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Index Wrap

Broad gains on light volume

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Sectors traded broadly higher where crude oil closed above $41.50 and sparked renewed interest in oil service stocks, while the Pharmaceutical Index (DRG.X) 323.72 -0.78% was today's loan sector loser on concern of increased competition on blockbuster drugs and the reimportation issue.

A late spat of volume buying kept the major indices unchanged to fractionally higher with the NYSE turning a modest 1.22 billion shares, while NASDAQ volume struggled to reach 1.4 billion.

Advancers outnumbered decliners by a 23 to 9 margin at the big board, while NASDAQ breadth was positive at 2:1.

U.S. Market Watch - 05/24/04 Close

Sector action was broadly higher today, with the Oil Service Index (OSX.X) 100.06 +4.38%, which was down more that 9% the past month, despite higher energy price getting a lift on thought that while Saudi Arabia wants OPEC to raise production at its June 3 meeting, industry analysts say the production increase of 2 million barrels per day would have to come largely from Saudi Arabia, as most other countries are running at full capacity. Oil service stocks jumped on thought that to increase capacity/production, the services would play the bigger role and benefit most.

The Oil Service HOLDRs (AMEX:OSH) $67.19 +4.46% have not tested their slowly trending higher 200-day SMA at $63.41, and today's session high came just shy of a falling 21-day SMA ($67.75).

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 564.94 +3.2% gained as Treasuries found evenly distributed buying across the major maturities.

Wednesday morning, homebuilder Toll Borthers (NYSE:TOL) $39.08 +2.57% is scheduled to report quarterly earnings per share of $0.88 versus year-ago EPS of $0.72.

Pivot Matrix -

The WEEKLY S2-R2 would suggest another rather tight range of trade this week. While not showing overly impressive strength, the NDX/QQQ have been stronger in MONTHLY/WEEKLY Pivots of late and new highs from RIMMM and YHOO show some bullish leadership from aggressive growth.

S&P 500 Index (SPX.X) - 10 and 5-point box

The broad S&P 500 Index (SPX.X) 1,095.41 +0.16% gained 1.85 points in today's trade. On May 10, the SPX's PnF chart generated a double bottom sell signal at 1,080 and for the most part, has been little-moved since. For the current bearish vertical count to be completed, a 3-box reversal back higher (30- points) to 1,110 is needed.

S&P 100 Index (OEX.X) Chart - Daily Intervals

Other than a potential bounce, which I feel could only come from some type of decline in oil prices, I don't see a catalyst for a bounce to have traders overly eager to be buying call options on the OEX at this point. I'd rate sentiment skewed negative on Iraq and terrorism until the June 30 deadline for turning over sovereignty to Iraq, and by that time, and OPEC production increases might have started to begin trickling through to energy prices. Meanwhile, technical remain bearish, and depending on how things go in the Middle East after the June 30 deadline, uncertainty over who will be the favorite for President of the U.S. creates policy uncertainty here at home.

Today, Lehman Brothers commented that current market analysis would have the markets leaning toward the thought of a Kerry victory with annuity oriented insurers, homebuilders, banks and retailers catering to the middle-class showing some relative strength versus while a Bush re-election would most likely benefit sectors like the pharmaceuticals, health service providers, energy drillers, utilities, autos and financial asset managers as well as property/casualty insurers and higher-end retailers.

The one sector that I would note weakness in of late has been the Pharmaceutical Index ($DRG.X) 323.72 -0.78%, which fell and closed back below its 200-day SMA (325.27).

Lehman Brothers confessed that they see a very tight race in this year's election, and I (Jeff Bailey) would have to agree. While the economic recovery will help Bush, its the current situation in Iraq which I think has the Bush re-election in doubt.

Dow Industrials (INDU) Chart - Daily Intervals

The Dow Industrials (INDU) has been trapped in a 300-point range the past two weeks. Breadth was even at 15:15 today, but a judges denial of a pre-trial motion by U.S. tobacco companies to disallow the government's $280 billion disgorgement claim (claim against past profits) in the Justice Department's lawsuit scheduled for trial in September weighed heavily on component Altria (NYSE:MO) $44.95 -8.18% and offset gains in Alcoa (NYSE:AA) $30.20 +2.44%, Disney (NYSE:DIS) $23.20 +2.29% and General Motors (NYSE:GM) $43.77 +1.60%.

NASDAQ-100 Tracker (QQQ) - Daily Intervals

New 52-week highs for Research in Motion (NASDAQ:RIMM) $114.47 +4.99% and Yahoo! Inc. (NASDAQ:YHOO) $29.36 +2.83% come on new product developments. While current valuations may seem stretched, buy side analysts say proven business models and exciting new technologies allow for growth which can outpace current uncertainty regarding inflation until Fed raises rates. Yahoo! (YHOO) benefited from the Interactive Advertising Bureau saying Internet advertising revenue reached about $2.3 billion in the first quarter of 2004, a record for a single quarter and is the latest sign the industry is poised this year to surpass it bubble-peak era.

Jeff Bailey

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