Uncertainty Plagues Trading Session

Mixed messages regarding the strength of the economy tormented traders today ahead of tomorrow's employment report. On the one hand, U.S. factory orders rose 4.1 percent in May, the largest one-month gain in over seven years, meaning there is still little evidence that the U.S. economic juggernaut is slowing.

On the other hand, traders remain optimistic ahead of tomorrow's employment report. After last month's anomalous decline, the overall trend in the employment figures will be harder to identify and decipher. The effect of tomorrow's report will depend on whether it contains large revisions to last month's data and other factors concerning the number of job creations. Look for direction in the first hour of trading to help determine market sentiment.

Despite the uncertain inflationary environment, the Nasdaq Composite Index (COMPX) managed to stage a decent rally today, closing up over 97.47 points, or 2.52 percent, to 3,960.57.

Interestingly, the COMPX was led higher by the semiconductor industry (yes, the same semiconductor industry that lost nearly 10 percent of its value yesterday). Countering Salomon Smith Barney's blasphemous doubts about industry profitability, savior Merrill Lynch came out in support of the chip industry today, igniting a 4.5 percent rally today. Big-cap chipmakers, like Intel (INTC), Micron (MU) and Texas Instruments (TXN), responded well to the comments with all three stocks exhibiting strong upward price moves.

I have always found this analyst-chasing phenomenon more than a little amusing.

The mood wasn't quite as cheery in the old-economy issues, though. The Dow Jones Industrial Average (INDU) could not sustain earlier gains, closing down just over 2.13 points, 0.02 percent, to 10,481.47 thanks to weakness in industrial stalwarts International Business Machines (IBM), Du Pont (DD) and SBC Communications (SBC).

The broader and smaller markets exhibited a little more chutzpah than the INDU, but not much more. The S&P 500 Index (SPX) advanced 10.44 points, or 0.72 percent, to 1,456.67, while the Russell 2000 (RUT) advanced 5.07 points, or 0.98 percent, to 523.32. Both indices traded relatively flat for the day.

As for market internals, advancers edged out decliners by a 10 to 9 margin on the Nasdaq, while gainers outpaced decliners outpaced decliners by a 4 to 3 margin on the NYSE. Volume on both exchanges was moderate, with 1.48 billion shares changing hands on the Nasdaq and only 943 million shares changing hands on the NYSE. Volume will likely remain moderate in tomorrow's trading, too.

In stock news, earnings warnings again weighed heavily on the market, particularly from Visual Networks (VNWK). The provider of Internet protocol systems tanked $14.25 to $12.00 after warning its second-quarter earnings will be well-below analysts' estimates. After the mea culpa, several analysts moved to downgrade the stock.

Meanwhile, FirstWorld Communications (FWIS), an Internet, communications and data services provider, warned that its second quarter loss would be as high as $26.4 million on revenue of $18 million. Thankfully, company president and CEO Sheldon Ohringer resigned today. FirstWorld shares finished the day off $5.00 to $4.19.

Also falling on earnings news was lottery enabler GTECH Holdings (GTK). The company's shares fell $2.94 to $19.81 after stating second-quarter earnings will not meet expectations. The company cited cost overruns and a poor lottery environment (bad management?) for the short-fall.

In more positive earnings news, orthopedic medical specialist Biomet (BMET) reported a fourth-quarter profit of $0.42 cents per share, beating the First Call estimate by a penny. Additionally, the company announced a 3-for-2 stock split. Biomet closed up $5.94 to $43.94.

Coming on the heels of yesterday's warnings from Computer Associates (CA), BMC Software (BMCS) and Entrust Technologies (ENTU), the market has soured on industries that may deliver weak earnings in the coming weeks.

Adding to investor irritability is next week's slew of earnings from such heavy-hitters Yahoo (YHOO), Motorola (MOT), Gateway (GTW) and Juniper Networks (JNPR). Any shortfall could spell disaster for their respective industry. After all, despite incredible historical earnings growth rates, a well-placed negative comment from a respected analyst can sink an entire sector, just look what happened to the semiconductor industry yesterday.

So far, according to Bloomberg, 335 companies have pre- announced their earnings. About 58 percent, or 195 of those announcements were negative, compared with an average 57 percent negative pre-announcements over past years, so the pre-announcements we're no experiencing aren't really that unusual.

In other stock news, oil and oil service stocks rallied today thanks to uncertainty regarding the timing of the stated production increases from Saudi Arabia. The Oilfield Services Index (OSX) closed up over 1 percent to 114.78. Analysts have said that oil stocks currently only reflect an $18-per-barrell price. Prices are expected to stay well above this level throughout the year. The oil service stocks should continue to benefit as well as increased drilling projects will continue to inflate service prices. However, keep an eye open for key reversals, as the market will likely find a top soon.

In bond news, the 30-year Treasury bond lost 22/32 to yield 5.91%, while the 10-year Treasury note lost 15/32 to yield 6.045 percent. Investors are looking to the bond market for direction regarding interest rates. The majority opinion seems to favor another increase from the Fed in August.

Now what? The way to profit in this skittish market is to play the sympathy moves. While Computer Associates was punished yesterday, one could have made an argument for additional weakness in other industry stocks.

The fact is people aren't making any big bets at this time. We're not looking at a crash, but good news is treated with selling pressure and bad news tends to be taken quite seriously. Earnings reports in the upcoming weeks should inspire plenty of volatility. Remember the sympathy plays and trade on earnings surprises.

Good luck.

Chris Pikul
Asst. Editor

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