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Oracle Says "We didn't Warn."

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06-05-2002        High      Low     Volume Advance/Decline
DJIA     9796.80 +109.00  9800.00  9688.30 1296 mln   1759/1388
NASDAQ   1595.26 + 17.14  1595.42  1563.55 1413 mln   1662/1734
S&P 100   520.87 +  4.84   521.05   514.84   totals   3421/3122
S&P 500  1049.90 +  9.21  1050.11  1038.84
RUS 2000  475.04 +  1.28   475.71   470.97
DJ TRANS 2680.63 + 17.13  2684.38  2656.49
VIX        24.71 -  1.44    26.28    24.71
VIXN       48.02 -  1.02    49.89    47.97
Put/Call Ratio      0.78 

Oracle Says "We didn't Warn."

Ah... the lazy days of summer right? You might think that with the constant day after day of lackluster volume. One might get the picture that the host of investors that brought the markets up off their September 2001 lows have all checked out. After a rough spring semester the final school bell has rung and the crowd has now left the building happy to be on summer vacation. It has indeed been a tough 2002 for the major indices and investors are seeing more and more reasons to sit back and wait before putting their money to work.

High up on the list is the geo-political turmoil that has taken center stage in the media these last few weeks. The threat of nuclear war between India and Pakistan is a nightmare that could throw the entire global economy into a depression. Fortunately, there were hints and whispers today that the situation may indeed be cooling in contrast to the +100 degree heat citizens are feeling in India right now. The Indian Prime Minister offered a suggestion that both India and Pakistan jointly patrol the Line of Control in Kashmir but the Pakistani government countered that India's offer was a media ploy. Despite the rejection, some analysts are encouraged that India, the more powerful of the two countries, is at least considering negotiations. Countering any positive press was a new travel warning from the U.S. State Department strongly urging Americans in the region to leave the area.

One hot spot that has been overshadowed by the nuclear silhouette between any Indian-Pakistani conflict is the Middle East. There was another suicide bombing today that claimed 17 Israeli lives and injured 36 more. The Islamic Jihad took credit for the attack as the perpetrator drove a car, lined with explosives, next to a bus and detonated the bomb in Megiddo, Israel. Ominously, reporters noted that Megiddo is Hebrew for Armageddon and the attack took place on the 35th anniversary of the 1967 Arab-Israeli war. Arafat condemned the attack but President Bush issued increasingly harsh language for Arafat's lack of leadership of the Palestinian people. The Israeli response was to send tanks into the town of Jenin, the reported base for the Islamic Jihad.

I realize that if you wanted a news report on the Middle-East conflict or the ongoing concerns in central Asia you'd probably turn on CNN or your nightly news. The issue here is that a backdrop of political and military unrest does not induce investors to part with the money but quite the opposite. The markets turn defensive as they cautiously await any outcome that might hinder business locally or globally.

Market internals expressed this hesitancy as volume did come in light with 1.2B on the NYSE and 1.4B on the Nasdaq. Bulls will point to the up volume out pacing down volume on the NYSE but the advance decline numbers were mixed. 1759 advancers sneaked past decliners of 1662 on the NYSE but decliners got their revenge on the Nasdaq beating advancers 1734 to 1338. The major indices may have ended the day in the green but it wasn't due to any change in investor sentiment.

Economists and market commentators may have been encouraged by the ISM non-manufacturing numbers this morning but nobody else really seemed to notice. For May the index rose to 60.1% outpacing the estimates for 56.0% and April's 55.3% reading. This was the highest reading in almost two years for the indicator but the major indices merely yawned.

Like clockwork, the regularly scheduled Wednesday stock-specific disaster was right on time. This morning the Federal Energy Regulatory Commission (FERC) threatened to revoke the trading licenses of Williams Co. (NYSE:WMB), El Paso Electric (NYSE:EE), Avista (NYSE:AVA) and Portland General Electric, which is owned by bankrupt energy trading company Enron (Nasdaq:ENRNQ). The FERC flexed its muscles as the agency alleges the group has failed to respond adequately to their investigation into possible energy market manipulation during the California crisis. Investor response was immediate and the fallout was painful. WMB lost 18%, EE lost 7.88%, AVA fell 13.3%, and ENRNQ slid another 4.76%. The commission has given the companies 10 days to "show why the commission should not revoke their market-based rate authority". It will be interesting to see how this develops but we hope any shareholders in these company owned protective puts on their positions.

