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Earnings and Political Jitters Roll On

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Earnings and Political Jitters Roll On
by Leigh Stevens

There are definite backdrops to the market jitters besides whether the king of the chipmakers Intel (INTC) is going to pull out its earnings slump sooner rather than later. Namely, the continued drumbeat of stories on the malfeasance and double dealings on the corporate front and the flare up of the latest mideast violence - a couple of Indian soldiers were shot dead overnight and this dreaded beat goes on. As soon as I saw those tanks in front of Arafat's headquarters in the morning news, I had that sinking feeling again.

The market caught the sinking feeling big time over the course of the day. Tech held up relatively better than the S&P, while trader waited for the Intel end of day (mid-Quarter progress) report. After hours was another story as Intel traded lower in active trading, after the company lowered its Q2 revenue outlook because of soft demand in Europe. And we're worried about a falling dollar?! Intel lowered its quarterly sales estimate to a 6.2-6.5 billion dollar range, from a 6.4 to 7.0 billion band.

The morning began with a Merrill Lynch downgrade of Intel - never accuse mother Merrill of closing the barn door after the horse is out! How things have changed from their recent reaffirmation of their "strong buy" rating - perhaps all that is different is the pressure on Merrill to show how "objective" they are.

Anyway, after some earlier positive Street comments this week on the semiconductor sector, ahead of the end of day Thursday mid- quarter update, Merrill announced a INTC downgrade to "neutral" from a "strong buy". The analyst involved told the firm's clients that the stock was "no bargain" on a price-to-earnings and growth basis. Hey, what tech stock is a "bargain"? Well, Merrill makes it "official" I suppose. They also lowered ratings on LLTC, SMTC, TXN and TQNT, with the assessment: "we believe that the early cycle semiconductor upturn has now played itself out."

Thursday is one report day on jobless claims - for the week ending 6/1, there was a decrease of 32,000 new claims from the week before, which saw an upward revision to 415,000. The 383,000 figure was well under the 405,000 forecasted. The 4-week moving average, fell 8,500 to 411,250 from the previous week/

The fly in the ointment was that, while initial jobless claims fell, continuing claims for the week ended May 25 increased by 29,000 to 3.8 million. The four-week moving average was 3.8 million, an increase of 12,250 from the previous week. On balance, the drop in new claims was offset by the rising continuing claims number, as people are just not getting back to work so quickly. This is tough on the people involved, but typical of the early stages of a recovery as companies would rather pay overtime than take back laid off workers or do new hiring.

Tomorrow will see the release of the nonfarm payrolls, expected up 50-60,000, and the unemployment report - the jobless totals are expected to rise to 6.1%, from April's 6%. Average hourly earnings are expected to be us have risen 0.3 percent.

Biotech, drug and financial stocks took a beating in the non-tech areas, followed by the utility and retail sectors. Investors sold the retailing stocks following lower May same-store sales figures. Only gold and most oil service stocks bucked the trend.

The healthcare sector ($HMO.X) was off only marginally (-0.29%), but based on my analysis of the topping looking stocks in this group, am recommending taking profits on stocks in this group (was holding 3 of the stocks) - you can see my Sector Trader analysis for more on the HMO group.

Standard and Poor's investment committee came out with a suggestion to lower equity exposure from 60 to 55% and it appears that some of their institutional customers took heed - S&P indicated that "equity valuations remain unjustifiably high." In the late 1990s, higher multiples were "justified by accelerating earnings growth, a U.S. budget surplus, declining rates and a "peace dividend." I don't recall this statement at Nasdaq 5000, but that's another story!

The software sector was down, after Oracle (ORCL) gave back more than half of its 11% Wednesday gain - this after ORCL indicated it would not warn on meeting its 12 cent EPS Q4 target. Of course, there was bound to be some rain on this parade, as UBS Warburg suggested that this would be due to aggressive cost cutting and share buybacks and not sales growth. WorldCom (WCOM) rebounded 4 percent and was the most actively traded stock on the Nasdaq, after the company indicated it would exit the wireless business to cut costs and pare down its long-term debt.

