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01-15-2003                  High    Low     Volume Advance/Decl
DJIA     8723.18 - 119.44  8854.61 8702.14   1669 mln  447/438
NASDAQ   1438.80 -  22.19  1463.99 1435.29   1692 mln  1184/1236
S&P 100   466.88 -   7.43   475.09  466.44   totals    1631/1674
S&P 500   918.22 -  13.44   932.59  916.70
RUS 2000  395.53 -  2.92   398.45  393.89
DJ TRANS 2360.51  - 22.21  2388.38 2353.90
VIX        27.86  +  1.31    28.44   27.31
VIXN       43.45  +  1.53    44.87   42.85

Put/Call Ratio .89

By Steve Price

The warm and fuzzy vibes from Intel's earnings and revenue surprise last night didn't last long, as traders focused instead on the company's capital spending projections and drove the market lower. Intel said its cap-ex budget would be between $3.5 billion and $3.9 billion and that it would remain flexible. That number was already below expectations of $4.0 billion and considering that Intel lowered its budget twice during 2002, flexibility could lead to further reductions. The company also made cautious statements about a recovery in the coming year. "This year will be driven by the pace of the recovery in the industry and the economy," said Chief Financial Officer Andy Bryant. Those comments don't exactly resonate with confidence for a recovery.

As both a Dow and NASDAQ stock Intel led both indices lower. The news came just as the Dow and SPX had achieved new breakthrough levels on a closing basis on Tuesday's closing rally. The Dow had been flirting with the 8800 level for six out of the last seven trading sessions, but unable to hold a close above that mark. Similar action in the SPX was found at the 930 level. Tuesday's close took both indices above those resistance levels and pointed to a continued rally that had finally broken the barrier. Then suddenly the slow, methodical series of higher intraday highs and higher lows that had formed during the consolidation of the last few sessions did a U-turn and we rolled over hard, giving bulls a scare.

The Intel fallout hit the chip equipment makers the hardest, driving the Semiconductor Index (SOX) down 3.5%. The SOX has been climbing for the better part of the year, adding 20% from its December 31 close to the high of 348.45 on 1/13. There was a pullback with the broader markets last Wednesday, but the index bounced strong off its 50-dma. We got another test of that support line today, with the 50-dma now sitting at 323.67, as the SOX traded as low as 322.22, before finishing the day at 324.94. A breakdown of that 50-dma could signal further selling in the sector. The SOX has been a reliable market indicator for the last year, reflecting changing patterns in technology spending. With earnings results due out from Microsoft and IBM on Thursday, we will likely see additional swings in the chip stocks as demand for PCs and business technology becomes even clearer. However, if Intel is cutting capital expenditures by as much as 25% from the $4.7 billion it spent in 2002, it is hard to imagine the chip equipment stocks getting much better news from IBM.

Chart of the SOX

The rollovers on the Intel news in the major indices happen to coincide with the 200-dmas, either simple or exponential, in the Dow, OEX, NDX and Nasdaq Composite. Because we got a bearish news release at the same time we tested these averages, traders are left wondering if a rollover was already in the cards, or if we would have continued upward through those 200-dmas if not for the Intel news. We had shown a gain of 6% in the Dow, 6% in the SPX, 6.7% in the OEX, 11% in the NDX and 9% in the COMP for the first two weeks of the year. Multiply those gains by 26 and the pace is clearly unsustainable. At some point we were likely to experience a pullback after the number of investors making their 2003 fund contributions eventually tailed off. The 200-dmas, which have held as strong resistance in the past, seem a logical point for that pullback. Today's afternoon bounce in the Dow did fail to hold the support level of the last couple of days at 8746, eventually closing at 8723. The question now will be whether this failure is the first step down in a reversal, or simply a pullback at a logical level, before heading higher.