Additional stocks contributing to the general malaise of the markets were found across multiple sectors. eFunds (EFDS) lost over 29% to close at $9.32 after lowering Q2 earnings and revenue estimates. Not only did the software company claim a growing list of customers were pushing back purchases but the CFO would be stepping down as of June 30th. It didn't take long for someone to slap a "hold" on the stock from a previous "buy" recommendation.

Tech company, Hewlett-Packard (NYSE:HPQ) got its earnings estimates trimmed by Credit Suisse Boston after HPQ's Tuesday conference call. Big surprise, the company lowered guidance for the current year and said revenues would fall.

Another big cap that can't get any respect is AOL-Time Warner (NYSE:AOL). Shares continue to slip even after the company reiterated its 2002 America Online advertising revenue target of $1.8 to $2.2 billion.

EBAY is another remnant from the Internet bubble that has been able to maintain a stock price not found in the single digits. The bad news is we may be seeing the first chink in the impenetrable armor of this auction-site behemoth. The company had earlier announced that 2002 earnings might come in below analysts expectations. EBAY confirmed that news with guidance of 73 to 75 cents a share versus the First Call consensus of 76 cents. Many have made the claim before but with a P/E close to 133 shares are priced for perfection and a couple of missteps could be painful for shareholders.

Joining its fellow big cap brethren were shares of WCOM. News has it that the company is looking into a 20% cut in its workforce in an effort to shoulder its $30 billion in debt. That's almost 16,000 jobs over and above the 13,000 the company has already slashed in the last two years. Shares ended down 2.48%.

Adding just one more log to the growing funeral pyre for the tech rebound in late 2002 was the CEO of Ericcson (Nasdaq:ERICY), Kurt Hellstrom. The Sweden-based telecom equipment giant is still struggling. The CEO believes the downturn may not end in 2002. As quoted by the Financial Times, Kurt said, "We don't think the market has become worse but the downturn has been prolonged. We have to face the possibility that next year doesn't turn upwards". Despite the negative comments shares of ERICY, QCOM and NOK all ended to the plus side.

One company that seems to have a poisonous touch is Adelphia Communications. The company's investment banker, Salomon Smith Barney, maintained a "buy" rating on the stock despite the implosion in its share price and the SEC is now investigating Salomon's banking deals with Adelphia.

Would you believe that gold finally hit some profit taking after touching the $330 level on Tuesday? The June contracts for gold (gc02m) hit $330.30 intraday in yesterday's session in what was the end of a non-stop three-week rally. We outlined the $330 level as potential resistance last week. Gold futures fell over $6.00 today in profit taking. The pull back started yesterday in the XAU.X as traders began to take profits in a number of gold-related stocks. After doing some research early this afternoon it's amazing the different perspectives you get from traders. Those bears who have been waiting to short the sector are drooling to grab their slice of any downdraft but there appears to be just as many bulls looking for the bounce to jump on the goldbug bullet train. Bears will correctly point to the weekly chart of gold and show you how the sector and the metal is very overbought and in need of a good bout of selling. However, bulls we tell you that neither the metal or the XAU index has violated its bullish trend and there is plenty of (trading) support still below it for an opportune entry point even if another day or two of declines were to be seen. I can see both sides of the argument but given its incredibly overbought state (bearish for gold) and the geo-political unrest and falling dollar (bullish for gold) I would avoid it. Only aggressive traders using 100% risk capital should approach gold at these levels (either direction). Bears who go short only to find India and Pakistan threatening the first nuclear exchange in 50 years next week could be in trouble and bulls who go long will be yelping in pain if the metal and the index see a 20% pull back.

How about some good news? The drug sector is still hitting new lows but the FDA is sparking bullish interest in AstraZeneca (NYSE:AZN) and Millennium Pharmaceuticals (Nasdaq:MLNM). AZN said it had received an approval letter from the FDA for its cholesterol drug Crestor. The FDA also gave "fast-track" status to MLNM's drugs to fight leukemia and multiple myeloma. While both stocks gapped higher this morning they did fail to maintain the majority of their gains. Let's try again.

