Markets Seek Direction in Choppy Trading

Stocks closed cautiously higher today as "Greenspeak" eventually coaxed some bulls out of their two-day slumber.

Mr. Greenspan read the same testimony to the House Banking Committee as he did to the Senate Banking Committee last week. However, in the question and answer session, he indicated that the relatively low level of current unemployment is unlikely to pose a serious inflationary threat due to increasing levels of productivity. Such comments may indicate the Fed's posture in advance of the August FOMC meeting.

It wasn't exactly the sort of statement that can set the market on fire, but it did reverse the sentiment of early morning trading. Two economic reports initially drove the market lower. The July consumer confidence index rose to 141.7, up from June's level of 139.2, and slightly higher than the Wall Street consensus of 139.1. Existing Home Sales rose to a 5.23 million annual rate, a 2.8% increase over May's number of 5.09 million.

When questioned about the significance of these figures, Mr. Greenspan spoke of the lack of indicators of future consumer spending, primarily due to rising debt levels, thus serving to somewhat mitigate the wealth effect created by the market.

The Dow (INDU) closed at 10,699.97 after rising 14.85 points during the session. Volume was moderate on the NYSE with 962 million shares changing hands. The advance-decline figures were just about even today, at 14 to 13.

The Nasdaq Composite (COMPX) moved up over 47 points to close at 4029.54. Volume was near the recent average at 1.46 billion shares traded. This was a narrow advance though, because declining issues beat advancers 21 to 18.

The broader market indices were also up. The S&P 500 (SPX) advanced 10.16 points to settle at 1474.45. The Russell 2000 (RUT) smaller-cap index edged up 0.07 to close at 514.32.

Bonds barely reacted to Greenspan's comments today. The 2-year notes remained unchanged at a 6.34% yield. The 10-year note and 30-year bond both dropped a basis point each to yield 6.03% and 5.81% respectively.

Earning's News:

A host of positive earnings news did little to motivate traders today. AT&T (T) released earnings that beat analyst expectations but still revealed weakness in the long-distance market. However, wireless revenue growth showed a 32% year over year increase. AT&T shares moved up over a point and a half to close at $34.94.

Major oil stocks such as Chevron (CHV) and Exxon Mobil (XOM) reported record earnings stemming from average oil prices of $28.77/barrel during the quarter. Nevertheless, both stocks lost ground as the outlook for higher oil prices remains questionable.

Nortel Networks (NT) released earnings after the bell today. The networking company reported earnings of $0.18/share, exceeding consensus estimates of $0.14/share. Trading in NT was briefly halted in after-hour activity, but after resuming the stock was trading approximately $5 higher than the closing price of $82.44.

Compaq Computer (CPQ) delivered earnings that met street expectations of $0.21/share. Revenue expectations were also in-line, revealing better profits from increasing margins as a result of increased pricing power. Before the report, the stock had gained $1.12 on the day.

EBAY reported income of $0.05/share compared to analyst expectations of $0.03/share. Revenue improved 13.5% sequentially to 97.4 million in the quarter. Gross margins also increased to 13.5%, buoying analyst estimates. EBAY is traded up a point in after-market trading.

Akamai Technologies (AKAM) was an interesting story today, closing down $22.75 to close at $85.62. Yesterday AKAM reported, along with their positive earnings release, that the lock-up period expires August 1st for 2.8 million shares held by management and Sept 13th for 58.2 million shares held by venture capital investors and key personnel. Given that today's drop was largely artificial, opportunities may exist to bottom-feed off the stock in coming weeks as the selling parties either hedge their position or sell the stock outright.

Sector Moves:

Investors moved into semiconductors for the first time in five days, propelling the Semiconductor Index (SOX) up 2.7%. The markets reacted positively to Texas Instruments (TXN) earnings report yesterday, confirming strong demand for semiconductors.

The Biotech Index (BTK) slumped 5.5%, continuing yesterday's sell-off. The move broke support at the 670 level as the index closed at 645. Next support is near 620.

Drug stocks were off 1.9%, lead lower by Pfizer (PFE) which fell $3.75 to close at $44.00 after revenues failed to rise as much as analysts had hoped, despite a 21% jump in profits.

Meanwhile, brokerage and financial stocks rallied on prospects of easing inflation worries. Banks (BKX) gained 0.08% and Brokerages (XBD) were up 2.6%.

The IPO market remains hesitant. Blue Martini (BLUE), the Internet business software developer, was priced at $20 and opened at $43.00, climbing to a high of $57.38 before settling at $54.25. Interland, the web hosting and application business, actually fell in trading to close just under $9, well under the IPO price of $12. The big IPO this week is the $1.5 billion offering from Tyco (TYC), representing the undersea fiber cable unit Tycom (TCM). The deal has been upped in both price and number of shares over the last few days indicating increased investor interest.

Wednesday's Trading:

Looking forward, the key to sustaining any type of technology rally will be determined in the semiconductor sector. The SOX index caught some support at 1075 level and managed to close at 1104. From that point, the upside potential to the next resistance point at 1270 is approximately 15%. On the other hand, if chips should reverse once again and slip below key support at 1065, things could get ugly for the NASDAQ.

No economic reports are due out tomorrow so the markets will have to find something else to be nervous about until Thursday when the Employment Cost Index and Durable Goods Orders are released before the market opens.

Also, keep an eye on JDSU tomorrow. Investors have been anticipating a rally based on S&P 500 managers having to buy at the close of business Wednesday. Given JDSU's $121 billion market cap, institutions will have to buy around 57 million shares to properly weight their portfolios. It is fairly apparent that investors have snatched up more than enough shares in anticipation of an easy buck. Average volume has increased substantially since the announcement, moving from a longer-term average of 20 million shares a day to over 40 million shares the past few days. Bottom line, investors looking for the quick buck will be selling tomorrow into a limited demand pool. Look for JDSU to move down in the fallout.

Good luck and may all your trades be profitable!

Chris Pikul
Research