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Market Wrap

The Apple of Their Eyes

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Apple and its forward-thinking Chief Executive Steve Jobs have been the apples of investors' eyes over the last several months. How quickly an apple can turn rotten, however, as APPL investors dumped the stock in after-hours trading yesterday, as reported by Jim Brown in last night's Wrap. During pre-market trading this morning, AAPL remained sharply lower, revealing how vulnerable markets were to declines once the shine had been dulled.

Pre-open earnings reports from HDI, AIT, FAST, HMT, MEG, MTG and MON were perceived as strong reports, but they couldn't ameliorate the disappointment. Neither could other developments, detailed below. After a short-lived attempt to bounce, markets rolled over and selling accelerated.

Annotated Daily Chart of the SPX:

Despite the damage done to the markets, AAPL managed to hold to its 50-sma, producing a long-legged doji for the day. That's a potential reversal signal but one that needs confirmation by a strong gain tomorrow, and preferably a gain that sees a gap higher in the morning.

Annotated Daily Chart of AAPL:

Anticipation that AAPL would unveil a video version of its iPod helped AAPL hold to that potential support. The new model was unveiled, a 30-gigabyte version that will be priced at $299 and a 60-gigabyte version priced at $399. Last week, one analyst had commented that a price above $299 might harm the outlook for rapid sales, a warning that AAPL seems to have heeded. That analyst posited that the first video content was likely to be music videos and video podcasts with movies possibly being introduced at a later time. In addition, Jobs introduced an iMac with remote-control access to music, movies and photos.


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Many had also considered Intel (INTC) lining up to be the next apple in their eyes as it sank into levels some considered attractive. During the pre-market period, Prudential Equity Group took the shine off that apple, too, along with dirtying up the whole semiconductor sector. Before the market opened, the firm downgraded INTC to an underweight rating from its previous hold rating and cut its price target to $20 from its previous $31. With INTC at $23.42 as of yesterday's close, that $31 target was long gone, but better late than never, some might propose. Despite already steep losses, there appeared to be room for more, and INTC dropped in pre-market trading on Instinet and then fell to a $22.79 low for the day, before bouncing and closing at $23.24, down 11.72 percent. Like AAPL, however, INTC was to produce a potential reversal signal, a candle that sprang up from that low of the day, leaving a long tail behind. That reversal signal also needs confirmation tomorrow.

Prudential cut the semiconductor industry's ratings to an unfavorable rating from its former neutral rating, and the SOX was to lose 0.39 percent.

Annotated Daily Chart of the SOX:

The RUT was an early decliner, too, dropping straight through the 50 percent retracement of its rally off the spring low, straight to the 61.8 percent level and almost to the weekly 72-ema. While the RUT also produced a spring on its daily chart, its daily candle was not a convincing potential reversal signal. Yet the weekly chart suggests that declines might soon slow, at least temporarily.

Annotated Weekly Chart of the RUT:

Like the RUT's bounce, the Nasdaq's tepid bounce was not particularly convincing.

Annotated Daily Chart of the Nasdaq:

Pre-market movers other than Nasdaq stocks INTC and AAPL had included Advanced Micro Devices (AMD), dropping after its earnings and revenue beat expectations, falling perhaps due to valuation concerns according to one source. AMD was to close 12.50 percent lower. Harley-Davidson jumped after Tuesday's after-the-close earnings report, and the stock closed 2.85 percent higher. Deutsche Bank upgraded GM to a hold rating from its previous sell rating, and GM climbed in pre-market trading, closing higher by 1.05 percent. While Deutsche Bank mentioned several already-known pressures on GM, the firm believed the bad news was already mostly priced into the stock.

Far from being the apple in investors' eyes lately, Microsoft (MSFT) was the subject of speculation in a Wall Street Journal article. Many thought that MSFT and Yahoo (YHOO) would announce the capability of their instant messenger services to communicate directly with each other, perhaps polishing up MSFT's outlook in investors' eyes. Although that announcement was made Wednesday morning, MSFT dropped 0.45 percent, and YHOO, 0.49 percent. The new service will support computer-to-computer Net phone calls, and will be launched in the second quarter of 2006. Reporters questioned whether a partnership with AOL had been considered and whether the new IM service would interoperate with Google's (GOOG) Google Talk. A spokesperson said that combining two IM communities had proven difficult and adding AOL would have intensified those difficulties, and further suggested that Google founders use the MSN/YHOO new service.

Pfizer (PFE) also did its part to add polish, at least to the Dow, leading the healthcare sector higher in earliest trading after the U.K.'s High Court of Justice ruled in its favor on one patent on Lipitor. The court said that generics could not compete until November 2011. PFE closed higher by 2.22 percent. Although it couldn't provide enough polish to close the Dow higher, the Dow did bounce off a potential support level pegged in last Wednesday's Wrap.

Annotated Daily Chart of the Dow:

It was going to take a lot to polish the reputation of Refco Inc.'s (RFX) chief executive Phillip Bennett after the WSJ speculated that he might have hidden the fact that he owes Refco hundreds of millions of dollars. The article proposed that he had used his control of an investment firm to pay a hedge fund in New Jersey to help him hide the fact that he owed that money. Later CNBC reports said that a third company might also be involved. Refco reported yesterday that Bennett had been put on leave and the money had been repaid. By early afternoon, reports surfaced that he had been charged with securities fraud. A research note by Fox-Pitt Kelton noted that Goldman Sachs might have legal exposure to the Refco case, perhaps as high as $208 million, and GS dropped 1.9 percent. The XBD dropped 2.3 percent.

