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Index Wrap

Sunstroke

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The major indices finished in the red after Sun Microsystems (NASDAQ:SUNW) $3.31 -14.2% said the company would take a $1.05 billion charge and would post a sizeable loss after reviewing the amounts of deferred tax payments it carried on its books, would be of little future use, as the company struggled to post taxable profits as its corporate customers remained cautious on spending. Sun said it re-evaluated the assets under the accounting rule known as, "Statement of Financial Accounting Standards No. 109."

While much of SUNW's expectations for a larger earnings per share loss is company specific, the company's announcement, which cited concerns that indicated an industry shift away from its traditional UNIX-based servers also weighed on Vertitas Software (NASDAQ:VRTS) $31.52 -2.89%, BEA Systems (NASDAQ:BEAS) $12.04 -1.39% and BMC Software (NYSE:BMC) $13.93 -1.13%.

Merrill Lynch lowered its fiscal 2004 revenue estimate for Sun by $100 million to $11.2 billion and its bottom-line forecast to a 4 cent-a-share loss from an earlier breakeven projection. Meanwhile, Sanford Bernstein's Toni Sacconaghi said that in the face of lower sales, Sun would need to cut about 7,000 jobs to get its revenue-to-employee numbers back in line with figures from the boom years of 1998 and 1999.

While multiple brokerage downgrades followed, the news did seem to be very stock specific, and not necessarily an industry wide move. Some analysts cautioned investors to not throw the baby out with the bathwater. SG Cowen analyst Richard Chu called Sun's move a "conservative treatment" even though the company is not completely certain it can return to regular profitability anytime soon. "This is the proper thing to do," Chu said. "You write down items that are not predicated on a return to profitability. These are non-cash items, so I think the investment community will largely overlook Sun's move."

As shares of Sun Microsystems set below their flat longer-term 200-day simple moving average of $3.83, the land of the rising sun, Japan, announced that its Finance Ministry sold yen and bought dollars, which was conducted through the New York Federal Reserve, in an attempt to reverse the latest decline in the dollar against the yen. The sales of yen helped the dollar jump over Y1 (1 yen) higher after weak US consumer confidence data had driven down long-term interest rates and pushed the US currency to a three-year low of Y110.12.

Japan's tactic of interacting with the New York Federal Reserve marked a change in strategy, where in the past, the Bank of Japan had been selling covert waves of yen to try and maintain a weaker yen to help its economy recover and have its exports attractive to consumers in the U.S.

The cooperation between the New York Federal Reserve and Japan gave currency traders mixed signals on the U.S.'s recent talk of a strong dollar policy, and the recent G7 meeting where the 7 major industrialized countries had apparently agreed to let more natural market dynamics establish currency values.

At the end of the day, Japan's Finance Ministry showed it had sold 4.4574 trillion yen, a monthly record, in the currency market in September after refraining from intervening in August. Currency analysts believe virtually all the intervention was carried out before September 20, when the G7 issued its statement calling for flexibility in exchange rates.

"After the G7 statement, the Bank of Japan has essentially been forced by the market to accept a lower trading range," said Tony Norfield, head of foreign exchange strategy at ABN Amro.

However, today's soft U.S. economic data from the Conference Board's September Consumer Confidence Index and lower than forecasted day's September Chicago PMI also raised the risk that the rapid acceleration in the US economy over the summer would lose steam, and perhaps threaten a global economic recovery, which a weaker dollar might only threaten further.

The combined news of Japan's intervention and weaker economic data found Treasury bonds seeing strong buying in today's session as past interventions by Japan to sell yen and buy dollars has found those dollars buying Treasuries, while the weaker economic data brought some defensive buying from investors on thought a slow to moderate rate of economic growth has Treasuries being a safer investment asset class. The shorter-dated 5-year YIELD ($FVX.X) fell 15.2 basis points to 2.823%, the benchmark 10-year YIELD ($TNX.X) dropped 14 basis points to 3.937% and the longest- dated 30-year YIELD ($TYX.X) declined 12.1 basis points to 4.884%.

With consumer confidence suffering a bit of a setback in September, it might be a logical jump to conclusion that the retailers might be a sector for traders to monitor, as a way to get a read on what the MARKET is thinking about today's economic data, specifically consumer confidence and future spending plans. Over time, I've noticed that both the S&P Retail Index ($RLX.X) 334.39 -1.06% and the Retail HOLDRS (AMEX:RTH) $84.87 -1.3% tend to mimic each other's technicals. Both trade options, but the retail HOLDRS also allow the individual investor to buy or sell short the underlying security.

