The Follow Through Falls Flat

The markets attempted to carry Friday's momentum into the new week. The rally on Friday was sparked by government action to stabilize oil prices and to strengthen a slumping euro. Oil prices continued to slip today and the euro continued to stabilize, but it was not enough to extend the recovery.

Intel (INTC) is the perfect poster child for the changing sentiment and its trading today characterized the market as a whole. INTC opened higher but slowly lost ground the rest of the day and finished down another $2.56 to close at $45.38. Market participants are still nervous about the possibility that Intel's revenue slowdown could just be the tip of the iceberg, as we get closer to the third-quarter earnings release season.

The NASDAQ (COMPX) extended its move from Friday on today's open and topped out at 3,868.11. The technology-laden Index finished poorly and ended up losing 62.54 points and closed at 3,741.22. Volume continues to be strong with 1.7 billion shares traded today. Losers were more prevalent than winners today at a pace of 23 to 18. There were 80 new highs and 126 new lows.

Winners were hard to find, but there were a few well-known and active gainers on the NASDAQ. Commerce One (CMRC) led this group of trend-bucking stocks and gained $5.00 to $80.75. Ciena (CIEN) also charged ahead, picking up $6.81 to $127.56 as it led a relatively strong group of advanced communications technology firms. Ciena shares gained following the announcement that it had secured a large contract with Korea Telecom.

The leaders of the NASDAQ were particularly weak. Cisco Systems (CSCO) shed another $3.13 to $57.19 and the stock appears to be firmly entrenched in a correction. Dell Computer (DELL) slipped again by losing $1.63 to $34.31. Qualcomm (QCOM) cooled off and dropped 3 points to $70.00 and Altera (ALTR) was a noticeable loser in the semiconductor sector, falling $6.19 to $46.19.

The DOW (INDU) was a bit stronger than the NASDAQ, but it, too, was hurt by the major components that these two indices share. In addition to the Intel weakness, Microsoft (MSFT) threatened to make a new 52-week low and dropped $2.00 to $61.25. IBM was another technology loser as it fell $2.31 to $121.69. On the other side, Citigroup (C) helped to stabilize the DOW as it picked up $1.38 to $54.13.

In the end, the DOW dropped 39.22 to 10,808.15. Volume on the NYSE was decent with 980 million shares traded. Losers narrowly edged winners 16 to 13 and there were 55 new highs and 67 new lows.

The NYSE had a few solid winners. SPX Corp (SPW) gained $9.13 to $144.00. Genentech (DNA) led a solid biotech sector as it picked up $7.38 to $184.00. Scientific-Atlanta (SFA) was also a gainer of note as it increased its share price $3.81 to a close at $62.50.

Some of the more important losers on the NYSE included Micron Technologies (MU), which dropped $4.56 to $47.06, and Texas Instruments (TXN,) which fell $4.69. Triton Energy (OIL) led the very weak energy stocks due to dropping crude prices. OIL fell $4.63 to $36.06.

The S&P 500 (SPX) mirrored the losses in the DOW and NASDAQ and fell 9.56 points 1439.05. The S&P 100 (OEX) did not fare any better and slipped 8.06 to 766.02. The NASDAQ 100 (NDX) was noticeably weaker than most of the other closely watched indices and it lost 79 points to 3,622. Smaller stocks represented by the Russell 2000 (RUT) only slipped 3.44 to 515.38.

Another steep drop in the PHLX Semiconductor Index (SOX) was the highlight (lowlight) among the major sectors. The SOX was crushed 46.2 points to 880.35. Oil and Gas stocks (XOI) fell 7.81 to 508.4. Winners included Biotechs (BTK), which moved higher by 12.84 points to 785.76 and Bank stocks (BKX) gained 13.16 to 878.14 on the day.

Bonds attracted some of the cash today, as the 10-year bond gained 1/32 to a yield of 5.845 and the 30-year Treasury bond was the star of the show as it rallied 11/32 to a yield of 5.895.

Crude oil saw its lowest levels in a month, as futures prices slipped below $32 a barrel on Monday. The price drop was caused by the US Government's decision to release 30 million barrels of its strategic reserves. Some analysts are already coming out and saying that the move was a knee-jerk, politically motivated action and it may only cause a temporary reduction in strong oil prices. If this is true, then the slip in prices of the major oil producing stocks may only be a temporary situation and there could be a good buying opportunity in these stocks.

Some technology stocks, especially commodity product manufacturers, could be under pressure yet again tomorrow because major printer maker Lexmark (LXK) warned that it would not meet current analysts estimates for the quarter. The Company said it will earn between 45 and 50 cents for its third quarter but estimates were calling for profits of 60 cents. LXK closed down on the day to $52.00, a loss of $2.63. The Company also said that the fourth quarter would likely see a shortfall in earnings. Third quarter earnings will be released on October 23rd.

Retail stocks also may be under some pressure tomorrow because Guess Inc. (GES) said that it will also miss current estimates. The Company expects to report profits in the 35 to 38 cent range compared to the consensus of 44 cents. Guess said that a slowing retail market may also cause them to miss the next quarter's estimates of 45 cents. The Company's stock was up $0.44 to $19.81. However, the announcement came after the close so do not expect a repeat performance for Guess tomorrow.

The NASDAQ could continue to be under some pressure this week, as it seeks to establish a major bottom that could give it the strength to stage a rally later this year. Friday's low just above 3600 is pretty significant support and if it holds through the rest of this week we may have found a bottom. If it fails, then a retest of the major support determined by August's spike low just above 3,500 would not be out of the question.

The MACD on the Nasdaq is pretty discouraging right now, but I would not expect too much more downside considering that the RSI is currently at a level low enough to be indicating an extremely oversold condition. Still, we are most likely going to be stuck in a round of consolidation.

The DOW is a little stronger technically and this is mainly due to sector rotation within the Index. The weakness in technology shares has resulted in some strength among financial and drug shares. The RSI issued a definitive buy signal last week when the DOW reached 10,500 which should be pretty good support. It seems likely that the DOW will stay in a range bounded by the psychologically important levels of 10,500 and 11,000. Look for isolated moves among the individual issues within the DOW.

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

Jim Booth
Research Analyst