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Merck Joins Symantec in the Valley of Death!

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        WE 6-22         WE 06-15          WE 6-08          WE 6-01
DOW    10604.59 - 19.05 10623.64 -353.36 10977.00 - 13.41  + 78.47
Nasdaq  2034.82 +  6.39  2028.43 -186.67  2215.10 + 65.66  + 38.95
S&P-100  636.15 +  9.52   626.63 - 25.29   651.92 +  2.31  +  3.38
S&P-500 1225.35 + 10.99  1214.36 - 50.60  1264.96 +  4.28  +  4.85
W5000  11312.45 + 74.45 11238.00 -498.70 11736.70 + 65.13  + 61.20
RUT      488.65 -  6.48   495.13 - 16.51   511.64 +  9.92  +  5.22
TRAN    2676.49 - 17.13  2693.62 -188.47  2882.09 -  4.96  - 58.85
VIX       22.50 -  3.83    26.33 +  4.92    21.41 -  2.55  -  2.00
Put/Call    .69              .73              .54              .53

Merck Joins Symantec in the Valley of Death!

MRK spoiled the party with an announcement this morning that their arthritis drug VIOXX was struggling and they would miss their prior estimates. Analysts were quick to jump on the downgrade bandwagon and said that Merck's other major drugs were also experiencing stiff competition from generics. The Dow component lost -6.75 in very heavy trading. Schering Plough was also hit since they have a competing drug for VIOXX.

Just another fun day in the markets! The Symantec warning produced a haircut of epic proportions. SYMC lost -22.41 to close at $38.90 on news that earnings would drop about 30% for the quarter. While Micron gained +.67 on actual earnings that were over 200% worse than expected. Do we have a perception problem here? The software makers had been doing relatively well until this week while the semiconductors have been beaten to a pulp. The turn around in MU came after comments that they saw a greater demand than ever in a new wave of new products launching over the next several years. The new wave of chips are not expected to hit markets until 2003 but investors appeared to feel that it could not get any worse. The book to bill ratio was slightly higher for May at .46 but still under estimates of .50.

The Merck announcement must have put defensive traders into a quandary. If their favorite defensive sector, drugs, was suffering just like the tech sectors then where should they put their money? MRK, SGP, AHP, PFE, all darlings of the defensive crowd were bleeding money as investors ran for cover expecting more warnings to come. SGP was under fire separately by the FDA for continued manufacturing problems. Biotechs did not fare much better. Biogen took a serious hit of -6.93 after detrimental drug claims from a competing company were brought to court. Serono and Biogen are arguing over which MS drug works better. This news as well as the MRK announcement caused many high flyers to give back recent gains. PDLI led the biotech loser list with almost a -$7 loss.

The retail sector was doing great on the expectations of another Fed rate cut until the Gap announced that it will be forced to cut between 500 and 700 jobs in its first ever wave of layoffs. The company will reduce its 10,000 worker office staff by -5% to -7% through attrition and layoffs. They are also shrinking their aggressive expansion program as well. GPS lost -1.51 on the news.

Surprisingly networkers were also higher Friday along with telecommunication stocks. Lucent and Ciena were both higher with CIEN adding +2.25 to $41.50 after analysts speculated that CIEN might make a bid for Lucent's fiber optic business. Investors and analysts believe that things can't get any worse in the optical networking sector and they even bought TLAB, NT and SCMR on bottom fishing speculation. JDSU and MCLD were also on the high side but MFNX lost again and is heading for penny stock status at $1.43.

Despite the ups and downs for the week the Dow closed only 19 points from where it started the and the Nasdaq was within six points. Stuck in a range appears to be the keywords prior to the Fed meeting. The Oracle news slapped the Nasdaq down and then propped it back up again with a slightly positive outlook. Micron painted a bleak picture with their actual results but then talked themselves out of a hole with forward looking comments that remind us of the Internet stocks with PE ratios based on 2005 to 2010 expected earnings. Still investors bought the story. The brokerage group is still generally on the upside with only slight profit taking on several stocks. The Airline stocks took another hit on Friday after reports from the Middle East that the U.S. was taking seriously terrorist threats related to the military barracks bombing in 1996. If oil supplies slow then higher prices and lower travel volume will continue to impact profits. Ironically gas prices had been heading down by as much as -$.50 a gallon from where they were just a couple weeks ago.

Earnings next week include COMS, PALM, CS, CWTR, FDX, NKE and LBRT. The street is sure to form and discard several opinions about the tech sector as further warnings and the COMS, PALM and LBRT numbers are made public. The real focus for the week is of course the Fed meeting. I hate repeating this dry facts over and over each month but as traders we are faced with losing money if we do not pay attention. The consensus (100%) favor a +25 point cut and there is a 44% chance of a -50 point cut as evidenced by the Fed funds futures. A 25 point cut would not be good for the market as it would paint a picture of a Fed that thinks its work is done even though the economy is still at the bottom. A -50 point cut would likely create a short rally until the next major earnings warning. If IBM, MSFT or some other major company which had not previously shown weakness were to warn then the cycle could start all over again.

Baring any major warning and a -50 point cut by the Fed there is ample cash on the sidelines to expect a Fourth of July rally. The real test is whether any rally would have any legs. The leading indicator I quoted on Thursday night performed a perfect swan dive at the open on Friday. I am speaking about the Russell-2000 RUT.X which now looks like a break through of support at 485 is possible. The oversold/Fed bounce on the Nasdaq suffered profit taking due mostly to the damage in the Dow and traders going flat before the summer weekend and Fed meeting. The selling was not that heavy but it was there. The Dow bounced off support at 10575 for the third time this month. I have to say the Dow does not look good. The weakness in MRK overwhelmed the index where only eight stocks finished positive with none up over a dollar.

If the Dow falls much below 10575 we could see another round of selling as the bears enjoy their summer fling. The Dow is right on support built over the last two weeks and should this fail the next support level is 10450 and we do not want to go there. The wildcard is the defcon Delta in the Middle East. With the navy taking ships out of port and Americans being warned to stay out of the area, there will be a level of uneasiness which traders will be watching. The Fed is still the key. Greenspan has gone on record this week that he is still going to the wall to stop this recession from happening. Lyle Gramley said he felt that Greenspan would be pounding the table to get at least one more 50 point cut. The contrarians feel the prior hikes have already done the trick and stopped the drop and more cuts will be pouring gas on smoldering coals. This war of words should keep a lid on the market but a lid is the least of our problems. We need a bottom not a top! The VIX is near its six month low and that could mean traders are still too complacent for a meaningful rebound.

Earnings are dead for the second quarter. They appear DOA for the third quarter as well. Funds are probably thinking they can sit back and watch until September and maybe get a better entry point. The "I have got to get into this market before it runs away" syndrome from several weeks ago has completely disappeared. There appears to be no urgency to go long and the chart on the Dow, which should be in rally mode after five 50 point rate cuts, paints the real picture. It is struggling to hold support and any negative news the market is not expecting, could be the last straw. Next week could be exciting. Buckle your seat belts when you climb aboard on Monday morning. The first few hours may be boring, like the ride up the first hill on a roller coaster, but after the Fed announcement the rest of the week could be real exciting!

Enter passively, exit aggressively!

Jim Brown
Editor

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