NASDAQ Disregards Jobs Report

It's the economy stupid! The mantra of the 1992 Clinton campaign came to mind as I struggled to draw conclusions about the current market environment. Right now, the techs are taking a back seat to the financials and it's all about the economy.

It's easy to get caught up in worrying about technology stocks. Hey, they've been the momentum leaders for so long that it's hard to see the forest for the trees, so to speak. But the techs are simply churning in a range bound, if not bearish market for the time being, while financials are rallying on the prospect that Alan Greenspan may be sated for now.

Friday's labor report pretty much precluded further interest rate hikes at the August FOMC meeting and possibly until after the election in November. Unemployment remained steady at 4.0% and new jobs came in at a negative 108,000 - more than enough reason for the FOMC to sit back and put their feet up.

You may have heard that the negative 108,000 number consisted mainly of census workers who were laid off, which is true. However, only 138,000 new jobs were created in the private sector, which is below this year's monthly average of 180,000 new jobs. Whichever way you slice it, the economy seems to be cooling to a manageable rate.

There has been some speculation that the rally in financials is a good sign for the broad market and I would have to agree. They are a barometer for the health of the corporate world, because of the tie-in with debt risk. More debt sensitive and debt reliant sectors should benefit from the lead of the financials.

Maybe even the techs can finally put together an extended rally once investors shed their economic concerns. Then again, every bull market climbs the proverbial wall of worry. It probably won't be long before the focus changes back to valuation - a slowing economy may equal a less than astronomical growth rate for the technology sector.

Friday's Markets:

The broad markets rose following Friday's jobs report, extending Thursday's gain in both the Dow (INDU) and the NASDAQ Composite (COMPX). Both markets showed considerable indecisiveness throughout the day, with last hour rallies that finished in the black.

The COMPX rose 27 points to close at 3787 on volume of 1.4 billion shares. Advancers outpaced declining issues 22 to 17. For the week, the Composite was up 114 points.

The INDU finished at 10768, up 61 points on 948 billion shares traded. Breadth was positive by 17 to 11. For the week, the INDU gained 156 points.

The S&P 500 gained 10 points, closing at 1463. Five consecutive gains for the index posted a 3% gain for the week - not exactly a volatile market as reflected by the Volatility Index. The VIX closed at 21.58 Friday, near the low end of the range and indicative of tightening trading range of the broad market.

Treasuries took the Friday jobs number and ran higher for the fourth straight day. The ten-year note yield has solidly broken support at 6% and closed at 5.901%. Financials have been taking their cue from the treasury market.

Sector and Stock News:

The star of the week was the financial triumvirate, which includes Banking (BKX) +9.7%, Insurance (IUX) +4.1% and Brokerages (XBD) +9.1%. If you are long these sectors, current momentum is quite strong, especially in the brokerage industry. Consider however, that the bullish sentiment, as measured on a point and figure chart, is at 78% for the brokerage index. That could mean that the index is a little overextended at this level. Since July 1st, the XBD index has gained 22%.

Semiconductors continue to be the thorn in the side of the technology sector. Friday's rally did not carry over into the Semiconductor Index, which posted a 3.11% loss, making it four losing days in a row. On a support and resistance scale, the SOX currently has support at 880 (Friday's close was 921) and resistance at about 1000, so we are mid range in a downtrend. Lehman Brothers defended the sector Friday, saying that the industry is still in the early stages of an uptrend. That's debatable from a price performance study, considering that the index is still up 76% from last year at this time.

Networking stocks bounced back swiftly on Friday, posting a 1.7% gain. Cisco Systems (CSCO) gained 1.18 points to close at $65.54. This follows rumors that the tech leader may miss earnings estimates of $0.15 per share when they report Tuesday evenings. Someone probably circulated the rumors with an interest in seeing the stock price fall and so far, the rumors are unfounded.

Monday and the Coming Week:

We are nearing the end of this quarter's earnings cycle and so far, 446 of the S&P 500 companies have reported. This will be a fairly full week, but three companies in particular will be key to the tech sector. Cisco Systems (CSCO) will report Tuesday after the bell, Applied Materials (AMAT) will report Wednesday after the bell and Dell Computer (DELL) will report at Thursday's close.

As for economic reports, look for the Fed Beige Book to be released Wednesday. Friday is somewhat weighty with the Retail Sales report and the Producer Price Index (PPI).

Looking at the chart for the NASDAQ Composite, the overall index is in a downtrend, but there is some reason to look for a break to the upside. Thursday's move took us all the way down to a 62% retracement, but by Friday, the index topped out at a 32% retracement. (see the chart below) If the COMPX closes below 3500, that would be very negative and we could retest old lows. If we can stay above 3500, the most likely scenario is that we meander for awhile in a tightening trading range with 3900 as the upside resistance.

The INDU is working up for a possible test of resistance at 10875 and the chart is looking like an ascending triangle. If the trading range coils to tightly, it is going to have to break above resistance soon to avoid a possible break down, which could test support at 10350.

Looking at the week ahead, the techs are truly indecisive and are looking for some leadership. Rallies will probably be short lived (two to three days) because there just isn't a real catalyst for techs right now and there may not be much reason to rally strongly for another month or so. Last week's late rally may carry over with some buying in front of the CSCO and AMAT earnings. Of course, these numbers are critical for the NASDAQ and AMAT's are particularly important for the semiconductor index, which in turn powers the Nasdaq. Bad numbers will probably have far more influence than good numbers. In fact, anything short of blowout numbers may see some selling on the news. In the other sectors, the financials can move independently of the techs and are bullish now. Other sectors will probably move contrary to the technology sector as a defensive play.

Good Luck!
Steve Pekarek
Editor

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