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Market Wrap

Waiting on Warnings

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        06-04-2001        High      Low     Volume Advance/Decline
DJIA    11061.50 + 71.10 11071.70 10938.90 1.18 bln   1986/1087 
NASDAQ   2155.93 +  6.49  2305.73  2198.14 2.31 bln   2027/1786
S&P 100   654.48 +  4.87   654.49   647.63   totals   4013/2873
S&P 500  1267.11 +  6.44  1261.17  1256.36           58.3%/41.7%
RUS 2000  507.32 +  5.60   507.32   501.72
DJ TRANS 2878.24 -  8.81  2889.46  2868.95
VIX        22.83 -  1.13    24.35    22.82
Put/Call Ratio      0.53

Waiting on Warnings

The Nasdaq Composite (COMPX) bounced around its waterline Monday on volume that was terribly light. Meanwhile, the Dow Jones Industrial Average (INDU) advanced back above the 11,000 level, led by gains in energy and cyclical issues. But, again, volume was ultra-light on the NYSE.

The 50-day average volume on the Nasdaq is currently 1.86 billion and 1.12 billion for the NYSE Composite. Monday's trading activity totaled 1.29 billion on the Nasdaq and a mere 839 million on the NYSE. I normally publish these numbers in my Monday columns for good reason. We can extrapolate from these low volume readings that participation and conviction are very low among market participants.

Now, this could be a function of seasonality or the lack of economic data points this week, or the fact that second-quarter earnings warning season is upon us. Whatever the reason, the lack of conviction in the marketplace does call for doing a lot less on the part of traders. Forcing trades is a recipe for disaster!

In the short-term, I think a good strategy to employ would be to wait for data points either on the economic or corporate profit fronts. Since this week's economic calendar is relatively moot, we're going to need guidance from corporate America to get this market moving. However, whether that guidance is to the upside or downside remains to be seen.

One sector that has been performing well and has the potential for upside surprises is the Biotechnology Sector (BTK.X). Evidence of the potential for upside surprises came from Morgan Stanley Monday morning. The brokerage firm raised estimates for IDEC Pharmaceuticals (NASDAQ:IDPH) based on recent sales data. Shares of IDEC finished $3.79 higher Monday.

The BTK has staged a nice advance recently, and now faces significant resistance at the 650 level. A breakout above that level is likely to carry the BTK up to the 700 level in the short-term, and positively impact several of OI's call plays, such as Amgen (NASDAQ:AMGN), Celgene (NASDAQ:CELG), Noven (NASDAQ:NOVN) and Protein Design Labs (NASDAQ:PDLI).

There are several mid-quarter conference calls coming out this week to be aware of. On tap to give guidance this week include Amazon.com (NASDAQ:AMZN), Hewlett-Packard (NYSE:HWP) and most importantly, Intel (NASDAQ:INTC). The chip giant was the target of several analysts Monday morning, who were attempting to get ahead of the company's first-ever mid-quarter conference call on Thursday. The consensus seems to expect Intel to lower its guidance Thursday, so any upside surprise could act as a catalyst for the chip sector and the broader tech sector.

On the topic of semiconductors, Cypress Semi (NYSE:CY) warned this morning. Cypress, the maker of high performance integrated circuits, said that revenue would fall about 30 percent sequentially from its last quarter to roughly $180 million. The company's CEO, T.J. Rodgers, noted, "Business conditions have not materially improved in the market segments that [Cypress] serve[s]." But, in the same breath, Rodgers said, "The Wireless Infrastructure and Wireless Terminal segments...have exhibited some positive movement." Despite its warning, shares of Cypress finished fractionally higher.

On the flip side of guidance, Xilinx (NASDAQ:XLNX) reaffirmed its fiscal first-quarter guidance after the bell Monday. The maker of programmable logic devices (PLDs) reported that its previously lowered guidance on April 19th hasn't changed, and that officials expect revenue in the $305 - $346 range. What's more interesting is that Xilinx reported that cancellations and delays in orders have substantially slowed and that its inventory turnover has improved. Shares of Xilinx advanced in the after hours session and could impact the broader tech sector Tuesday morning. Keep in mind that Xilinx is a supplier to Cisco Systems (NASDAQ:CSCO).

Intel's guidance Thursday and Xilinx's comments after the bell Monday will most certainly impact price action in the Philadelphia Semiconductor Index (SOX.X) this week. Hopefully the SOX can follow the lead of its neighbors, the 76ers, and step up this week.

The SOX has been hovering just above the 600 level for last couple of trading sessions, and a breakdown below that level could signal further trouble for the Nasdaq. But Xilinx's comments Monday evening will boost the index, at least Tuesday morning. What traders will want to watch for, at least in the short-term, is for the SOX to clear the 620, which has kept a lid on the index the last three session. A nice advance above that level should carry the SOX up to 650.

My highlighting of the BTK and SOX is very intentional, in that it's my belief that the two hold the key to the Nasdaq's progress. As for the Dow (INDU), although the energy sector has been out performing as of late, I think going forward we'll need continued participation from the Bank Sector (BKX.X) and the Cyclical Sector (CYC.X).

Since breaking out of its ascending wedge at 900, the BKX has been consolidating its gains above that level. Now, the interest rate sensitive index is having trouble near 930. Look to leaders within the sector, such as BankAmerica (NYSE:BAC), Citigroup (NYSE:C) and J.P. Morgan Chase (NYSE:JPM) to carry the BKX higher.

The cyclicals played a major role in carrying the Dow to its 71 point gain Monday, which included Boeing (NYSE:BA), Caterpillar (NYSE:CAT) and DuPont (NYSE:DD). Since breaking above its long standing descending trend line in mid-May, the CYC has been consolidating. And any pullback down to the 550 area would offer entries into the aforementioned names. Conversely, an advance above 565 would allow for the Dow to further advance past the 11,000 level.

I'd like to emphasize that Monday's trading was the type that was very difficult to game and is very likely to persist as we enter the summer. But, if we get through this second-quarter earnings season relatively unscathed, we could be in for a nice summer rally. What we'll need to hear is further comments like that from Xilinx Monday evening. That is, the technology business is stabilizing, which should be followed by an improvement. On the other hand, what we don't need is continued blow ups like the one delivered by Sun Microsystems (NASDAQ:SUNW) last week.

Eric Utley

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