An Ugly Start to Expiration Week

The technology stock swoon continued today, as traders let September's reputation for being brutal to bulls get to them. Although late trading eased some of the sting, it certainly was not a good start to a week that is usually characterized by some upside bias. Triple witching expiration weeks have been typically solid throughout this long bull market, but today's start portends more dismal action that could be intermixed with some volatility.

The excuse for today's technology stock sell-off was a decrease in expectations for IBM (IBM) by Goldman Sachs (GS). The well- respected investment giant stated that Big Blue may have problems meeting earnings expectations in the third and fourth quarters due to the sizable drop of the euro against the U.S. dollar. The statement has created doubt about the earnings of technology stocks in general. IBM fell $4.75 to a close at $124.75.

The rising price of oil, which topped $35 a barrel today, has renewed inflation concerns and consequently interest rate sensitive stocks were sold mildly. Many analysts have stated that oil prices cannot go much higher, but the futures guys love keeping the inertia going and really love making the "experts" look foolish.

The NASDAQ (COMPX) was the major losing index as it dropped another 82.06 to 3896.35 extending Friday's abysmal performance. The large caps within the index were hurt relatively more as the NASDAQ 100 (NDX) dropped 106 points to 3707. Volume was about average with 1.47 billion shares traded and breadth was pretty bad with losers trumping winners by a ratio of 24 to 15.

The major volume leaders were lower. Cisco Systems (CSCO) was beat up $2.69 to $61.19, which took the stock very close to the critical support of $60.00. Oracle (ORCL), which had been very strong in recent months, lost $3.13 to $83.44. Another recent favorite, Sun Microsystems (SUNW) also got caught in the selling, as it lost $5.50 to $115.25. Trader favorites, JDS Uniphase (JDSU) and Juniper Networks (JNPR) suffered, as the former dropped $4.56 to $109.75 and the latter dropped $14.56 to $183.06. Ciena (CIEN) was also a notable loser as it fell $15.63 to $184.00.

There were a few winners out there. Next Level Communications (NXTV) was very strong as it gained $15.19 to $72.44 on slightly more than two times average daily volume. NXTV received an $80 million contract from a South Korean electronics firm. Fiber optic equipment company, New Focus (NUFO) had a very nice day as it climbed $11.00 to $108.00 on good volume. Ballard Power Systems (BLDP) was strong because Credit Suisse First Boston saw fit to upgrade the stock to Strong Buy from Buy following a favorable emissions control mandate ruling in California. BLDP increased a healthy $8.00 to close at $109.88.

The Dow Jones Industrial Average (INDU) attempted to stay above water all morning only to succumb to some modest selling pressure. For the day, the INDU lost 25.16 and closed at 11,195.49, which was more than 50 points above the late afternoon low, but was more than 90 points off the morning highs. Hewlett Packard (HWP) fell $8.06 to $113.56 and Intel (INTC) joined the technology droppers with a mild loss of $0.69 to $64.56. Chevron (CHV) helped to level off the index with a nice gain of $2.63 to a close at $89.31. Retailers were also very strong with Wal-Mart (WMT) gaining $2.25 to $54.31 and Home Depot (HD) picked up $1.31 to $54.25. Volume for the entire NYSE was a modest 902.9 million and breadth was slightly positive with winners passing losers with a ratio of 15 to 13.

The broader NYSE was also characterized by technology losers. SPX Corp (SPW) led point losers by dropping $12.25 to $152.50. Micron Technologies (MU) continued its slide, as it fell another $3.56 to $65.50. Nortel Networks (NT) was also weak, slipping $4.00 to $68.00. Genetech (DNA) led biotechs lower as it fell $10.50 to $159.00.

The most watched market indices were all lower. The S&P 500 (SPX) fell 6.65 to 1487.85. The S&P 100 (OEX) was also under a little pressure to the tune of a drop of 4.78 to 808.12. The Russell 2000 (RUT) lost 2.08 as the smaller cap stocks were unable to escape the selling pressure. The RUT closed today's session at 533.62.

