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Market Wrap

Is this Round 10 for Bulls?

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10-22-2002                  High    Low     Volume Advance/Decl
DJIA     8450.16 - 88.08  8534.08 8376.15   1518 mln  1038/2198
NASDAQ   1292.80 - 16.87  1307.60 1280.66   1510 mln  1322/1904
S&P 100   452.59 -  3.65   455.20  447.96    totals   2360/4102
S&P 500   890.16 -  9.56   899.72  882.40
RUS 2000  362.66 -  5.97   368.63  362.49
DJ TRANS 2312.43 - 26.10  2354.99 2284.73
VIX        39.34 +  1.10    40.44   38.95
VIXN       53.61 +  1.27    54.41   50.98
Put/Call Ratio 0.78

Is this Round 10 for Bulls?
By John Seckinger

The Dow and the S&P 500 have set higher lows for eight consecutive daily sessions, while the 30-year bond has failed to take out a previous session's high since October 10th. Relative Strength in the Dow is currently at 58.98 on a daily basis, higher than when the blue chips were at 9077 on August 22nd. Furthermore, both contracts seem comfortable above their 50 DMA's and are beginning to eye the 200 DMA for the first time in quite awhile. Of course, there are some caveats that will be explained later.

After Texas Instruments (TXN) warned that revenue and profit for the current quarter will miss expectations due to decreased demand for chips used in personal computers, traders were certainly prepared for an early morning retreat. However, even as shares of TXN fell $3.12, or 18.22%, to 14.00 and hurt the overall Oil sector (XOI down 3.45%), the overall equity markets kept the recent bullish sentiment relatively intact. Other developments on traders' minds before the market opened included 59 companies issuing quarterly earnings. The results were as followed: 61% better than expectations, 24% in-line with estimates, and 15% were below forecasts. Let's spend a moment and look at a few notable names.

Taiwan Semiconductor (TSM) was one of the companies failing to meet analyst expectations, and as a result fell seven percent to 6.95. Even though TSM is not part of the Semiconductor Index (Sox), Tuesday's weakness coupled with Texas Instrument's miss clearly gave investors one more reason to book profits in semis after a solid run-up beginning on October 8th (209 to Monday's high of 283). Speaking of the Sox, this highly-watched index fell six percent, or 17.22 points, to 265 on moderate activity. However, Monday's low of 260 remained intact. Hmmm...Is this a pattern?

Other stocks making headlines included AT&T (T) beating earnings estimates but coming under pressure after the opening bell. Shares did manage to recover, rising from 12.05 to 13.24 before traders took profits during the last few minutes. Shares still closed higher by 0.52 at 13.05. Speaking of volatility, shares of McDonald's (MCD) announced in-line 3Q earnings and gapped higher (18.33 to 18.95). Also fortunate for bulls was the fact that MCD noted that it will continue to target EPS of $1.43 "or better" for all of 2002, excluding special charges. After the gap higher, shares traded almost vertical to 19.95. Since then, shares formed an aggressive bearish channel and closed at 18.90. Closing underneath its opening level may not be a good sign going forward. Note: This Dow component just missed its 50 DMA (exponential) by about six cents.

Other securities reaching the spot light included UPS, G, and BUD. United Parcel Service (UPS) fell three percent after lower- than-expected 3Q earnings and guidance that was underneath analysts' estimates. Shares of UPS settled at 62.26 and underneath both its 22 and 50 DMA's (62.61 and 62.71, respectively). Gillette also fell under both moving averages, losing a solid 5% to 29.90 after reporting in-line net income for its 3Q. Anheuser-Busch (BUD) lost ground as well, closing lower by 1.8% to 53.97 after Morgan Stanley downgraded shares to "equal-weight" from "overweight." It was interesting that shares of BUD managed to close 17 cents above its opening level and didn't even test its 22 DMA to the downside. Of course, it was just yesterday when shares hit a new all-time high. I don't want to over simplify things, but it does make sense for companies such as BUD to do well when the economy is falling apart. However, shares have managed to remain resilient as the major equity markets recovered. Interesting.

Speaking of the economy, there were no economic reports to digest on Tuesday. Tomorrow is light as well, with only the Fed's Beige Book due out. This report will hopefully outline economic conditions in the Fed's 12 districts. Moreover, it might give insight (possibly encrypt) into November 6th's FOMC Meeting. Economists currently expect no change in the fed funds rate on November 6th, and fed funds are now only 40% sure that the Fed will cut rates by 25 bps before year's end. Later this week, September durable goods orders, September new and existing home sales and the University of Michigan's consumer sentiment index are scheduled to be released.

Not only does the economic calendar look better over the few days, but I would not be surprised to see market activity increase as well. Tuesday's 88 point shaving in the Dow came on volume of 1.5 billion and down volume out surpassing up volume by a 2:1 margin. Decliners beat advancers 2:1 as well, while new lows outpaced new highs 89-17. This may not be something to write home about; however, bulls certainly are not letting profit-taking turn into short selling and long liquidation. Turning to the tech-laden Nasdaq, the 16.87 point loss came also on volume of 1.5 billion shares exchanging hands. Down volume beat up volume by an 8:7 margin, while decliners outnumbered advancers 19:13. New lows beat new highs by a score of 70-35. Checking the other major indices, the S&P 500 contract fell 9.5 points to 890, OEX lost 3.65 to 452.59, and the Dow Transports fell 26 points to close at 2,312.

