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Market Wrap

Tech Wreck Turning Into A Fender Bender?

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        WE 7-20          WE 7-13          WE 7-06          WE 6-29
DOW    10576.65 + 37.59 10539.06 +286.38 10252.68 -249.72  -102.19
Nasdaq  2029.37 - 55.42  2084.79 + 80.63  2004.16 -156.38  +125.72
S&P-100  625.59 -  1.26   626.85 + 13.90   612.95 - 19.07  -  4.13
S&P-500 1210.85 -  4.83  1215.68 + 25.09  1190.59 - 33.79  -   .97
W5000  11212.37 - 59.55 11271.92 +212.36 11059.56 -347.59  + 94.70
RUT      487.93 -  2.78   490.71 +  7.45   483.26 - 29.38  + 23.99
TRAN    2965.66 + 25.31  2940.35 +191.43  2748.92 - 81.04  +153.47
VIX       24.97 +  1.10    23.87 -  1.10    24.97 +  3.34  -   .87
Put/Call    .82              .65              .90              .58

The giants warned and the market yawned? Despite all the noise and fury attached to the IBM and MSFT warnings the markets did not self destruct. S&P futures down 9 points, Nasdaq futures -50 but traders refused to budge. Gosh, did we actually see a bullish event? A weak sell off on weak volume produced a positive sentiment on the floor. The consensus of opinion was a collective sigh of relief as the Friday drew to a close.

Microsoft warned that revenues would fall due to weak global PC sales and the Nasdaq only lost -17 points. Garnter Dataquest says a recent survey showed a -1.9% negative growth in personal computers and the first drop since 1986 and the Nasdaq lost -17. Chipmakers and chip equipment makers warned left and right all week and the semiconductor index finished higher than two weeks ago. Many chip stocks actually gained ground on Friday.

Normally this would be a highly positive set of circumstances resulting in a rally as buyers decided that all the bad news is priced into the market. The only flaw in this analysis is the time of year and the continued uncertainty about the economy. Summer earnings just don't normally cause rallies even when they come in better than expected. This is the dog days of summer and many investors are simply not watching the events unfold. They were so frustrated with the spring drop into the April lows they simply closed all their positions until summer is over. The reports from brokers that online trading volume has dropped between 35% and 50% prove this theory. The day trading boom has bust and the markets are going back to a more traditional pattern.

The more traditional pattern was not evident in the double option expiration on Friday. Volume was positively anemic and volatility closed at a four day low. Another yawn! This is yet another sign that there is simply a lack of interest in trading until something energizes the markets again.

This was a near record week for earnings announcements and they were generally positive yet the Dow only managed a +37 point gain and the Nasdaq a -55 loss. Over 850 companies reported and over 60% of them beat estimates. Only 12% missed estimates. In 1999 or 2000 we would have had a +500 point week. This lack of movement suggests that when earnings are over and there is nothing left to produce daily news on a major scale we could be in trouble. Am I talking out of both sides of my mouth? Yes.

The markets are basing just above major support levels of 10550 and 2000. The trading range for the Nasdaq on Friday was less than the range for some stocks on a good day last year. Twenty-six points is a non-event for the Nasdaq on an expiration Friday. An old adage is "never short a dull market" and the market on Friday was definitely dull. The moves during the week with 100 point gap opens in alternating directions is driving traders to drink. The term directionless is definitely appropriate.

If we are directionless and resting on strong support then that represents a basing period that we can build on for the next move, normally. There have been no successful penetrations of 2000 since July-11th but there have been a series of lower highs. There is no rush to sell off but nothing is motivating traders to take the index higher.

In order to take the Nasdaq higher the Nasdaq big caps need to catch fire. By analyzing the bigcaps we should be able to determine if a bounce to the upside is imminent. Microsoft just warned but even after their warning they will make about $2.5 billion next quarter. Not shabby in a negative growth PC environment. Still news after the bell shows that MSFT may still be too hot too handle for most institutional traders. They asked the appeals court to hold the order sending the case back down to a lower court. They now appear poised to attempt a Supreme Court challenge and that is a suicidal wild card. With the differing views held by the free thinking justices they could as easily get stuffed with a bigger penalty as a smaller one. This could be a settlement ploy but it effectively puts MSFT stock on the sidelines again and we should not expect any major moves here.

SUNW beat the street but had nothing positive to say about the future. They said their European business was falling with sales dropping -$200 million in the last quarter. They said they would probably "at least break even" for the current quarter if the economy did not get any worse. Kings X, there is a serious qualifier in that sentence and after the Garnter report today that PC sales were now in a negative growth mode it does not look good for growing earnings for SUNW. They did hold on to .59 of positive gains on Friday but that kind of move is not going to cause the Nasdaq to soar.

