Nowhere Fast

That's the best way to describe Friday's action. That's the best way to describe the entire week, for that matter. Most of the major indices have been stuck in a narrow trading range, making it extremely difficult for all but the most sagacious traders to make any money.

For example, the Nasdaq Composite Index (COMPX) traded most of Friday in a 20 point range, between 4,040 to 4,060. If you look at the day's range, though, it traded between 4,025 and 4,083. Don't be fooled. The only reason the range ballooned to 58 points was because of the Emulex (EMLX) fiasco that occurred early in the session (more on that later). For the day, the COMPX lost 10.60 points, or 0.26 percent, to 4,042.68 on anemic volume of 1.25 billion shares, which was roughly 180 million shares below Thursday's figure.

For the week, the COMPX advanced by 112.28 points, or 2.9 percent, putting it within 27 points from where it started the year. However, the index is still off 20 percent from its March high of 5,028.

The older economy issues were equally as range-bound. On Friday, the Dow Jones Industrial Average (INDU) spent most of the morning meandering between 11,160 and 11,180 and most of the afternoon staggering between 11,180 and 11,200. When it was over, the blue-chip average was up 9.89 points, or 0.09 percent, to 11,192.63, it's highest close since April 11. However, volume on the NYSE was extremely light, with only 677 million shares changing hands (back in February and March, the NYSE was routinely posting 1 to 1.2 billion exchanges). With volume being so weak, it's difficult to say if this new four-month high has much meaning.

For the week, the INDU added 146.1 points, or 1.3 percent, to its value, though it spent most of the time trading between 11,050 and 11,200.

In the smaller and broader markets, the S&P 500 Index (SPX) ended Friday on a sour note, closing down 1.86 points, or 0.12 percent, to 1,506.46. However, for the week, the SPX added 14.74 points. Ending on a happier note was the small-cap Russell 2000 Index (RUT), which added 1.81 points, or 0.35 percent, to 525.11. For the week, the RUT finished up 9.6 points, or 1.9 percent.

Despite the fact no one has been in the market for the past month, the four major benchmarks have risen four straight weeks. The first that's happened since November 1998.

In sector news, the PHLX Semiconductor Index (SOX) snapped a three-day winning streak on Friday, closing down 19.73 points to 1,143.71. Intel (INTC) lost $1.31 to $72.94, Micron (MU) dropped $2.56 to $67.06 and Texas Instruments shed $2.56 to $67.06. It seams traders finally decided to take some profits after advancing the SOX 20 percent over the past three weeks.

I said in last Sunday's commentary that I thought the SOX was ready for a slowdown, which it was. The index traded around 1,125 for most of last week. I don't think it will do much better this week, either.

Biotechs, on the other hand, were another story. The AMEX Biotech Index (BTK) rallied through the entire week, adding 90 points to its value to close at 750.68. Friday's biotech movers included Genentech (DNA), which added $10.38 to $190.25; Immunex (IMNX), which added $0.94 to $47.63; and Amgen (AMGN), which rose $2.00 to $74.63. However, don't look for another 90 point rally this week, I think the BTK looks ripe for some profit taking of its own.

In stock news, there is only one stock I could possibly lead with and that's Emulex (EMLX). As many of you are aware, the fiber networking company was crushed on Friday, falling 62 percent from $113 to $50 before its shares were halted. Emulex was rocked thanks to a bogus news release stating the company's CEO had resigned and that it would need to restate earnings. Fortunately, the company's shares rebounded once the release was exposed as a fake. Still, Emulex wasn't able to recapture all its losses, closing down $7.31 to $105.75.

Unfortunately, the press release claimed a number of victims by erasing nearly $2 billion of shareholder value. One sorry fellow appearing on CNBC was nearly in tears explaining how he had lost $50,000 because of the bogus circular (I'd have been bawling like a baby).

Then of course, there were the smug brokerage house analysts, who just had to give their two-cents by pontificating that these high-flying network stocks are risky and more prone to massive sell-offs than more moderately priced stocks.

