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Market Wrap

No Fireworks Prior to the Fourth

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07-03-2002                High     Low     Volume     Adv/Decl
DJIA     9054.97 + 47.22  9070.89  8897.54 1540 mln   1215/1903
NASDAQ   1380.17 + 22.35  1380.38  1336.06 2629 mln   1492/1910
S&P 100   474.41 +  4.30   474.60   463.65   totals   2707/3813
S&P 500   953.99 +  5.90   954.30   934.87
RUS 2000  429.47 -  3.37   432.84   429.47
DJ TRANS 2596.76 - 23.12  2639.12  2568.18
VIX        33.37 -  0.32    35.35    32.89
VIXN       60.08 +  0.51    62.25    59.61
Put/Call Ratio      0.95

No Fireworks Prior to the Fourth

There may not be a lot of travelers flying this Fourth of July but the markets took a round trip prior to the Independence Day holiday. The morning hours were painful to watch as all three major indices traded significantly lower. Yet after hitting new relative lows the selling abated as traders began to "get flat" or cover their short positions prior to the holiday closure. This bounce began around noon and continued into the afternoon for the DJIA, COMPX and the SPX allowing all three to close positive.

Volume was decent for a pre-holiday trading session. The NYSE saw over 1.5 billion shares traded and the NASDAQ reported 2.6 billion shares trading with 1B of that coming from WorldCom (WCOME). Market breadth remained negative with advancing issues of 1215 and 52 stocks hitting news highs falling behind 1903 decliners and 188 new lows on the NYSE. The NASDAQ turned in similar numbers with 1492 advancers and 86 new highs to 1910 decliners and 247 new lows.

The afternoon bounce was impressive as the DJIA gained 150 points of the lows for the day lead by shares Home Depot (HD) who turned in a 9% gain to close at $36.85. Fellow retailer Wal-mart (WMT) also added to the Dow's positive moves with a 3% gain of its own. Short-covering in the tech sector had shares of INTC gaining 7% and IBM adding 2.8%. Traders looking at an intraday chart (try the 5-minute interval) couldn't help but notice the multiple bounces at the 8900 level for the DJIA. While the close over 9000 is encouraging the trend is still down and we pray that an uneventful weekend will allow for the relief rally everyone expects.

Chart of the Dow Jones Industrial Average

The NASDAQ's bounce was worth a 3% move off its low for the session. As outlined in the OI wrap last night, the tech-heavy index is below its September 2001 intraday lows and the average is trading at levels not seen in years. The bounce off 1336 was near the bottom of its current channel and we're not expecting much change in direction.

Chart of the Nasdaq Composite

The S&P 500 has not offered much hope for investors either. The broad based index fell to new lows and fell below its September 2001 intraday lows before reversing course due to the afternoon short-covering. While we expect a rebound if the holiday weekend escapes any terrorist events we question if it can break through the top of its channel.

Chart of the S&P 500

Still Ignoring Economics?

It still appears that the stock markets are ignoring the positive (but slow) data that is coming from the economy. The ISM June services index did slide from 60.1 in May to 57.2 in June but the U.S. is still seeing expansion in this sector. Plus factory orders rose in May by 0.7%, which beat expectations of a gain for 0.6%. The Labor Department published the Jobless claims this morning and first-time claims fell by 11,000 to 382,000 from the recently revised (upward) of 393,000 for last week. This economic indicator continues to hover below the 400,000 level, which many see as the benchmark for additional economic weakness. The big report on Friday will be the employment report for June. Estimates are for an increase of about 80,000 new jobs but economists are also anticipating a small bump in the national jobless rate from 5.8% to 5.9%. As of May there were 8.35 million Americans unemployed out of the 142.7 million estimated Americans in the workforce.

Overseas Divergence

European markets continued to fall in tandem with the U.S. declines on Monday and Tuesday this week. The London FTSE 100 dropped 81 points or 1.8% to 4466 while the German Xetra Dax skipped down 0.9 percent to 4156. Likewise the French CAC 40 shaved off 1.6% to 3674 in thanks to additional concerns over Vivendi and possible accounting anomalies. Also suffering from rumors of potential accounting mishaps was British mobile-phone powerhouse Vodafone (VOD), which fell almost 5% on the rumors. Lest you think the U.S. is the only market getting rocked by debt downgrades, shares of Alcatel, Europe's largest telecom equipment maker, was beaten for a 15% loss as investors fear the company's debt will be moved to junk bond status after Alcatel's profit warning last month.

