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Market Wrap

Did You Hear The Sigh?

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        07-31-2000        High      Low     Volume Advance/Decline
DJIA    10522.00 + 10.80 10603.30 10497.80   93 mln   1707/1158
NASDAQ   3766.99 +103.99  3767.89  3615.79 1.51 bln   2315/1747
S&P 100   782.64 +  6.46   786.65   776.07   totals   4022/2905   
S&P 500  1430.83 + 10.95  1437.65  1418.71           58.1%/41.9%
RUS 2000  500.64 + 10.42   500.64   487.39
DJ TRANS 2858.09 + 88.56  2858.09  2768.63
VIX        23.44 -  0.86    24.32    23.09
Put/Call Ratio       .53

Did You Hear The Sigh?
By Eric Utley

The inevitable relief rally showed up right on cue Monday. After suffering a 10.5% loss last week the oversold NASDAQ was due for a bounce. The magnitude with which the broader market fell last week was a rare event. Such precipitous declines generally take place only three or four times a year. Of course, traders have discovered a new definition for the term 'anomaly' this year. This week's earnings calendar is filled with the second-tier names that generally make for minimal impact on the direction of the market. And, the economic numbers scheduled for release this week are also of secondary nature, with the exception of the Jobs Report on Friday. The eventless week will most likely lead to range bound trading as Wall Street digests last week's losses. The search for market direction and answers from the Fed will come to the forefront as the week progresses.

The DOW followed the NASDAQ higher this morning, but had trouble clearing resistance at the 10,600 level. The Industrials rolled over in the final half hour of trading to erase nearly all of its early-day gains. The ongoing shift of capital from the blue chips to the Tech sector - and back again - is creating enough whipsaws to put a crick in your neck and your portfolio. The retailers that helped stabilize the DOW last week fell under heavy selling pressure today. The biggest drag on the Industrials came from WMT, which shed -$4.00, and HD, which lost -$0.94. Other losers on the DOW today included PG -$2.44, MRK -$1.25, and KO -$1.19. However, the ebb and flow of capital benefited the Tech and Financial components of the blue chip index. The Financials helped stabilize the DOW's late-day rollover with JPM +$2.94, C +$1.56, and AXP +$0.56. The Tech winners included INTC +$2.00, HWP +$2.38, and IBM +$0.81.

Traders were calling for the Tech and Financial sectors to reassert their leadership roles today. Without a recovery in the two sectors, the DOW is in danger of falling below support at 10,500, which might send us directly to the 10,400 level. The sharp sell-off late Monday afternoon will set the DOW to retest support at 10,500 tomorrow morning. The narrowing range of lower highs and higher lows has got to give one way or another. Without much of a catalyst for the bulls, the prospects of the Industrials breaking its string of higher lows seems likely. But, for the time being, the range bound trading of the blue chips and the continuous shift back and forth to the NASDAQ can lead to impatience, which can lead to losses. The best bet right now is to wait for the DOW to break one way or another and look for a discernible trend to play.

The divergence we've come to love (or hate) this year returned today. The theory of sell the blue chips and buy the NASDAQ was in full practice. The Tech sector was boosted by a combination of events Monday. First, there were the bargain hunters who stepped in to pick up the bruised and battered Chip stocks off the floor. The Philly Semi Index ($SOX) gained 3.8% in its second straight session of recovery. The Chip sector received a big boost from INTC after the company said it had developed the fastest microprocessor to date. The 1.13 gigahertz chip was clocked at 1.13 billion cycles per second. I'm no tech wizard, but that sounds pretty fast! Second, a few analysts raised their voices to boost morale in the beleaguered Tech sector. DB Alex Brown issued a research note early in the morning, calling last week's sell-off in the wireless arena overdone. The bullish comments sent a ripple throughout the Wireless sector, which prompted a bounce in ERICY +$1.50, KYO +$7.00, TKLC +$4.94, and NOK +$0.56. Apart from the Semi and Wireless sectors, the other winners which contributed to the NASDAQ's bounce included VRTS +$14.25, SEBL +$8.63, SCMR +$8.31 CIEN +$7.69, CMVT $+7.56, ADBE +$3.13, and ORCL +$2.81. Despite the broad rally on the NASDAQ, the Biotech sector added to its recent losses. The AMEX Biotech Index shed 2.3% on the heels of the news from Cephalon (CEPH). The company announced disappointing results from trials for a potential treatment for attention deficit disorder. The Biotech Bears took control and ripped -$22.44 from CEPH. Other losers in the sector included HGSI -$6.56, CRA -$3.63, MLNM -$3.38, and BGEN -$1.44.

