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Market Wrap

Bifurcated, Again

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        02-05-2001        High      Low     Volume Advance/Decline
DJIA    10965.80 +101.70 10977.70 10851.40 1.01 bln   1630/1443
NASDAQ   2643.21 - 17.29  2656.02  2596.73 1.65 bln   1577/2221
S&P 100   709.66 +  4.18   709.97   703.85   totals   3207/3664
S&P 500  1354.31 +  4.84  1354.56  1344.48           46.7%/53.3%
RUS 2000  500.74 -  0.76   501.02   498.43
DJ TRANS 3069.71 - 23.05  3099.68  3056.96 
VIX        24.39 -  0.36    25.65    24.34
Put/Call Ratio      0.54

Bifurcated, Again

Despite triple digit gains in the Dow Jones Industrial Average (INDU), the Nasdaq Composite (COMPX) was shunned by market participants. Perhaps the avoidance of tech stocks Monday had something to do with the Cisco Systems (NASDAQ:CSCO) earnings report tomorrow.

The networking giant's earnings reports are always highly watched and much anticipated by fans of technology and the Internet. But Cisco's quarterly report this time around is being viewed as a bit more crucial. Because of its wide ownership and heavy weighting in the COMPX, the potential for collateral damage or relief should concern the majority of market participants this week. We know that Cisco's CEO, John Chambers, informally talked down guidance last month at a tech conference and again at the World Economic Forum. And while many analysts expect Cisco to hit its estimates for the current quarter, or perhaps beat by the usual penny per share, the crucial data point will be the company's guidance going forward. Chambers admitted that visibility into the second-half of 2001 was less clear, when translated, means Cisco is seeing a slowdown in business. So the question tomorrow will be whether the market has already discounted all the bad news into shares of Cisco or whether the worst is yet to come. For our readers with the ability to listen in on the Cisco conference call, I would highly suggest doing so - you can bet I'll be there! It pays to hear the guidance first hand and be able to make your own informed decisions.

The nervousness surrounding Cisco and the related impact on the broader tech sector weighed on the COMPX early this morning. The tech-heavy index gapped down this morning, subsequently bounced off the 2600 level, and proceeded to advance into the close of trading - I'll elaborate on the details and reasons for the COMPX's behavior below. But for now, let us look forward. If the bulls return tomorrow, the COMPX will need to clear resistance at 2660 - last Friday's close. An advance above that level accompanied with momentum will probably take the COMPX back up to 2700. Conversely, if the nervousness ahead of Cisco's earnings report prevails again, pay close attention to the 2600 level. A break below will most likely take the COMPX back down to 2500. It's probably best to wait for a break in either direction and trade accordingly, instead of gaming the 60 point range between 2600 and 2660 - unless, of course, you're very nimble in your operations.

Along with the Cisco-related event and its ramifications on the COMPX tomorrow, I maintain that our readers should pay close attention to the Philadelphia Semiconductor Index (SOX.X) and its impact on the broader tech sector. In my very humble opinion, the SOX was the primary force behind the COMPX's advance in January. And I believe the SOX will continue to be a leading indicator for the broader tech sector.

In order to emphasize my views on a micro level, let me share a few observations I made during today's session. Earlier in the morning, every time the COMPX attempted to rally the SOX acted very heavy - that is, it didn't advance with the magnitude of the COMPX's futile attempts. And once the SOX broke below 650, it was almost certain, in my mind, that the COMPX was headed towards 2600. Sure enough, the COMPX bounced off 2600, but only after buyers stepped into the SOX. Both indexes subsequently rallied into the close on what appeared to be short covering. Getting back to the macro view, I think it's crucial for the SOX to trade above its 50-dma and consolidate some of its recent losses. If the SOX breaks below its 50-dma currently at 634, there exist the possibility of an ugly decline to 600, which will probably drag the COMPX back down to 2500.

The heavy trading in the SOX earlier this morning had everything to do with a bearish report from the Semiconductor Industry Association. The chip business monitoring firm reported that worldwide sales of semis were down 3 percent during the fourth-quarter of 2000. On top of that report, the axes at Lehman Brothers and CS First Boston suggested that the chip sector probably hasn't reached bottom yet. The two brokerages firms pointed to the rising inventory levels at leading chip firms and the lack of demand to meet the supply. Here again, as is the case with Cisco, it's a question of how much discounting of bad news has already taken place. The market foreshadowed all the bad news we're currently hearing last fall and winter. So the question remains if this is as bad as it gets in the chip business. The only way to filter out the noise from analysts and industry watchers is to give the most credence to price direction.

