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Market Wrap

Waiting For Greenspan

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        02-12-2001        High      Low     Volume Advance/Decline
DJIA    10946.80 +165.40 10953.60 10771.60 1.01 bln   1950/1133
NASDAQ   2489.66 + 18.69  2508.27  2435.36 1.75 bln   2007/1780
S&P 100   692.06 +  9.71   692.32   682.11   totals   3957/2913
S&P 500  1330.31 + 15.55  1330.96  1313.64           57.6%/42.4%
RUS 2000  505.35 +  8.30   505.36   495.51
DJ TRANS 3039.23 + 25.81  3039.28  3010.15 
VIX        24.55 -  0.60    26.31    24.30
Put/Call Ratio      0.64

Waiting For Greenspan

The Dow Jones Industrial Average (INDU) advanced towards the elusive 11,000 level on strong buying across nearly every sector of the market. Meanwhile in the Nasdaq Composite (COMPX), traders were reminded of the prevalent risks in the technology sector.

Late Friday, Emulex (NASDAQ:EMLX) said it was experiencing a slowdown in sales. The maker of fibre channel hubs and switches, used in the data storage business, held a conference Friday evening in which its executives effectively warned of lower revenue growth for the fiscal third-quarter. The company's executives said that their customers were pushing orders back, which is consistent with the overall slowdown in capital expenditures by corporate America. Following the warning from Friday, US Bancorp analyst Ashok Kumar slashed his rating on shares of Emulex to a hold from a buy rating - the stock lost nearly half its value in Monday's session.

While I normally try to look forward and not focus on the past and report old news, I feel that it's prudent to examine the Emulex blowup a little more closely. The warning by Emulex reinforces that great risks remain in the tech sector, especially in the highly-valued segments of tech. Companies like Emulex trade with extremely high valuations because the expectations built into these types of stocks are so high. For a long, long time these high-flying companies blew away estimates and kept raising the bar - they couldn't lose! But as we've witnessed recently with the likes of PMC Sierra (NASDAQ:PMCS) and now Emulex, the slightest misstep is extremely detrimental to both the company and its shareholders. My intentions here are not to blast Emulex or its stock. Just know that the tech sector still has plenty of risk.

Now let's look forward. Fed Chairman Alan Greenspan will be testifying before the Senate Banking Committee Tuesday morning at 10 a.m. EST. The Fed's semiannual report, formerly known as the Humphrey Hawkins testimony, is closely watched by the market because it includes the FOMC's official forecasts for growth, inflation and unemployment. The report Tuesday morning is all the more important in light of the current condition of the U.S. economy. Just three weeks ago, Greenspan said that growth was close to zero and the economy was walking a fine line between recession and recovery. Greenspan opined that consumer confidence was crucial in preventing a recession - the data that followed Greenspan's remarks suggested that consumer confidence was slipping.

There are several scenarios that could unfold following Greenspan's testimony tomorrow morning, and here are three possibilities that might help to generate trading ideas. If Greenspan hints that the Fed will stage another intermeeting rate cut before its scheduled gathering near the end of March, interest rate-sensitive sectors will advance sharply. Pay special attention to bank, broker, retailer and cyclical stocks. However, if Greenspan speaks in a convoluted way and does not give a clear indication of the Fed's future policy on interest rates, we'll likely witness choppy, difficult trading in the aforementioned sectors and it might be prudent to stand aside. A third possible scenario to watch for is if Greenspan says the economy is not all that weak and recession threats remained subdued. If Greenspan indicates that the Fed will not be cutting interest rates as aggressively as the market has discounted, then the aforementioned sectors are likely to pullback as an aggressive easing policy has already been factored into the respective stocks. I don't think the third scenario I've set forth is likely, but it should be known nonetheless.

Before I give a list of stocks in each of the aforementioned sectors, keep in mind that these names should ONLY serve as a reference. The individual stocks you choose to trade should depend upon your individual risk profiles and not my lists.

In the broader finance sector, keep an eye on Citigroup (NYSE:C), J.P. Morgan Chase (NYSE:JPM), US Bancorp (NYSE:USB), Mellon Financial (NYSE:MEL), American Express (NYSE:AXP), Merrill Lynch (NYSE:MER), Lehman Brothers (NYSE:LEH) and Goldman Sachs (NYSE:GS). In addition to the aforementioned individual names, traders might want to take a look at the trends and support and resistance levels in two indexes: Philadelphia Bank Sector Index (BKX.X) and Amex Securities Broker/Dealer Index (XBD.X).