Although the NASDAQ posted triple digit gains Monday, the volume on the bounce was significantly lighter than the volume on last week's declines. Traders exchanged 1.48 bln shares today; that's compared to last Thursday's and Friday's robust trading of 1.79 bln and 1.77 bln, respectively. However, on a positive note, the NASDAQ loosely formed an inverse head-and-shoulders over the course of Friday's and Monday's trading. The somewhat strong technical position of the NASDAQ might lead to more upside in the near-term. After last week's sharp sell-off there's not much resistance above current levels. Another triple digit gain by the NASDAQ would position the index to test resistance at its 200-dma.

The higher prices posted in the Tech and Financial sectors were nice to see today after last week's rampant red on the quote sheet. However, there are plenty of hurdles the broader market needs to clear before moving substantially higher. We mentioned last week that the slew of IPO's scheduled for release presented a potential threat to the health of the overall market. The heavy offerings of new stock last week could have very well contributed to the steep losses in the Tech sector. However, the number of new issues last week is thin compared to the offerings on the table this week. A full 52 issues are scheduled for offering this week, of which 38 are IPOs and 14 secondary offerings. Of course many of those won't be issued for various reasons just as several of last week's IPOs didn't make it. But, the potential for billions of dollars of new stock hitting the market is not what the bulls need right now. For instance, Goldman Sachs (GS) is slated to release 40 mln shares in a secondary offering. That stock needs to be absorbed by institutions and brokers, which might lead to the liquidation of other securities to raise the necessary proceeds to pay for the transaction. Supply and demand reign supreme on the stock market. The oversupply of stock scheduled to be released this week is unhealthy for the overall market.

Furthermore, despite the 10.5% on the NASDAQ last week, many of the sentiment and speculative indicators are still waving warning flags. The VIX is still trading at dangerously low levels. The investor fear gauged dropped to 23.32 today. Although it did spike up during last week's decline. The CBOE equity Put/Call ratio is hovering around 0.50, which is relatively low in light of last week's drubbing. And finally, the Investment Advisors Sentiment Indicator is still rising into bullish territory. When viewed in context, the lack of fear in the market bodes poorly for the prospects of a rally anytime soon. In fact, the current levels of the aforementioned indicators has prompted several talking heads to call for a retest of the spring-bear market lows. With the lack of a bull catalyst and the ever-looming Fed not far off in the distance, it would seem the market's path of least resistance is down.

The remainder of the week will most likely be a tug of war between the bulls and bears. As the week grinds on, traders will turn to the Jobs Report Friday for clues of future FOMC interest rate policy. The lack of events this week will cause traders to hang onto every last word from the analyst crowd. The various upgrades and downgrades we'll encounter might present trading opportunities for those quick day traders and swing traders. However, the battle between the bulls and bears will probably churn the major indices for the time being. Range bound trading can create impatience, which generally leads to forced trades and losses. The name of this game is survival, which means preserving capital. The current market is difficult to game with no clear direction, which warrants the practice of patience for a discernible trend to show itself.

The beginning of August marks the official welcoming of the summer doldrums. The big institutions and money managers will tie up loose ends this week before heading to the beaches for the remainder of the summer, hence the heavy offering of IPOs this week. The lack of big money will make trading all the more difficult for the next month. Don't get me wrong, there is still opportunity to take money out of the market, it's just a lot harder to do so. Be patient, trade with your head, and preserve your hard earned money for only good opportunities.

"There are times when one should [trade], and just as surely there are times when one should not [trade]." - Jesse Livermore

Words to trade by from a master!

Eric Utley
Research Analyst

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