U.S. Investors aren't seeing any help from their European counterparts but the Asian markets were up on Wednesday. Taiwan, Singapore and Japan produced the biggest gains with Japan's NIKKEI running up 1.8% or almost 190 points to 10,812. Market observers noted that cyclical stocks and banking issues produced the majority of gains since the Japanese government is considering the use of public funds to help out their troubled banking sector still burdened by non-performing loans.

Bounce in the Russell?

The Russell 2000 index is looking pretty oversold and the oscillators have all gone from bad to worse. I'd be expecting a decent bounce or round of short-covering on Friday or Monday since it didn't really show up this afternoon.

Chart of the RUT

Getting Softer?

A wave of software companies released warnings and lowered guidance after a lackluster month in June. AZPN was cut in half after warning for a quarterly loss on weaker revenues. Previous Internet-darling KANA was hit for a 39% loss after stating it would post a Q2 loss of $30M and that revenues would be significantly below analysts estimates. SBYN fell almost 17% with news it would turn in a Q2 loss instead of a previously estimated profit. MANU lost 15% on news that previous employees had plead guilty to insider trading. It's been a tough week for software stocks but one was able to buck the trend. Surprisingly, share of SY gained 8% after warning it would miss revenue forecasts. Unfortunately, the trend in the GSO software index remains stuck in its descending channel and below its September 2001 lows.

Chart of the GSO.X

Covering the Chips

The chip sector rebounded strongly despite a second earnings warning in two weeks by chip-maker AMD. The rebound was lead by shares of rival chip-maker Intel, who rallied for a 7% gain after hitting lows not seen since April of 1997. The SOX.X bounced off its September 2001 lows of 343 and added 4.3% by the close. This entire move looks like short covering! Unfortunately for AMD the company reported that its Q2 sales will fall closer to $600 million compared to the guidance given two weeks ago with a range of $620 to $700 million. Earlier this year, AMD had estimated revenues would land between $820 to $900 million for the second quarter. Management cited weak computer sales, as if we should be surprised, and shares fell 4.2%. Earnings are expected on July 17th. Believe it or not, Prudential tried to defend the stock claiming this was a buying opportunity.

Chart of the SOX.X

Biotech Bounce?

The Biotech index was hammered again this morning with the BTK.X hitting levels not seen since late 1999. The group did manage a decent afternoon bounce but this was probably due to short covering (again). The group was hit with more bad news when European regulators claimed that NaPro BioTherapeutics' (NPRO) patent for its generic formula of its cancer drug paclitaxel was invalid. NPRO said it would appeal but admitted the ruling was bad news and "may result in additional competitive marketing pressure in Europe" for this product. No kidding, please pass the Zantac. The sector was also hurt by a downgrade of Genentech (DNA) by Deutsche Securities. The broker said they were concerned about valuations and possible risks to DNA's Phase III trials for a breast cancer drug. This sent shares of DNA down sharply and below important support at the $30 level but the stock did rally off its lows.

Chart of the BTK.X

Looking Ahead

Friday could be a volatile session since most of the nation and most of the professional traders will be on vacation. Volume is expected to be extremely light, especially with the early close for the equity markets at 1:00 PM EST. Unfortunately, this leaves the markets vulnerable to any program trading that will take place and we could see any moves exaggerated by the lack of human activity. Of course there is also the strong possibility the markets don't do anything and merely idle while we wait for Monday and the beginning of earnings season, which actually begins to pick up speed on Wednesday, July 10th.

All bets are off if a terrorist event does occur and we could see traders showing up on Friday to protect positions assuming the markets are allowed to open.

The best bet will be to wait until Monday. If the weekend passes uneventful then the markets will likely rally strongly off the bottom of their current channels and we could get another two-day run. It's breaking through the top of those channels that we need to watch for.

I've mentioned it before but if you haven't checked out the Market Monitor on OptionInvestor.com I would encourage you to do so. Everyday we continue to receive glowing emails about the contributions and observations of the Market Monitor team. Even if you are not an intraday trader or prone to play index options it's still a great window on the markets. Join the MM team this Monday as Friday's session apt to be slow and you'll probably have more fun manning your grill than hovering over a PC.

Speaking of time off, this independence day I would personally encourage you to share your thanks with the policemen, fire fighters, and armed-forces who go to work everyday protecting our lives, our homes and our freedoms.

James

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