On the NYSE, Alcoa (AA), Home Depot (HD), SBC Communications (SBC), Merck (MRK), JP Morgan Chase (JPM) and General Electric (GE) were all off around 3% or more. Bellwether S&P stock GE at its 29.30 close is now under its September closing low at 30.37 and is nearing its Sept. intraday low at 28.50. This is not going to gladden any fund manager's heart!

AFTER HOURS -
Intel was trading down some $3 to the $24 area, from its closing level of $27.00. Oracle and Microsoft traded lower as well. Tech damage was enough to send the Nasdaq 100 down a further 33 points from the NDX closing level of 1157, to around 1124, but not all 100 stocks were trading actively in the after hours. The NDX has, or should have, technical support in the 1120 area, extending down to 1100.

TRADING STRATEGY -

The market is getting quite oversold based on numerous ways of measuring it, such as on a price, moving average and bearish sentiment basis. Moreover, the CBOE volatility index ($VIX.X) has closed over 27 for the first time since early-February. The VIX may rise still further tomorrow. When it starts coming back down, it has often been a precursor to a good-sized rally.

I would not try to catch a "falling knife", but we are getting down to an area, where bullish news on one of the troubling political fronts and focus on the emerging economic rebound, can cause a strong technical rally. Certainly, the odds of continuing to profit from the short side and put positions is likely less than the potential for even a moderate oversold rebound. Sectors that might be bottoming include the brokers, software and the semiconductors.

I suggested a long QQQ position at 29.30 recently in my Index Trader writings and would suggest keeping a 28.5 stop. I will be watching for another opportunity to get long if stopped out. As long as risk is kept reasonable by buying only where the market is already extended on the downside, risk to reward on this type of trade can be favorable in my estimation.

I also continue to suggest shorting good-sized rallies - since the indices are traveling again in well-defined downtrend channels, there have been many shorting opportunities at the upper trendlines - it strikes me as amazing how well this has been working. And, so far, the "overnight" risk has been far less than on the long side - witness the Intel sell off after hours Thursday.

The charts with the channel definitions I refer to are below. I can imagine overnight news of the capture of Osama Ben Laden might put a little hurt into the bears, but short of that, it's "what me worry"!

CHARTS OF INTEREST -

S&P 500 (SPX) Daily/Hourly charts:

1030 was where SPX support looked to be but we're likely to get an opening under this area. 1020, if reached, may be the area for a high-potential long position, using a stop at 1015.

Selling in the 1050-1054 area looks to also be a good trade, with stop protection 5-6 points higher - who knows, peace may "break out"!

The Dow Index (1/100: $DJX.X) - Daily/Hourly charts:

9600 on the Dow has been holding as support, but next stop looks like 9500 (95 on DJX). These trend channels are amazing in terms of the regular reversals at the resistance lines for sure. When we get in a trend channels rule, or rock or whatever - not all the time, but it's a useful tool. 98-98.5 looms as overhead resistance, then just look at the prior upswing highs stair- stepping up the channel.

The Nasdaq Composite ($COMPX) - Daily/Hourly charts:

1530 is expected to be potential support on the daily chart, but with a good possibility of "slippage" to 1523-1520 or a bit lower. Measuring the height of the (dashed lines) "rectangular" hourly consolidation on the hourly chart and subtracting it from the lower line (at 1555) generates an objective to around 1515 in the Composite.

With a break of 1555, it immediately "becomes" an area of initial resistance on a rebound. Above 1555, next resistance and an area to trade again on the short side is in the 1580-1585 zone.

The Nasdaq 100 ($NDX) - Daily/Hourly charts:

The Nasdaq 100 (NDX) was down about 33 points in after hours trading - if this is an indication of the opening tomorrow, it puts the NDX down close to the low end of the hourly downtrend channel and at the lower envelope line (10% under the 21-day moving average) that indicates a "typical" area for the this index to bottom or at least slow its rate of decline.

If NDX gets down to around 1120 and stabilizes in this area, I favor buying for a short-term rebound. If over the coming days, no lower lows are seen and the market shows signs of stabilization, this may suggest a longer-term bullish play, looking for a move back up to the 1200 to 1245 area.

Leigh Stevens
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