail Index is down 1.3% and has been stuck in a consolidation pattern the last few days after big gains off of its 52-week lows a week ago Thursday.

Trying to judge market sentiment by Friday's action was tough, due to the news events that occurred throughout the day. First, there was an explosion on Staten Island the dropped the markets hard and then later in the day we got comments from Iraq saying they wanted to open a dialogue with the U.S. The drop in the morning established point and figure reversal down in the SPX at 835, after topping out at 850 in its column of "X." Because that reversal came on a terrorism scare that proved to be unfounded, it is significant that we reversed down once again this morning and hit that reversal level, with a low in the SPX of 832.46. That low, and the low in the Dow of 7859, are still above the lows from the Friday morning sell-off, but still look more bearish as they have not come on a single event.

Of course, the hawkish comments from the U.S. today and Sunday about a new resolution also qualify as an event, so to ignore them would be short-sighted. However, they are not of the same nature and we have seen more of a slow drain, than a big drop. News events do dominate our current environment and we must take them into account when trying to choose direction. However, the slow bleed seems to give us a better idea that the bullishness of last week seems to be fading.

Steve Price

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