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Market Wrap

Caveat Emptor: You're Alone

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        07-23-2001        High      Low     Volume Advance/Decline
DJIA    10424.42 -152.23 10595.40 10419.71 1.03 bln   1326/1760	
NASDAQ   1988.56 - 40.81  2047.85  1987.51 1.48 bln   1381/2347
S&P 100   614.41 - 11.18   628.07   614.07   totals   2707/4107
S&P 500  1191.03 - 19.82  1215.22  1190.50           
RUS 2000  487.70 -  5.23   489.51   482.70
DJ TRANS 2961.81 -  3.85  2982.31  2957.00
VIX        26.13 +  1.16    26.77    24.92
Put/Call Ratio      0.45

Caveat Emptor: You're Alone

Not even an upgrade of shares of Cisco Systems (NASDAQ:CSCO) could embolden the buyers Monday. Maybe they're all still out on the beaches and lakes enjoying summer. Whatever the reason, the lack of interest on the part of the bulls left the bears control of the market Monday. However, the 970 million shares traded on the NYSE and the 1.3 billion shares traded on the Nasdaq are typical trading volumes for this time of year. In a word: tepid.

Speaking of bears, they won the TECH battle last week. The Nasdaq Composite (COMPX) finished lower by about 2 percent. The S&P 500 (SPX.X) and the Dow Jones Industrial Average (INDU), however, finished last week fractionally lower and higher, respectively.

So can we assume that after last week's roughly 2 percent drop in the COMPX and Monday's additional 2 percent loss that the bears are getting greedy? I think to a certain extent, yes. To steal a few observations from Jeffrey Cananvan recently, bears don't like surprises and they equally dislike crowds. (Caveat Venditor: It's growing crowded out there.) Add to the possibility that the short side may be growing a bit crowded the fact that several key support levels lay just beneath the COMPX. Therefore, a short-term, tradable rally may be fast approaching in the tech infested Nasdaq.

But, my initial bias would be to short weak Nasdaq stocks after Monday's close below psychological support at 2000 - only the COMPX's second close below 2000 since mid-April. But that seems too easy. And the market is currently diametrically opposed to easy, at least from where I sit.

Of course, the after hours earnings releases will impact the Nasdaq Tuesday morning, but more on that later. For now, let's turn the focus to levels. The COMPX has support just below at the 1975 area, which is the 50 percent retracement level. Coincidentally, the 1975 retracement level is currently bisected by the aggressive ascending support line displayed on the chart below. In short, the general area of 1975 should serve as support early Tuesday, that is if the COMPX doesn't gap below that level. If it does, 1975 will most likely morph into resistance. Other than 1975, the COMPX has support at its relative lows around 1960 and 1934 - both levels could serve as profit taking points for the bears.

After the bell, there were three important earnings reports insofar as the tech sector is concerned. AT&T (NYSE:T) reported earnings of 4 cents per share, while consensus estimates had the company pegged to earn 3 cents. More importantly, the company guided third-quarter earnings lower. This is disconcerting for those networking companies that are highly leveraged to the telecom business, such as Tellabs (NASDAQ:TLAB), ADC Telecom (NASDAQ:ADCT), CIENA (NASDAQ:CIEN), Comverse Technology (NASDAQ:CMVT), Lucent (NYSE:LU) and Nortel (NYSE:NT), among others. Keep an eye on the Networking Index (NWX.X) Tuesday morning. At time of writing, AND PRIOR TO ITS CONFERENCE CALL, shares of AT&T were flat in the after hours session.

Amazon.com (NASDAQ:AMZN) reported a net loss slightly smaller than what Wall Street had been expecting. And the company reported that AOL - Time Warner (NYSE:AOL) agreed to buy $100 million worth of stock. But, Amazon guided revenue estimates for the second-half of the year lower. Obviously, the market didn't take the news too well. Shares of Amazon were down by about $1 in the after hours session at time of writing. Worth noting, the CBOE Internet Index (INX.X) has been holding above support at 160 recently, but that may change in the wake of Amazon's lowered guidance.

The third big report from the tech space Monday evening was delivered by Texas Instruments (NYSE:TXN). The chip giant reported earnings that beat estimates by one penny. And guess what? It completed the trifecta of lowered guidance. TI lowered both earnings and revenue guidance for its third-quarter. However, its warning had little impact on alike chip companies in the after hours session. For the most part, shares of Intel (NASDAQ:INTC), Advanced Micro (NYSE:AMD), Analog Devices (NYSE:ADI) and National Semi (NYSE:NSM) were unchanged, although on light trading. It remains to be seen how TI's warning impacts the Semiconductor Sector Index (SOX.X). For its part, the SOX is approaching key support between the 540 to 550 range. Should it breakdown below that level of demand, the Nasdaq is very likely to witness further downside.

On the bullish side of the coin Tuesday, shares of Cisco were upgraded to a buy rating. UBS Warburg raised their rating and price target on the networking king, noting stability in the current quarter. Readers should note that Cisco is not entirely leveraged to the telecom business because of its exposure to enterprise, which is essentially every company other than telecom that buys routers and other networking gear. Shares of Cisco ended Monday with a fractional gain.

After Greenspan's repeat appearance Tuesday, market participants will lend the remainder of the week to corporate earnings and economic data in the form of second-quarter Gross Domestic Product (GDP). Economists are forecasting that the U.S. economy grew by a mere 0.8 percent annual rate during the second-quarter. The GDP number is set for release Friday morning, before the bell.

There are plenty of earnings reports throughout the week that have the potential to move the market in one direction or another. Copmanies announcing earnings this week include Lucent, QLogic (NASDAQ:QLGC), JDS Uniphase (NASDAQ:JDSU), LSI Logic (NYSE:LSI), Qualcomm (NASDAQ:QCOM), Verisign (NASDAQ:VRSN), Worldcom (NASDAQ:WCOM) and Adolph Coors (NYSE:RKY). Alright, maybe RKY won't move the market. They are headquartered just up the street, though, and make a good brew.

The aforementioned companies have the potential to produce a catalyst this week. Will that catalyst emerge as bearish or bullish? Barring a major blow-up by Qualcomm, I think that things in technology have grown so negative that at this point any positive comment from the likes of Lucent or JDS Uniphase would result in a short covering rally. No matter if it's warranted or not, bears don't like being crowded. And when they're crowded, they tend to cover.

It seems that fading the prevailing sentiment and direction in the market continues to work. In other words, buying near meaningful support levels and selling near meaningful resistance levels. Of course, meaningful is subjective, and there's the fact that the COMPX CLOSED below 2000 Monday. Then again, the Market Volatility Index (VIX.X) continues to stick around 25. Therefore, lonely may not be such a bad place. That is, if you're a trader.

Eric Utley
Option Investor

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