S&P Retail Index (RLX.X) Chart - Daily Intervals

I've overlaid a retracement bracket on the RTH, using conventional technique of attaching at a low and recent high. A normal pullback for a stock would be to $80.50 and we find the RTH having broken below an aggressive bullish trend, which may have come into play as resistance when the RTH achieved its most recent high on September 3. Make note of September 3. When the RTH was setting a new 52-week high, this was right when the SPX and OEX broke out of their summer bases.

S&P 500 Index Chart - Daily Intervals

As the retailers were achieving a relative high, the SPX was just breaking out of its summer base. Now the retailers look to be leading lower, based on their conventional retracement, where today we see the SPX still holding above its 19.1% retracement. While I wouldn't disregard the 992 level on this retracement, it didn't seem to be a meaningful level this summer, other than serving as somewhat of a waterline that the SPX traded either side of. The conventional retracement doesn't help explain what was going on at 961 this summer, when the SPX found support on pullback two separate times. It is at least informative to compare both the RTH and the SPX with conventional retracement and similar trends to see how the two might be impacted by each other, with the retailers being a sector that would be impacted, both positive and negative, with rising consumer confidence or weakening consumer confidence.

For a "blast from the past" and perhaps an explanation of why the SPX found support at 961 in early August, check out our old Index Trader Wrap from August 6 titled "I'm counting on you for strength." http://members.OptionInvestor.com/Itrader/marketwrap/iw_080603_1.ASP

The RTH looks as if it is vulnerable to a lower trade, and perhaps the MARKET sniffed out the Conference Board's Consumer Confidence setback in September, which was released today, earlier this month. What will October's consumer confidence reading be? Watch the RTH!

S&P 500 Index (SPX.X) - Daily Intervals

Here's a chart of the SPX with new October MONTHLY pivot retracement in place. We now see a more formidable level of resistance appear at the 1,008 level and when the WEEKLY pivot of 1,009.74 was there by itself. This has me more cautious on larger bullish positions and a greater measure for rebound strength in the SPX above 1,010.

While the extension of our "old" downward trend came into play as support at this morning's lows, that's what stands between today's close and WEEKLY S1.

Bears can't be too bearish here, with the SPX managing to hold the bullish trend (green trend) on a closing basis. Tomorrow's more national ISM Index for September is forecasted at 55.0, and will be a comparison, to today's more regional Chicago PMI.

Today's trade saw a net loss of 3 stocks to point and figure sell signals in the broader S&P 500 Bullish % ($BPSPX). Still "bull confirmed" at 76.80%, but getting closer to the 76% reading, which would be a reversal back lower to "bull correction" status. As a benchmark, in early August, the bullish % pulled back to 74% before the recent reversal back higher. As such, we might eyeball a break below the MONTHLY S2 of 959, should the S&P 500 Bullish % ($BPSPX) fall to 72% and achieve a "bear confirmed" status.

Dow Industrials (INDU) Chart - Daily Interval

This morning's economic data gave little chance that the Dow could show some leadership and not unlike the SPX, has MONTHLY Pivot now serving as a level of near-term resistance. I hesitate to think a trader should be overly bearish at current levels, as I do think there is higher likelihood for a bounce back to 9,500, or the opportunity to look for better bearish entry when Stochastics turn higher and are "overbought."

I will say that I was surprised that today's Consumer Confidence and Chicago PMI data were as far off of Augusts' levels as they were. I'm not sure I was surprised that economists were as far off as they were however. I'm not taking a shot at economists, but we've noted that in weekly employment data they have explained their error. I don't recall reading many explanations from economists regarding today's economic data forecasting models, and there may be some adjusting going on today. Not only in some economic forecasting models, but stock portfolios as well.

I have not had the time to look at the 30 Dow components point and figure charts, but a bullish % watcher e-mailed me today that the Dow Industrials Bullish % ($BPINDU) did not lose 1 stock to a point and figure sell signal yesterday, and that the net loss of 1 stock I reported from www.stockcharts.com was the result of 3M's (NYSE:MMM) $69.07 -1.7% 2:1 stock split. I do see where www.stockcharts.com is showing the bullish % back at 80% today and still "bull confirmed." I will take some time later tonight to confirm this for myself. Not that I don't believe our subscriber, but just want to make sure.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals

The QQQ saw steady and still rather heavy volume traded today and hints to me that the QQQ is not yet "sold out" on the current pullback. In early August, under similar technical setup, the QQQ saw just over 111 million shares trade, then volume decline over the next four periods. Volume still pretty heavy on a comparison basis and has QQQ vulnerable to $31.88 and WEEKLY R1.

Today's trade saw a net loss of 3 stocks to point and figure sell signals as the NASDAQ-100 Bullish % ($BPNDX) fell 3% to 75%. Still "bear correction" status and would take a reading of 74% to reverse back lower to "bear confirmed" status.

This internal weakening has me looking at $33.80 as more formidable resistance.

Jeff Bailey

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