That may be true, but the fact is everyone who trades long enough will experience a disaster at one time or another. It happens to everyone. George Soros, John Meriwether and Robert Wilson have all placed nearly ruinous trades. The secret is not to do it to often.

Unfortunately, Emulex's decline hit other stocks in the industry. Brocade Communications (BRCD) lost $6.44 to $211.88, Qlogic (QLGC) sank $5.81 to $103.88 and JNI (JNIC) fell 2.31 to $62.56.

On the brighter side, International Business Machines (IBM) gained $4.31 to $129.13, closing at its highest levels in nearly 11 months. The advance was due to investor optimism over the company's second-half performance.

Level 3 Communications (LVLT), a phone and data services provider, advanced $4.69 to $78.38. Robertson Stephens analyst James Friedland raised the stock to "strong buy" from "buy," stating that he believed that investors should revisit the telecom services sector.

Razorfish (RAZF) finished down $0.88 to $13.69 after trading as low as $11 earlier in the day. The Web site design firm said that its president resigned late Thursday, adding it's not looking for a replacement.

Shares of SDL (SDLI) slipped $9.75 to $402.13 after a few busybody-types (antitrust regulators) asked JDS Uniphase (JDSU) and SDL to provide more information on their proposed $44 billion merger. Both companies said they intend to fully respond to the request.

In earnings news, Sycamore Networks (SCMR) dropped $7.19 to $150.81 despite reporting better-than-expected fourth-quarter earnings and an eight-fold surge in sales. But if it's any consolation, Sycamore has climbed in value 45 percent over the past three weeks.

If you're wondering about the second-quarter earnings tally, earnings growth slowed compared to the first quarter. For the second quarter, earnings grew 3 percent compared to 4.8 percent in the first quarter. However, the drop is probably more attributable to an accounting fiction rather than a real economic slowdown. The second-quarter calculations figures excluded such non-recurring items and was based on depreciation of fixed assets and inventory withdrawals valued at current costs, rather than at historical cost.

In economic news, it appears our economic juggernaut is finally slowing. On Friday, a government report showed that sales of previously owned homes fell a greater-than-expected 9.8 percent in July to the lowest level in five months. That's a sign that the Federal Reserve's six interest-rate increases since June 1999 are finally beginning to squeeze buyer demand.

Looking ahead, income growth and consumer confidence data will be released this Monday and Tuesday, respectively. Also on Tuesday, we'll get an idea of how new home sales are doing. The most important data set, though, will be released on Friday when the payroll report hits the wires. Additions to payroll numbers are widely expected to be low in August, which would further boost the soft landing scenario. Unless, of course they slowed too much, which could lead some market watchers to believe we're headed for a crash landing instead of a soft one.

On the earnings front, again there's not much to watch. The only company remotely capable of causing a stir is Comverse Technology (CMVT), and it's a relative lightweight.

As for trading next week, look for another listless market. Granted, the INDU has remained stable at 11,000 for several sessions now, though it just can't break that stubborn 11,000 to 11,200 range. What's more, I don't expect it to break out this week, either - there just aren't enough market participants. I'd be surprised if the NYSE had more than one day of 900 million volume.

Further adding to my bearishness is the fact the RSI is approaching 70, which usually signifies an overbought market, meaning a breakout is more likely to be down than up.

Another variable that could hold the blue-chips in check are emerging concerns that the brakes may have been applied too hard to the economy. It's not out of the question that a soft landing could turn into a prolong period of sluggish growth. In fact, capital and consumer spending is already starting to trend down. It doesn't take much for a snowball to turn into an avalanche, particularly when powered by ever-rising oil prices.

As for the new economy issues, I don't see much going on here, either. The range on the COMPX is constricting between its 150 and 200 day moving averages, which to me, means there will probably be more consolidation around 4,000.

In the final analysis, don't look for any real action until after Labor Day when the money and the real investors return. To that end, Trim Tabs reported that equity funds investing in U.S. stocks saw inflows of $5.6 billion vs. inflows of $1.1 billion in the previous week. Look for the new money to be put to work the first week of September.

Until then, enjoy the last week of summer vacation.

S.P. Brown
Editor

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