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Blame It On The Euro, High Oil Prices, Or A Bottomless Tech Sector.

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         09-18-2000        High      Low     Volume Advance/Decline
DJIA    11808.50 -118.50 10935.60 10798.20  960 mln    684/2215
NASDAQ   3726.52 -108.71  3862.32  3702.54 1.61 bln   1099/2977
S&P 100   778.93 - 10.84   791.16   777.14   totals   1783/5192   
S&P 500  1444.51 - 21.30  1467.77  1441.92           25.6%/74.4%
RUS 2000  516.68 - 14.20   531.23   516.42
DJ TRANS 2620.16 - 51.30  2676.93  2619.29
VIX        23.01 +  1.08    23.21    20.83
Put/Call Ratio       .57

Blame It On The Euro, High Oil Prices, Or A Bottomless Tech Sector.

They were selling stocks today. The broad market has been engulfed by a sea of red during the past three weeks over concerns of corporate profits taking a hit in the third quarter. Many of those concerns have recently been realized in the form of myriad warnings across a broad range of industry groups. Although third-quarter warnings generally make their way into the market around this time of year, for some reason it feels a little different. Is it the high cost of energy? Despite what some economists suggest, the ten-year high in oil prices will impact both corporate profit margins and hit the consumers in the pocket. Have you heard from the Fed chief recently? Although Greenspan spoke at a bankers meeting today, he's been relatively mute as of late. Possibly because there still exist concerns that Doc Greenspan raised rates a little too much and too fast. How about the euro? What about Intel (INTC) trading below its 200-dma? How does that make you feel? With a host of fears mounting, there exists no compelling reason to buy stocks right now.

The lack of buying interest over the last two weeks has left the bears free reign over the Tech sector. Over that time, the path of least resistance for the NASDAQ has obviously been down. In the past eleven trading sessions, the NASDAQ has finished in the green on only two days. You'd think the NASDAQ was due for a technical bounce tomorrow, but it won't happen if the outlook in the Tech sector doesn't improve. Volume on the NASDAQ totaled 1.58 bln shares today, which was enough trading to take notice of. It was not however, capitulation selling, which might have signaled a market bottom. Finally, the plunge in the COMPX today was lead by the Tech Generals, which is all the more worrisome. CSCO fell -$2.69 and is back to its critical $60 support level. INTC lost -$1.69, and is well below its 200-dma. ORCL gave up -$1.88 and is still bleeding from its ill-received earnings report last week. DELL shed -$1.31 en route to falling to a new 52-week low. JDSU dropped -$5.81 and sank below its $100 support level.

As I detailed on the COMPX chart above, there are two very distinct and interesting patterns developing. First, the bigger picture shows the COMPX broke its trend-line of lows. While the COMPX is still trading at a relatively higher low, today's breakdown might position the index to retest support near the 3500 level. It's hard to argue a compelling bullish case for the Tech sector after looking at the COMPX's failure today. Second, you can see the two little green candles on the chart, which follow exactly three days of selling. Well, we've witnessed three consecutive days of selling again, which might lead to a bounce tomorrow. However, if the COMPX does bounce tomorrow, it would not mean we are in the clear. And, it would not be a rally that I would buy.

The INDU haven't faired much better over the past two weeks. In fact, the DOW has lost 400 points in the space of four trading days. Looking at the DOW chart, again, we should expect a technical bounce tomorrow. But, what we suspect usually doesn't happen. The DOW's recent slide was triggered by weakness in the big Financials, namely AXP, C, and especially JPM. Of course, the Tech components such as MSFT, INTC, and IBM haven't helped to buoy the DOW's slide.

Today's fresh batch of earnings warnings were spread across myriad sectors. The not-so illustrious Auto Parts sector was full of warnings today. Eaton (ETN) and Dana (DCN), both parts makers, warned of lower earnings due to a slowdown in the auto market and the skidding euro. A disconcerting warning was also issued by Rockwell (ROK), a diversified manufacturer of automated controls. ROK said its auto parts division was the main reason for the shortfall, but the company had also suffered from a shortage of electronic components. If component shortages are affecting ROK, the very same shortages might be pressuring other segments of the Tech sector.

