Tech Rebounds, DOW Sinks

Sale prices encouraged investors to purchase 'bargain priced' Nasdaq issues today. Traders who may have missed out on the August rally scooped up technology stocks at a discount following two days of markdowns on semiconductors, biotechs and fiber optics. But lingering questions about the economy and its effect upon corporate earnings seem likely to continue.

Today's sector rotation to technology and away from Financials, Chemicals and Energy stocks was inspired by technical factors, then pushed along by positive news from semis and biotechs.

We now have a classic tug of war between bulls and bears in regard to the fundamentals of our economy and the earnings potential of individual sectors. Last spring, the tech crash was caused by valuation alone, with no concern about future earnings.

But now, analysts are divided about the prospect of future earnings growth. That translates to a limit on price appreciation. Semiconductors remain the stalwart industry of the tech sector and with the mixed reports about chip demand, I doubt that anything near Nasdaq 5000 can be achieved this fall, especially considering that other sector valuations remain relatively cheap and the big money, institutional, is chasing more than just technology.

In other words, until earnings are reported in October, our likely path will be sideways.

Thursday's Data:

The NASDAQ Composite posted an 85-point rebound to close at 4098 on moderately heavy volume of 1.6 billion shares. Advancers were well ahead of declining issues at 23 to 17. The Advance-decline line on the NASDAQ returned to a positive indication, as it was during most of August.

Over in the blue chip arena, the Dow Industrials average gave back 51 points to close at 11260. Volume at the NYSE exchange was moderate at 978 billion shares traded. Advancers beat declining issues 15 to 13.

In the broad market, the S&P 500 index gained 10 points to close back over the 1500 barrier, at 1502.

With economic news on the light side Thursday, Treasury issues traded in a choppy range, with the ten-year note losing 7/32 to close at 99 30/32 and yielding 5.755 percent. Trading was influenced by new corporate debt coming to the market, which pushed prices lower and oil prices continued to surge, also putting pressure on the market. Crude oil gained 49 cents to close at $35.39 per barrel.

Stock and Sector News:

A rebounding semiconductor index was a relief to tech investors. Broadcom (BRCM), which is being sued by Intel (INTC), mounted a 12.68 point comeback after company reps made positive comments at the Salomon Smith Barney conference. Also helping the chip sector were upgrades to beleaguered Micron Technology (MU), which gained 3.50 points to close at 73.50. Also in the news was National Semiconductor, (NSM) which reported earnings that beat estimates by 11 cents per share. NSM posted a 2.81 point gain to close at $47.31.

Although today's news was positive for the chip sector, the index is showing much weakness following the recent disparaging remarks about the industry. Technically, the MACD is crossing under the signal line and the SOX index is midway to support at 1000.

Other sectors showing strength today included the Biotech Index (BTK), which gained 5.77% in today's tech rally. The starting gun was sounded for the industry when Millennium Pharmaceuticals (MLNM) declared a 2 for 1 stock split. MLNM gained 2.68 points to close at $141.75.

Another standout was the Fiber Optics group, which surged strongly. Curiously though, the rebound was not uniform. Sycamore Networks (SCMR) was punished by 8.62 points on rumors that Williams Communications (WCG) is displeased with Sycamore products.

In weak sectors, Oil Service stocks (OSX) slid 1.6% lower after Bank of America Securities downgraded industry leader Schlumberger (SLB) on valuation concerns. This came despite oil prices which increased to over $35 per barrel, so the setback may be temporary. SLB lost 2.62 points to close at $83.88.

Chemicals were hard hit (and the Dow Industrials for that matter) after Du Pont (DD) announced that the company would miss earnings estimates for fiscal year 2000 due to energy and raw materials expenses that had risen higher than projected. Other chemical companies such as Dow Chemical (DOW) -1.88 traded lower on the news.

And finally, Internet stocks will have to look elsewhere for leadership. Yahoo, one of the only Internet stocks to hold a basing pattern through the summer, is slowly sinking. CEO Tim Koogle painted a less than rosy picture by giving the kickoff speech at the Robbie Stephens Internet conference, which runs through Friday. He basically said that advertising revenues are in a period of consolidation - otherwise interpreted as: revenues are falling. YHOO fell 5.06 points to close at $107 while the CBOE Internet Index (INX) fell 1.56%.

Friday's Trading:

Earnings to be reported for Friday are practically non-existent, so turning to economic reports, we find - not much more. The only report expected is Consumer Credit for July, estimated at $10 billion. It's not a widely followed report, but with the lack of other news events, expect much commentary to follow regarding the torrid pace of consumer spending and decreasing consumer savings.

To the charts we go. The NASDAQ Composite had an inside day while holding support at the 4000 level. Forming a nice base of support is the 200-dma, which is now at 4005 and rising. Our trend remains intact, although shaken, so the bias will remain to the upside. Due to recent weakness in the index, the RSI has slid back to a more normal level, offering upside potential. The MACD trend indicator is still positive, but if the index closes below 4000, multiple sell signals will trigger.

The INDU decided to take the day off, but no sell signals here. The trend remains strongly higher, while supporting sectors to the INDU remain fundamentally strong. The RSI indicator is still hovering near an overbought condition, but the MACD trend indicator remains positive so this uptrend looks solid.

Looking forward, expect more of the same. More sector rotation, more range bound trading. The key for the NASDAQ will be further interpretation of the semiconductor issues. If investors can shrug off their worries, the NASDAQ may be able to test 4300 again. If not, the sector will drag down all of the tech issues. For the broad market, the next couple of weeks will be subject to economic concerns and next week is heavy with reports such as Retail Sales, PPI, CPI and Industrial Sales. Beyond that, attention will turn to earnings in October.

Good Luck!

Steve Pekarek
Editor