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Market Wrap

Trading Scared

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         09-25-2000        High      Low     Volume Advance/Decline
DJIA    10808.20 - 39.20 10897.30 10783.00  986 mln   1267/1581
NASDAQ   3741.22 - 62.54  3868.11  3737.50 1.78 bln   1789/2252
S&P 100   766.01 -  8.07   779.10   763.47   totals   3056/3833   
S&P 500  1439.03 -  9.69  1457.42  1435.93           44.4%/55.6%
RUS 2000  515.38 -  3.44   521.74   515.29
DJ TRANS 2555.63 - 41.51  2598.40  2554.72
VIX        24.40 +  0.23    24.88    23.16
Put/Call Ratio       .51

Trading Scared

Fears of profit problems erased early morning gains in both the DOW and NASDAQ. Major markets opened higher this morning after last Friday's rebound, but were unable to hold onto their gains. The carryover from the Intel warning in conjunction with a round of profit taking in last Friday's Tech leaders combined to carry the broader market well into the red this afternoon. It was a little disappointing not to see last Friday's buying follow-through today and keep the NASDAQ above support at 3800, but, we still have four days of trading remaining during this bearish month known as September, so today's sell-off was not unexpected. This coming Friday marks the end of the third-quarter, and with it we should expect to see an increase in volatility, whether it positively or negatively affects the market remains to be seen. Nonetheless, the end of a quarter can create trading opportunities, which we'll elaborate upon below.

Asian and the majority of European financial markets finished higher this morning, which caused the COMPX to gap above the 3850 level. The +50 point gap higher in the NASDAQ this morning following last Friday's recovery was encouraging for the bulls sake. But, just when you think the bulls regained control of the NASDAQ, the bears come out of hiding to sell the Tech sector lower. Around 11:30 EST this morning, the bears came out with vengeance after last Friday's defeat, and sold the COMPX below the 3850 level, then subsequently drove the index below its critical support level at 3800. After wrecking support near 3800, the bears didn't rest until near the close of trading, where the NASDAQ finished just off its day lows. Despite the NASDAQ's monumental rebound last Friday, the Tech-heavy index has yet to break its string of lower highs. Since forming a double-top near the beginning of September, the COMPX cannot seem to buck the bears. What's more, the COMPX's nearly 10% drop this month would mark the worst September in over 10 years. Needless to say, I'm looking forward to this Friday for myriad reasons, with the ending of this particular September number one on the list.

Away from the NASDAQ and the Tech sector and into the realm of Energy, oil prices fell below $32 a barrel this morning after President Clinton authorized the release of 30 million barrels of crude from the U.S. oil reserve after market close last Friday. Although the actual impact of an extra 30 million barrels of crude oil is still unknown, the market responded by pulling prices down to a one-month low. The falling oil prices resulted in an extended pullback in the Energy sector, which has been a recent market leader. The major integrated oil stocks took it on the chin today, led by losses in: XOM -$0.69, BP -$0.88, CHV -$1.50, and UCL -$0.56. While the one-day point losses in the aforementioned might not seem significant, the overall direction in the fallen Energy sector is causing some market problems.

However, while the falling price of oil hurt the Energy sector, it helped several other industry groups. The Capital Goods sector benefited from easing oil prices, led by modest rallies in TYC, GE, and MMM. Also reaping rewards from the falling price of oil was the Financial sector. The prospects of easing energy prices led the market to believe that inflation will remain in check and interest rates will remain stable or even head lower. The thought of lower interest rates induced a broad rally in the Finance sector, which lifted the Regional Banks, Money Centers, Insurers, and the Brokers. The Finance sector tried to stabilize the Dow Industrials, but the losses in the Tech sector were too much for the blue chip index. Among the notable losers on the DOW today were: HWP -$2.87, IBM -$2.13, INTC -$2.56, and MSFT -$2.00.

