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Market Wrap

Hope Minus Worry Equals Stagnation

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     02-03-2004            High     Low     Volume Advance/Decline
DJIA    10505.18 +  6.00 10528.96 10457.11 1.82 bln   1414/1427
NASDAQ   2066.21 +  3.06  2071.44  2057.33 1.83 bln   1404/1635
S&P 100   563.36 +  0.60   563.69   560.89   Totals   2818/3062
S&P 500  1136.03 +  0.77  1137.44  1131.33
RUS 2000  579.15 -  1.39   581.19   578.29
DJ TRANS 2851.39 - 16.63  2880.30  2851.03
VIX        17.34 +  0.23    17.78    17.17
VXO        17.06 +  0.19    17.72    16.92
VXN        26.30 +  0.49    26.31    25.66
Total Volume 4,033M
Total UpVol  1,644M
Total DnVol  2,249M
52wk Highs     442
52wk Lows       13
TRIN          1.34
PUT/CALL      0.70

Hope Minus Worry Equals Stagnation
By Linda Piazza

Traders today could easily identify the hopes and worries that affected markets, but had more difficulty predicting which would most fan market behavior. By the end of the day, the two revealed themselves to be equally matched, with markets stagnating near Monday's closing levels in a boring session that seemed to go on and on and on.

The Dow closed up 6 points, the Nasdaq 3.06, and the SPX 0.77. Adv:dec ratios stood at 17:16 for the NYSE-traded issues and 15:17 for the Nasdaq-traded issues, with down volume ahead of up volume on both indices. A high TRIN persisted all day, indicating selling pressure, but there was no follow-through on that pressure except in specific sectors. Advancing sectors included the SOX, gaining 0.49 percent; the Natural Gas Index, gaining 0.51 percent; the Utility Index; gaining 0.57 percent; the Pharmaceutical Index, gaining 0.70 percent; and the Dow Jones Home Construction Index, climbing 1.57 percent. Declining sectors included the Oil Service Sector Index, falling 1.20 percent; the Morgan Stanley Healthcare Index, falling 1.99 percent; and the Airline Index, declining a steeper 2.92 percent. Autos fell as January sales reports trickled in. Ford (F) reported a 5 percent decline in sales from year-ago level, with the decline in line with expectations, according to some. GM reported that January sales fell 2 percent, with expectations having been for an increase in sales. Ford fell 1.65 percent on strong volume and GM declined 1.72 percent on almost double average daily volume.

Where prompted the hope today? Hope arose from the CSCO earnings due after the bell, with that hope fanned by some CSCO suppliers and competitors having reported good news during this earning season. With memories of other post-CSCO-earnings rallies, those hopes burned bright. After the bell, CSCO reported Q2 net sales of $5.4 billion against expectations of $5.2-5.3, depending on the source. Headlines announce that the company expects Q3 sales of $5.45-5.56 billion. CSCO reported Q2 earnings per share of $0.18 GAAP, with expectations being for $0.17. As Jonathan Levinson pointed out on the Market Monitor after hours, however, that $0.18 was before an accounting charge. CNBC trumpeted CEO John Chamber's statement that it was "clear that the global economy is improving." However, CNBC commentators also mentioned FDRY's pummeling the day after it reported in-line expectations, with FDRY considered a lesser competitor of CSCO's. At the time of this writing, CSCO traded at $25.17, down $1.24 from the 4:00 close, but be careful of trusting what you see in after-hours trading periods. Analysts will be paying particular attention to margins, for example, and tomorrow morning should see a slew of statements, either negative or positive, from those analysts. Cramer was already characterizing Chambers' statements as more cautious than Juniper's CEO's, and if that attitude carries through to other market watchers, CSCO may indeed trade lower.

