Summertime Clues

Stock trading was extremely lackluster today ahead of tomorrow's FOMC meeting. Although no change in interest rates is expected, the statement that the Fed will issue following the meeting should give us a clue as to how hawkish it will be going forward. It's expected that the statement will be somewhat cautionary about inflation, which is pretty much the same statement that the Fed has been issuing for almost a year. However, if Fed is cautionary, then the markets may drop in anticipation that the Fed may raise rates again. A surprise statement that implies that inflation is under control may send the market into a bull run driven by the hopes that the Fed is done raising rates. Odds are, any major market moves in relation to the FOMC meeting will probably happen on Wednesday.

On the seventh day they rested. Semiconductor stocks (SOX) were the huge winners last week and accounted for much of the strength in the NASDAQ Composite Index (COMPX) last week. Therefore, today's profit taking in the sector created a little pressure on the broader index. Despite this pressure, the COMPX was able to stage a decent late rally and closed up 22.81 to 3,953.15.

The NASDAQ 100 (NDX) was up a similar amount and picked up 20 points to close at 3828. Volume limped in with 1.22 billion shares traded. Breadth was only slightly negative with decliners outnumbering advancers by a ratio of 20 to 19. There were 52 new highs and 68 new lows.

Some of the biggest names moved higher. Cisco Systems (CSCO) picked up two points to $65.50, Intel (INTC) bucked its sector's sell off and moved up $1.50 to $72.06, JDS Uniphase (JDSU) managed to move up $1.50 to $124.38 and Oracle rallied $1.88 to $83.19.

The largest gains were seen among the Human Genome stocks. Affymetrix (AFFX) was higher by $12.75 to $125, Human Genome Sciences (HGSI) picked up $6.31 to $130.94 and Protein Design Labs (PDLI) gained $1.75 to $161.63.

Among losers, Sycamore Networks (SCMR) drop $13.19 to $154.00, Redback Networks (RBAK) tumbled $9.56, Tollgrade (TLGD) slipped $7.75 to $118.69 and i2 Technologies (ITWO) dropped $5.13 to a close just below $145.00.

The Dow Jones Industrial Average (INDU) rallied a bit today, though trading was mostly directionless and there were not any particularly strong groups. Some of the winners that pushed the INDU higher were Citigroup (C) which was up a solid $2.13 making a new high at $76.88, Honeywell (HON) gained $1.25 to $36.69, Boeing (BA) gained $2.13 to $47.75 and United Technologies (UTX) gained $2 to $63.50.

Leading the INDU lower were the index's two retailing components. Home Depot (HD) slipped $0.69 to $50.69 and Wal- Mart (WMT) fell $1.44 and closed at $49.06.

For the day volume on the NYSE was very low as only 699 million shares traded. Losers outpaced winners by a ratio of 15 to 12. There were 57 new highs and 30 new lows.

In the broader and smaller markets, the S&P 500 Index (SPX) was up 7.8 to 1499.5, which is just a shade below a psychological resistance point. The Russell 2000 (RUT) added $0.94 to close at 516.45.

There was a little weakness in Chicago ahead of tomorrow's Fed meeting. The 10-year Treasury note was off by a sixteenth and is now yielding 5.785 percent and the 30-year bond retreated 12/32 to a yield of 5.715 percent.

One of the largest oil service companies just got a little bigger, as Transocean Sedco Forex (RIG) agreed to acquire R&B Falcon Corp (FLC) for $5.8 billion in stock. I sure hope the name of the new company is not Transocean Sedco Forex R&B Falcon Corp. Anyway, when the deal is completed, the company will become the third largest oil services company in the world. Nevertheless, RIG dropped $4.50 to $53.19 and FLC only picked up a quarter to close at $25.19.

Microstrategy (MSTR) had the unenviable role of being the poster child for the market collapse this spring. MSTR dropped from a high of $333.00 all the way into the teens due to the discovery of some creative accounting. Well, MSTR is trying to claw its way back and an expansion of its relationship with IBM announced today has certainly helped its cause. The alliance aims to provide information broadcasting and narrowcasting solutions for Business Intelligence (BI) and Customer Relations Management (CRM). IBM Global Services will be providing MSTR's software to their enterprise customers. MSTR finished the day with a gain of $8.56 to $29.56, and was trading up another half of a point in after hours trading.

Intel (INTC) was a very strong performer and actually made a new all time high today. The company is expected to unveil its latest chip, the Pentium 4, during its Intel Developer Forum taking place during the middle of this week. The new chip will run at speeds up to 1.4 gigahertz and will be available in the fourth quarter. Also during the conference, INTC will announce new chips for wireless devices. Intel was also helped when Lehman Brothers raised their earnings estimate for 2000 to $1.74 from $1.70.

In a surprisingly aggressive move, Ford (F) will idle three truck plants for 2 weeks in order to free up enough new tires to replace the recalled Firestone tires. The plan could result in 10-12 percent hit on Ford's earnings this year because truck production will drop by some 25,000 vehicles. Ford finished the day down $0.25 to $27.50. The announcement was made after the close so shares of Ford could be under a little pressure tomorrow.

Today's NASDAQ rally was somewhat impressive considering that the Fed meeting is tomorrow. Evidently, a few players wanted to be long ahead of the meeting. The NASDAQ is hovering right around its critical 200-DMA, which is sitting roughly at 3950. A positive statement from the Fed could result in a continued rally to 4,000. We do not expect a major rally unless the NASDAQ can close convincingly above 4,000. In the meantime look for support at last week's low of 3,831.

The INU reached an overbought condition last week according to the RSI. A couple of pullbacks relieved some of that pressure and now the Index may be gathering some strength for another run. Just like the NASDAQ, though, do not expect a major rally unless the Fed issues a surprisingly benign outlook for inflation going forward. The Dow is likely to find some resistance just below 11,200, a price level the Index tested and fell back from four times last week. There is some support at 11,000 and a drop below that price could cause a decent sell off down to 10,750.

There is a dearth of economic reports and earnings announcements this week. Consequently, if the Fed does release a report that is similar to what everybody expects, we could see a market with very little activity. Friday may be very slow as major players sneak in their summer vacations. It may actually be a difficult week for trading because bid ask sizes are likely to be small from the lack of participation. It may turn out to be a good week to take a couple of days off.

Good Luck! And may all of your trades be winning ones!

Jim Booth
Research Analyst