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Awaiting The CPI And An Earnings Barrage On Tuesday

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        07-17-2000        High      Low     Volume Advance/Decline
DJIA    10804.30 -  8.50 10847.40 10749.50  904 mln   1319/1518
NASDAQ   4274.67 + 28.49  4289.06  4215.86 1.57 bln   2195/1875
S&P 100   817.75 +  2.23   820.93   812.72   totals   3514/3393   
S&P 500  1510.49 +  0.51  1517.32  1505.26           50.9%/51.8%
RUS 2000  545.18 +  2.55   545.71   541.55
DJ TRANS 2900.27 - 18.77  2921.21  2888.60
VIX        22.06 -  0.55    23.34    21.66
Put/Call Ratio       .42

Awaiting The CPI And An Earnings Barrage On Tuesday

The big story of the day today was...waiting for tomorrow. At least that is what most traders would have told you seeing how many "announcements" will come on Tuesday. Before the open, we will get a major piece of economic data as the CPI will be released. There isn't likely to be many surprises here, but we could always use more evidence that the Fed will be on hold once again in August. The Street has seen no real evidence to command a move just yet and are hoping this report maintains that stance. It has been nice not hearing the "I" as much lately (although you can never fully be rid of such murmuring). Speaking of which, we have more good news on that front as OPEC announced this morning before the bell that they would be raising production. That sent oil tumbling below $30 a barrel, which is good news for our wallets when filling up at the gas station as well as the inflation outlook.

Generally speaking, the market was relatively muted today. The DJIA pulled back for the first time in over a week, albeit by only eight and half points. It closed at 10804.27, holding above support at 10,800. The volume was average at 904 mln., but it is likely to pick up over the next couple days. The S&P 500 gained a half a point to 1510.50, while the Russell 2000 gained 2.55 points to 545.18. The overall action was not bad, just not inspiring. We are going to need some very strong earnings in the next couple of days to keep this rally alive. The upside movers in the DJIA included INTC, IBM, JPM, JNJ, and GE, while the losers were MSFT, SBC, and DIS.

The Nasdaq was able to post gains though. The Composite ended up 28.49 to 4274.67. Volume was decent at 1.5 bln. The story here is earnings. We have dozens of companies reporting on Tuesday, big ones too. INTC, MSFT, AAPL, SEBL, CMRC, DCLK, FDRY, IDPH, RMBS, TERN and ITWO, to name a few. This is the biggest day of the quarter for earnings announcements amongst the tech group. That is why volatility and volume should be expected in the coming days. The Nasdaq looks strong on the daily chart listed below, but that doesn't jive with where the VIX and historical patterns are concerned. The VIX is raising it's voice (although not yet screaming) to the overbought theory. And this week is typically the beginning of the downturn after earnings. That makes me a little cautious about the Nasdaq. Not to mention, we are now up 40% off the May lows. That is a big move in a short time frame.

We did have one big earnings story to talk about today. It came from fiber-optics leader, Corning. They reported earnings $0.14 better than upwardly-revised expectations. At $0.94 per share, they nearly doubled last year's second quarter. The company said second-quarter profit rose 80 percent on strong demand for high- data rate optical fiber and cable and LCD flat-panel display glass. GLW tacked on over $12 to $279.25 and ignited the entire sector as SDLI was +24.50 and JDSU +4.31.

In the merger arena, General Mills and Pillsbury announced they would merge in a deal valuing at $10.5 billion. Last week the two announced they were in talks to join the two food operations, which will combine the Pillsbury range of ready-to-cook baking products and General Mills' Betty Crocker brand. "The combination of Pillsbury and General Mills creates a major new force in the changing U.S. food industry," Diageo chief executive John McGrath said in a statement. Well, it changed the price of the stocks anyway, but not by much. GIS dropped $1.31 to $35 while London- based Diageo (owner of Pillsbury) rose by 2.6%. Also, Georgia Pacific said it will buy Fort James in a stock-and-cash deal worth about $11 billion. Under terms of its agreement, GP will acquire all outstanding shares of FJ for $29.60 per share in cash and 0.2644 shares of Georgia-Pacific Group stock. FJ gained 34% on the news and GP dropped 8.8%.

More earnings reports emerged after-hours with GNET and NVLS checking in. Go2Net reported earnings of $0.22 per share vs. estimates of $0.15 from First Call. Revenue checked in at $23 million compared to $5.7 for the same period a year ago. This report was good enough to see GNET surging after-hours. They had a regular close of $58, but I have seen them trade up as high as $65. Novellus was also an earnings winner by posting a profit of $0.56 vs. estimates of $0.52. Chairman and CEO, Richard Hill said, "This has been an eventful quarter for Novellus, with the addition of our company to the S&P 500, preparing for the launch of a new and revolutionary product, and another record quarter driven by robust capital spending by our customers." The stock is waffling back and forth after- hours, but is near the regular close of $68.44.

So with the CPI due out in the morning, Greenspan speaking on Thursday and the Nasdaq sitting less than 800 points from a new high, we have quite an interesting situation on the Street. Volume has picked up, but will it last? I don't think we are really seeing the big buyers return just yet. Otherwise, volume would really be cooking, closer to 2 billion or more on a regular basis. Therefore, I am going to have to side with the VIX and say a turn around is inevitable. The second half of July is typically slow for a reason. Earnings are over and everyone is gone on vacation. That is just the way it works. But not all hope is lost. The basing pattern on the Nasdaq shown in the chart above gives us hope. If that basic uptrend line (in blue) will continue to hold, then we will be setting up for a whopper of a spring board to jump from this fall. It is painful to wait for the action to return, but you can bet I won't be sitting here talking an 8-point down day on the DJIA and 28-point up move on the Nasdaq three months from now. The buyers will come back with a fury, barring any major event.

But back to the short-term. The CPI shouldn't tell us anything since it is somewhat of a lagging indicator and the preceding PPI, etc have been benign. And the CPI will be the biggest report to contend with over the next week and a half until we get the second quarter GDP on July 28th. So with the passing of the CPI, all eyes will turn to Fed Chief Greenspan on Thursday. With earnings winding down by then, we could be set-up for some profit-taking if he says the wrong thing. And with the Nasdaq rallying like it is, he may be inclined to do so.

In all cases, don't fight the trend. I have seen too many traders, itching to buy puts, jump the gun early. Sometimes this market just wants to keep going for no reason. Wait for a clear break in momentum first and always leave yourself an escape plan.

Ryan Nelson
OI Editor

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