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Market Wrap

Another Day, Another Support Level Broken

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      05-28-2002           High     Low     Volume Advance/Decline
DJIA     9981.58 -122.68 10118.51  9961.86 0.96 bln   1392/1775
NASDAQ   1651.86 -  9.32  1671.35  1632.75 1.13 bln   1586/1905
S&P 100   534.32 -  5.60   540.89   532.05   Totals   2978/3680
S&P 500  1074.55 -  9.27  1085.98  1080.31             
RUS 2000  492.41 -  1.23   495.22   487.43
DJ TRANS 2728.13 - 15.50  2749.01  2700.49
VIX        22.43 +  1.27    23.37    21.68
VXN        45.11 +  2.25    46.48    44.45
TRIN        1.72 
PUT/CALL    1.08 

The day started off bad and got worse. Sounds like the never ending story of late. Before the bell two Dow components were downgraded and that took all the steam out of investors who came back from the holiday weekend with a bullish intent. At 10:AM the economic news provided a mixed picture of the recovery and a monster sell program was triggered that quickly knocked -100 points off the Dow.

Intel was downgraded by Merrill Lynch before the open saying in a research report that business for the first two months of the quarter had been soft. The analyst kept his short term strong buy on the stock but lowered his profit estimates by a penny. The outlook from Merrill was based on flat shipments of motherboards from Taiwanese manufacturers. Also, memory prices are still dropping and microprocessor inventory is growing. Not a recipe for a strong economic recovery in chips. Intel also cut prices over the weekend on its Pentium 4 chips. Typically April and May represents a very slow period for Intel with the quarter strongly back end loaded with June orders. INTC dropped intraday but recovered some to close down only -.31 cents.

Another Dow component, Home Depot, was down -1.88 after UBS Warburg downgraded it from BUY to HOLD saying the retailer was changing too much too fast. He cited the volume of current changes as "monumental changes for a complex organization in a very short period of time." He also cited the great profitability of Lowes compared to HD. He said the departure of "key veterans" could be impacting sales trends.

The economic news was mixed with the Consumer Confidence coming in lower than March for the second month in a row. The headline number of 109.8 was slightly ahead of April's 108.5 but below the 110.7 in March. There were several weak elements in the index including fewer consumers thinking about buying cars, houses and major appliances. They also expected interest rates to rise soon and expected business conditions to worsen. While the numbers were positive on the surface the underlying tone was one of increasing caution. While the buying trends weakened the consumers felt slightly better about the employment situation.

Personal Income came in as expected with an increase of +0.3% but was only half of the growth for February. This indicates the impact of higher unemployment and the impact on raises and benefits on existing jobs. Personal Spending remained high with a +0.5% growth compared with +0.3% in March and +0.8% in Feb. Spending on services slowed however by only +0.2%.

The biggest plus for the day was the Existing Home Sales which showed no signs of slowing at 5.79 million units. This beat the consensus of 5.50 million significantly. This shows the impact of the low interest rates and according to analysts is showing a race by the consumer to lock in the lower rates before the expected hikes later this year. Once those hikes begin the housing market is likely to come to a screeching halt. Greenspan and company will see this as a big plus for the economy and will try and hold off on those hikes as long as possible.

After the close today Novellus hosted an analyst call to update their guidance for the quarter. Piper Jaffray had expected them to update guidance to between $250 and $275 million. Good call! NVLS said that orders for Q2 would be in the $275 million range but the CEO said a resumption of corporate confidence and spending would be necessary to maintain current growth levels. NVLS also said they expect to earn 8 cents a share instead of the 6 cents estimated at the beginning of the quarter. The increased earnings on only $220 million in revenue was directly related to reduced costs. As for visibility going forward they would not discuss guidance for Q3. The good news, bad news joke saw NVLS and the chip sector trading lower in after hours. That little tidbit of information could be the problem tomorrow. If they were doing well they would surely want to report it. This means things must not be good if they do not want to release the information. They are hoping sales will pick up before they are forced to make the disclosure. NVLS was trading down about $1 in after hours.

The markets were down today but many people have not yet noticed. The three-day weekend stretched into five with the Nasdaq posting the 2nd lowest volume day of the year and the NYSE the third. The lightest day of the year was Friday. It appears most traders left early for the holiday and stayed late. What they missed today was another breakdown of support on all the Dow and S&P. The Dow fell below the 10100 support level from last week and the psychological 10000 level as well. Once the 10K level broke at 10:51 this morning the index struggled the rest of the day. Three times it traded above 10K briefly only to fall back again as sellers leaned on the average. Only three Dow stocks finished positive, EK +.01, HPQ +.01 and SBC +.31. Those unlikely three stocks are not normally the leaders of any rally. Should the Dow move down from here the next support level is 9922 from May-10th followed by 9811 from early May. Resistance is now 10000 and 10100.

The Nasdaq faired much better than the Dow and managed to close back above its closest support level of 1650. Despite the downgrade to Intel at the open the Nasdaq held its ground bounced off support at 1632. Considering the weak tech environment this was encouraging. The big cap Nasdaq winners were an unlikely set of players including SUNW, ORCL, QCOM and AMGN. Biotechs continued to bounce around after the BGEN news last week. The NVLS news tonight could cause a retest that 1632 support level on Wednesday if the cautious comments are met with concern by traders. Support below that would be 1600 followed by 1565. Overhead resistance is at 1674.

The S&P struggled all afternoon after breaking support at 1080 and 1076. The afternoon trend was marginally up but it traded in a very narrow range with zero conviction on the part of traders. Resistance is now 1080 with support at 1067 followed by 1054.

The trading day on Wednesday could be exciting. With support levels just below our close and resistance levels just above, something has to give. The positive side of the NVLS conference call could give the bulls a reason to buy when support levels are hit. Conversely, the bears claim the news on NVLS was already priced into the market since Piper started making those claims last week. I would not be surprised to see an oversold bounce with the TRIN at 1.72 and the put/call ratio at 1.08. Both of these indicators are very bullish. With the summer doldrums ahead of us this would setup another entry point for the bears. I doubt there are enough buyers to prompt a sustained rally so any long positions would only be for short term traders.

Enter Very Passively, Exit Aggressively!

Jim Brown

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