Chart of the Dow

Chart of the COMP

Chart of the OEX

Another factor weighing on the markets this morning was a warning from the number one U.S. chemical company Dupont that its fourth quarter earnings would come in below estimates. It blamed to shortfall on weak demand and higher energy costs. . According to Standard & Poor's credit analyst Kyle Loughlin, "Rising raw materials will present pretty stiff headwinds for chemicals companies until they can try to pass those additional costs to customers." However, with the current poor economic situation for industrial customers, right now that really isn't possible The rising natural gas and oil prices as a result of the Iraqi situation, Venezuelan general strike and previous weather disruptions are apparently making their way through the economy and seem to justify the inverse correlation between the price of oil and the movement in equity markets. I highlighted the correlation between the two a few weeks ago and have updated those charts to reflect to continuing relationship.

Chart of the Dow and Oil Futures

This morning we got a report from the National Association of Business Economists, which is made up mostly of in house economists from corporations and banks. That report said that businesses will remain very cautious with their spending and hiring in 2003. "Weak profit momentum, continued absence of price pressures and a cloudy macroeconomic outlook are the main culprits," said NABE president Tim O'Neill. The report also showed capital spending dropping for the seventh consecutive quarter at the end of 2002. That is the longest stretch of declines since the survey was begun 21 years ago. However, there were also some positives in the report, including the expectation that finance and service firms should see increased spending and more than 50% of the respondents said they planned to update or replace equipment. The biggest factor identified in possibly affecting financial results this year was a prolonged war in Iraq.

The Beige Book report also came out this afternoon and most of the comments were not pretty. The report said reports from the twelve Federal Reserve Districts showed subdued growth in economic activity from November to January, with little change in overall conditions from the last report. Reports on consumer spending were consistently weak and holiday sales came in at or below last year's levels. Considering we were still recovering from 9/11 last year, the lack of improvement seems particularly gloomy. I mentioned on Monday that I thought the discounting would have a pronounced effect this year, due to a later Thanksgiving (thus moving a higher percentage of sales closer to Christmas) and high unemployment. That appears to be the case, as the report highlighted substantial discounting on holiday retail sales in all districts. Also disturbing, in light of yesterday's retail data that showed auto sales as one of the few bright spots, were comments in the report that auto sale showed signs of weakening. The Beige Book also said most districts reported little or no increase in capital spending by manufacturers. Residential construction and home sales were still strong, but showed signs of cooling. The recent surge in the markets will have a tough time finding support in the economic data, but that isn't exactly new information. In fact, we got rallies following last week's poor jobs data and a bounce after selling off on poor retail data. If we are back in the "buy the bad news" swing, then maybe today's pullback was only that - a pullback before the next higher leg..

However, after the bell, we saw the Intel phenomenon repeat itself with Yahoo. The company reported after the bell that it beat profit estimates by $0.02 per share ($0.08 v. $0.06) and beat revenue estimates by $7 million. This was a vast improvement over last year in the same quarter, when the company lost $0.02 per share. The news was apparently not enough to keep traders happy and the stock dropped over a dollar following the results. It did bounce some, but not enough to get back above the $19 mark, after finishing the regular trading session at $19.58.

Apple also released results after the bell. The company met expectations for a loss of $0.02 per share, but predicted its 2003 second-quarter revenue to be "relatively flat" with the $1.47 billion it saw in the last quarter, which ended December 28. It also said it expects a small profit in the next quarter. After an initial drop, AAPL rebounded close to unchanged.

Traders can look for a move back below Dow 8689, along with a breakdown of the 50-dma in the SOX, as evidence that a pull back may continue for some time. That Dow level was our bounce point Friday following the poor payrolls report and the 50-dma provided support in the SOX on the last significant downside test. However, with the IBM and Microsoft earnings due out after the bell on Thursday, it is hard to predict how the markets will react. Traders may be better off waiting for a clearer picture to develop after those releases. If we do snap back from today's losses and cross over the 200-dmas, then a significant barrier will be removed in case of a positive market reaction and The December 2 highs in the broader indices should be the next step.

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