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NASDAQ Breakout!

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        05-21-2001        High      Low     Volume Advance/Decline
DJIA    11337.90 + 36.20 11345.70 11232.80 1.18 bln   2075/1034	
NASDAQ   2305.59 + 106.71 2305.73  2198.14 2.31 bln   2603/1381
S&P 100   678.60 + 10.22   678.77   665.42   totals   4678/2415
S&P 500  1312.83 + 20.87  1312.95  1287.87           65.9%/34.1%
RUS 2000  515.91 +  9.63   515.91   506.38 
DJ TRANS 3004.35 + 25.40  3008.93  2970.38 
VIX        23.24 -  1.02    24.82    23.13
Put/Call Ratio      0.47

NASDAQ Breakout!

The Nasdaq Composite (COMPX) broke out above a key near-term resistance level Monday, led by massive gains in the big caps. What's more, volume confirmed the Nasdaq's advance. The 30-day average volume for the Nasdaq has been around 1.95 billion shares. Monday's trading activity topped 2.2 billion shares. Volume was also relatively robust on the NYSE as 1.17 billion shares exchanged.

The key resistance level hurdled by the Nasdaq Monday was, of course, the 2250 level. The overhead resistance around 2250 had kept the Nasdaq contained for roughly five weeks, while the tech-laden index traded sideways in an effort to consolidate its gains from the April 4th low of 1619. And now with Monday's breakout on healthy volume, the Nasdaq Composite is poised to work its way up to 2500. Insofar as pullbacks are concerned, the 2250 level should now provide support.

Also worth noting was the breakout in the Nasdaq-100 (NDX.X) - the index tracked by the QQQs (AMEX:QQQ). The NDX closed above the psychologically significant 2000 level for the first time since early March, which coincided with the QQQ contract settling above the $50 level. The NDX tracks the top 100 stocks on the Nasdaq market in terms of market capitalization. And its price action Monday epitomized the awesome gains in big cap tech stocks. For example, shares of Cisco Systems (NASDAQ:CSCO) gained 13 percent, shares of Sun Microsystems (NASDAQ:SUNW) gained nearly 15 percent and shares of Qualcomm (NASDAQ:QCOM) added 8.5 percent. There have been some rumblings recently that enterprise spending is beginning to show signs of rebounding, which has been the catalyst behind the recent advances in shares of Cisco and Sun. If we continue to hear anecdotal evidence that information technology (IT) spending is rebounding, stocks such as Cisco and Sun will continue to work higher as longs return to the beaten down big caps and shorts scramble to cover their bearish bets.

The Nasdaq Composite's 4.85 percent gain Monday far surpassed the paltry 0.32 percent gain in the Dow Jones Industrial Average (INDU). But many market watchers suggested that the Nasdaq was due to play catch-up with the Dow. Furthermore, several isolated news events amongst Dow components pressured the blue chip index. Procter & Gamble (NYSE:PG) said Monday morning that it would buy the Clairol hair-care business from Bristol Myers Squibb (NYSE:BMY). PG's $4.95 billion cash purchase of Clairol resulted in its shares shedding $2.23. In addition, shares of Phillip Morris (NYSE:MO) were punished for $2.15 after a Dow Jones headline reported that the company may have violated securities laws regarding its upcoming IPO of its Kraft unit. Aside from the Phillip Morris and PG news, perhaps the greatest source of pressure on the Dow Monday stemmed from the rotation into the more aggressive issues in the Nasdaq. While it still seems early in the cycle for tech to be out performing blue chips, Monday's action may morph into a near-term trend where the Dow languishes and the Nasdaq shines.

Despite the under performance in the Dow - it is a price weighted index, after all - the S&P 500 (SPX.X) charged higher, moving further away from that staunch resistance down around 1270 level. In fact, the broad market index plowed past resistance at 1300 Monday. The continued strength in the bank sector, as measured by the KBW Bank Sector Index (BKX.X), and the breakout in the Securities Broker/Dealer Index (XBD.X) bode very well for the health of the broader market and the potential perpetuation of its advance. Further, continued strength in the two aforementioned sectors will continue to lift the S&P 500. As for near-term resistance in the S&P, I'll be watching the 1325 level. But if that resistance level is cleared, the S&P could very well trade up to 1375, which is its high traced in late January. In terms of support, pullbacks to the 1300 level may offer solid entries, and thereafter the 1270 level should now serve as a floor where bulls defend long positions.

With the Dow now firmly above the 11,000 level, the Nasdaq Composite and Nasdaq-100 back above key resistance levels and the S&P 500 on the high-side of 1300, sentiment has most definitely shifted to the bull camp. But there are several disconcerting developments that may beg caution in the near-term.

For starters, the Arms Index, which accurately forecasted the market bottom in early April, is flashing a big caution sign with its overbought readings. The NYSE Arms reading dipped down to 0.65 Monday.

Further, the CBOE Market Volatility Index (VIX.X) has been in free-fall for the past five trading sessions, and closed at 23.24 Monday, down 1.02. The VIX is a contrarian indicator and a general gauge of fear in the broader markets. The VIX at 23 Monday is telling us that fear is a rarity currently and that market participants are growing complacent. Additionally, the Nasdaq-100 Volatility Index (VXN.X) plunged below the 55 level Monday, which is far below its reading of 65, when it debuted in late January. Of course we only have four months of historical data on the VXN, but its steep slide recently does suggest that a lot of fear has been displaced from the Nasdaq-100.

I think that it's also prudent to address the recent advance in the price of crude oil. The June contract for crude futures hit the key $30 mark early Monday morning on speculation that the OPEC member countries would not consider a production hike this summer. The implications of rising crude oil prices are such that it could impact the bottom-lines of many of the cyclical companies, whose shares have been powering the Dow and the S&P 500 higher recently.

Finally, we are entering into second-quarter earnings warning season. I think it's important to point out that the recent advances in the broader market averages, especially the Nasdaq Composite, were predicated upon an improvement in business conditions. And we have been hearing of anecdotal improvements from the likes of the data storage sector and the uttering of the "bottom" word by the likes of Cisco Systems officials and Applied Materials (NASDAQ:AMAT) officials. However, if the earnings warnings and lowering of guidance resurface in the coming weeks, the markets may be setting up for an extended pullback.

Then again, the aforementioned issues I just addressed may be the perfect building blocks for the proverbial wall of worry, which the broader market averages steadily climb over during the coming weeks.

Eric Utley
Assistant Editor
www.OptionInvestor.com

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