What about the other markets that occasionally trade either in- step or inversely to equities? The dollar index (DX00Y) fell 0.17 percent to 108.04, gaining ground against the Yen and losing against the euro. Comments from Kuroda, Japan's vice finance minister for international affairs, that the Yen is declining from "excessive strength" handicapped the Yen as short players took over. I am glad we don't talk down our currency like that. As far as the euro is concerned, strength in the overseas currency seemed to be more technical in nature, as the EUR/USD spread fell to 0.97. The August 4th low of 0.9647 should be an objective for traders. Note: A weaker dollar should not be good for equities.

Also not good for equities are higher Gold prices. The XAU index rose a significant 5.79% on Tuesday to close at 63.36. This index was poised to fall under 59 and break a possible bullish intermediate trend; however, buyers clearly stepped in today and closed the index at its highest level since October 7th. The 22 DMA is above at 64.53. Other indices most likely pressuring stocks included the Utility Index (UTY) and Oil (XOI). The Utility Index did rise above its 22 DMA on Tuesday (234.4 versus and intra-day high of 237), but failed to attract buyers and ended up losing 2% to 229 and back below this moving average. The range I would watch in the UTY index is from 219 to 234. Turning to Oil, the 3.42% loss now has the index under both its 22 and 50 DMA (453 and 463, respectively) at 446; however, solid support should be found near 438.

So, what should have been good for equities, but wasn't on Tuesday? Yes, lower bond prices (read: higher yields). The 30- year bond (TYX.X) saw yields rise to 5.15% on Tuesday, recording its highest close since August 8th. Has the inverse relationship between bonds and stocks dissipated? I don't think so; however, a sharp sell-off in stocks coupled with only consolidation in bonds could make me think otherwise. Resistance on a yield basis? 5.24%. Support? Look for 5.1% to attract some bids, while a close back under 5% should have traders wondering if cash will flow en masse back into the fixed-income arena.

The futures market for bonds (December Bond, ticker: ZB02Z), which is quoted in price, showed another session of pit selling and concern over mortgage companies lifting their hedges (read: closing position, selling bonds) and capping any attempt of a rally. The Dec bond fell '15 ticks (Q-charts had the contract down '31, but I believe that is a bad quote) to 107'19 and closed lower for the eight consecutive session.

Ever since October 10th, I have been worried about a particular hedge fund liquidating a position that was entered in hopes of a rate cut by the ECB (which didn't happen). I am starting to think of another strategy: This same hedge fund is now selling bonds short in an attempt to offset the massive losses sustained over the last few weeks. As is usually the case, the bond market loves to trade directionally. Therefore, since it would take a ton of energy to turn things around and get prices back towards 113, why not maintain the pattern of lower prices. Until prices prove us wrong, least resistance remains lower and this should help intermediate-term equity bulls. What would change the picture? How above a move back above 109'13.

Time for an after-hours look. KLA-Tencor beat earnings by three cents and began to erase part of Tuesday's 10.2% collapse; however, the conference call did not go well (guided Dec EPS to 0.14 versus expectations of 0.24) and shares are currently at 28.90 and underneath Tuesday's close of 30.53. This will undoubtedly affect the Semiconductor Sector (Sox) during trading on Wednesday. Other after-market developments included Metro One (MTON) announcing that Sprint (PCS) will not sign a new contract with the company, as well as Abgenix beating earning estimates by six cents with a (0.39) report. Since Sprint represents roughly 32% of MTON's revenue, it should not be surprising that shares are lower in after hours. On Tuesday, MTON closed 5.34% lower at 9.03, and shares appear to be currently trading near 5.20 following the announcement. Seems hard to believe.

Turning to ABGX, shares closed at 6.54 on Tuesday and appear to be up fractionally after the better than expected results. Additionally, Computer Associates reported earnings of 0.04 and beat estimates for a rise in profits of 0.02. Revenues also increased by 5.3%. Shares closed on Tuesday at 12.10 and appear to be higher at 13.01 in after-hours activity. Overall, the December Nasdaq futures are lower by 8 points, or 0.82%. The S&P 500 futures contract is lower by 0.50 at 891.

Time for some illustrations. Beginning with a weekly chart of the Dow, it seems as though bears might begin to get confident and scare bulls into initiating positions. Why? There is a bearish trend line, 38.2% retracement from March's high to October's low, and the 22 weekly moving average. Before we sell the house and buy puts, let us look at a daily chart as well. Note: The red line comes in at 8605.

Chart of Dow Jones, Weekly

A daily chart shows a less bearish look, and actually used a 38.2% retracement as support. Furthermore, the 50% retracement at 8774 seems to correlate with many traders' thoughts when predicting resistance.

So, which chart do I put more weight in? Well, the weekly chart should have more psychological weight (8605), and if that level is penetrated it would make sense to turn to the daily and expect a move to 8774. Support should be harder to determine, and I would look at the daily chart for insight. 8400, the 22 and 50 DMA's, and then 8000.

Chart of Dow Jones, Daily

Of course, the bond market might have something to say about equity direction. As stated earlier, I would focus more on support than resistance levels.

Chart of the 30-year, Daily

Also noted earlier is the Gold Index, outperforming during trading on Tuesday and sending the index 5.79% higher and above a solid pivot area (62.96). I would definitely place the XAU index on the radar screen going forward.

Chart of Gold and Silver Sector (XAU), Daily

Good luck.

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