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Market Wrap

Split Decision

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        06-27-2001        High      Low     Volume Advance/Decline
DJIA    10434.84 - 37.64 10531.19 10408.00 1.14 bln   1811/1271	
NASDAQ   2074.74 + 10.12  2084.41  2048.88 1.69 bln   2085/1635
S&P 100   626.69 -  2.85   631.33   624.62   totals   3896/2906
S&P 500  1211.07 -  5.69  1219.92  1207.29           57.3%/42.7%
RUS 2000  495.58 +  4.76   496.23   490.50
DJ TRANS 2699.47 + 53.16  2699.66  2644.46
VIX        23.57 +  0.22    25.10    23.39
Put/Call Ratio      0.54

Split Decision

The market's reception of the Fed's decision to cut interest rates by 25 basis points Wednesday left more questions than answers. The indecisive nature of Wednesday's bifurcated price action lends credence to further range bound trading, and may very well serve as a proxy for this summer's price action.

To the chagrin of many, the Federal Reserve decided to lower its target for the federal funds rate by 25 basis points to 3.75 percent. In conjunction with its decision on rates, the Fed released the following:

"The patterns evident in recent months - declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad - continue to weigh on the economy. The associated easing of pressures on labor and product markets are expected to keep inflation contained...The Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighed mainly toward conditions that may generate economic weakness in the foreseeable future."

From where I sit, the Fed's guidance suggests continued cuts in interest rates, especially after the recent pullback in the price of energy and the ensuing positive impact that has on inflation. Still, I think it's rather clear that the Fed is still on "our" team, but whether or not that's enough to advance the market is the variable I cannot quantify. My sense is that the short-term price action of the market will lean more towards the corporate profit front which, unfortunately, continues to show signs of deterioration.

Vitesse Semiconductor (NASDAQ:VTSS) issued a profit warning Tuesday night that guided to expect an operating loss for its fiscal third quarter. Vitesse's warning was eerily similar to what Applied Micro (NASDAQ:AMCC) reported Monday evening. In fact, in Monday's Market Wrap I highlighted a list of companies that were likely to warn within the tech/telecom space, which included Vitesse. The reason I bring this up is because many other market participants were expecting the same thing, which is why shares of Vitesse didn't get blown-up in the wake of the warning.

Not so positive was the market's reception to Redback Network's (NASDAQ:RBAK) profit warning after the bell Wednesday. Without going into detail, Redback issued an awful warning and its shares shed nearly $2 after hours.

In the reversal of fortunes story of the week, I'd like to point out that less than a month ago, in this very column, I wrote about the guidance delivered by Xilinx (NASDAQ:XLNX) that, at the time, suggested increased visibility and improved inventory levels. So, Xilinx's warning Tuesday night reveals just how quickly business conditions are deteriorating in certain segments of tech.

Meanwhile, Xilinx's chief competitor, Altera (NASDAQ:ALTR), reaffirmed its previously lowered guidance after the bell Wednesday, which sent its shares nearly $2 higher in the after hours session. So, let's get this straight: business has grown worse for Xilinx but has stabilized for Altera, in just the last three weeks? I think the dynamic between these two companies is a microcosm for how difficult it is to trade in the telecom-related technology sector of the market. Caveat Venditor and Emptor!

Despite Xilinx's and Vitesse's earnings warnings Tuesday night, and the Fed's supposedly "disappointing" 25 basis point rate cut, the Nasdaq Composite (COMPX) finished slightly higher Wednesday. But, more importantly perhaps, is the fact that the COMPX managed to finally clear and close above the 2060 resistance level Tuesday and settled above that level again Wednesday. Although the COMPX stalled around the 2075 level Wednesday, which is an area of light resistance, I still think it has a good chance of working its way up to 2100, or higher, during this advance. Of course, a major earnings warning from the likes of Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) or Qualcomm (NASDAQ:QCOM) would thwart any rally attempt from current levels.

The Nasdaq market is still relatively oversold. Furthermore, the big caps such as Microsoft, Qualcomm and Oracle (NASDAQ:ORCL) have been trading relatively well in the short-term. In contrast, however, is the still relatively overbought condition of the Dow Jones Industrial Average (INDU), as measured by the index's bullish percent reading. Although the Dow has found support around the 10,400 level in recent sessions, my sense is that the risks of further downside exist. In terms of resistance, as expected, the Dow is now having trouble getting back above the 10,500 level.

In terms of overbought versus oversold, the S&P 500 (SPX.X) lies at mid-field. That is, the risks are equally weighted towards either an advance or decline from current levels. Of interest, though, is the S&P's propensity to continue to attract buyers around the 1210 level, plus or minus 5 points. The sellers lack the strength to take the S&P below that level, which is a most positive development for the broader market. But, we'll want to cast an eye towards the psychologically and technically significant 1200 level in the short-term. A break below that level may negate any further rally attempt in any of the major market averages.

While the S&P's and Dow's losses were to be expected in the wake of the Fed's decision to cut by 25 basis points, the Nasdaq's positive finish, albeit moderate, surprised many market participants. Its out performance Wednesday may lend to the Nasdaq continuing to advance in the short-term. Nevertheless, it's very difficult to draw too many conclusions from the finishes in the major market averages following the Fed's announcement. That's why I suggested in the introduction of the column that this summer may be one of range bound trading.

At least in the Fed's estimation, the economy isn't bad enough to warrant a 50 basis point cut, instead opting for the 25 point reduction delivered Wednesday afternoon. The Fed has done - and is doing all - it can to stimulate the economy and the market with its benign monetary policy. But the fact remains that corporate America is still paying for the greed that was so rampant over the past three years. Unfortunately, so is the market. Mark Andreessen, who was the whiz-kid behind and co-founder of Netscape prior to its acquisition by America Online (NYSE:AOL) and currently runs LoudCloud (NASDAQ:LDCL), appeared on CNBC late Wednesday evening and touched upon something I'd like to pass along. Andreessen elaborated on how technological booms are initially received with much excess, go through a correctional period, followed by the true realization of the productivity gains from that technology. We're going through the correctional period now, and I unequivocally agree with Andreessen's remarks in that the long-term benefits of the Internet have yet to be fully realized and will positively impact each of our lives over the coming decade.

In the meantime, however, we must go through this nasty correctional period which is synonymous with the bottoming process. In Monday's Market Wrap, I touched upon a theme that may work as we progress through this bottoming process. That is, buying relatively strong stocks near meaningful support levels and selling as they approach resistance. And vice-versa for shorting stocks. While some of our recent plays have been successful in attempting to game breakouts and breakdowns, such as MVSN and HGSI, respectively, we have had much success with entering strong stocks near support and weak stocks near resistance, such as QCOM and NETE, respectively. While the current market is one of difficulty, we shall persevere and survive for the easy days that lie ahead.

On a final note, I think it would be prudent to address the market phenomenon known as end-of-quarter window dressing. The event, in essence, is an attempt by hedge funds and other money managers to "dress" their portfolios with the quarter's best performing stocks. That way, they don't have to explain to their clients why they held losers such as Lucent (NYSE:LU) when they send out their quarterly performance reports and portfolio holdings. The result is that some of the quarter's best performing stocks are artificially taken higher into the last day of the quarter, which is this Friday. Judging by the price action in some of the quarter's best performing stocks this week, I'd guess that most of the window dressing has already taken place. But for those who want to monitor this phenomenon first hand, here's a random list of some of the best performing stocks of the quarter: PCLN, EXPE, WEBX, FFIV, KOSP, QLGC, QSFT and TARO.

Questions and comments are welcome: Contact Support

Eric Utley

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