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Market Wrap

Earnings jitters and energy price concerns hit the market.

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         09-11-2000        High      Low     Volume Advance/Decline
DJIA    11195.50 - 25.10 11286.10 11139.30  905 mln   1525/1295
NASDAQ   3896.35 - 82.06  4008.46  3880.69 1.48 bln   1568/2433
S&P 100   808.12 -  4.78   818.42   804.76   totals   3093/3728   
S&P 500  1487.85 -  6.65  1506.76  1483.01           45.3%/54.7%
RUS 2000  533.62 -  2.08   539.63   532.94
DJ TRANS 2691.22 - 41.56  2745.55  2685.47
VIX        20.96 +  0.27    21.92    20.40
Put/Call Ratio       .60

Earnings jitters and energy price concerns hit the market.

Is a bounce imminent or will the bears prevail? The Tech-heavy NASDAQ fell for the second-consecutive session today on third- quarter profit concerns, which added to last Friday's losses. It seems the bears are fattening up as they usually do during September, before their long awaited hibernation in the coming Winter months. Adding to the bears' fury today was the rally in crude oil futures above the $35 mark, but more on that later. With the post-Labor Day rally yet to materialize, market participants are searching hard for reasons to buy stocks. Yet, at the same time, there isn't a real compelling case to sell stocks at their current oversold levels.

Volume picked up on the NASDAQ today as 1.4 bln shares traded, which makes the sell-off a bit more disconcerting. The COMPX attempted to rally this morning after amateur hour, but ran into resistance at 4000. From there, the Tech sector was steadily liquidated as the day wore on. Today's sell-off marks a nearly perfect 50% retracement of the NASDAQ's big August rally. With that said, we might be due for a technical rebound tomorrow morning. The NASDAQ did bounce off its day lows near the close of trading this afternoon, which might be a prelude to a bargain buying-induced rally over the coming days. However, if the sellers show-up early, we might see the NASDAQ fall to its 100-dma at 3831, below that level help is located at the 3800 level. The NASDAQ's sell-off thus far in September has carried many leading stocks down to critical support levels. To solidify my point, it might be worth your while to pull-up a chart on CSCO as it nears its $60 support level. The thought of CSCO falling below $60 is a bit scary for the NASDAQ bulls out there. Speaking of CSCO, the stock shed -$2.69 today. Other fallen NASDAQ leaders included SUNW -$5.50, JDSU -$4.56, ORCL -$3.13, CIEN -$15.63, and JNPR -$14.56.

The DOW followed the NASDAQ's lead late this morning and headed into negative territory for the third-consecutive day. IBM, which finished the day -$4.88, was the biggest drag on the blue chip index. Goldman Sachs cut its fourth-quarter revenue growth estimates on Big Blue. Goldman's downward revision of IBM's revenues was the catalyst that sprouted earnings jitters in the broader Tech sector. If it weren't for IBM, the DJIA would have had a respectable day. The Financial components of the DOW plowed higher as a new wave of consolidation spread through the group, which I'll expand upon below. AXP and JPM both tacked on respectable gains to neutralize the effects of the IBM sell-off.

The DOW has faired a little better than the NASDAQ, on a relative basis, thus far in September. However, the Industrials are looking a little top heavy at their current levels and might be ready to rollover. After August's big rally, a few more weeks of consolidation might be in order for the blue chips. Although, in similar fashion to the NASDAQ's current position, the DOW might also be due for a technical bounce tomorrow morning.

Never mind OPEC, oil prices are still on the way up. October crude oil futures rose above $35 a barrel today, which marked a ten-year high. A ten-year high! Over the weekend, OPEC agreed to boost output by 800 K barrels per day beginning in October. The "drop in the bucket" increase was not enough to appease the futures market. Traders' concerns over a shortage in heating-oil are becoming more legitimate as we approach the Winter months. The simple fact is heating-oil inventories already are at extremely low levels, which is supporting the high prices in the futures market. A relatively "bad" winter could send energy prices into the stratosphere. The high cost of energy not only hits consumers in the pockets but also hurts the broader economy. Every $1 increase in a barrel of oil takes away $15 bln in discretionary buying power from the U.S. consumer. Have you been on an airplane recently? Notice the fuel surcharge that several carriers have added to the ticket price? Although we live in technologically-driven economy, energy costs still matter. Just ask DuPont (DD), who warned of lower third-quarter earnings last week due to rising energy costs. I expect we'll hear several additional earnings warnings in the coming weeks resulting from high energy costs. After all, 'tis the season to warn.

The semi-crisis in the energy market is, however, carrying several sectors to all-time highs. The high price of oil translates into big profit margins for the energy-related companies. The Oil Producer and Oil Service sectors bolted higher today on the back of $35 oil prices. The offshore driller, Global Marine (GLM), rose $1.81 to a new 52-week high. The natural gas conglomerate El Paso (EPG) rose to a new all-time high along with Coastal (CGP); the two companies plan to merge later this year. The integrated refiners also enjoyed the high crude prices today as XOM added $1.50. P gained $1.44 and CHV rose $2.63 after a report said the two were in merger talks. If oil prices continue to trend higher, consumers might be able to fight the pinch in their pocketbooks by investing in the group and riding the Energy sector higher.

The feeding frenzy in the Financial sector intensified today. Goldman Sachs (GS) announced it would acquire the privately held Speer Leeds & Kellogg (SLK) for about $6.5 bln. The deal is significant because it will combine one of the world's leading investment banks with one of the leading market making and clearing firms. SLK makes markets in over 6,000 NASDAQ stocks along with listed securities on the NYSE and AMEX. The spree of consolidation in the Financial sector is not unexpected. The repeal of the Glass-Steagal Act last Fall opened the path to merger and acquisition activity. We should expect to see further consolidation within the broad Financial sector, which might continue to carry the group higher.

For once, there was relevant and pertinent news out of Washington today. This morning, the Justice Department filed a lawsuit against the four U.S. options exchanges (CBOE, AMEX, Philadelphia, and Pacific). The DOJ alleged the exchanges stifled competition by limiting the trading of certain contracts to just one exchange. In doing so, the DOJ implied the exchanges were able to artificially inflate spreads on certain contracts. The four exchanges agreed to be censured by the SEC and spend $77 mln on market enforcement. It remains to be seen what ultimately comes from the lawsuit, but, hopefully it translates into the multiple listing of more options contracts. Obviously, the more liquidity and players in a given market the more efficient it becomes, which translates into smaller spreads and bigger profits for us, the retail option traders.

With the exception of the Energy and Financial sectors, the broader market has taken a beating in the last week. Now, we all know that the market doesn't move in a straight line. With that said, many traders might be looking for a bounce early tomorrow morning, especially with a heavy docket of economic data scheduled to be released later this week. The August PPI is scheduled for release Thursday morning and the August CPI a day later. Traders might begin positioning for a run into the PPI as early as tomorrow. However, the market has been selling off with little opposition lately. That might suggest the path of least resistance is still down. Put your biased opinions aside in the coming days and let the market tell you which way to trade. Go with the market and your chances of profitability will greatly increase. Trade against the market and, well, it can get pretty ugly. Let profits run to the sky and cut losses with the blink of an eye. Good trading!

Eric Utley
Research Analyst

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