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Market Wrap

Up One Day And Right Back Down The Next

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        WE 7-21          WE 7-14           WE 7-7          WE 6-30
DOW    10733.56 - 79.19 10812.75 +176.77 10635.98 +188.09  + 43.14
Nasdaq  4093.86 -152.32  4246.18 +222.98  4023.20 + 57.09  +120.77
S&P-100  804.55 - 10.97   815.52 + 12.52   803.00 + 12.75  +  9.18
S&P-500 1480.19 - 29.79  1509.98 + 31.08  1478.90 + 24.30  + 13.12
RUT      522.70 - 19.93   542.63 + 14.41   528.22 + 10.99  +  6.82
TRAN    2808.42 -110.62  2919.04 +134.40  2784.64 +139.27  + 14.66
VIX       21.47 -  1.14    22.61 +   .79    21.82 -   .44  -  3.63
Put/Call    .59              .38              .48              .48

Up One Day And Right Back Down The Next

Buyer beware, this is not a friendly market! Investors scrambled to salvage their recent gains in the Tech sector Friday. The fading of Greenspan's voice coupled with a host of new earnings warnings prompted a profit taking sell-off Friday. The news of profit short-falls was enough to grab the attention of the bears and bring that formidable group out of hiding. Needless to say, we didn't get the follow-through day we needed after last Thursday's impressive rally. While the major indices didn't suffer serious technical harm after Friday's sell-off, it did suggest that investors are not quite ready to plow back into the market just yet.

Over half of the S&P 500 and DOW companies have now reported their second-quarter numbers. According to First Call, around another 130 companies will report their results next week which we'll expand upon below. Of the companies that have reported their quarterly results thus far, amazingly, only 8% have disappointed. Historically, that number has stood closer to 25%. However, it seems that the small percentage of companies that have warned of lower-than-expected profits have had a much larger impact on the market than the majority that have surpassed estimates. Earnings warnings took their toll on the Tech sector Friday, led by the cautionary comments from A, LXK, and ERICY, not to mention the carryover of LU's disappointment on Thursday. HWP weighed heavily on the Industrials Friday in part from the warning issued by its spin-off A, and also from the cautionary tone from fellow printer maker LXK. Merrill Lynch issued a report Friday morning stating that HWP might suffer from LXK's warning. And suffer it did, HWP shed -$6. Among the other DOW losers were MSFT -$2.50, INTC -$4.50, HON -$1.50, JPM -$2.25, and EK -1.88.

The DOW appears to be narrowing its three-month trading range. The index has been churning between the 10,500 and 11,000 levels since mid-April. The big decline Friday doesn't look too promising and could send the Industrials to retest its near-term support level at 10,700. A failure of support at that level might send the blue chip investors packing for a late-summer vacation and the DOW back down to 10,500.

If the DOW's performance on Friday made you queasy, the NASDAQ might just put you over the edge. The Tech-laden index gave back all of its gains from Thursday's stellar rally. The COMPX finished the week in negative territory for the first time in four weeks. The warnings from A and ERICY rattled Tech investors, which prompted them to exit the NASDAQ. ERICY warned that its handset division would lose money this year, which erased 12% off the stock. The Semiconductor sector continues to show signs of weakness. The Philly Semi Index shed 12.8% last week, which contributed mightily to the NASDAQ's losses. It would appear that the once beloved Chip stocks have lost their leadership role. If it weren't for SUNW, the NASDAQ would have finished the day a lot lower Friday. In an atypical fashion, SUNW rallied over 6% after reporting better-than-expected profits and guiding analysts to higher growth estimates for the remainder of the year. The only standout winner on the NASDAQ Friday was the Biotech sector, which was ignited by the debut of several genomic related IPOs and anticipation of positive profits. The winners in the group included AMGN +$3.94, MEDI +$3.63, and IMNX +$2.81.

While the NASDAQ's decline was a precipitous one, the volume was less than convincing. Which is about the only positive thing I can say about Friday's losses. Its two-month trend of higher prices is still intact, but like the DOW, the NASDAQ is looking a little top-heavy right now. It's those types of big rounding tops, that is clearly evident on the current chart, that bodes poorly for the index. Support at 4000 is both a psychologically and technically important level for the NASDAQ to trade above. A failure at 4000 might break the COMPX's string of higher lows, and could, dare I say, bring on the dreaded dip we have been fearing. After the big gap up in early June, there is little in the way of support preventing the NASDAQ from slipping back to the 3500 level.

Along with Friday's nasty decline in the major indices, there are a few other cautionary flags being waved by the market. First, you may have noticed that a few IPOs have made their way to the headlines on CNBC. If you haven't noticed, the IPO market is showing signs of life. While it may be good for specific sectors of the market, it also means more supply of stock is making its way into investors' hands. And, like we mentioned above, investors' demand for stock is somewhat questionable right now. Moreover, the VIX is still hovering near relatively low levels. And, would you believe, the fear gauge actually dropped during Friday's sell-off. The complacency with which market participants met Friday's decline does not bode well for the market early next week. The CBOE equity Put/Call ratio did spike up Friday, but it's still reading fairly low numbers.

One positive item I must bring to your attention is the recent action in the Long-bond. After Greenspan's hints of easing up on his rate rising binge, the Thirty-year bond rallied Thursday and again Friday, which of course sent yields lower. The 20-dma moving average of the yield of the 30-year turned downward last week, which may indicate a stabilizing of interest rates. And, of course, stabilizing or lower interest rates generally have positive implications for stock prices. After the final round of major earnings announcements are released next week, the market will give its full attention to the Federal Reserve meeting looming in the distance. Pay close attention to the action in the bond market. Many analysts have suggested that the Fed will only act according to what the market tells them to do. Although Greenspan has been criticized recently for trying to suppress stock prices, the bond market might be saying, "Hey Al, it's time to ease up." Those sweet nothings being whispered by the bond market into Greenspan's ear might signal the Fed chief to lighten up on rates. If so, the market might be poised for a big fall rally.

We still have plenty of earnings reports next week that could sway the market one way or another. Of the companies expected to report next week, JDSU will most likely be one of the bigger releases. The fiber optic giant is scheduled to report after the close of the market Wednesday, which is coincidently, the same day the stock is being added to the S&P 500. Some of the other big names reporting next week include TXN, MRK, NT, XOM, T, NOK, EBAY, AMZN, WCOM, and AMGN.

Along with the fresh crop of earnings announcements next week, two key economic reports are will be released. The Labor Department will report the second quarter employment cost index on Thursday. Most economists expect the ECI to rise between 1% to 1.2%. And on Friday, an advanced reading of second quarter gross domestic product will be released by the Commerce Department, which is expected to record an increase of about 3.6%. Also, Greenspan will grace the airwaves again when the chairman testifies to the House Banking Committee on Tuesday. Existing home sales and durable good orders for May will also be reported next week.

Molly Evans wrote a fantastic article about the market's seasonal tendencies in her Traders Corner column last Thursday. If you haven't already, I highly suggest reading Molly's column, she puts out some great stuff! In her article, you will discover that the odds of a major market rally transpiring over the next several months are slim. However, if you must trade, may I offer the following. You've read the axioms several times here at OIN, such as 'don't fight the tape' and 'the trend is your friend'. They are general trading guidelines, but I've found the simpler rules are generally the most profitable. I'm also often reminded that the market is never wrong, only my opinions about it. With that said, whichever way the market decides to turn for the remainder of the summer let the tape be your guide. Ride the trend, cut your losses, and let profits run.

May all your trades be profitable!

Eric Utley
Research Analyst

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