CSCO CEO John Chambers was interviewed on Thursday night and he refrained from calling a bottom in their sector and also kept from saying anything positive other than CSCO would still be number one when and IF the recovery came. The comments still had a positive tone and succeeded in adding several points to a very negative Nasdaq futures but was only able to garner a +.23 gain during trading on Friday. The most positive thing he said was they had $17 billion in cash and were not afraid to use it if the opportunity arose. Still CSCO is showing no signs of movement and with them not reporting earnings until August they are not likely to move much before then. No help for the Nasdaq here.

Intel is seen as gaining ground in the AMD price/share war but at the cost of profit margins. AMD is committed to taking the battle to Intel and in reality they have to in order to survive. When faced with survival companies tend to do things that are not good business or cut prices to cost in order to maintain bookings and personnel. Intel will have to fight this battle in the retail trenches and even though they will be the eventual winner they may bleed a lot of profit getting there. There is a serious top on INTC at $30-31 and until they can breakout of this trap they will not be able to help the Nasdaq.

Dell is probably the best positioned to hold up the Nasdaq. The only company with positive PC sales growth according to the Garnter survey was Dell. They are gaining share and according to Michael Dell on Thursday they will meet their lowered earnings estimates in August. No major downside risk other than the sinking economy and dropping PC sales. Dell has resistance at $29 but by being seen as a leader on any recovery they could break that barrier the moment the economy starts looking up. I would rate Dell a possible for Nasdaq help. Compaq announces next week and the odds are good that they will warn about coming quarters. This could be a negative for Dell depending on the language of the warning.

ORCL is neutral to positive. The software environment they sell into is less dependent on new PC sales than MSFT. They have said things are looking up and larger orders are being closed. They have been unable to break and hold $20 to the upside since February but keep knocking on that $20 door. I would rate them a neutral until the Nasdaq techs start to move as a group and then they should be a strong performer. The software sector is split and a lead put candidate, CHKP, announces next week. They are so beat up that any good news could rally the sector but more bad news could be contagious.

QCOM is the wild card that could actually be the leader out of the summer doldrums. With Nokia saying positive things and new CDMA deals seemingly weekly QCOM appears to be ready to break the $65 barrier and start a new uptrend. Telecoms and cell phone companies may have bottomed and once positive news replaces bad news the entire sector could benefit with QCOM leading the league.

On the Internet side YHOO and EBAY have already announced and should continue flat to down as the excitement leaves those stocks and looks for profit elsewhere. AMZN announces on Monday and while the outlook is good the possibility for a negative event is strong. This would indicate that there is no serious Nasdaq help coming soon from the Internet crowd.

The chip sector is split. Some chips are trending up while others are falling. Until something energizes this sector or investors decide that all the bad news is priced in, we are not going to get any convincing leadership from here. They are trying to build a bottom but every time a chip stock announces and lowers guidance the buyers simply look the other way. This sector is so beaten up that any positive news could provide the lure for buyers with 6-9 month time horizons to nibble their way into a rally. Fighting the trend TXN will announce next week and Dan Niles with Lehman Brothers thinks they will guide lower, possibility even to a loss.

Biotechs would be the best chance for a positive bounce. They are not really techs, the bad news is always there and company not sector specific and there are some biotech stocks showing buying interest today. Since biotechs don't normally have positive earnings any surprise is normally a good surprise.

To recap, the bigcaps appear to offer no hope for a Nasdaq rally anytime soon. Chips and Biotechs in general are about the only hope for any gains in the index. There is not a rush to buy or any indications by institutions eager to put money to work. Everyone appears willing to sit and wait for the rate cuts to take effect and summer to be over. There is just not any urgency for institutions to buy. Don't get me wrong. They are buying whenever support levels are hit but they are not chasing stocks above those levels. This basing pattern should keep us out of major trouble but may not provide any fireworks to the upside until September. Still, remember the adage from above, "never short a dull market" because dull markets tend to eventually explode. Once the starters gun fires and a real rally on real volume appears the urge to not be left behind becomes unbearable. Shorts run for cover and longs start high fiving anybody within reach.

Greenspan takes center stage again on Tuesday when he gives the same speech to the Senate Banking Committee. Unfortunately they read the Cliff Notes from last weeks version and they will be better prepared to question him on what he really meant and why the rate cuts have not worked. He will get a chance to re-spin anything he said and did not like from last week. Just another chance for a market dip on Greenspeak.

I think the lack of serious selling on Friday was bullish but I also think we are locked in a trading range and not likely to bounce much anytime soon. Nasdaq 2100 is the top of the range and provides a solid top. I don't like being the bearer of bad or in this case mediocre news but this is my opinion, right or wrong. Everyone wants a rally but nobody is willing to put up the billions necessary to make it happen. Until then we wait. Turn on the baseball and pass the watermelon.

Definitely, enter passively, exit aggressively!

Jim Brown

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