One of the big winners was Lehman Brothers (LEH), which soared to a new high of $160.25 with a gain of $12.19. Other financial stocks that led the NYSE include JP Morgan (JPM), which increased $5.00 to $169.00; Morgan Stanley Dean Witter (MWD), which picked up $3.94 to $109.56; and Goldman Sachs (GS), which rose $7.31 to $132.31.

Speaking of Goldman Sachs, the investment banking giant inspired today's brokerage stock rise when it announced it was taking over privately held market maker Spear Leeds & Kellogg LP. The deal, for about $6.5 billion in cash and stock, heats up an already sizzling round of consolidation in the financial services arena. Look for more deals down the road as major independent brokers become takeover targets to avoid being left as little fish in a very aggressive pool of sharks.

The Goldman Sachs deal seems to be a hedge, because the future evolution of how markets will work and specifically how orders will be executed is still unknown. For a while, GS was in the camp that was expecting a general decline in the importance of market makers and specialists as trading technologies evolve but obviously GS also wants to hedge their bet just in case market makers are with us for a long time to come.

There is another blockbuster deal in the works as Hewlett Packard (HWP) admitted that it is in negotiations to acquire the consulting arm of the #1 accounting monster PricewaterhouseCoopers for about $18 billion in cash and stock. The strategy behind such an acquisition is to expand HWP's business services opportunities and make the company less dependant upon its commodity business. If a deal is reached, HWP estimates that its revenues would increase 15% next year but earnings may be hurt a little in the early going. HWP was stung with a drop of $8.06 to $113.56 in today's trading.

Another takeover announced today actually failed to stop a selloff in the entire Biotech sector. Genzyme General (GENZ) agreed to purchase drug maker GelTex Pharmaceuticals (GELX) in a cash and stock deal valued at about $1 billion. GENZ executives claim that GELX's kidney drug should reach $500 million in sales in the next five years and $1 billion in revenue by the end of the decade. Despite the predicted growth for their new acquisition, GENZ dropped $7.63 to $57.69 because the deal should dilute earnings in the early going. Shares of GELZ managed to rise $5.88 to $43.25.

Thursday's brief counter rally could not fool the major players into throwing their weight behind the NASDAQ. Technically, it appears that the NASDAQ is pulling back into its trading range, after establishing a declining double top with peaks of 4289 in July and 4260 in late August. The decline has been swift and major support points at 4100 and 4000 have been breached. The area around 3920 was the next support level that failed to hold today and this area should provide the resistance if we should start to comeback. If today's low of 3880 should fail, a drop to 3840, which is the 62 percent retracement from the March high, is quite possible. After that, we are looking at the 100-dma of 3,831.

Another bearish signal is the RSI, which has been dropping steadily every since it offered a sell signal based upon an overbought condition reached two weeks ago. The drop has not taken this indicator to an oversold level yet. The MACD issued a sell signal on Friday so we still may have some down days ahead of us with the very real possibility of some swift bottom fishing spikes like the one we saw on Thursday, especially since we are entering the usually volatile days just before triple witching Friday.

The DOW is still decidedly better off technically than the NASDAQ. With that said, its exhibiting signs of rolling over after stairstepping solidly higher for the past six weeks. Today's action stemmed the tide of three consecutive days of lower intraday lows. Perhaps the profit taking was short term and the DOW is ready to digest its gains through a period of consolidation. Be careful, if today's low of 11,139 is violated, support at 11,000 looms. The RSI is no longer indicating an overbought condition but the MACD has rolled over. It looks 50-50 as to whether the DOW will head lower from here or just trade sideways.

The rest of September looks like it will be characterized by some general weakness. Pay close attention to the support levels of your favorite stocks. In my opinion, a really strong momentum move for stocks, and in particular the tech stocks, is unlikely to occur until late October or perhaps after the election.

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

Jim Booth