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Market Wrap

Retracing The Rally

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        04-26-2001        High      Low     Volume Advance/Decline
DJIA    10692.30 + 67.10 10767.00 10623.70 1.27 bln   1955/1114	
NASDAQ   2034.88 - 24.92  2095.83  2032.38 2.03 bln   2125/1729
S&P 100   640.29 +  4.71   647.28   637.47   totals   4080/2843
S&P 500  1234.52 +  5.77  1248.30  1231.64           58.9%/41.1%
RUS 2000  477.56 +  4.82   479.81   472.99 
DJ TRANS 2820.27 + 58.27  2840.28  2749.94 
VIX        29.57 -  1.70    30.64    29.38
Put/Call Ratio      0.58

Retracing The Rally

It was an interesting day of trading action as the markets finished with a split decision: the Dow ($INDU) added another 67 points while investors fled the NASDAQ, closing down 24 points. A slew of earnings today moved individual stocks but trading was a bit choppy out of the gates after Initial Jobless Claims and the Employment Cost Index were released. But it wasn't the daily news that raised my eyebrows today.

This morning's economic reports told two different tales. Initial Jobless Claims rose 18,000 to 408,000, breaking the 400K mark for the first time in five years. While evident of a loosening job market, it also indicates that slowing growth is the point of battle for the Fed, not inflation. Yet, in the same breath, the ECI hit its highest level in a year, coming in a 1.1% versus estimates of 1%. This rise in the ECI shows upward cost pressure, however, it is negligible. With the Jobless Claims trending higher, rising unemployment is expected to drive the rate toward 5% in the latter half of the year. To put this into perspective, during the last recession of 1990-91, Jobless Claims peaked at 512,000 per week in March of 1991. Futures traded higher in the pre-market on this morning's news, seeing that it further solidifies the role of an aggressive Fed, widely expected to cut rates again at the May 15th FOMC meeting.

On the NASDAQ, the big winner was PeopleSoft (NASDAQ:PSFT) which reported stellar earnings, beating Street estimates of 9 cents by two pennies. It wasn't the headline number that drove the stock higher by 22%, rather the 500% revenue growth year-over-year in an extremely difficult market and economic environment. In addition, PSFT reiterated earnings projections for the year and noted that they have widened the competitive gap from smaller B2B players such as Ariba (NASDAQ:ARBA) and I2 (NASDAQ:ITWO). PSFT finished at $36.62, up $6.69.

It is also worth noting that WorldCom (NASDAQ:WCOM) released in-line earnings this morning and reaffirmed earlier financial guidance for the year. The stock initially traded higher on the news, holding above $20, but fell with the broader tech index into the close. WCOM closed at $19.75, up $0.35.

Okay...now that we got the boring news out of the way, let me tell you about the interesting developments I saw in the market today. The NASDAQ traded a bit higher in the morning, however, it wasn't very exciting. Typical consolidation. It remained relatively flat between 2070 and 2090, acting well for the most part. But its inability to move through 2095 set off a signal that the NASDAQ really didn't have the legs to go higher. There had to be a break, especially given the recent run-up. I was watching the index via the QQQs, which were equally rangebound between $45 and $46. The break of $45 offered a nice put entry.

Looking at the retracement bracket on the QQQs below, we can see that since the recent April rally, the QQQs have backfilled about 38.2% of the advance. (That's the percentage number which is hard to see on the chart.) This level is exactly where buyers stepped in on Wednesday, and it appears that this level may be tested again. A break below this retracement level could very well lead to a test of the 50% retracement, essentially filling the gap from last Thursday. Keep a close eye on the action in the QQQs when determining action points for your trades. If techs pulled back further on a downside catalyst, support at the 68.2% line would be a great opportunity to establish long positions.

Further strengthening the significance of these retracement levels is the Semiconductor Index (SOX.X). It too is reaching a key support area around 600. Again, like the QQQs, the SOX.X has retraced approximately 38.2% of the recent rally and happens to be in-line with 600. As we all know, the fate of the NASDAQ is strongly tied to the Semi sector and this 600 level roughly coincides with 2000 on the NASDAQ, also believed to be key support. Buyers may choose to step up at these levels, however, if this major support is broken, it would be safe to go short along with a tight stop. Like the QQQs, we would expect the next test to be at the 50% line. This does not change my general upside bias in the market, but part of consolidation is retracing the rallies.

After the bell today, we had a few big earnings reports. In the biotech arena, Amgen (NASDAQ:AMGN) beat the Street by a penny, but lowered their guidance for 2001 and are paying for it in after-hours. AMGN traded $3 lower from its NY close. Look for the Biotech Index (BTK.X) to test 500 tomorrow.

Fiber-optic player Corning (NYSE:GLW) also managed to beat estimates by a penny. They also managed to cut 2001 estimates and 4,300 jobs as well. Not so good. Their overexposure to Nortel (NYSE:NT) and the general slowdown in the long-haul fiber market is going to take its toll on GLW going forward. Even in the face of bad news, GLW's stock traded higher by $0.25 from its NY close of $21.

The overachiever of the bunch tonight was Verisign (NASDAQ:VRSN). They crushed Street estimates, which were downwardly revised earlier, by ten cents! Needless to say, the stock moved $5 higher in after hours, but I'm wondering who revised those numbers back in February.

Looking ahead to Friday, GDP and the GDP deflator will be announced at 8:30am ET. Expectations are 0.9% and 3%, respectively. At 10am ET, Michigan Sentiment-Revised for April will be released. The market expects 89. Don't forget that Friday trading typically brings out the profit takers. As I stated above, key levels on the NASDAQ, QQQs, and SOX.X will be action points for trades. While the market feels like it is recovering and making strides, the short-term(about a week) will likely be sideways to down. The NASDAQ is digesting its recent gains and will give entry points into long positions on a further pullback. Watch those retracements. Volatility has imploded the past two days, closing under 30 at 29.57, which may be indicative of some selling pressure tomorrow. Trade smart.

Matt Russ

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