To monitor the retail sector, watch the CBOE Retail Index (RLX.X). Some individual companies include Wal Mart (NYSE:WMT), Home Depot (NYSE:HD), Kohls (NYSE:KSS), Gap (NYSE:GPS), Costco (NASDAQ:COST) and American Eagle Outfitters (NASDAQ:AEOS).

And for the cyclical stocks, it might be worth while to watch the Morgan Stanley Cyclical Index (CYC.X). In this industry group, keep on an eye on International Paper (NYSE:IP), General Electric (NYSE:GE), Georgia Pacific (NYSE:GP) and General Motors (NYSE:GM).

Keep in mind that the strong rally in the INDU, led by the three aforementioned sectors, could prove to be a buy the rumor sell the news event, depending on exactly what Greenspan says tomorrow morning. Since the risk is very real in the three sectors, make sure to have a risk management plan in place before entering any trade, i.e. stops!

Additionally, retail sales for January are scheduled for release before the bell tomorrow, with the market expecting a bit of a rebound. The market expects retail sales to have risen by 0.7 percent in January. A weaker-than-expected number could throw the retail sector for a loop so be cognizant of the number.

As I previously mentioned, the three aforementioned sectors helped to carry the INDU back towards 11,000. If Greenspan delivers pleasing comments tomorrow morning, the INDU has a shot at closing above 11,000. Keep in mind, however, that the INDU has failed on four separate occasions to close above 11,000 thus far in 2001. For the more risk averse traders with the inability to quickly maneuver in and out of positions, it may be more prudent to wait for the INDU to settle above 11,000 before initiating positions.

I still think the Nasdaq is a bit more difficult to gauge and operating in the tech sector requires far more on the part of the trader to manage risk. However, I was encouraged with the Nasdaq's ability to shrug off bad news and close higher today. The Emulex blowup was far reaching and dragged down shares of QLogic (NASDAQ:QLGC) and Brocade (NASDAQ:BRCD) - those two stocks got whacked. On top of the Emulex-related badness, the Nasdaq was able to digest bearish comments bestowed upon the optical networking sector, with CIENA (NASDAQ:CIEN) taking the brunt of the selling. Let's step back for a minute: huge losses in shares of Emulex, Brocade and CIENA yet the COMPX closes higher. From where I sit, today's action in the Nasdaq was very constructive. But be cautious in the tech space, if you're going to venture into the Nasdaq in an attempt of trading the long side, I think it's most prudent to stick with the names that have come down to earth and try to avoid the high-flyers. I think the risk/reward is much more favorable in the downtrodden tech names as opposed to the highly-valued stocks, but that's just my take.

In my humble opinion, the best place to look for downtrodden tech stocks is in the chip sector. I'll beat the SOX.X to death until I discern a better risk/reward opportunity in the tech sector. But for the time being, I think the SOX.X represents the best opportunity in tech. Some might disagree with me on that view, but for what it's worth, Thomas Weisel Partners boosted their ratings on several chip stocks this morning, which included Applied Materials (NASDAQ:AMAT), Lam Research (NASDAQ:LRCX), Novellus Systems (NASDAQ:NVLS), Teradyne (NYSE:TER) and Micron Technology (NYSE:MU). Applied Materials, the chip equipment giant that it is, will report earnings after the bell tomorrow - plan any trades in the chip sector accordingly and take into account that although the semis acted well today, overnight risk remains.

I still think the best strategy to employ in the current market is to be nimble and quick to take profits. The Nasdaq continues to be a tough market to trade and will be until the visibility in corporate America improves along with the fundamentals in the tech sector. But if you must trade the tech sector, from the long-side that is, I would argue to stick with stocks that are trading at modest valuations and have already fallen. Moreover, rather than aggressively pursuing breakouts in tech stocks, a more prudent strategy might be to wait for pullbacks to support levels.

The blue chip, old economy stocks continue to produce profits for traders with patience and discipline. Entering on pullbacks in sectors such as finance and retail has been working recently and will probably continue to work as long as the Fed stays on the offensive. Greenspan can act either as a catalyst tomorrow morning, a non-event, or a detriment to the market. But whatever transpires, know your risk profile and profit objectives before entering any trade.

Eric Utley
Assistant Editor
www.OptionInvestor.com

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