Meanwhile, in a different segment of the Tech sector, the already-beaten down Allaire (ALLR) said it would lose more money than previously expected in its third-quarter. Although ALLR's shortfall resulted from company specific problems, the announcement spurred a broad sell-off in the Internet Software and Services sector. The big losers included ARBA -$8.50, ITWO -$2.75, EXDS -$1.89.

Away from the Tech sector, Gillette (G), the battered consumer products maker, fell to a new 52-week low after the company warned its third-quarter revenues would come in lower than analysts had anticipated. The world's largest razor maker blamed its sales shortfall on the slumping euro. The currency exchange problems afflicting multinational companies have been rampant across several sectors. Over the past two weeks, DuPont (DD), McDonald's (MCD), Colgate-Palmolive (CL) and now G, have all warned of lower-than-expected profits due to the euro's slide. Not by coincidence, each of the aforementioned are trading at or near 52-week lows. I have a feeling we will be hearing from a few more multinationals this week. I don't think all the currency problems have been completely discounted into the market, specifically the Consumer Products sector. A few of the big multinationals that have yet to warn of euro problems include: Procter & Gamble (PG), Avon (AVP), and Estee Lauder (EL). And with that counsel, I urge you to tread carefully in the euro sensitive sectors.

It was hard to find one winning sector today amid the flurry of warnings and Wall Street fears. Even the market-leading Energy sector took a break today, despite the rebound in oil prices. Traders found some solace in the Drug sector as capital sought out defensive positions during today's sell-off, but there is no real discernable trend to trade in the Pharmas. A few bright spots in the Tech sector continue to be ADBE +9.38 (still rallying after blowout earnings last week), QCOM +$3.56 (renewed hopes of CDMA technology being adopted in China), and EMC +$1.06 (bullish presentation at the Bank of America Investors conference this morning). So, all is not gloom and doom in the Tech sector; there are still a few bulls defending their positions. At the same time though, if you go long this market be very careful in your stock selection, the bears are relentless.

So, if the path of least resistance is still down on the NASDAQ, and it's hard to find a strong group of stocks to trade, what are we to do? Let me tell you about a trade I put on in the QQQ last week, which might help you profit from any continued downside move in the NASDAQ. Last Thursday, the lower-than-expected PPI report caused a major gap higher in the NASDAQ. The Tech sector was holding up relatively well for most of the day, that is until the professionals returned from their lunch breaks ready to sell into the rally. I noticed that many of the big Tech leaders such as CSCO, INTC, and MSFT began acting very weak around 1:15 EST. The tick on the NASDAQ also began falling into negative territory, very quickly I might add. As soon as the QQQs began retracing the gap open, I was good for 10 SEP 93 Puts. Yes, I knew expiration was the next day, and yes it was a risky trade. But, it was a small position and after all, I'm a speculator and must take risks. Anyway, back to the trade. The NASDAQ kept weakening and with a little bearish speak from Ralph Bloch, sank near the close. Since expiration was the following day, I took my 30% gain. The more adventurous Matt Russ put on a very similar trade, but held his position until expiration morning, which resulted in a 100% gain for him. With the directional-bias in the NASDAQ favoring the bears, don't be afraid to look for a solid entry into a put play.

There won't be much in the way of market-moving economic data this week. Instead, the markets will focus almost solely on earnings, and the events that might impact profits. What's more, several companies will kick off third-quarter earnings this week. Companies on the profit docket include: FedEx, Jabil Circuit, Goldman Sachs, Lehman Brothers, Morgan Stanley Dean Witter, Celera Genomics, and the always-interesting quarterly announcement from CMGI. Good numbers from the Brokers this week might help to stabilize that group's recent slide, which might portend a recovery in the Financial-sensitive DOW. On the other hand, a major earnings disappointment this week or a high-profile warning might send the market into a nosedive. Either way, it's best to trade with the direction of least resistance. Until the NASDAQ and DOW show us some stabilizing price action, the clearest path is to the downside. Be smart!

Eric Utley
Research Analyst

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