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More Confessions: Will The Market Forgive?

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        03-08-2001        High      Low     Volume Advance/Decline
DJIA    10858.30 +128.70 10859.50 10711.30 1.12 bln   1683/1386
NASDAQ   2168.73 - 55.19  2219.87  2161.41 1.75 bln   1438/2179
S&P 100   651.46 +  0.74   653.44   647.04   totals   3121/3565
S&P 500  1264.74 +  2.85  1266.50  1257.60           46.7%/53.3%
RUS 2000  481.49 -  3.35   484.84   481.44 
DJ TRANS 3017.29 + 26.86  3019.07  2981.43 
VIX        26.46 +  0.01    27.36    26.25
Put/Call Ratio      0.74

More Confessions: Will The Market Forgive?

In an already tough trading environment, tonight brings us another high-profile warning that will cause further gyrations tomorrow. Intel (NASDAQ:INTC) warned that its 1st quarter revenue would fall 25% from the previous quarter, attributing the shortfall to PC weakness. It is this same PC weakness that is infiltrating not only the Semiconductor sector(SOX.X) but also Networking(NWX.X), Communications and Server sectors, according to the semi giant. With the last night's YHOO warning dragging the NASDAQ lower, INTC's announcement will weigh upon both the tech index and the rallying Dow(INDU).

Today's session brought divergence to the market as the INDU traded higher for the fifth consecutive day, powering through key resistance at 10800. Since last Thursday, the INDU has successfully tested 10300, establishing a bottom, and soared 550 points to its current level of 10858. What was incredible about the INDU's performance today was the it did so without the the leadership from the broader finance sector, namely the KBW Bank Sector Index(BKX.X) and the Securities Broker/Dealer Index(XBD.X). The weakness in the financial issues is a bit disconcerting, and without strength in that group of stocks, it will difficult for the broader market to continue higher. And by the broader market, we mean the S&P 500 (SPX.X). The SPX did manage to edge higher during Thursday's session, but would have finished much higher with strength in finance, as well as tech (another complex that remains a cause for concern).

The S&P 500 finished at 1264, up 2.85 points, or 0.22 percent. Although the SPX has bounced from its recent lows, it remains in a relatively oversold condition relative to the INDU. We'd like to see some strength in the finance sector, which would aid the S&P 500 in its rebound.

As I previously mentioned, the tech sector remains a place of peril in the forms of deteriorating fundamentals and lack of visibility. This was exemplified in INTC's revenue warning and news that they would be cutting 5000 jobs through attrition. More interestingly, INTC decided NOT to change its capital spending number, currently $75 bln, which is a sign that they are willing to ramp up spending when the business cycle turns the corner. However, it remains to be seen whether INTC CEO Andy Grove sticks to that figure as 2001 unfolds. In addition to INTC's comments, four other Semi stocks warned after the bell, all with similar confessions and woes: RF Micro Devices (NASDAQ:RFMD), TranSwitch (NASDAQ:TXCC), ON Semi (NASDAQ:ONNN), and Integrated Circuit Systems (NASDAQ:ICST). Warnings have become commonplace during the after-hours and everyday it's a question of who's next.

This warning from Intel was the last thing that the COMPX and the broader tech sector needed. After the NASDAQ was pinned between 2200 and 2250 on Tuesday and Wednesday, Yahoo's (NASDAQ:YHOO) warning brought supply to the market today and the tech index broke down below the 2200 level. As we have mentioned in the past, the Semiconductor Sector(SOX.X) plays a crucial role in the direction of the Nasdaq. The SOX was the first index to fall last summer when the downturn in tech began, and it will most likely be the first sector to up-tick once the correction in tech ultimately ends. But with another warning from Intel this evening, we're likely to witness collateral damage in the SOX and subsequent damage in the Nasdaq. And we're reminded that the SOX may, in fact, have not yet reached its trough.

The SOX has been holding up relatively well since tracing a double-bottom near the 515 level. We'll be watching closely Friday morning to see how the Intel warning, among other chip- related warnings Thursday evening, is absorbed by the SOX. Although its down about 39 points from Thursday's close, we'll be watching to see if the 600 level holds, which coincides with the SOX's 10-dma.

We're likely to see pressure in the tech sector tomorrow, but the question remains if the INDU, and the blue chips, can put together a sixth consecutive day of higher prices. Much of the action in the INDU tomorrow will be predicated on the jobs report. This is the wild card that will dictate the direction of the broader markets. What's important about this announcement tomorrow is not necessarily the actual figures, but rather the market's reaction. The job report will be released at 8:30am ET.

There was some chatter among market participants, along with a Fed-head, about the possibility of the FOMC only cutting by 25 basis points on March 20th, as opposed to the expectations for 50 basis points. That talk today may be a prelude to a favorable jobs report tomorrow morning, which could lead the Fed to not cutting rates as aggressively as the market would like.

Add on this high-profile warning from INTC and we have a market with visibility as unclear as many of these tech companies. We continually are getting convoluted signals that are making the tape increasingly tough to read. Once the jobs report is known, the question will be, will the NASDAQ forgive INTC's confession? The stock trader $2.25 lower in after-hours last night. Whatever positions you may be taking tomorrow, be sure to employ discipline, stop losses, and quickness.

On a side note, many of you may be interested in this piece of news regarding the SEC tightening the equity-margin rule for day traders. It will require day traders to keep a minimum of $25,000 of equity in their accounts if they use margin to trade NYSE or NASDAQ stocks. The previous minimum was $2000. For more information and the SEC technical definition of "day trader," click here SEC Equity-Margin Rule.

Trade Smart,

Matt Russ

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