The longer-term trend of the DOW remains relatively bullish despite the index's poor performance during the month of September. Since hitting a low during the bear market last Spring, the DOW has traced a successive series of relatively higher lows. However, over that same time, the DOW has also traced a series of relatively lower highs. The ensuing diamond that formed this year should lead to a breakout in the coming months. Whether the DOW breaks up or down remains to be seen. However, falling energy prices and interest rates, and stable foreign markets are certainly conducive to a prospective Fall rally in the DOW.

Speaking of rallies, several sectors continue to show strength in the face of the September bears. It would appear the Biotech and Fiber Optic sectors have already begun their Fall rallies. The former has clearly surpassed the Semi sector as the leading industry group this year, lead by recent gains in MEDI, MLNM, and PDLI. Along with the Biotechs, the Optical-related stocks continue to advance to new highs, which was epitomized today by rallies in GLW, CIEN, and JNIC.

On the other side of the Tech sector today were the Semis. Individual rallies were hard to find in the Chip stocks today. The carryover from the Intel warning pressured Chip Equipment makers such as AMAT, CMOS, and KLAC today. The Chip manufactures also felt the pain today as MU, CY, TXN, NSM, and XLNX all fell substantially lower on heavy trade. The problems in the Chip sector are making it harder for the broader markets to mount substantial rallies, especially the NASDAQ.

And, what would be a Monday without a profit warning from a Tech company? Lexmark (LXK) said after the close that it expects lower earnings for the second-half of its fiscal year. LXK blamed its shortfall on a slowdown of sales in inkjet printer products and, of course, the weakness in the euro. The fact that LXK felt the ill-effects of the euro might scare the market tomorrow and leave traders asking who's next? The fear of profit warnings will most likely continue to influence trading this week.

In bullish earnings news, PALM reported exceptional fiscal first-quarter numbers after the close today. The consensus among analysts was for PALM to earn 2 cents per share; the company doubled projections by reporting 4 cents per share. Amazingly, for the third consecutive quarter, PALM reported year-over-year revenue growth north of 100%. The market had been expecting good numbers from PALM, which explains the stock's 23% rally since the beginning of September. As expected, PALM edged slightly lower in afterhours trading as the "sell the news" crowd emerged. However, the bullish report from PALM could give the bulls something to believe in tomorrow.

Also on the earnings front this afternoon was Cabletron Systems (CS). The Internet equipment maker reported a profit of one penny per share, edging past the consensus estimate to lose one penny. CS's three biggest competitors are CSCO, JNPR, and RBAK. The better-than-expected report from CS could help the aforementioned fend off the bears tomorrow.

As I mentioned above, the end of the third-quarter this Friday will play a key role in the direction of the market this week. The term commonly used to describe the end-of-quarter phenomenon is "window dressing". Wall Street money managers like to make their portfolios look as pretty as possible when they report their quarterly holdings to big institutional clients and investors. As a result, the worst performing stocks over the past quarter generally are replaced for the best performing stocks during the same period. We could see the affects of end-of-the- quarter window dressing as soon as tomorrow morning as fund managers scramble to "clean-up" their portfolios by Friday. As such, if you're thinking of bottom-fishing in a group of beaten down stocks, i.e. Telecom Carriers, you're probably better off waiting until next week after the fund managers are done with their end-of-quarter selling. Also worth watching might be the leading stocks during the last quarter. As fund managers load up on the quarter's biggest winners, their buying will most likely drive the market's recent leaders higher.

Other than the quarterly window dressing this week, traders will look forward to economic numbers in the form of Durable Goods orders Wednesday morning, and second-quarter final Gross Domestic Product numbers along with Jobless Claims Thursday morning. All in all, the economic data is fairly mute this week, with earnings garnering the market's full attention. Additionally, traders will continue to monitor the levels of oil and the euro and their future influence on corporate profits. Barring any major catastrophe, we will likely remain in a fearful market, which can present opportunities for the fleet afoot trader. However, it's hard to find a clear and present trend in the current market environment, which presents more risks for the swing traders who like to hold positions longer than one or two days. With that said, trade with your head, not your emotions.

Eric Utley
Research Analyst

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