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Market Wrap

Manhole Covers Outperform Markets

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        05-29-2002        High      Low     Volume Advance/Decline
DJIA    9923.00  - 58.60  9988.50  9923.00 1070 mln   1397/1770
NASDAQ   1624.39 – 27.78  1644.29  1624.31 1224 mln   1311/2160
S&P 100   530.04 –  4.28   534.38   529.96   totals   2708/3930
S&P 500  1067.66 -  6.89  1074.83  1067.66
RUS 2000  487.60 -  4.81   492.05   485.74
DJ TRANS 2724.92 -  3.21  2731.40  2718.70
VIX        23.10 -  0.04    23.47    22.49
VIXN       45.70 -  0.25    46.77    45.54
Put/Call Ratio      0.89

Manhole Covers Outperform Markets

It seems like the only things going up in New York City today were manhole covers. A jittery market responded negatively to an accidental underground explosion near the Empire State Building that caused several manhole covers to jump into the air. After last week's stream of terrorist warnings one might have thought that an uneventful Memorial Day weekend would have brought some relief to the markets. Not so. The crowd of investors who pundits had suspected was waiting until after the holiday before relocating their money into the stock market must still be on vacation. Volume today was better than Tuesday's but not by much.

Wednesday's session marked the third drop in a row for the markets and unfortunately the markets appear ready to stretch this string to four. Leading the indices lower were the tech stocks again. Chip bulls were hoping that there might have been a positive reaction to the Novellus call last night but failure to comment on the third quarter merely handed bears a hammer they were more than willing to use. Shares of NVLS lost 7 percent by the end of the day closing at $43.40. While NVLS might have support at its 200-dma near $42.50, the SOX (currently 480.10), which has been in a constant slide since mid-May, lost another 3.3% and may not have support until the 450 area. The chip sector selling hit Dow component Intel and shares slipped 3.8%. Truly optimistic bulls might hope for some support on the SOX near 475, if a bounce did occur I suspect we'd be witnessing an oversold relief rally as shorts did some covering and waited for their next entry point.

Another stock weighing heavily on the Dow Jones index is AT&T (T). The stock was already in a bearish pattern of lower highs and the stock had fallen through support at the $12.65 level yesterday. To make matters worse, Moody's downgraded T's credit rating to two levels above junk status. Moody's claimed that the long-distance giant would have trouble raising revenues in an increasingly competitive industry. Shares of T slipped 3.2% to $12.01.

Disaster Du Jour

Of course what is a day in the markets without our daily stock horror story. The runner up for this honorary award was oil company Halliburton (NYSE:HAL). HAL announced late Tuesday that they had received notice from the Securities and Exchange Commission (SEC) of a preliminary investigation of their accounting practices. News like this can normally run havoc with a stock's price but amazingly, shares of HAL rebounded throughout the session from the early morning selling. The stock closed at $18.72, down 3.25%. The lows of the day effectively closed the gap from May 23rd when shares jumped higher after a positive analyst meeting that left many feeling the company had taken appropriate actions to protect themselves from asbestos liabilities. Don't mistake this comment as a bullish recommendation on the stock but merely an observation. The company did say they would cooperate with the SEC but felt their accounting procedures were in full compliance with GAAP rules.

The real disaster du jour is energy-trading firm El Paso Corp. (NYSE:EP). It could have been an attempt to flush its system of any Enronitis but the company announced it would slash its trading staff in half and increase its investment in its core natural gas business. As a result of these changes the company lowered its full 2002 estimates for the second time this year. There was no surprise that traders reacted negatively. Shares gapped down $7.52 to open at $27.75. By the end of the day EP closed at $27.01, down 23.4%.

Some disaster stories sound more like the X-files. They never fully close and a few are harder to believe than others. Today's urban legend was offered by Nortel Networks (NYSE:NT). The stock had a very brief morning rally after the fiber-optic & communications company affirmed their Q2 outlook for quarter over quarter improvement. Really? An improvement in a telecom related industry? I don't believe it. Basically, NT is telling us they'll post a smaller net loss but management also said Q2 revenues would likely be flat to down five percent. What really got traders' attention and left the stock down 6.75% by the close was their next statement. NT forecasted that the fiber optic market would not recover until late 2003 or even early 2004. Oh, and lest we forget, they also cut another 3500 jobs.

Reaction to the news in shares of JDSU was a 5.5% loss. Yet what I find humorous was CS First Boston's downgrade of JDSU from a "strong buy" to a "buy". If no improvement in the sector for the next 12 to 18 months earns a "buy" recommendation, what gets a "hold" or a "sell"? The broker also lowered their price target from $10 to $7.00. JDSU closed at $3.77.