Tuesday's worries proved equally easy to identify. Concerns about the budget-deficit, the dollar's weakness ahead of this week's G7 meeting in Florida, the discovery of a ricin-laced envelope in a U.S. Senate office, the timing of rate hikes and their likely impact on interest-rate-sensitive sectors, and sector downgrades all worked to dampen those brightly burning hopes. Bear Stearns downgraded the U.S. machinery sector due to the specter of higher interest rates and the reality of a slowdown in new orders in January, with Caterpillar (CAT) and Honeywell (HON) declining 0.58 percent and 1.33 percent, respectively. Goldman Sachs downgraded the semiconductor sector to a neutral rating from its previous attractive rating, and also downgraded some semiconductor companies on valuation concerns. Among Applied Materials (AMAT), KLA-Tencor (KLAC) and Novellus Systems (NVLS), all subjects of the GS downgrade, only NVLS ended lower on the day, however, as the SOX recouped some of its recent losses.

Other worries cropped up during the day. The Fed's Bank of Chicago President Michael Moskow spoke before a Chamber of Commerce in South Bend, Indiana, reportedly saying that U.S. economic slack might continue for some time and that the job market remained a key area of weakness. At 10:00, the release of the Challenger report revealed that U.S. layoff announcements were up 26 percent in January. Challenger says that January always sees layoffs accelerate, a point Jim Brown has made in his commentaries, too, but this doesn't engender much faith in a stronger jobs number on Friday. Weakness in SOHU, a Chinese Internet-related stock, after its earnings report may have hit AMZN, too, dropping the company's stock more than 3 percent and the INX, the CBOE Internet Index, 1.60 percent.

The worries couldn't entirely dampen the CSCO-inflamed hopes, though. The day might have been much different without those hopes. During the overnight session, the Nikkei set the tone for a negative open with an early heart-stopping plunge almost 300 points from the day's high. Plummeting from 10,800 toward 10,500 support in early trading, the Nikkei managed to claw its way back to a 10,641.92 close, but still closed lower by 134.81 points or 1.25 percent. Various forces led to that decline, including worries over the dollar's further slippage against the yen, reports of new deaths due to avian flu, and the typical February pattern that sees Japanese banks sell some of their stock holdings. News of the ricin-laced envelope found in a U.S. Senate office began to circulate during that overnight session, too.

European markets also helped set the stage for a lower open, with the FTSE 100 down 0.18 percent, the CAC 40 down 0.83 percent, and the DAX down 0.95 percent as the U.S. markets opened. When our markets steadied, so did European markets. All erased some of those early losses, but only the FTSE closed in positive territory. Not being a tech-heavy or export-reliant index, the FTSE 100 outperformed the others in afternoon trade, climbing off its midday low and closing up 9.20 points or 0.21 percent, but just under 4400 resistance. The CAC 40 saw a late-day climb that erased some of its losses, but it still closed down 0.73 percent and below the day's two resistance levels at 3640 and 3660. The DAX closed down 0.35 percent, but also closed below the day's resistance, at 4060.

Before the bell-earnings included reports from Colgate-Palmolive (CL), Spring FON (FON) and Sprint PCS (PCS), with each beating expectations by 2 cents, according to one report, but those reports didn't do much to prop up the markets. CL closed higher by 3 percent, FON dropped 0.28 percent, and PCS dropped 1.33 percent, each moving on big volume.

That's what happened today. What's likely to happen tomorrow and the rest of the week? If GM and CSCO after-hours trading can be trusted, we could see a down day tomorrow, with both trading lower as this report was prepared. GM announced this afternoon that it had received a Wells notice from the SEC, with its CEO and CFO reportedly now expected to face civil charges due to possible problems with sales practices and disclosures. However, not putting much faith in what I see after-hours, I think it remains possible that many indices may remain in a holding pattern ahead of Friday's unemployment and nonfarm payrolls numbers. Let's take a look at several charts to see what would have to occur to change that holding pattern. Jeff Bailey will be covering the indices in more detail in his report, so this will be an overview only, and one that's complicated by the fact that my charting service was not delivering daily charts as this report was prepared. I've switched to 720-minute ones, but the charting service balked at following those back past October, too. I've removed the moving averages, as they're erroneous.

