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Market Wrap

Simply Short-Covering Or New Relative Low?

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         02-07-2001        High      Low     Volume Advance/Decline
DJIA    10946.70 - 10.70 11004.00 10911.30 1.15 bln   1620/1460
NASDAQ   2607.82 - 56.67  2636.07  2554.76 2.06 bln   1490/2226
S&P 100   700.77 -  7.75   708.53   697.13   totals   3110/3686
S&P 500  1340.89 - 11.37  1351.80  1334.26           45.8%/54.2%
RUS 2000  507.08 +  1.32   507.47   502.67
DJ TRANS 3034.67 - 27.05  3068.00  3025.15 
VIX        24.52 +  0.70    25.04    24.14
Put/Call Ratio      0.58

Simply Short-Covering Or New Relative Low?

After Networking giant Cisco's (NASDAQ:CSCO) disappointing earnings report last night, we were all wondering how the market would absorb the news. Would the news already be discounted in the lower stock price, or would it create a panic across the market? Looking at the tape tonight, we got a little of both, giving traders the option to play both ways today. Fortunately, it happened in the order of panic, then rebound, and not vice versa.

Because of this fact, the market is setting up for a decent day tomorrow. Considering the magnitude of CSCO's influence over the market, whether real or overstated, missing earnings by a penny had the potential to disrupt the 2001 recovery. But as investors, we must read between the lines and understand that the market is priced to perfection. As Eric Utley mentioned in the Wrap on Monday, CSCO CEO John Chambers informally talked down guidance and admitted that visibility was, indeed, difficult. The market priced this into the stock price prior to the announcement as Chambers telegraphed what was confirmed in last evening's conference call. Even the Networking behemoth is not immune to the slowing economy and lower forecasted IT spending.

This lack of visibility is exactly what makes this market difficult to trade. The tape has been tough to read lately, but today's action gives hope for the coming days. CSCO traded down to its key support level of $30, a base dating back to June 1999. When it hit that level, big money stepped up to defend the stock and increasing volume pushed the stock higher into the close. CSCO traded 281 mln shares today! Second highest for a single equity in one day. The NASDAQ reversed its course at that time, bouncing from 2554. Was this just a short covering rally or will this new relative low anchor the bottom of a trading range? Volume on NASDAQ favorites grew heavier on that rebound, indicating more than just short covering. Take a look at Ciena (NASDAQ:CIEN), Dell (NASDAQ:DELL) and Veritas (NASDAQ:VRTS).

While this recovery was impressive, we must still be weary of the overall NASDAQ health. Since trading near 2900 last week, the tech-heavy index has retreated to the lower-end of this new range. The question is where is the bottom of this range? Critical support was at 2600. It broke below that level today, yet the afternoon rebound afforded a close above that level. Still, notice in the chart below that the downtrend line is intact. A strong, sustained move tomorrow toward 2700 would indicate that the NASDAQ is making its way higher in the range between 2500 and 2900. 2500 is KEY critical support. A break of that level could bring a retest of January lows.

We continue to watch the sector rotations vigilantly. Following the money trail is essential in determining the next move. During the past month, we have seen sector rotation occurring on a much more frequent basis. It happens quickly and furiously. Only the nimble players can keep up. Unfortunately, given the current market environment, i.e. no defined trend, rangebound trading, institutions are making their moves much quicker as well. This creates more exaggerated moves as money is churned.

Let's take a look at some sectors. Of course, as CSCO goes, so do the other Networkers(NWX.X). Players in this space suffered a similar fate to that of CSCO: Juniper(NASDAQ:JNPR), Redback(NASDAQ:RBAK), and Sycamore(NASDAQ:SCMR). CSCO cited a slowdown in telecom carrier spending and that means that companies like Nortel(NYSE:NT), Nokia(NYSE:NOK), Lucent(NYSE:LU), and SBC(NYSE:SBC) will struggle. Biotechs(BTK.X) had some short covering yesterday after five consecutive down days. Today's late session failure to break above 600 may lead to continued downward pressure as the short players reassert themselves. Drug stocks were down today as well, while Oil Service stocks continued their advance. Retail stocks performed well ahead of Retail Sales numbers next Tuesday, which are expected to be slightly above expectations. The Internet Index(IIX.X) continues to be weak as the entire business model is questions. EToys. Enough said. CSCO, NTAP, and GLW all hit 52-week lows today.

The next two days should bring continued weakness in the Biotech sector, and strength in the Retail stocks like American Eagle (NASDAW:AEOS), Nike(NYSE:NKE), Abercrombie & Fitch(NYSE:ANF). Financials have fallen prey to profit-takers after this recent run-up on Fed-easing euphoria. And after the tech rebound, we are looking for this momentum to attract buyers the next two days. But, remember that being in a trading range means consolidation, so be selective in choosing entry points and exits. Using this sector rotation thesis, we don't just want to plow into any old tech stock. We have learned the hard way during the past year, and promised ourselves not to make the same mistake twice. We are in an environment with a value-focus rather than a growth-focus, and following that idea, traders should look to quality tech names. Both IBM(NYSE:IBM) and Microsoft(NASDAQ:MSFT) are perfect examples. These two stocks helped buoy the Dow(INDU)in the afternoon, lifting it from a low of 10911.

11000 proved to be intraday resistance once again today for the INDU. A close over that magic number was elusive for another day as investors sold Financials and Drugs. Even in this rate-cutting environment, which has been the INDU catalyst, this psychological resistance level proves to be resilient. The previous close above 11000 was September 14th, 2000. This level has loomed overhead since November and the INDU has been rangebound between 10300 and 11000 since Halloween. The longer that it takes to close above 11000, the stronger resistance becomes. If the INDU fails on the next attempt, it will likely fall back to recent support levels near 10850 or 10800. It will be essential for the Financials to participate on the upside for the INDU to achieve this feat. Watch the BIX.X and the BKX.X as they settle back to support.

Looking ahead, we are constantly monitoring the sector rotations as the market continues to churn in a sideways motion. The fact is that bad news is still expected in the coming months, yet the question is will stocks absorb it? While the euphoria of a rate cut is immediate, the economic effect is not. What the economy is feeling right now is that 50 basis point rate hike from last May. This is evident in the widespread tightening of the corporate belt. Given the new economic environment and a very different market than we grew accustomed to in the 1990's, we must analyze the market with different outlooks and ideas. I cannot stress enough sector rotation and the churning that's indicative of a sideways market. As the market changes, so must our thought process and trading techniques. Be nimble, trade the ranges, stick with works working, and when it doesn't, look for another sector. We have entered a value market rather than the explosive growth market, but money is still there to be made. One thing that my trading mentor, a former option market-maker, taught me was that consistently taking small profits will outperform swinging for the fences in the long-run. Less risk, consistent performance. Trade smart.

Matt Russ

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