An example of how to filter out the noise and focus on price might be provided by Triquint Semiconductor (NASDAQ:TQNT). After the bell, the high-end chip company beat consensus estimates by 3 cents per share. Shares of Triquint were jumping around in after hours trading at the time of writing, adding $1 to their regular session close. Depending on the guidance given by the company during its conference call, shares of Triquint might provide a good study tomorrow on my mantra of filtering out the noise, especially in light of the bearish news and analyst comments surrounding the chip sector today.

Away from the tech sector, it was another nice day for the bulls in the Dow Jones Industrial Average (INDU). The bids in the INDU stemmed from the ongoing, and very dynamic, sector rotations out of tech and into cyclical names. In addition, a mega-merger in the energy sector sparked some interest in the broader sector. Phillips Petroleum (NYSE:P) agreed to acquire Tosco (NYSE:TOS) over the weekend.

The INDU's recent relative strength stems from the fact that the Fed is on the offensive in cutting interest rates. As I've said before, the direct and near-immediate beneficiaries of a lower cost of capital are those companies that are most closely tied to the business cycle. And that includes retailers, financials, consumer product makers and deep cyclicals, such as paper and chemical companies. The list of winning sectors today included many of the aforementioned, with the exception of the retail sector, which appeared to pullback on profit taking. Nevertheless, there's a bull market in many sectors of the market away from tech and traders need look no further than the list of industries I previously mentioned. If you're a trader who prefers to operate from the long side, I would suggest trading the sectors of the market whose recent price action suggests the path of least resistance being to the upside. And you won't find many of those names on the Nasdaq - at least for the time being. Keep in mind, however, that the path of least resistance for the tech sector can change in the space of one day - maybe tomorrow, maybe six months from now. Though, don't misconstrue my thoughts with a bearish stance on tech. Instead, I'm only suggesting to look for opportunities in sectors that are working (read: advancing) in the here and now.

And if the business cycle-sensitive sectors are going to continue advancing, the INDU needs to break out above the 11,000 level. It inched closer today, but whether the INDU breaks out anytime soon has to do with the amount of conviction the bulls have. If the INDU doesn't breakout above 11,000 soon, the aforementioned sectors I highlighted run the risk of pulling back either on profit taking or disappointment. In either case, the use of stops are crucial - whether mental or hard stops, they both work and aid in discipline. If the INDU does pullback, support at 10,900 appears fairly solid.

A breakout above 11,000 in the INDU might be the easiest way to play the tape tomorrow, but be careful of head fakes, which can be countered with stops and discipline. Other than the obvious in the INDU, from where I sit, tomorrow's action is tough to game ahead of Cisco's earnings report. The sector rotations in the current market landscape are fast and furious, which is why I don't necessarily count the COMPX out tomorrow. But to reiterate my stance on the Nasdaq, I think the best way to approach the COMPX is to wait for it to either break below 2600 or above 2660, and trade accordingly. Yes, it's a 60 point range, but I think the risk/reward in that range is tough to game right now. Of course, those who want more confirmation of a trend may want to simply wait for Cisco.

If there's one thing I can't emphasize enough, it's that the current market condition requires...no, demands discipline. This bifurcation nonsense in the broader market averages makes the game all the more difficult. And until a discernible trend emerges, the keys to profiting in this market are: nimbleness, quick profit taking and discipline as defined by a strong market thesis and stops.

Now, if you'll bare with me, I have a request for the faithful readers of OptionInvestor. As many of you know, I (Eric Utley) write the Market Wrap section on this day (Monday) every week. As you may have noticed, I make market observations and write commentary that is quite different than that from Jim Brown and Matt Russ. I try to provide unique, value-added commentary every time I pen a piece of work. But I rarely receive any disagreements, approvals, insights, or general comments from the readers of this column. So what I would like, if you have the time, is let me know what I do well and what I can approve upon. If I can get a better grasp on the needs and demands of my readers, then I can tailor my commentary to add more value. I openly welcome complaints, criticism, suggestions, general ideas...anything that will let me know what you, the audience, wants from me the trader/writer. Please send your comments to the following e-mail address:

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Thank you.

Eric Utley
Assistant Editor

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