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Market Wrap

A Tale Of Two Markets

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        10-30-2000        High      Low     Volume Advance/Decline
DJIA    10835.80 +245.20 10869.50 10578.50 1.17 bln   1870/1012
NASDAQ   3191.40 - 86.96  3279.72  3149.24 1.74 bln   1764/2229
S&P 100   732.77 +  6.59   736.21   722.38   totals   3634/3241
S&P 500  1398.66 + 19.08  1406.36  1376.86           52.9%/47.1%
RUS 2000  482.72 +  2.87   484.08   477.47
DJ TRANS 2686.61 +157.64  2691.80  2525.98
VIX        27.79 -  3.12    30.19    27.25
Put/Call Ratio      0.58

A Tale Of Two Markets

Rotation out of Tech and into Cyclicals continued to plague the NASDAQ. While in blue chips, a broad market rally in almost every sector (Financial, Utility, Transportation, Retail, Paper, and Health Care, among others) led the Dow Jones Industrial Average (INDU) to a very respectable one-day gain. The increasing probability of the US economy landing "softly" combined with an end to third-quarter tax-loss selling induced the strong rally in the INDU. While the advances in the beaten down sectors such as Paper and Retail bode well for the overall health of the market, the tech-heavy NASDAQ is suffering from such rotation. Furthermore, negative analyst comments and actions on tech leaders certainly didn't help the struggling NASDAQ.

Cisco Systems (CSCO) led the NASDAQ lower after Lehman Brothers lowered its price target on the tech bellwether this morning. Lehman analyst, Tim Luke, cut his price target on shares of CSCO from $90 to the $60 - $65 range. In his research report, Luke cited lower capital spending among telecom carriers as the reason for his lowered price target. According to Luke, 40% of Cisco's sales come from telecom carriers. In typical contradictory fashion, Luke also noted Cisco's near-term outlook remained good as he expected the company to post strong quarterly results scheduled to be released on November 6th. The consensus is for Cisco to increase earnings by 50%. The negative comments weighed heavily on the Networking sector with the likes of Juniper and Sycamore taking it on the chin. Shares of Cisco finished down -$2.63 at $48.06.

Not all sectors were bestowed with bearish comments. The beaten down Paper sector received bullish comments from DB Alex Brown this morning. The brokerage upgraded its outlook for the entire Paper sector which sparked a blaze among International Paper (IP), Georgia Pacific (GP), and Weyerhaeuser (WY). The less-than sexy Philadelphia Forest Paper Products Index (FPP.X) gained an impressive 7.6% on the heels of the upgrade.

The bullishness in the Paper sector spilled over into other cyclical sectors of the market. The Chemicals sector, as measured by the S&P Chemical Index (CEX.X), gained 6.9%, bolstered by an upbeat profit report from Dow Chemical (DOW).

Powered by the strength in cyclicals, among several other sectors, the INDU charged past several key resistance levels. The bullishness in the INDU was broad and far reaching. A mere four issues finished in negative territory in the INDU today, which included shares of IBM, Intel (INTC), Procter & Gamble (PG), and General Motors (GM). Where the latter two finished only slightly lower with fractional losses. Volume was somewhat light on the NYSE with 1.16 billion shares trading hands. However, the internals of the NYSE were impressive. Advancing issues outpaced declining issues by a margin of almost 2 to 1.

The full-on breakout, which Matt Russ mentioned in Sunday's Market Wrap, followed through with gusto today. The INDU cleared the 10,600 resistance level in the first five minutes of trading this morning and never looked back. Subsequent rallies above the 10,700 and 10,800 levels carried the INDU to one of its best finishes in recent trading. Amazingly enough, the INDU's next major resistance level lies near 11,000. Before jumping for joy, though, we must realize the INDU has gained over 450 points in two days. It's that fact that prompted Dick Arms, who called the market bottom last Thursday and spoke at the Denver Seminar Saturday, to caution of a pullback in the INDU over the next several trading days during his appearance on CNBC after market close today. Whether or not the INDU does pullback remains to be seen. Nonetheless, the recent advance of the INDU has been encouraging to witness.

Try as it might, the INDU couldn't pull the NASDAQ into positive territory into the close of trading today. However, there was one bright spot in technology found in the form of the Chip sector. The Philadelphia Semiconductor (SOX.X) battled higher and tacked on a relatively impressive 2.5%. The gains in the Semi sector didn't come easy, though. Intel (INTC) shed -$1.38, and finished right at $45. Shares of Intel have rallied in recent sessions and today's losses may prove to be no more than profit taking. Nonetheless, shares of Intel weighed on the NASDAQ Composite as well as the INDU. Despite Intel's lagging performance, shares of chip equipment makers plowed higher amid the tech weakness. Leading the charge were shares of Applied Materials (AMAT), which gained 3.1%, and Novellus (NVLS), which added over 5%.

Despite the strength in the SOX, the Cisco downgrade was overwhelming. Declining issues on the NASDAQ outpaced advancing issues by a margin of 11 to 9. Volume on the NASDAQ was a bit more robust as 1.7 billion shares trading hands. Cisco added to that volume number as over 112 million shares traded during the stock's sell-off. Along with the aforementioned chip equipment shares, several Tech leaders showed strength on the NASDAQ despite the broader weakness. Shares of Microsoft (MSFT) were actively traded during the stock's continued advance today. MSFT finished at $69.06, up +$1.38 on the day. The stock has gained nearly 40% in the last nine trading days. Other notable advancers on the NASDAQ included shares of Dell, WorldCom, Sun Microsystems, and Palm.

Although the NASDAQ lost 86 points today, the tech-heavy index managed to close well off its lows for the day and hold its recent near-term low at 3100, which was established last Thursday. If the NASDAQ's pattern of rolling higher while tracing relatively higher lows continues, the intraday bottom at 3149 traced today needs to hold as the week progresses. If the NASDAQ clears resistance at 3225 tomorrow, the index will face a significant hurdle between the 3230 and 3250 levels. If the NASDAQ breaks its near-term downtrend, which was established last week, it may be ready to start the rebuilding process.

The rebuilding of the NASDAQ may start to accelerate this week as third-quarter tax-loss selling comes to an end. October will finally come to an end tomorrow with the passing of Halloween. Hopefully the ghost and ghouls, which have plagued the market for the past two months, will leave investors with a treat.

Moreover, inflows into equity mutual funds may start to turn positive with the recent strength in the INDU. Mutual fund outflows are expected to reach $9.6 billion for the month of October, according to a recent report issued by fund watcher Trim Tabs. If those numbers come to light, October would mark the worst month this year for fund outflows. Big surprise!

With an already big stash of cash on hand, money managers will be searching for places to put money to work as October comes to an end. Whether that money makes its way back into the beaten down tech sector remains to be seen. But, the capital will make its way back into the market in one form or another. And when it does, it's important to trade with the market, not against it. Trade smart!

Eric Utley
Assistant Editor

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