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Index Wrap

Chips lone bright spot ahead of Fed

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Stocks finished mixed to lower a day ahead of the Federal Open Market Committee's decision on interest rates, where an upgrade of the semiconductors had the Semiconductor Index (SOX.X) 399.90 +2.93% today's lone percentage gainer, while disappointing comments from consumer products giant Colgate Palmolive (NYSE:CL) $48.23 -11.22% and Unilever (NYSE:UL) $33.22 -5.19% raised concerns about the global consumer.

U.S. Market Watch - 09/20/04 Close

Treasuries reversed Friday's losses and then some with yields back lower. Despite the bid for Treasuries ahead of tomorrow's FOMC meeting, Fed funds futures still predict a nearly 100% chance of a 25 basis point hike tomorrow to 1.75%, and another 25 basis point hike to 2.0% before year's end with December Fed Funds futures (ff04z) unchanged at 98.04 (100 - 98.04 = 1.96%).

Semiconductor Index (SOX.X) - 5-point box

The oversold bounce in the SOX.X got further legs today after Bernstein Investment Research and Management upgraded the sector to "overweight," which has the unconventional 5-point box scale of the SOX.X giving a second double-top buy signal at 400 as demand starts to show some further outstripping of supply. Bullish divergence becomes evident as the SOX.X trades a LOWER price level than the Semiconductor Bullish % (BPSEMI) from Dorsey/Wright and Associates, which as of Friday evening's reading was still "bull alert" status at 20.25% having risen 0.63% on Friday. It would currently take a sector bullish % reading of 34% for the sector to achieve "bull confirmed" status.

In mid-June, when the SOX.X was trading around 475, the Semiconductor Bullish % (BPSEMI) had reversed up to "bull alert" status after a relative low reading of 18% to 32%, but reversed back lower to "bear confirmed" status at 26% in early July (red 7).

Semiconductor Index (SOX.X) Chart - Daily Intervals

My QCharts is missing Friday's bar, but early morning weakness, despite the Bernstein upgrade before the bell, found fractional morning weakness turning into sudden gains as buyers seemed eager to gobble up some chip stocks above the MONTHLY Pivot of 383.72 after Friday's quarterly expiration.

Recent sector bounces have had the SOX.X gaining roughly 13% to 14% from inflection lows, and the recent rebound to today's close from the recent September 8 low is just about 14%.

Sector bellwether Intel (NASDAQ:INTC) $20.92 +1.6%, which traded a 52-week low on September 8 at $19.69, is up just 6.24% and not showing the bullish leadership I would think a sector bulls looks for from the sector bellwether.

Hedge funds may pick up on this by shorting a basket of semiconductors like the Semiconductor HOLDRs (AMEX:SMH) $31.68 +3.09%, while implementing long positions in Intel (INTC).

NASDAQ-100 Tracker (QQQ) Chart - Daily Intervals

The QQQ dipped lower at the open, but found buyers just above our WEEKLY S1 where SOX.X strength helped build some mid-session gains for technology and have the QQQ making an impressive turnaround to trade a session high of $35.77. But by the close, the QQQ went nowhere with index heavyweights Microsoft (NASDAQ:MSFT) $27.51 (unch), Qualcomm (NASDAQ:QCOM) $38.38 -1.15% and Intel (NASDAQ:INTC) $20.92 +1.6%, Cisco Systems (NASDAQ:CSCO) $19.31 +0.78% and eBay (NASDAQ:EBAY) $91.36 -1.86% finishing mixed.

S&P 500 Index Chart - Daily Intervals

Gains among the semiconductors weren't enough to offset weakness among financials and from the opening tick, the SPX found sellers very close to the 1,125 strike and WEEKLY Pivot of 1,126.28. Regardless of what the Fed has said or done the past three meetings, the SPX has seen a gain that session.

One thing we've noted in past Index Wraps is that when the SPX has broken back below its shorter-term 21-say SMA, which is currently rising at 1,113.60, that's been a negative trigger for some rather sharp and sudden declines. As I see it, the rising 200-day SMA, 21-day SMA and this week's WEEKLY S1 at 1,115.83 become key near-term technical support.

Pivot Analysis Matrix -

The QQQ and SOX.X were the only equity-based indices to see trade at their WEEKLY R1s, and without the financials as partially depicted by the S&P Banks Index (BIX.X), the SPX/OEX found sellers firm at the WEEKLY Pivots.

Jeff Bailey

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