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Market Wrap

Techs Feel The Love

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        02-14-2001        High      Low     Volume Advance/Decline
DJIA    10795.40 -107.90 10917.90 10780.40 1.12 bln   1383/1709
NASDAQ   2491.40 + 63.68  2493.11  2388.40 1.99 bln   1770/1966
S&P 100   682.68 -  2.07   685.62   676.28   totals   3153/3675
S&P 500  1315.92 -  2.88  1320.73  1304.72           46.2%/53.8%
RUS 2000  503.49 +  0.92   503.49   497.74
DJ TRANS 2999.49 - 46.97  3050.27  2991.07 
VIX        24.22 - 93.00    25.53    24.06
Put/Call Ratio      0.73

Techs Feel The Love

The NASDAQ got a shot of adrenaline from cupid's bow as the long awaited oversold rally got underway this morning. With the verdict in from Greenspan's Senate testimony, the market is not pricing in any intermeeting rate cut, which now appears to be a long shot. So what did happen today? A downward revision of guidance from Applied Materials(NASDAQ:AMAT) and a warning from JDS Uniphase (NASDAQ:JDSU), and the NASDAQ charges on. What that tells me is that many of these beaten down NASDAQ stocks have worst case scenarios discounted in their share prices. When a company confesses, the market learns just how bad it is and can readjust valuation. Just look at Nortel(NYSE:NT), Corning(NYSE:GLW), and Lucent(NYSE:LU), all at 52-week lows. Lower expectations and naturally odds increase for an upside surprise. It's all in the way we look at it.

As I said in Sunday's Wrap, the NASDAQ was due for an oversold rally, possibly stimulated by the Greenspan's comments during his semi-annual testimony to the Senate. We didn't get the explicit statement that the Fed will vigilantly cut rates for the weakening U.S. economy. Pipe dreams! Greenspan is far too linguistically talented to ever be clear! His commentary more or less shot down the hope that an intermeeting rate cut was in the cards. But just because we didn't hear what we wanted doesn't mean that what was said was undesirable. G-man feels that the U.S. economy has seen the worst and is bottoming out. That's great news for earnings going forward. All we need now is for all the companies to 'fess up and lower their guidance from these unsustainable growth rates. Then, we can learn to expect less.

That's exactly what happened today for AMAT. After listening in on their conference call last night, I would say that it was less-than-favorable. Same themes: CFO lowers revenue guidance, limited visibility in the next quarter, etc. But, AMAT made a fantastic recovery today and the Semi sector(SOX.X) led the NASDAQ to close at the day high. Is it time to buy with reckless abandon? No. Is it time to trade this oversold relief rally? Yes, but know that it can and will turn on a dime at some resistance level. This AMAT action was indicative of bad news already priced into the stock and then short-covering on the news. It's hard to believe that this type of news would ignite a rally in the SOX.X. Remember, the market always overdoes it on both sides. Novellus(NASDAQ:NVLS) and KLA-Tencor(NASDAQ:KLAC) both posted strong gains in the Semi sector.

Continuing with another theme from last week, rotation into the SOX.X kick started the NASDAQ rally. Money came out of the Insurance sector(IUX.X), the Brokers(XBD.X), and the Drugs(DRG.X). The Networking sector(NWX.X) was looking very weak this morning after the JDSU 3rd quarter earnings warning last night. This was followed by some downgrades and revisions from brokerage houses, but the stock rallied into the close as index fund managers bought to match the S&P 500's reweighting(after closing the SDLI deal). Helping bring the NWX.X into positive territory was a 10% rally in Ciena(NASDAQ:CIEN) which is expected to post earnings tomorrow BEFORE the bell. This announcement will most certainly set the tone for NASDAQ trading tomorrow. Dell(NASDAQ:DELL) also posts earnings tomorrow, but after the bell. As I covered last week, there were rumors that Dell may be laying off some 10000 employees, which has not been confirmed, so tomorrow may prove to be the day.

Technically, 2388 was the level that saved the NASDAQ. Notice in the second chart below that the bounce occurred near the longer term downtrend line from September. Coincidence? The rally that ensued was the oversold rally we had been waiting for. There are so many NASDAQ stocks that have been beaten down without any relief. The problem, however, continues to be that they remain in strong downtrends. This is the reason that an oversold rally from this point needs to be navigated cautiously. I can't stress that enough. We are not in a market that you can buy and forget. We must be vigilant on monitoring positions with stop losses and quick profit-taking. Today's action in the NASDAQ gives a good reason to trade, but a bad reason to invest. Simply put, it's a trading rally. There will be resistance overhead at the 2550 level, and at 2700. Buying into the close brought the NASDAQ above the recent downtrend line that was established after failing at 2900. It would be encouraging to break the trendline, if only to bring the NASDAQ to a slightly higher trading range.

On the Dow(INDU), yesterday's failure at 11000 certainly indicated further weakness. This was the third failure in February at this critical level, strengthening resistance there and giving the shorts more momentum. That is exactly what happened today as investors sold just about everything non-tech: Financials, Cyclicals, Drugs and Healthcare. Support at 10850 was quickly overtaken and the index settled slightly below 10800. Yesterday's failure keyed on Greenspan's testimony. It rallied throughout the meeting but given his comments on the economic recovery and the odds of not getting that intermeeting cut, investors did not have what they needed to move the INDU higher. At this point, the INDU could very well experience further weakness, settling back near stronger support at 10600.

Looking ahead, the NASDAQ appears poised for an oversold relief rally. However, we must be very skeptical of its longevity. Short-covering added to today's rally quite a bit. As Jim recently suggested, call buyers may want to stay out until the NASDAQ trades above 2700. If you do want to trade the relief rallies, exercise caution by closely monitoring positions and using stop losses. We have seen how quickly this tech index can retrace its gains. CIEN's earnings tomorrow morning certainly will dictate NASDAQ sentiment for the day. Watch for their guidance going forward, that will be the driver. Friday will be a good old volatile expiration being double-witching, plus the PPI number due out in the morning. Earnings from DELL after the bell tomorrow will weigh on the NASDAQ Friday. On this Valentine's Day, this is no time, nor market, to fall in love with any stock. Trade smart.

Matt Russ

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