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Market Wrap

Send In The Clones!

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        11-26-2001        High      Low     Volume Advance/Decline
DJIA     9982.80 + 23.10  9992.80  9903.80 1.08 bln   1666/1508	
NASDAQ   1941.20 + 38.00  1941.31  1906.89 1.72 bln   2106/1561
S&P 100   596.24 +  2.97   596.85   590.82   totals   3772/3069
S&P 500  1157.42 +  7.08  1157.88  1146.17           
RUS 2000  461.22 +  2.80   461.44   456.97
DJ TRANS 2525.85 -  9.05  2550.67  2506.57
VIX        25.24 +  0.46    26.20    24.94
Put/Call Ratio      0.45

Send In The Clones!

Re-igniting the cloning controversy, a small biotechnology firm announced over the weekend that it had successfully cloned a human embryo. Advanced Cell Technology Inc. announced that it had cloned three human embryos as a potential means of extracting stem cells from embryos as treatments for disease. Day-traders jumped into stem-cell related issues such as Geron Corp. (NASDAQ:GERN) and Aastrom Biosciences (NASDAQ:ASTM), driving these stocks higher at the open.

All three embryos died before growing beyond the puny size of 6 cells, but that didn't stop the debate about the ethics of pursuing either cloning or stem-cell research. President Bush denounced the practice of human embryo cloning, saying "We should not, as a society, grow life to destroy it". The Vatican chimed in with their condemnation of the embryo cloning, saying that the scientists tampered with life, not just cells. This debate began with the cloning of the sheep "Dolly" and it won't end anytime soon. But the stocks involved in the Biotech sector should continue to provide profitable trading opportunities long after the ethical debate is resolved.

Despite comments from noted Biotech analysts that this was not a significant development, the Biotechnology sector surged more than 3% during Monday's trading session, led by the likes of Millennium Pharmaceuticals (NASDAQ:MLNM), +7.3% and Protein Design Labs (NASDAQ:PDLI), +7.1%. Note that PDLI is currently on the OIN Call list. The moves in these more established Biotechnology stocks likely had less to do with the cloning news, and more to do with the fact that the Biotechnology index (BTK.X) has been one of the leading sectors for the past 2 months, now up more than 50% from the September 21st low. More importantly, the BTK broke above its long-term descending trendline (currently $590) last week and continued that breakout today, as it advanced through resistance at $613 for the first time since late June.

I don't care what angle you choose, that is an impressive uptrend, with a consistent pattern of higher-highs and higher-lows, without so much as a single oversold Stochastics reading since the last week of September. With the move through the descending trendline, I wouldn't be a bit surprised to see it continue, as the bulls continue working through overhead resistance. For the record, the next likely levels of congestion will be at the conveniently round numbers $650 and $675.

On the news front, the recession is official! According to the National Bureau of Economic Research, it began in March 2001. Does that mean it is over? Historical patterns point out that by the time a recession is officially acknowledged, that the economy is already on the path to recovery. Judging by the market action, it seems like that may be the case, as we edged ever closer to Dow 10,000. Historical patterns also suggest that the recession should end by July 2002, and investors are jockeying for position so they won't miss out on the profit train that surely is leaving the station, even as I write this.

The September 11th attacks deepened the recession, but it is widely believed that the combination of an aggressive Federal Reserve and the pending economic stimulus plan currently being bandied about Washington will serve to keep the economic downturn short-lived. While the signs of actual economic improvement are slight, at best, we must keep in mind that they always are at these turning points. The stock market is a forward-looking mechanism and is clearly focused on the certainty that the economy will be looking much better by next summer. Whether or not that actually comes to pass really isn't important. If enough other market participants believe the story, the market will behave as though it is true, creating the trend from which we can profitably trade.

To that end, let's look at the important developments that took place today. Intel (NASDAQ:INTC) and Taiwan Semiconductor (NYSE:TSM) kicked the Semiconductor sector back into rally mode this morning, each with positive news. TSM is the world's largest chip foundry and rocked the newswires this morning by raising its pre-tax profit estimate by 55%. In addition, the company ratcheted up its sales forecast and the market responded by handing TSM a 5.7% gain.

INTC announced a breakthrough in transistor design, which could lead to microprocessors that run at blazing speeds, while consuming far less power and therefore generating less heat than conventional ones. Named the TeraHertz transistor because it cycles on and off a trillion times per second, the new advances could ultimately lead to new applications such as real-time voice and face recognition, computing without keyboards, and (dare we hope?), improved battery life.

Dan Hutchison of market research firm VLSI Research said "The real significance of this is that they've basically invented a new transistor technology that's fundamentally different and it's manufacturable. They've completely re-engineered the transistor as we know it." If you think that's impressive, take a look at INTC's price chart -- the stock is now trading just below $32, a major level of support since April.

We have talked about the Semiconductor sector (SOX.X) over the past 2 weeks, pointing out the fact that it has been one of the leading sectors in the recent NASDAQ advance. Last week it was looking a bit top-heavy, as it had rolled over right at the descending trendline. Well, don't look now, but the SOX is right back at that trendline this week (currently $532) after bouncing from the ascending 2-month support line last Wednesday. The dip to support relieved the overbought condition and the SOX is now poised to take a serious run at the $540-550 resistance area. This was a consistent level of support from December 2000 through August of this year, and now that it has been converted to resistance, it will likely be the site of a hard-fought battle between the bulls and the bears.

Our discussion of leading sectors wouldn't be complete without a visit to the Internet index (INX.X), which was the top gainer on Monday with a 5.4% advance. The catalyst here was the 34% gain in shares of Amazon (NASDAQ:AMZN) after the online book (and everything else under the sun) vendor reported that holiday sales may be running modestly ahead of expectations. Internet portal Yahoo! (NASDAQ:YHOO) made similar comments about its online sales and was rewarded with a nearly 15% increase in price.

While the price moves on Monday may be exaggerated, we can draw an important conclusion from the recent strength in leading Technology sectors such as Biotechs, Internets, Networkers and Software is that money is finding its way off the sidelines into the riskier areas of the market. As this process continues, we can expect to see the broad market averages continue to work through overhead resistance.

Speaking of the broad market averages, I deliberately stayed away from discussing them tonight. The scorecard at the top of the Wrap contains the details, but in a nutshell, they are all working towards their 62% retracement levels, and that will be the next major obstacle for the bulls. For the record those levels are 10,153 for the DJIA, 1178 for the S&P500 and 1963 for the NASDAQ Composite. Rather than just watching the movement in these indices, I think the real place to watch for market direction is in the sectors that are leading the advance. If they remain healthy, then it looks like victory (at least over the near-term) will go to the bulls.

Stay long while the pattern of higher lows continues, and protect yourself with trailing stops. Remember that the music will stop eventually, and we want to make sure there is a seat available for us to relax in while the profit-taking occurs. The only thing worse than having to take a large loss on a position after failing to set a stop is taking a large loss on a position that at one time was showing a large profit. Remember that markets and their underlying stocks oscillate over time. If we are entering a new bull market, there will be plenty of dips for us to buy as we work through the technical damage inflicted over the past 20 months.

So, until next time, protect your profits!

Mark Phillips
Research Analyst

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