If we're looking for good news who could you turn to for a few choice words to lift the markets. Why John Chambers of course! The CEO of Cisco Systems, one of the few men (besides Greenspan) who can change the course of the markets with a well-crafted utterance. Last time the markets received positive news from CSCO there was a sharp rally higher as shorts ran for cover in fear that a bull stampede was right behind them. Unfortunately, no such stampede occurred. This time John offered some soothing words for an oversold market but no one cared. It was if Chambers had become the boy who cried, "wolf" (or recovery) one too many times. The CEO stated that he believed the rebounding U.S. economy would revive the telecom industry. John was quoted as saying, "We believe the commercial marketplace will come back first. That will be followed by the enterprise, and that will be followed by the service providers. Unfortunately, service providers lagging two to six months behind the enterprise." The market's response was a 16-cent loss for shares of CSCO and a new all-time low for the NWX.X.

So what's a bullish trader to do besides turn in his uniform and join the other team? Why look to the software sector for a little pep talk. I know. I know... you're thinking that any bull looking to the software sector for trades has probably got mad-cow disease. Believe it or not, the $GSO.X turned in another positive session making it two in a row. That's an uncommon site around here, especially considering that Manugistics (Nasdaq:MANU) and Tibco Software (Nasdsaq:TIBX) both warned today. Most of Wall Street has already written the software sector off as a lost cause. In the last few weeks Goldman, Salomon and Merrill have all downgraded the group due to the I.T. spending outlook. Imagine the market's surprise when ORCL says the made their numbers late afternoon.

It looked like those bears that were still paying attention this afternoon decided to cover when Ellison announced, "We didn't warn." The expectation for ORCL to guide lower was pretty strong but Ellison said the company made its per-share profit estimates of 12 cents for the fourth quarter. This was the catalyst for the afternoon rally and the major indices all closed just below major resistance levels. While this sounds like good news for ORCL and the sector my concern is with the details. What are the odds that ORCL "made the numbers" due to massive cost cutting and expense controls? Recent successes due to resource management and not rising revenues have not been the seed of any prolonged market recovery. I said I was looking for good news and the markets may continue to rally/cover tomorrow but with Intel's analyst meeting after the close on Thursday I'm not expecting a lot of investors willing to place bets in tech land.

That's right. Tomorrow night, the biggest semiconductor company in the market is holding its mid-quarter analyst meeting. In its Q1 results Intel forecasted Q2 revenues to come in between $6.4 and $7 billion. The last couple of weeks have shown a growing expectation that Intel will guide to the lower end of that range. Analysts believe that Intel may be cautious since this is typically a back-end loaded quarter. With the SOX.X attempting to bounce off the 450 level of support any positive news could light a big fire under the group and lead the Nasdaq higher as well. Any significant negative news could have the sector breaking to new relative lows and likewise become a lead weight around the Nasdaq's neck.

Traders can also expect news to come out from the management team at EMC. The storage device leader will begin its own analyst meeting at 10:00 a.m. ET tomorrow but the CFO is expected to focus on the company's new products versus any guidance to the company's quarter.

The Dow Jones Industrials has bounced strongly off the 9600 level but closed just shy of resistance at 9800. If investors can keep the upward momentum going I'd expect the battle to take place between the 200-dma (near 9880) and the 10K mark.

Chart of the Dow Jones

The Nasdaq Composite has also rallied off the 1550 support level but closed just under the 1600 level of resistance. If the ORCL news can keep the bears on the defensive then a rally back to the 1650 level might not be out of the question. However, before you day trading bulls start looking for plays, keep this in mind. The Intel report after the bell is likely to keep the tech-heavy Nasdaq in limbo as investors wait to hear the news.

Chart of the Nasdaq

Dancing in unison, the S&P 500 also closed just under resistance of 1050 but looks like it could bounce another day or two before running out of steam. Unfortunately, I would not be surprised to see it trade sideways as the markets wait for direction from either Intel or the Payroll report on Friday. My bigger concern is the bearish outlook from the weekly charts for all three of the major indices.

Chart of the SPX

Taking into account the bearish trends we see in so many sectors, the lack of strength in the Transports and Airlines even through oil has fallen significantly from its recent highs (down 12%), the political unrest overseas, the falling dollar, lack of any pick up in I.T. spending and negative guidance for the remainder of the year, and the onset of summer - a traditional time of year that bulls go into hibernation... I don't see a lot of reasons to buy stocks at this time.

Weekly chart of the Dow Jones

Weekly chart of the Nasdaq

Weekly chart of the SPX

I hate to sound bearish because history has shown too many times that when everything looks the worst it can usually mean the bottom is just around the corner. What should concern you and I is how do you define "the worst".



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