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What Facts Can We Ignore Today\?

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       7-17-2001          High      Low     Volume Advance/Decline
DJIA    10606.39 +134.27 10628.48 10438.66 1.22 bln   1841/1204	
NASDAQ   2067.32 + 38.20  2067.44  2006.80 1.66 bln   2125/1593
S&P 100   626.91 +  6.31   627.62   616.45   Totals   3966/2797
S&P 500  1214.44 + 11.99  1215.36  1196.14             
RUS 2000  490.57 +  6.77   490.57   481.65 
DJ TRANS 3007.08 + 44.29  3007.81  2957.78 
VIX        25.36 +  0.05    26.87    25.12 
Put/Call Ratio      0.63

What Facts Can We Ignore Today?
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Let us see. . .NVLS warns, industrial production fell for the ninth consecutive month, and industrial utilization fell to an 18 year low. . .RALLY!!

What? That is correct. Industrial production levels fell 0.7% vs. estimates of negative 0.5% (that's a bottom, right?); the rate of plant utilization fell to 77% from 77.6% (that's a bottom, right?), and NVLS, a chip equipment manufacturer, reported earnings in-line with estimates but declined to give guidance (that's a bottom, right?). It should have been "lights out" today for the major equity indexes. Early this morning, it was. In the end, it was not.

That INTC would report earnings tonight largely expected to disappoint did not inspire confidence. Many traders were cautious in front of INTC's earnings, especially with rumors abuzz about likely "capex" (capital expenditure) reductions. That of course would be lousy for equipment manufacturers and rub off like skunk spray on the rest of technology issues going forward.

But who should arrive to save the day? None other than KLAC, another semi equipment manufacturer who re-affirmed guidance at the SemiCon West Conference in San Francisco. Short covering in tech issues ensued, and investors assumed that meant that INTC would re-affirm its capex plans, thus "insuring" that reasonable demand remained in the chip sector, and semi manufacturers would not crash in the next 12 months.

Hooray! Everything stays the same for the next 12 months and it cannot get any worse! Wow! And INTC beat the numbers! Hooray again!

Let me dispel a myth. First of all, chip equipment stocks are NOT leading indicators for the technology sector. For them to get orders, there has to be demand from INTC, AMD, IFX, PMCS, AMCC, MOT, etc., who get their demand from DELL, CPQ, HWP, NOK, SUNW, CSCO, and a host of other hardware manufacturers. Who creates the demand for hardware? You, me, and our businesses that we own, and for which we work. Equipment manufacturers are about the last on the food chain to see an increase in demand. Next time you hear an analyst talk about equipment stocks leading a technology rebound, you have my permission to laugh heartily at their expense.

Second, beating the numbers is the biggest charade and shell game on Wall Street. It is a sophisticated version of 3-card Monte for CFO's and analysts who do not adhere to generally accepted accounting principals. Companies offer their "guidance" so they can beat it. INTC coming out with earnings $0.02 "above analyst expectations" is a con game at best. Set the bar two inches above the ground, then clear four inches, and you too can be a world-class hurdler. That is why there is great shame in them failing to beat their numbers - they cannot even clear a lowered bar that they set themselves.

But alas, investors will forgive as long as the companies have willing accomplices in the analyst community unwilling to issue "sell" recommendation in hopes of garnering underwriting business. Offending companies need only promise not to disappoint again, which in effect allows another shot at lowering the bar.

Wait, this just in. . .INTC is forced to acknowledge that "without a lower tax rate, INTC's EPS would have been in line with the consensus", according to briefing.com. I hope nobody thinks I just make this stuff up.

Anyway, back to trading. The markets remain a daytrader's paradise and a neophyte's minefield, where the expected rarely happens. "Expect the unexpected" might be the closet thing to advice we can receive tonight. Many companies have beat the lowered estimates, which undoubtedly caused some after hours euphoria that may spill over into tomorrow's trading. Yet futures are mostly lower following some conference calls, not to mention the uncertainty of AOL and EMC earnings, which are to be announced before the bell tomorrow.

Chart patterns will offer little help, but look at them we must to see the possibilities.

