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Commentary Monday, July 31, 2000 
A Breakout or Bull Trap? Monday was a sigh of relief if you were tired of selling, but the conviction of buyers was certainly lacking. The last day of the month started off in the right direction if you were bullish, but the level of sincerity was questionable, with low volume being recorded across the major indexes. In a perfect world, the ideal situation for a true breakout is large volume with support in both major markets. Then, in the following days, a confirmation of the breakout comes with more volume and more conviction -- Monday was not such a day. Since we don't live in a perfect world, the more likely scenario (as alluded to in our weekend commentary) is that we are seeing a bull trap forming. For those unfamiliar with the term, a bull trap is when the market rises, leading investors to believe a breakout is occurring. The absence of volume is a key element here: As more investors enter the market, prices rise. But then the trap is sprung, trapping investors who bought into the false rally. Speaking of a possible trap, the NASDAQ Composite Index (COMPX) closed in the green again, up 103.99 points to close the day at 3766.99. The volume, as previously mentioned, was anemic for a true rally, only 1.4 billion shares changed hands today. Still, advancers managed to beat decliners 2,315 to 1,746. The bulk of the COMPX buying was centered in tech stocks, as noted by the big gains in the NASDAQ 100 Index (NDX), which was up 132.23 to finish at 3609.54 for the session. The other positive standout index was the NASDAQ High Technology Index (IXCO), which was up +73.77 and closed at 2243.95. Looking at the old economy issues, the Dow Jones Industrial Average (INDU) also closed in the green but with far less conviction, up 10.81 to close at 10,521.98 for the day. The trading volume again was lighter than would indicate true buyer interest, with only 930 Million shares changing hands. Meanwhile, the S&P 500 Index (SPX) closed at 1430.83, up 10.94 and the small-cap Russell 2000 Index (RUT) finished at 500.64, ending the day up by 10.42. Now, let's look behind the numbers and see who was doing what today. If you were looking for a quick 40 points by lunch, you would have done well if you were trading in SDLI Incorporated (SDLI). The stock traded as low as $315 in the opening minutes of trading and by early afternoon had hit $357, this stock is a monster mover and not for the faint of heart. Over on the NYSE, the most active issue was Lucent Technologies (LU), which lost -1.69 and hit a new 52-week low at $43.50 but managed to close above that at $43.81 for the day. New S&P 500 component JDS Uniphase (JDSU) was the second most actively traded stock on the Nasdaq, finishing up $1.88 at $118.12. JDSU was closely followed by Microsoft (MSFT), which released its first bug fixes for Windows 2000 on Monday. The stock closed at $69.81, up $0.12 for the day. Nokia (NOK) took the number two spot on the NYSE, adding $0.56 to close at $44.38. General Electric (GE) and AT&T (T) took spots three and four, respectively. GE was up $0.75 at $51.69 and AT&T closed up $0.31 to $30.94. In more dour stock news, biotech Cephalon (CEPH) got hammered $22.55 after announcing that its narcolepsy drug failed to show it could help reduce attention deficit disorder. The stock closed at $40.31, a 35 percent drop from Friday's close at $62.75. In the credit market, bonds lost some ground in the long and mid range issues. The benchmark 10-year note fell 3/32 to 103 13/32 with its yield up 1 basis point at 6.05 percent. The long 30-year bond was also negative, down 6/32 at 106 15/32 to yield 5.79 percent. The second-quarter earning season is drawing to a close. The "earnings news" which often drives action in stocks is about to be hushed by the "no news" period in between earning season. Investors will have to come back to reality and face the prospect that Federal Reserve Chairman Alan Greenspan may add another 25 basis points to short-term interest rates. As a technician, I see the possibility of the following on the major indices. The NASDAQ hit a low of 3042 on May 24th and rallied to 4289 on July 17th, that equals a 1247-point rally this earning season. Based on the theory of retracement, a 33% decline would put the index at 3878, a 50% decline at 3666 and a 66% at 3466. The other possibility would be a full retracement back to the May lows (3042) and a double bottom.
Meanwhile, the DOW has been channeling between 10,300 and 10,850 for the last 4 months. Either a nice stable base is being established for a cup and handle pattern (so says Investor's Business Daily), or 10,300 will be retested and then if it can't hold, a visit back to 9775 may be in store. Frankly, I don't don't see what can or will propel the market higher at this point. This might be an excellent time to learn and become familiar with the use of protective strategies such as put options. Extensive training is available through our sister site, Optioninvestor.com.
Dave Hobbing
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