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Market Wrap

Silly Snakes, Brassy Bulls, And A Heap of Homeruns

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      10-03-2001          High     Low     Volume Advance/Decline
DJIA     9123.78 +173.19  9148.35  8860.84 1.53 bln   1493/1648	
NASDAQ   1580.81 + 88.48  1595.48  1473.22 1.73 bln   1380/2243
S&P 100   550.60 + 11.03   552.51   533.64   Totals   2873/3891
S&P 500  1072.28 + 20.95  1075.38  1041.48             
RUS 2000  413.22 + 11.43   413.85   399.64
DJ TRANS 2222.86 + 52.42  2232.20  2166.20
VIX        33.13 -  0.92    35.00    32.46 
VXN        62.17 -  1.67    64.84    60.85
TRIN        0.61 
Put/Call    0.47

Silly Snakes, Brassy Bulls, And A Heap of Homeruns

Tech was due for a big day. And like Barry Bonds, the Nasdaq stepped up to the plate and hit the long ball Wednesday. In retrospect, the nearly 6 percent gain in the Composite (COMPX) wasn't that out of whack. After all, that was an awful chunky pitch that Chambers & Co. lobbed over the Nasdaq's home plate Wednesday afternoon.

Despite earnings warnings from Prozac maker Eli Lilly (NYSE:LLY) and beat down networker Nortel (NYSE:NT), the broader market was off to a bullish start Wednesday morning. That's because the National Association of Purchasing Management said its service-related index rose during the month of September. While some economists questioned the accuracy of the report in light of the September 11 attacks, the market received the favorable economic news rather well. In addition to the positive NAPM report, President Bush reassured business leaders Wednesday morning that the government is taking measures to boost the sagging U.S. economy, which includes a $60 to $75 billion fiscal stimulus package.

But the news that really got things rolling higher Wednesday were the remarks made by Cisco Systems' (NASDAQ:CSCO) CEO, John Chambers, at a Goldman Sachs conference. Regarding fiscal first-quarter estimates, Chambers said, "I am very comfortable with the consensus estimates."

Bears have been betting heavily that Cisco and many of its networking cohorts would fall short of estimates this quarter and be forced to, once again, guide estimates lower. Indeed, that's what Nortel did Tuesday night and what Corning (NYSE:GLW) did after the bell Wednesday. Apparently Cisco is taking so much market share from its beleaguered competitors that its business remains stable. But the operative idea is 'stable.' Chambers didn't say business was getting better. Nevertheless, stability was good for a 21 percent gain in shares of Cisco Wednesday, which goes to show just how many traders were betting on the company warning.

Being the big cap that it is, Cisco helped to carry the Nasdaq-100 (NDX.X) to a 7.76 percent gain. It's interesting to note that the NDX - the 100 largest stocks on the Nasdaq market - out performed the COMPX by nearly 2 percent, which reveals that a lot of Wednesday's buying was focused on big caps.

It could be argued that of the three (INDU, SPX, NDX) major market averages, the NDX is still the most oversold. In all reality, the Dow Jones Industrial Average (INDU) and S&P 500 (SPX.X) have been rallying for about the last eight trading sessions, while the NDX bounced above its relative low. In the words of Jeff Bailey, the INDU and SPX are the "head of the snake," while the NDX is the "tail of the snake." In this trader's words, the INDU and SPX are leading indexes, while the NDX is a lagging index. That being the case, the NDX has some more catching up to do to the upside, which could mean that tech has further upside from current levels, while INDU and S&P issues pause or pullback.

But for tech to have further upside, the NDX needs to clear resistance at 1270. Not by coincidence, the 19.1 percent retracement level of the NDX's descent since mid-May lies at the 1270 level. And it's this trader's opinion that the NDX's intraday high of 1267.51 was no coincidence either.

Like the NDX, the SPX has resistance nearby. For its part, the SPX is about 10 points away from its 38.2 percent retracement level around the 1083 area, plus or minus 5 points. (This particular retracement bracket, in my opinion, is quite accurate. The SPX has followed this bracket closely, noting the triple bottom at the 1170 (61.8 percent) level and various support and resistance observations.)

Unlike the NDX, the SPX's Stochastics reading on a daily timeframe is well into bought territory, which reinforces the fact that the SPX has been advancing for about the last eight days. Again, the SPX and INDU have out performed to the upside recently, which is why we call them the "head of the snake."

The technical setup of the INDU is very similar to that of the SPX. The chart below is displayed with a retracement bracket similar to the ones we're using for the NDX and SPX. We're simply anchoring at the mid-May high and at the relative low traced a few weeks back. For its part, the INDU is about 200 points away from its 38.2 percent level at 9308. And like the SPX, the INDU's Stochastics reading is well into overbought territory.

With the SPX and INDU in overbought territory by way of Stochastics and approaching resistance, it's hard to argue a strong case for chasing stocks higher in those indexes. In fact, banks and healthcare under performed the SPX and INDU Wednesday and those two groups were the driving forces behind the advance over the last eight days. The softness in banks and healthcare may have been an indication that the INDU and SPX are about to pullback.

On the other hand, Stochastics is an oscillator and both the SPX and INDU are trending higher. Furthermore, bullish percent for both the SPX and INDU are on bull alert, which is a cautiously bullish stance.

With as oversold as tech shares are and the NDX not yet overbought insofar as Stochastics is concerned on a daily timeframe, there's a better argument for being bullish on tech issues. The one problem with being overtly bullish on tech issues is the massive amount of "homeruns" hit on Wednesday. By that I mean stocks were up 20, 30, some even 40 percent. Just take a look at the Nasdaq-100 components such as QLogic (NASDAQ:QLGC), which was up 32 percent Wednesday! That's a whole year worth of gains in the underlying in just one day!

In addition to the fact that the market was up so much Wednesday, there's reason to be cautious ahead of economic data set for release Thursday and Friday morning. Jobless claims are expected to be reported at 472,000 Thursday and the unemployment rate is expected to be reported at 5 percent Friday. Negative surprises in either of those reports could bring a harsh dose of reality back to the market following Wednesday's massive short-covering rally in tech.

Eric Utley
Option Investor

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