CSCO Gets Cut To Sell

It's not everyday that an analyst slaps a sell rating on Cisco Systems (NASDAQ:CSCO), the giant in the networking and Internet routing industries. Over two dozen analysts have a "strong buy" or a "buy" rating on CSCO and eight have a "hold" rating. Only one analyst, a Ariane Mahler at Dresdner Kleinwort Wasserstein (I know, I know, you're saying "who"), has come out with a "sell" rating on the company. There have been a number of cautious comments from the brokerage group on CSCO after the company released their 10-K late Tuesday but most are merely voicing concerns. Mahler is telling her clients to sell claiming accounting concerns, disclosure issues and the stock's valuation. Merrill Lynch did not see any big alarms over CSCO's accounting practices but was concerned over the company's allowance for doubtful accounts, which had risen to its highest levels ever. Solomon Smith Barney also raised flags over details in CSCO's 10-K. Jeff Bailey made a note in the Market Monitor today about Applied Micro Circuits (AMCC). Jeff noted that Needham cut AMCC from a "hold" to a "sell" and shares closed down 4.28% today. How does this relate to CSCO? AMCC is an OEM for CSCO and Jeff offered the theory that if Needham believes business is slow for AMCC then it's probably not very strong at CSCO either.

Hello, Did Someone Say Jewelry?

I would be negligent in covering the markets if we didn't touch on gold. While fans of the precious metal are going giddy from the huge rise I don't think it will last (at least short-term) and Goldman Sachs agrees with me but I but I think their reasoning is flawed. If you have been following the rise of gold recently then you may have heard some of the gold bug propaganda for a new bull market in gold. They will be quick to point to happier times (if you're bullish on gold) like the 1985 to 1987 rise in the precious metal. During that period, a 40 percent drop in the dollar had gold run up from $284 to $500 an ounce. More fanatical still, some proponents will forecast a return to the heyday of gold when it hit $850 an ounce back in 1980.

Dissenters of the gold-inspired fanfare claim that the hyperinflation of the 70s doesn't stand a chance of appearing anytime soon. Thus, another long-term bubble in gold is not likely to appear. The XAU.X did pull back today and I would credit Goldman's downgrade of AngloGold (AU) and Barrick Gold (ABX) on valuation concerns and belief that the rally was near its end. What irks me is Goldman Sachs' reason for calling a top in gold. The Goldman analyst claimed that weakness in physical jewelry demand would not sustain the rally. Hello, did he just say jewelry? People aren't buying gold for a run on jewelry stores. Investors are buying gold as a hedge against the U.S. markets, as a hedge against the falling dollar, and as a hedge against a land war in Asia (thank you, Vizzini), not to mention just plain old momentum buying.

Nothing goes up in a straight line but gold futures have tried to do just that. A chart of the gc02m shows an almost constant rally of higher highs from mid-May. I would not be surprised to see a pull back to the $320 to $315; of course I was looking for a pull back last week too. The challenge here is the weakening dollar and the new build up of forces on the India-Pakistan border.

Chart of Gold Futures (gc02m)

Thursday and Friday

My concerns with the broader markets are that now we are under recent support levels the major indices will be pulled to the early May lows. Pulled may be too strong a word. With the anemic volume we have been seeing the better word might be drift to the May lows.

The Dow Jones is quickly approaching its 200-dma and while this might offer support I wouldn't be placing any bullish bets on it. The index is down three days in a row and we could get a bounce just because we're due for one.

Chart of the Dow Jones

The S&P 500 does not look much different. The break under recent support and the imminent bearish crossover in the MACD sound like a recipe for a retest of the 1050 level. Yet again, I wouldn't be surprised to see a one or two-day bounce.

Chart of the SPX

It was very disappointing to see the Nasdaq break under the 1650 level but with the SOX.X, the GSO.X, telecom and Internet stocks all giving up ground we shouldn't be surprised. Currently, the Nasdaq is down 6.7% from the mid-May closing high but if you look at the chart you might see an interesting observation. It was only a few sessions ago that the index had dropped a quick 4%. Shorts covered and we got a two-day bounce. The last three sessions have produced a similar decline. If you were a true optimist you could look for another bounce soon but I wouldn't put my money on it. At least not until we retest the 1600 mark. Something you'll see in the charts of the three major indices is the MACD, which has produced a bearish crossover (in the Dow) or is about to (in the SPX and Nasdaq). This is not a good sign but that doesn't mean it can't be reversed.

Chart of the Nasdaq

Market watchers will also find similar patterns in the Wilshire 5000 index (TMW.X) and the Russell 2000 (RUT.X). What is likely to concern traders is that the strength in the small caps has evaporated and the RUT is hitting new relative lows. The next stop for the Russell could be 480 and then a probable test of the 200-dma.

If you haven't switched to a defensive posture again I would consider it. The market is already doing so. Moving to gold is the classic defensive posture but the rally there has been boosted by the falling dollar and the appearance that a war between India and Pakistan is all but imminent. You should also notice that the markets are moving into traditional defensive sectors like tobacco (Merrill upgraded the group today) and healthcare stocks. Take a look at the HMO.X. Go on, do it. A little homework didn't hurt anybody.

James

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