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Market Wrap

Sleepy Session Ahead of the Fed

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      12-10-2001          High     Low     Volume Advance/Decline
DJIA     9921.45 -128.01 10075.61  9921.45 1.19 bln    965/2152	
NASDAQ   1992.12 - 29.14  2036.54  1989.68 1.65 bln   1336/2311
S&P 100   581.24 - 10.54   591.94   581.22   Totals   2301/4463
S&P 500  1139.93 - 18.38  1158.31  1139.66             
RUS 2000  474.18 -  7.03   481.21   473.50
DJ TRANS 2599.10 - 29.16  2645.54  2590.92
VIX        26.00 +  1.11    26.65    25.22 
VXN        52.12 +  1.94    52.15    50.54
TRIN        1.56 
Put/Call    0.57

Sleepy Session Ahead of the Fed

The major averages attempted to rally early Monday morning, but failed to follow-through above overhead congestion. The triple digit loss in the Dow Jones Industrial Average (INDU) and nearly 1.5 percent dip in the Nasdaq (COMPX) might have you think that Monday was a wild session. But it wasn't. Following the early morning rally attempt, stocks drifted lower throughout the session, ultimately closing near their day lows. The drifty action of the tape was indicative of traders stepping to the sidelines ahead of the FOMC's announcement on interest rates Tuesday afternoon. Volume totals reflected the non-commitment on the part of traders. Only 1.2 billion shares traded on the NYSE, while 1.65 billion exchanged on the Nasdaq market. The totals are well below the recent daily volumes.

The Federal Reserve will announce its decision on rates at 2:15 p.m. EST. The market is expecting another 25 basis point reduction in short-term interest rates Tuesday afternoon. In addition, the market will be listening for guidance from the Fed. While nothing short of vague, traders will nevertheless turn to the release accompanying the decision on rates for insight into being Alan Greenspan. Tomorrow's announcement, more than any other this year, will be read into by Wall Street very carefully. There's a growing consensus that the economy may be over stimulated from monetary and fiscal stimuli. While Main Street continues suffering through loss of jobs and a lousy economy, Wall Street is growing worried about the prospects of inflation. That's why traders will scour the Fed's release tomorrow afternoon, searching for indications of what the Fed's opinion is of the U.S. economy and when they may begin to raise rates in an attempt to fend off inflation. The Fed Fund Futures contract is currently anticipating a hawkish monetary policy by next summer.

Despite the prospects of another rate cut, bonds were modestly higher Monday, evidenced by lower yields in the longer-dated securities. The short-end of the yield curve, however, was slightly lower. The 13-week Bill Yield (IRX) finished at 1.68%. The shorter-dated securities had been aggressively bought last week. Today's action in the IRX was most likely a product of profit taking and rotation into longer-dated securities.

Without any economic news Monday morning, stocks were left to their own devices and earnings guidance. The biggest of companies, General Electric (NYSE:GE), reaffirmed its financial goals for fiscal 2001. The company said it would hit its revenue target and EPS goals for the year and would achieve double-digit growth for fiscal 2002. The company hosts its analyst meeting next week, when more details about the current quarter and forecasts for next year may become available. Despite the reaffirming of its financial targets, shares of GE finished lower by almost 1 percent.

JDS Uniphase (NASDAQ:JDSU), the beleaguered optical networking equipment maker, said Monday morning that its sales would continue to slump until its fiscal third-quarter, which ends in March. The company reported that it expects another 10 to 15 percent drop in revenues in the meantime. But that March quarter will represent the bottom in sales for the current slowdown in spending. The attempt to call the bottom didn't appease traders. JDSU finished 5.5 percent lower on relatively active volume. The stock added pressure to an already weak Networking Index (NWX), which lost more than 3 percent on the day.

The most recent victim in the energy sector was Calpine (NYSE:CPN). An article in the New York Times over the weekend suggested that similarities existed between Calpine and Enron, which should give investors reason to worry. Investors in the energy sector, already nervous after the Enron debacle and Haliburton (NYSE:HAL) issues, took the Times' warning to heart and knocked shares of Calpine down to the tune of nearly 17 percent. The stock finished Monday at a two year low. Calpine hosted a conference call after the bell in an attempt to soothe and reassure investors that it is not like Enron. Poor Enron. The words of Calpine's CEO seemed to help as the stock gained about 35 cents in the evening session.

The Packard Foundation voted against the proposed Hewlett-Packard (NYSE:HWP) - Compaq (NYSE:CPQ) merger. Both stocks were lower on the news. HWP seemed to track the weak tech sector Monday, but CPQ's 14 percent drop was more than market-related. The drop in CPQ seemed to reflect a growing consensus that the merger will never be.

In the Biotechnology (BTK) space, Protein Design Labs (NASDAQ:PDLI) dropped by nearly 19 percent. The company reported the full results of its Phase II cancer drug, Remitogen. Of the 25 test patients, only one showed a positive response to the treatment. The poor showing of PDLI's Remitogen followed the release of poor data for its leukemia drug last Friday. The stock was the target of several analyst downgrades and weighed on the BTK as PDLI is one of the components of the index. The BTK finished lower by 4.26 percent.

Away from individual company news weighing on the market, Banc of America's "market guru" reduced his weighting of stocks in his recommended portfolio to 55 percent from 60 percent. Tom McManus suggested to take the five percent from stocks and to put it into bonds, which is interesting noting the recent weakness in Treasuries. Noting the recent retreat in bonds, McManus said that higher long-term rates could pose a challenge to the consumer, the group that has been busy refinancing homes and spending. McManus added that the sell-off in bonds puts into question stock valuations.

With the exception of GE's two bits, the news flow was fairly negative Monday. It's no wonder stocks finished lower. It's a wonder that they didn't fare worse. The selling Monday was very contained and routine, the boring type. Stocks drifted lower throughout the day on relatively light volume. There weren't any major earnings warnings (JDSU isn't major), just a bit of bearishness here and there. Moreover, the trends in the major averages are intact, which means we could be nearing another entry point, possibly ahead or shortly after the Fed's announcement tomorrow.

The Dow finished about 20 points away from its ascending trend line that has been in place since September 21. Another bounce from the line at 9900 be the entry point that buyers have been waiting for. A breakdown below 9900, however, could send up a red flag and have the bears ready to pounce. Weakness below the 9800 level could negate the Dow's trend and cause the bulls to re-think their strategy.

The COMPX is in a similar position. The tech-heavy index is about 40 points away from the ascending trend line of its regression channel. A bounce from the 1950 area could be the entry point into tech stocks. But a breakdown below that level, confirmed by a decline below 1900, could give the bears incentive to short tech stocks.

With the Dow and COMPX approaching key support levels, the bulls better be ready to step in. That could happen before or after the Fed's official announcement on rates tomorrow afternoon, which may have been partially to blame for the weakness Monday. Whatever the reason was, stocks pulled back in a normal, routine, profit taking fashion today. The light volume on negative news didn't reveal conviction on the part of sellers. Rather, the bulls took the day off, opting to wait for the Fed's decision on rates.

The contained selling pressured the major averages closer to key support levels, where the bulls may return tomorrow. The beauty of entering BULLISH plays near key support levels is that risk is relatively easy to manage with tight stops just below the support levels. That way, risk isn't a four-letter word.

Eric Utley
Option Investor

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