Can You See The Market Through the Chips?

National Semiconductor (NSM) upset the Nasdaq (COMPX) applecart and sent the Semiconductor Index (SOX.X) down 60.89 or 7.8%, to 716.37. Late Monday the company reported that its second and third quarter sales and earnings would come in below the first quarter's levels. Analysts were calling for earnings of $0.77 for the second quarter and $0.79 for the third quarter. Again, the culprit turned out to be lower mobile phone chip demand. National Semi ended the day down $12.69 or 34.7%, to $24.25.

It's Tuesday; do you know where your chip stock is? The last up Tuesday in the SOX.X was back in early September. Not surprising, given the fall from grace that this sector has been experiencing. Also weighing on the chip sector was a downgrade of Texas Instruments (TXN) from Banc of America analysts. The firm changed its rating on TXN from Strong Buy to Buy, citing earnings uncertainty in, yes you guessed it, their mobile phone chip unit. Better stick the I.V. back in, this sector isn't healthy yet.

Meanwhile, AT&T (T), known on the Street as simply "Telephone", announced late Monday, and confirmed today, that their Board of Directors approved a plan to split up the business units of the business. AT&T's grandiose plans to incorporate local, long- distance and web access on one cable TV system bill have been abandoned. The company will split up the their business units and will consider issuing tracking stocks. Some analysts were hesitant about the break-up (AT&T's third restructuring since its 1986 court ordered breakup). AT&T has said that with dropping long-distance rates, revenues were decelerating and were not contributing enough to the build out of their cable operations.

Tuesday's Happenings:

The spotlight was clearly on the DOW (INDU) today as the index rallied early on and held onto its gains to close strong. The DOW finished up 121.35 or 1.18%, to close at 10,393.07. It was a day for the "old steadies" to shine. General Electric (GE) finished up $3.63 to close at $53.38. International Paper (IP) had a good day, up $2.88 to finish at $32.56. J.P Morgan also finished strong, up $6.56 to $145.13. Advancing issues outnumbered declining issues 1560 to 1278. NYSE volume was moderate at 1.1 billion shares.

The NASDAQ (COMPX) succumbed to its old ways today, tripping over fallen chip shares, closing down 48.90 or 1.41%, to end at 3,419.79. The index started the day in the black, but was unable to overcome the nagging pull from all those chip shares grabbing at its coattails. Intel (INTC) stumbled $1.31 to $42, Cisco (CSCO) finished off $1.00 to $54.88. Sun Microsystems took a break from its recent run up, ending down $0.94 to close at $117.81. As could be expected from this broad downdraft in the COMPX, decliners edged out advancers 2133 to 1824.

The broader market held its own today, with the S&P 500 finishing up 2.34 or 0.17% to close at 1389.12. The index spent the better part of the day on the sunny side of 1400, only to collapse around 2pm. It is still on its way to putting in a good recovery, but it needs to hold 1350 to avoid another trip to the doctor.

Treasuries faltered today on the heels of money flowing back to a more "stable" stock market. We shall see how long this rotation of funds can keep up. The 30-year ended the day down almost a point, or 27/32 to yield 5.74. The benchmark 10-year note slipped 10/32 to yield 5.63. There was no economic data released today, but watch for the Existing Home Sales number to come out tomorrow followed by the granddaddy of them all, the Employment Report before the bell Thursday.

Sectors and Stocks On the Move:

The Financial Sector posted some gains on the day, after staying out of Tech's way for the last few sessions. The Broker/Dealer Index (XBD.X) rallied 1.5% and the Bank Index (BIX.X) posted a 3.1% gain. Some movers within these sectors include Merrill Lynch (MER) up $1.56 to $65.25 and American Express (AXP) up $2.75, closing at $57.13. Citigroup also had a good day, finishing up $1.25 to close at $51.69.

Despite fairly good earnings numbers from a handful of drug stocks, the sector gave back some gains today. Pfizer (PFE) registered earnings ahead of estimates by $0.02, but lost $2.38 on the day to close at $43.00. Schering-Plough (SGP) came in with earnings that matched estimates and shed $0.50 to finish at $52.50. The Drug Index (DRG.X) was off 0.7%, but kept its recent up trend in place.

It is worth revisiting the Semiconductor Index (SOX.X) for clues as to what may be going on behind the numbers. The semis have grabbed more of their fair share of the headlines lately and have served as an adequate diversion to what is really going on behind the upgrades, downgrades and disasters du jour. When a sector that is so all encompassing within the NASDAQ gets a case of the jitters, all is not well. It has been argued that the NASDAQ cannot possibly move higher without the semis on board. This is going to be a tough row to hoe, especially with all the numbers flooding us almost every day. Until we can get a string of days without pre-announcements, industry data or ratings revisions, the SOX is going to remain at these low levels.

The SOX is disguising notable moves in the Biotech Sector (BTK.X) and the relative strength of the Software Index (GSO.X). Both are not out of the water yet, but when the hyper levels of news we have been experiencing comes to a halt in a few weeks, these may be good places to look for profitable long candidates.

Looking Forward, Always Forward:

As of the writing of this piece, Nortel Networks (NT) had just reported earnings and was down in after hours trading. I don't normally like to mention after hours moves in stocks, because often they are not meaningful and come on choppy, light trade. However, with NT being part of the far-reaching optical/telecomm sector, the stock could have a significant impact on trading tomorrow. Bottom line is that NT reported earnings of $0.18 a share, beating First Call estimates by $0.01, but the Canadian company noted that optical network sales were short of most estimates. NT shares were recently down 20% in after hours trading.

Looking at the indicies, it is not unusual to get very volatile, choppy trading after a supposed market bottom. We are witnessing this right now and probably will be on this Tilt-a-Whirl for a few weeks. It is healthy market action, which weeds out the fast money. Essentially, nobody wants to miss a run off of these levels. As everyone piles in for the ride, we naturally have pullbacks as the fast money sells out for a slight gain. These dips will be significant as long as there is still lingering fear in the markets. As mentioned above, the semis are stoking the "fear factor" and keeping a lid on the upside potential for the time being. We need to see more sideways action, (which may include some more runs at the lows) before we can move forward and leave the lows behind for good. As always, keep those stops activated and take profits earlier than later for the near term.

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