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Market Wrap

Jinxed By Juniper

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        WE 6-08          WE 6-01          WE 5-18          WE 5-11
DOW    10977.00 - 13.41 10990.41 + 78.47 11005.37 -296.37  +480.43
Nasdaq  2215.10 + 65.66  2149.44 + 38.95  2251.03 + 52.15  + 91.45
S&P-100  651.92 +  2.31   649.61 +  3.38   658.29 - 10.09  + 22.95
S&P-500 1264.96 +  4.28  1260.67 +  4.85  1277.89 - 14.07  + 46.29
W5000  11736.70 + 65.13 11671.40 + 61.20 11849.89 - 73.63  +432.18
RUT      511.64 +  9.92   501.72 +  5.22   508.62 +  2.34  + 18.92
TRAN    2882.09 -  4.96  2887.05 - 58.85  2929.20 - 49.75  + 99.39
VIX       21.41 -  2.55    23.96 -  2.00    23.15 -  1.11  -  3.22
Put/Call    .54              .53              .62              .47 

Jinxed By Juniper

Following Intel's (NASDAQ:INTC) guidance late Thursday, the tech bulls were poised to carry the Nasdaq higher into the weekend. But that was before the bomb Juniper Networks (NASDAQ:JNPR) dropped Friday morning.

The networking equipment maker issued a terrible warning. Juniper officials guided revenues for the second quarter down to a range of $200 - $210 million, while previous guidance had called for between $300 - $330 million. What's more, officials lowered earnings estimates to a range of 8 to 9 cents, while First Call previously had earnings per share (EPS) estimates pegged at 24 cents. In conjunction with its lowered guidance, Juniper issued comments that read like a very familiar book: "Challenging service provider and global carrier business...capacity absorption cycle." In short, business is bad for the networking equipment makers.

Something that struck me as rather peculiar about the Juniper warning is that its company officials denied that their shortfall had anything to do with losing market share to Cisco Systems (NASDAQ:CSCO). Interestingly, I've read A LOT of research reports recently that suggested that Cisco is gaining market share from Juniper in the core router market, and winning many contracts in the OC-192 space - a high-end, optical router technology. If Cisco is, in fact, taking market share from Juniper, and in light of the demise of other competitors such as Nortel Networks (NYSE:NT) and Lucent (NYSE:LU), shares of Cisco may be an interesting investment idea currently despite the terrible telecom environment.

To digress, the Juniper warning did snuff all of the excitement over Intel's (NASDAQ:INTC) guidance Thursday evening. It's simply amazing how quickly market psychology can shift in the current environment. One day, warnings are shrugged off like that of Broadcom's (NASDAQ:BRCM), in favor of comments about a possible stabilization in the second-half of the year. The next day, stocks get blown up on a warning ala Juniper.

Neither the Nasdaq Composite (COMPX) nor the Philadelphia Semiconductor Index (SOX.X) were able to breakout above their respective resistance levels that we've been monitoring this week. On the part of the SOX, it never got the chance Friday to break above the 700 level. And the COMPX wasn't able to fully reject its bearish head-and-shoulders (H&S) top.

Last Tuesday, I suggested that the neckline of the COMPX's H&S was horizontal at the 2100 level. I was wrong. I think the H&S appears more like an ascending pattern now, with the neckline currently around the 2100 support level that we've been monitoring. While the current position of the neckline coincidentally coincides with our initial level, viewing the H&S as an ascending pattern does lower the bearish price objective of the pattern. On Tuesday, I calculated the bearish price objective to be around 1870. But the ascending neckline lowers that level by about 50 points to 1825.

The ONLY reason I'm going to great lengths to dissect the COMPX's H&S is because I know for a fact that many, many market participants are monitoring the very same levels we are. And for some uncanny reason, these technical patterns of price (H&S) tend to become a self-fulfilling prophecy, so I want my readers to be informed.

Nevertheless, I think it's prudent to suggest that 2100 marks the proverbial line in the sand for the COMPX and should be monitored closely going into next week's trading, although it's still another 115 points lower. Should the COMPX decidedly break below that level next week, the path of least resistance may shift back to the downside. Conversely, if the H&S it to be rejected next week, we need to see the COMPX advance above its relative highs Thursday around 2265. If the COMPX can advance to the 2280 - 2300 range, perhaps we could quit worrying about its H&S.

The Juniper warning is likely to carry over the weekend as traders worry about who's next to warn. Of the company's that haven't pre-announced yet, those most likely to warn include Dell Computer (NASDAQ:DELL), JDS Uniphase (NASDAQ:JDSU) and Motorola (NYSE:MOT), according to analysts. Of course, market psychology could quickly shift again next week if we hear continued remarks about a rebound or, at the very least, a stabilization in the second-half of the year. But the concern over tech fundamentals may lead to a rotation back into other sectors, such as finance, energy, cyclical and retail, among others. A rotation back into those sectors would carry the Dow Jones Industrial Average (INDU) higher.

The Dow settled below the 11,000 level Friday for the first time in about a week. Part of the Dow's weakness may have stemmed from the computer glitch on the New York Stock Exchange (NYSE). Around 10:00 a.m. EST, a computer problem caused trading in about 1700 stocks to halt. Most trading resumed about one-and-a-half hours later, but several issues, such as IBM (NYSE:IBM) remained halted for the majority of the day. When trading did finally resume, it seemed like any bids that were in the Dow earlier dried up, as the remaining bulls called it an early weekend.

They say, "Never sell a dull market," but participants didn't heed that advice and took the Dow lower as soon as the NYSE re-opened. That event, ironically, may have foreshadowed continued weakness in the Dow next week if the thesis of rotation into non-tech names doesn't hold. Furthermore, there's the distinct possibility that warnings from non-tech firms will surface next week, which could damage the Dow. Although the it's difficult to give much credence to such a light volume day (723 million on the NYSE), the Dow's settlement below 11,000 is a bit disconcerting.

My causes for concern in the market currently are twofold: The first being the ominous price action (Dow below 11,000 and COMPX H&S). The second, is the continued deterioration in fundamentals, especially in the tech sector. But the third variable, which in all honesty I can't gauge, is psychology, which recently has proven more powerful than price and fundamentals. In the tech sector, there appears to be a growing tendency to buy the dips. As my colleague, Matt Russ, opined before he departed the OI team, "Buying dips is back in style, baby!" Over the past several weeks, each pullback in the Nasdaq has been met with buying. And if this pattern holds, we could see buyers emerge around the middle of next week, depending upon the news on the corporate profit front.

In addition, the economic front is full next week, as opposed to the last week's lack of data. The first big release next week is May's retail sales report, due Wednesday morning, before the market open. The consensus is expecting a pretty bleak report, with sales expected to rise only 0.2 percent. Thursday, the Commerce Department will report April inventories in conjunction with the release of the producer price index (PPI), released by the Labor Department. And Friday will bring production numbers along with the consumer price index (CPI). Keep in mind that we're about two weeks away from the Federal Reserve's next meeting. That event could begin to buoy the market as participants keep their faith and dollars invested with Greenspan.

If you haven't already, you can still sign up for my online seminar for Sunday, June 10th at 8:00 p.m. EST. Just follow the link below and I hope to see ya' there!

***Editor's Note

Jim will be back next week to deliver his excellent insights.

Eric Utley
Editor
www.OptionInvestor.com

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