FOMC Chairman Alan Greenspan did his best to polish up sentiment in a Wednesday morning speech before the National Italian American Foundation. Greenspan reiterated some thoughts from a speech given in late September, saying that the U.S. economy was flexible and could recover from stresses that might have caused recessions in previous periods. He pointed to the stability of the economy in the face of steep rises for oil and natural gas as one example of the economy's flexibility. Greenspan was only one of a number of FOMC members scheduled to speak throughout the day, through Governor Mark Olson's address at 3:45 ET in Vancouver. Olson was to comment that the industrial sector was beginning to recover, among comments on the need for Congress to address the budget deficit, perhaps by the adoption of new rules.

Like a consumer disdaining the wax put on grocery-store apples to make them shine, the Department of Energy was trying to take the shine from Greenspan's polishing act in the early morning period. Ahead of the natural-gas inventories release later in the week, the Department of Energy was reporting that U.S. households should expect a 48 percent increase in natural gas bills, with heating bills to rise 5 percent and propane heating bills to rise 30 percent. Although the crude inventories release had been delayed until Thursday because of the government holiday on Monday, crude muddied up those shiny apples, too, rising overnight and then climbing straight up into the resistance near $64.00. It paused there but closed at a one-week high. The energy services sector still remained the worse-performing sector today according to one source, with refiners still reeling.

The Mortgage Bankers Association shined up its report, too, noting for at least the second week in a row that its figures were steady. It released mortgage applications for the week ending September 30 at 7:00 EST. The Market Composite Index dropped 1.1 percent on a seasonally adjusted basis and 1.2 percent on an unadjusted basis, 1.8 percent below the year-ago level. This number measures mortgage loan application volume. The Purchase Index fell a seasonally adjusted 1.9 percent. The Conventional Index fell 1.8 percent but the Government Index climbed a strong 11.4 percent. Refi's increased by 0.1 percent, climbing to 44.5 percent of total applications. AMR's climbed to 29.8 percent of total applications. The average interest rate for a 30-year fixed-rate mortgage climbed to 5.94 percent from 5.85 percent of the preceding week. Points increased, too. The MBA noted that the spread between the interest rate for the 30-year fixed-rate mortgages and one-year ARM's was the lowest in more than four years.

Somewhat tied to the health of the housing industry is the health of retailers such as Lowe's Companies, Inc. and Bed Bath & Beyond. Tuesday, Credit Suisse First Boston cut its outlook on LOW to a neutral rating from its previous outperform and trimmed its price target to $66.00 from its previous $73.00. CSFB mentioned higher oil and gas prices, as well as other inflationary pressures. It also cut BBBY's outlook to a neutral one. LOW nevertheless managed a 0.62 percent climb, although BBBY dropped 2.38 percent and sector peer Home Deport (HD) fell 0.28 percent.

While the shine comes off some companies, brokers were digging into the bottom of the apple barrel and finding some apples that they deem ready for polishing. Before the open, Deutsche Bank upgraded Goodyear Tire & Rubber Co. (GT), Lear Corp. (LEA) and American Axle (AXL) on valuation reasons, and Johnson Controls, Inc. (JCI) at least in part due to belief that 2006 and 2007 earnings will be strong. GT fell 0.15 percent, and LEA, 1.01 percent. AXL climbed 0.66 percent, and JCI, a heftier 4.51 percent.

After-hours developments included speculation about an unexplained drop of nearly 13 percent in former apple-in-investors'-eyes company, Krispy Kreme (KKD). The company has not released any information that would clarify the drop as of the time this report was prepared. Systems distributor and storage products company Bell Microproducts (BELM) fell after warning that it would likely not meet analysts' forecasts for the third quarter. It expected earnings of 7-9 cents per share and revenue of $760 million, a shortfall from analysts' expectations of 16 cps and revenue of $832 million. Lam Research (LRCX) was climbing in after-hours trading after beating expectations for its earnings but disappointing on sales. Net income dropped to 35 cents per share from the year-ago 64 cents per share while revenue dropped to $320.9 million. Expectations had been for profit of 30 cps against revenue of $325 million. Supplier of thin-film disks Komag (KOMG) and Nabi Biopharmaceuticals (NABI) both climbed strongly in after-hours trading, with KOMB guiding earnings expectations higher and NABI announcing positive results on a study for its StaphVAC, a staphylococcus vaccine.

Earnings expected tomorrow include such diverse companies as Fairchild Semiconductor (FCS), Winnebago (WGO) and Capital Corp of the West (CCOW), with CCOW after the close and the other two before the open. Thursday's economic releases begin with the usual 8:30 release of jobless claims, but that time period will also include September's Import/Export numbers and August's Trade Balance. August's trade balance is forecast to widen to -$59.0-59.3B from the previous -$57.9B. With such steep declines into this report, there's the potential for a sell-the-rumor, buy-the-fact reaction, but steep declines can gain momentum that is hard to stop, and there's a further potentially market-moving release tomorrow. The crude inventories release was delayed for release until tomorrow, and should appear at its usual 10:30 time period. September's Treasury Budget will be released at 2:00, with that expected to expand to expand to $36.0-37.0B from the prior $24.6B.

Several indices and stocks printed potential reversal signals today, but those must be confirmed by strong performances tomorrow, and some still show the potential for further downside before they hit convincing support. I would pay particular attention to SPX 1171.50, Dow 10,195 and RUT 612-615, and the SOX 200-sma, as those indices have reached or approached levels at which some steadying might be expected. If those levels collapse, then longs are running for cover and far deeper declines might be expected. Recoveries of indices such as the RUT and SOX will be needed to buoy sentiment and send the Nasdaq higher, as it looks to be the shakiest of the indices right now. I'm watchful for the possibility of a bounce, but a countertrend bounce, and my hands got sliced up several times today trying to catch the falling knives. The wisest action may be to wait for bounce-and-rollover bearish entries, perhaps still several days away.

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