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Market Wrap

The Weekly Chip Flip-Flop Continues

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        08-06-2001        High      Low     Volume Advance/Decline
DJIA    10401.30 -111.50 10504.10 10374.90  817 mln   1200/1869	
NASDAQ   2034.20 - 32.10  2053.60  2032.51 1.08 bln   1393/2286
S&P 100   615.21 -  8.44   623.65   613.16   totals   2593/4155
S&P 500  1200.48 - 13.87  1214.35  1197.35           
RUS 2000  480.96 -  6.19   487.14   480.95
DJ TRANS 2908.27 -  5.75  2934.27  2905.50
VIX        23.74 +  1.35    24.20    22.85
Put/Call Ratio      0.56

The Weekly Chip Flip-Flop Continues

The seemingly never-ending chip saga continues with negative comments on the Semiconductor industry issued this morning to combat Merrill Lynch's bullish remarks last week. Salomon Smith Barney fired the opening volley before the opening bell this morning, trimming their estimates on Intel (NASDAQ:INTC) for Q3 from 11 cents down to 8 cents, for 2001 from $0.54 to $0.47, and from $0.75 to $0.70 for 2002. Lehman Brothers chimed in, saying the company is planning to cut prices by up to 50% in an effort to halt a growing market share loss to rival Advanced Micro Devices (NYSE:AMD).

Other analysts stepped in to defend INTC, saying the price cuts are not a surprise. Bear Stearns reiterated their Buy rating, saying that bookings are strong. Clearly, the bullish case on INTC is predicated on strengthening back-to-school and seasonal demand driving strong order flow for the chip giant's ubiquitous Pentium processors. But there's a fly in that ointment. Radio Shack (NYSE:RSH) reported disappointing July same-store sales this morning, and investors responded by shaving 8.5% from the stock's price. Other electronics retailers like Best Buy (NYSE:BBY) and Circuit City (NYSE:CC) fell in sympathy.

It's hard to make a bullish case for chip stocks when demand seems to be softening at the end market and major price reductions tend to cut into margins. Hmmmm...Lower sales volume and less profit on each sale don't seem to be a good recipe for earnings growth and that seems to have been the conclusion many investors arrived at today. The Semiconductor index (SOX.X) gapped lower and fell all the way to its 200-dma near $625 on the bearish sentiment. But what's this? The SOX actually bounced at the 200-dma and managed a steady, if tepid recovery throughout the day. The daily chart below shows the mixed technical picture that is facing traders right now.

Bulls see the bounce at significant support and the fact that the SOX has broken out of the descending channel. Bears see the reversal at the 61% retracement level (near $644) and daily stochastics just lining up to give a strong sell signal as the fast line drops out of overbought territory. A renewed move through the 61% retracement level will embolden the bulls as they take aim on major resistance at $700. The other side of the coin has bears focused on the 50% retracement level, as a drop through that point would open the door for a retest of the 38% level ($605) as support. Semiconductor bulls don't want to think about a violation of that level, as it would drop the SOX back into the descending channel.

And what's this? CDW Computer Centers (NASDAQ:CDWC) is out after the close with an earnings warning, confessing flat same-store sales and a lack of confidence that it could meet its August and September sales targets. After closing on Friday at $47.62, the stock had already lost nearly 4% to $45.82 by the closing bell. The extended session saw plentiful sellers drive the price down as low as $40.10, and there could be more collateral damage in the consumer electronics sector tomorrow.

Why have I focused so heavily on the Semiconductor sector tonight? It is widely accepted that any sustainable recovery in Technology stocks will have to be led by growth in chip stocks, so the outcome of this bull-bear debate will be pivotal to the near-term direction of the NASDAQ. And simply put, the broader market averages are stuck in a rut, stuck in a rut, stuck in a rut...SLAP! Thanks, I needed that!

While we've seen some substantial daily moves both to the upside and the downside over the past week, we are awfully close to unchanged for the past 5 sessions. As I was filling in the table above, I was astounded by the miniscule week-over-week changes. The DJIA is down a whopping 0.4 points since last Monday, the S&P500 is down just over 4 points and the NASDAQ Composite is actually leading this parade with a gain of 16.40.

So the NASDAQ did the best of the 3 major indices over the past week, but a quick look at the chart shows the bears flexing their muscles again. Daily Stochastics have rolled and dropped out of overbought, and the descending trendline (now at 2085) is still capping the upward moves. Whether you pick 2000 or 1960 as your support level, the COMPX is locked in a bearish descending wedge, and with earnings winding down, there are few catalysts on the horizon that might motivate buyers. Earnings from CSCO tomorrow evening are one possible exception, but I'm not holding my breath.

Looking at the DJIA and S&P500 doesn't present a rosier picture either as you can see from the montage below. Simply put Dorothy, we're not in Kansas anymore! We're in the summer doldrums, with anemic volume to boot. For the record, this was the lightest full trading day on the NASDAQ for 2001, with a measly 1.08 billion shares trading hands. The NYSE didn't do much better, barely topping 800 million shares. The set of charts below show the effect this lack of interest is having on the other two broad market averages.

Market internals weren't rosy either with decliners solidly outpacing advancers on both the NYSE and NASDAQ, but with the light volume, it is hard to draw solid, reliable conclusions. There is a reason for the old trading advice about never shorting a dull market. Ken Fisher, the initiator of the "Great Humiliator" theory, says the market endeavors to humiliate the greatest number of investors. One of the easiest victims for the market is freshly-minted and complacent bears. Trade the downside as long as it lasts, but keep those protective stops in place.

Heading up the news parade on Tuesday will be Cisco Systems (NASDAQ:CSCO), announcing their earnings after the close. Investors are waiting to hear what the company says, hoping for some sort of bullish forward-looking comments. If you're dipping your toes in the Tech market, the smart move will be to wait for CSCO's report and more importantly, investor response to the company's conference call. As Jim has been mentioning for the past month, the prudent approach for bullish Tech positions is to wait for the Composite to move back through the 2100 level. If the charts above are any indication, we may have to wait until volume comes to more robust levels after Labor Day in order to have this condition met.

Trade only when the reward/risk ratio is in your favor.

Mark Phillips
Research Analyst

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