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Expect the unexpected

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The S&P Banks Index (BIX.X) 359.55 +0.12 came within 2.23 points of trading its all-time high and looks extended after trading a May 10th intra-day low of 322.50.

One would expect some type of profit taking in the banks after an impressive 10.7% gain in just over 3-months, but with Toronto- based Toronto-Dominion (NYSE:TD) $33.35 -2.39% formally announcing it would take a 51% stake in Banknorth Group (NYSE:BNK) $33.90 -2.8% in what industry analysts see as a way for Toronto-Dominion to gain access to further acquisitions in the U.S., bank bulls seem hard-pressed to relinquish their hold on the group.

As the BIX.X looks to challenge its all-time highs, Banc of America Securities threw in the white towel by cutting earnings estimates and lowering price targets on several semiconductor stocks. I'm not sure, but CNBC reported that Banc of America might have been the last broker to make such a call in the last few months.

Ahead of this evening's quarterly update from chip-equipment maker Novellus (NASDAQ:NVLS) $24.65 -1.94%, Deutsche Bank unexpectedly upgraded Novellus' rival KLA-Tencor (NASDAQ:KLAC) $37.50 -0.55% saying KLAC should be well positioned for an up- cycle as a recent flux in forecasted orders from chip foundries brings uncertainty, and combined with the lowering of expectations from the semiconductor industry has stock prices in the sector depressed.

Perplexing to Deutsche Bank's call on KLAC was the firm expecting stocks to be subject to catalyst driven trading in the near term.

U.S. Market Watch - 08/26/04

While Deutsche Bank looks for a catalyst to bring gains to KLA- Tencor (KLAC) and perhaps the semiconductor itself, its the Semiconductor Index (SOX.X) that has been the weak spot the last 5-sessions.

The semiconductors are perhaps ripe for a bounce, but from deeply oversold bullish % levels of 6%, one needs only to wait for this sector's bullish % to begin reversing up from these levels to still be way ahead of the eventually known catalyst.

Stocks traded in a very narrow range today with the Dow Industrials giving less than a 40-point intra-day move with breadth ending with 16 gainers, 13 decliners and General Electric (NYSE:GE) $32.79 finishing unchanged.

How fitting for GE, with the largest market cap weighting in the S&P 100 Index (OEX.X) 539.46 -0.02% to also finish nearly unchanged, down a fractional 0.11 points.

Market Snapshot/Internals - 08/26/04 Close

If looking for clues to any directional bias, don't look at the TRIN. On a light volume trade, TRIN closed 1.00, a reading interpreted as "neutral" by most TRIN followers.

Take the NASDAQ's finishing advance/decline line, flip it around and you get something close to the more bullish NYSE advance decline line.

Put both the NYSE Composite ($NYA.X) 6,439.80 +0.12% and NASDAQ Composite ($COMPX) 1,852.92 -0.41%, and we'd most likely get something that looked like the Wilshire 5000 Total Market ($DWC.X) 10,721.63 -0.01% in today's trade. Not unlike the very narrow Dow Industrials (INDU), it too traded in a tight 37-point range.

Pivot Analysis Matrix - 08/27/04

Good gravy! Today's tight trade would have the DAILY S2 to DAILY R2 easily in play, and with the preliminary second quarter GDP due out before tomorrow's opening bell, with economists' expecting the initial figures of 3.0% growth to be revised lower to 2.7%, regardless of what we expect, this week's trade, excluding yesterday afternoon's little pop higher, has the MARKET looking like it doesn't necessarily know what to expect.

The retailers as depicted by the S&P Retail Index (RLX.X) 392.06 +0.11% have given some indication of strength. It's no easy task to move above a correlative 50-day SMA and 200-day SMA.

S&P Banks Index (BIX.X) - Daily Intervals

Maybe the economy is growing at such a sluggish pace that market participants have piled into the banks. On the other hand, this meteoric rise in the banks comes from the very level that some analysts felt was the beginning of a Fed-engineered economic and financial crisis.

S&P 500 Index Chart - Daily Intervals

I've drawn a BROWN horizontal line at tomorrow's DAILY S2, which would roughly market the top of Friday, Monday and Tuesday's highs. Tomorrow's DAILY R2 once again builds a third level of resistance at WEEKLY R1.

As the SPX now tried to get back above my "old" downward trend, I'd have to at least view near-term support in front of a relatively important economic report to that trend and the 1,096 level. So far this week, buyers have been steady at the MONTHLY 61.8% retracement of 1,093.

Keep and eye on your BIX.X tomorrow, where I would at least tie its MONTHLY R2/DAILY S1 correlation to the SPX's DAILY S2.

For those that don't expect the unexpected, look for a BIX.X break above 362 to have the SPX surging above 1,111 should it decide to get back on trend above that rising 200-day SMA.

Volumes have been light and there seemed to be little interest. It does seem crazy to even think there wouldn't be some type of computer selling above 1,111, but a break of DAILY R2, and WEEKLY R1 may have computers turning on with upside risk immediately assessed to 1,122.

Jeff Bailey

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