The Dow rises off last week's low in a pattern that resembles a bear-flag climb, with that bear-flag climb possibly forming the right shoulder of a H&S formation. Even if that formation is valid and is eventually confirmed, the completion of the pattern might require a day or two for prices to round over into that right shoulder.

Annotated Daily Chart for the Dow:

Note the confluence of the H&S neckline and top-line support from the Dow's former regression channel, however. Bears will need to exert strong downward pressure to break through that converging support. RSI and stochastics already reveal a propensity to turn up and the MACD histogram has stopped declining. This remains a bearish formation of a type that was once considered reliable, but lingering bullish fervor could keep this one from confirming, just as that bullishness has kept others from confirming in recent months and weeks.

However, take a look at the TRAN, the Dow's sister index. Was that a H&S that fell to its target straight from the head without ever forming a right shoulder?

Annotated Daily Chart for the TRAN:

The TRAN sometimes leads the Dow, so that the Dow's possible H&S should perhaps be given some credence this time. Before bears start salivating, however, the Dow's failure so far to confirm the TRAN's plummet with a plummet of its own could be seen by some as bullish divergence between the sister indices. If the Dow continues to hold up for another week or so, relief may send the Dow higher again as the H&S formation is rejected.

Much may depend on the reaction to CSCO's earnings tomorrow. In Japan last night, some credited a negative outlook on Olympus with a snowball effect, sending all tech-related stocks lower, and the Dow does also include some tech stocks. In addition, many tech-related indices perch precariously on the respective regression-channel support. Recent declines have been ugly, but they're always ugly as the tech-related indices have fallen to the bottom of their respective regression channels, and somehow the bounce always occurs.

Annotated Daily Chart for the NDX:

Since the NDX has always bounced from the bottom of this channel, the presumption remains that it will this time, too. However, I'm watching for a fall beneath last week's NDX low of 1474.13 to signal that the NDX may be beginning to break out of its regression channel. As is evident from the minimal data the charting service reveals tonight, the NDX does sometimes violate that channel before climbing again. Support lies at 1460 and again, stronger, at 1450, so unless momentum gets the NDX moving to the downside, tech bulls will soon gain confidence and bid this up again.

It's been a while since I last wrote a wrap. I had planned to include a weekly OEX chart from that wrap complete with the original annotations, but the snafu in my charting service doesn't allow me to do that. Those original annotations had included the comment that if the OEX could climb above 523.50, it would see no real resistance again until 550. I'd commented that at the time, I wasn't seeing anything particularly bearish in the OEX action, in that it had climbed above 487, consolidated, and then begun another move higher. I still am not looking for a market collapse, but I do worry about the speed at which the SPX and OEX zoomed higher in December. Those gains need to be consolidated and new support confirmed before traders feel confident of buying into the market. A prolonged period of consolidation can perform this function, but so can a pullback. The TRAN has shown us what can happen to the downside, and December's climb has shown us what happens when bearish hopes are dashed and bulls gain the power. Trade carefully, using stops appropriate for your account management practices. Expect to be whipsawed out of some trades.

Tomorrow morning sees the release of December's factory orders and January's ISM services number, with both released at 10:00. Because the GDP number has already given us a glimpse of factory orders, the number doesn't usually prove to be a market-moving number. Expectations are for a gain of 0.3 percent, although estimates range all the way up to a 1.5 percent gain. Factory orders were down 1.4 percent in November. January's ISM services or non-manufacturing number is estimated at 60 percent, although estimates range down to 59 percent, with any number over 50 representing an expansion. December's number was 58 percent. Reaction to CSCO earnings and jitters over the upcoming G7 meeting and Friday's employment numbers will probably outweigh any reaction seen due to these numbers, however.

Linda Piazza


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