Dow Industrials (INDU) chart:

Let us begin with the Dow Industrials - probably the strongest of the bunch racking up an impressive 134 points today after a slow start. Less impressive though is the volume at only 1.23 bln on the NYSE. For investors, this matters. It is not screaming that now is beginning of a strong leg up. The weekly chart suggests that may be the case though. Note the flattening out and partial reversal of the fast stochastic line. For the traders, technicals tell a bullish story. The daily charts shows price action has broken the descending trend line, support has held at roughly 10,440. More importantly, today's long white candle engulfs the preceding two days and pops the index above (barely) previous resistance of 10,600. If it holds here, then great for the bulls. But the 60/30 charts suggest price exhaustion and the stochastic bar rollover just beginning to take place on the 30-min chart supports a fall from here. Despite lower futures prices, EMC and AOL could play heavy for the bulls (or not), and there is a lot of dark before the dawn. In other words, past performance is no guaranty of future results.

NASDAQ 100 chart (NDX):

Any still holding the notion that the NASDAQ leads the market need only look at the above to see it is not so. Despite today's white candle, there is some weakness here and INTC results will not help the cause in the morning. Then again a lot can change between now and tomorrow morning. While support was found well above 1650 at 1667, breaking through the congestion at 1750, not to mention the 20-dma of 1736, is going to be difficult. The daily stochastic is showing that it wants to roll over. The 60/30 stochastics show that slightly more upside is possible, but the 30-min chart is already topped. Nonetheless if price action can remain flat and not give up much of today's gains while the oscillators cycle down to oversold, the NDX has a fighting chance to break over 1750 by the end of the week.

S&P 500 chart (SPX):

For long-term investors, The SPX is showing signs of bullish life. Of course, it did that three weeks ago too, and it was not to be. The daily charts too are not yet the pillars of strength that we would expect in a market that has reached "the bottom". Note that this proxy for the whole market cannot break out above its declining trend line as it dances back and forth over 1208 support/resistance. The daily stochastic line is showing its first sign of hesitation in further advance as a result. Also the 60/30 charts are nearing the completion of today's cycle up as the 30-min chart stalls out. It is running out of steam. Even so, the SPX's direction will not be determined by lines of history, but by what the future holds in investors' reaction to obfuscated earnings reports from tonight and tomorrow morning. No clear direction from here so be sure to check the game plan in the morning.

Speaking once again of earnings, tomorrow EMC, BA, F, UAL, TYC and AOL (and a host of other 3-letter stocks) report in the morning, while IBM, MO, AMCC, and BRCM report after tomorrow's close. Add Alphonso The great Greenspan in his speech on Capitol Hill (formerly known as Humphrey Hawkins) during market hours, and we have a recipe for volatility that would make the trajectory of a birthday balloon with air rushing out its tail relatively tame by comparison. As Austin duly noted in the final Market Pulse update, "I see no convincing evidence to play either direction into the bell as a case could be made either way. Therefore, I'll wait until tomorrow before picking sides past the opening bell."

Last, I usually have a blurb here about the VIX foretelling direction by its ratio of ATM calls and puts. But at a current 25.36, and a range of 24-27 over the last three days, it is apparent that it cannot make up its mind either, never reaching high enough (29 or higher) to cause contrarian bulls to jump in with four hooves, nor sinking low enough to cause hungry bears to eat them! Tonight, it is a broken instrument.

One other word about earnings. There are many companies that have NOT warned even though they were expected to do so. Their lack of warning is viewed by many to be a good sign. INTC was one of them. Their results surprised nobody. The same may be true for SEBL, MSFT, EBAY, AOL, and IBM, the latter two of which will report tomorrow. One hiccup or mis-statement may be disastrous, or a meager re-affirmation may ignite a rally. I would equate the market now as beta-test rocket waiting for ignition. Onlookers await nervously as they watch with hope that it will launch flawlessly, with the danger of launch pad explosion ever present.

Wait for ignition followed by a needle-like projectile (or the blazing fireball) before you add your own fuel (money) to the experiment.

See you at the bell.

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