Stuck in Neutral

Stocks went nowhere fast last week thanks to the never-ending saga that is our presidential election. However, despite the legal wrangling that has left the nation perplexed as to whom it's next President will be, one thing has been made clear and that's the market's favorite candidate to take the White House for the next four years.

On Friday, a Florida judge ruled that state officials could ignore the hand count of presidential ballots now under way in three Florida counties. The ruling essentially gave George W. Bush a victory in Florida and victory in the presidential election. When the news hit the wires, stocks soared. The Dow Jones Industrial Average (INDU) rocketed 106 points to an intra-day high of 10,762.59 while the Nasdaq Composite Index (COMPX) bolted 59 points to its intra-day high of 3,090.97.

As most of us are aware, though, the rally didn't last. Al Gore's attorneys saw to that by stating they will appeal the judge's decision. Both major market barometers did an about- face on the news. The INDU lost nearly 200 points over the subsequent two hours to hit an intra-day low of 10,565.79. The average then flatlined through most of the day before rallying in the last half-hour of trading to close at 10,629.87, down 26.16 points, or 0.25 percent, for the day.

Meanwhile, the tech-heavy COMPX suffered nearly the same percentage loss, trading down to 2,967.17 before also flatlining through most of the day. But like the INDU, the COMPX rallied in the final 30 minutes of trading to close at 3,027.19, down 4.69 points, or 0.15 percent, for the day.

Friday's session was also vexed by "double witching," the simultaneous expiration of index and stock options, which in addition to the Florida election mess, contributed to the market's seesaw action during most of the session.

The entire week mirrored Friday's session; the Nasdaq fell less than 0.1 percent, while the Dow gained 0.3 percent in range-bound and choppy trading. In retrospect, I suppose we should be thankful the market was able to maintain the status quo considering it endured a disappointing Fed meeting, the continuing election debacle and profit uncertainties.

Speaking of profit uncertainties, the telecom sector continues to be plagued by them. Friday's disaster du jour in the sector was BellSouth (BLS), which fell $7.13 to $42.13. The dominant provider of local telephone service in the Southeast said it expects earnings next year to increase by 7 to 9 percent, a considerable discount from the previous forecast of 13 to 15 percent. The company blamed the shortfall on rising costs.

If it's any consolation to you BellSouth shareholders (and I'm sure it's not), you didn't go down alone on Friday. Nortel Networks (NT) fell $0.38 to $34.06 after Banc of America Securities analyst Christopher Crespi wrote in a note to clients that the company is losing business to Quest Communications (Q) and Ciena Corp. (CIEN). Nortel has lost nearly two-thirds of its value since hitting its all-time high of $89.00 a share on July 25.

Other notable telecoms losers on Friday included Lucent (LU), AT&T (T) and WorldCom (WCOM). Like Nortel, this triumvirate is trading at a third of its all-time high. In fact, Lucent and WorldCom are trading at new three-year lows while AT&T is trading a new ten-year low. For you Graham-and-Dodders (if there are any), AT&T might be worth a look. The stock is trading at a price-to-earnings (P/E) ratio of 11 and yields 4.24 percent compared to a P/E ratio of 33 and dividend yield of 1.56 percent on the S&P 500 Index (SPX).

Another sector taking it on the chin of late has been the biotech sector. The AMEX Biotech Index (BTK) lost 14 percent of its value last week after an article appeared in Barron's questioning the sector's valuation. With all due respect to Barron's, I've been questioning biotech valuations for the past month, stating that I believed a correction was imminent. I also stated that I thought capitulation in the sector would be good for the market. Nearly all the high-tech sectors have taken their lumps over the past three months, except for the biotech sector. I think it's healthy for the market that some speculative fervor should be taken out of these issues, too, which it has. However, I wouldn't be too quick to jump back in quite yet. I still think the sector is vulnerable.

In other sector news, it looks as if the front-end Internet companies may be in for an acute paradigm shift. Since the Internet revolution began, most content offered by the major portals has been offered gratis, with the majority of the costs being picked up by advertisers. That could soon change. On Thursday, Yahoo (YHOO) chief executive Tim Koogle stated that charging for "premium services" could be an attractive option. By "premium services," Koogle was referring to certain areas on Yahoo where the company can charge a monthly or yearly fee for use. Koogle didn't elaborate, but many industry pundits are speculating that Koogle was referring to music and entertainment. Some even speculated that Yahoo might even start charging for its popular financial information services.

Koogle's admission that Yahoo might start charging for its services should surprise no one. For the past five years, we've all enjoyed a "free lunch" from the front-end Internet folks. As many of us who have studied economics know, free lunches can't go on indefinitely, and it looks like this one is about to end.

In economic news on Friday, the Commerce Department reported that housing starts edged up 0.1 percent to an annualized rate of 1.532 million, compared to 1.530 million a month earlier. Additionally, the number of new building permits, which portends future home construction projects, rose by 1.5 percent last month to an annualized rate of 1.537 million units. Overall, the data shows the housing sector is holding steady.

As for this week's economic news, don't look for anything to roil the markets. The economic calendar is light due to the Thanksgiving Day Holiday. On Tuesday, look for the U.S. trade balance, which is expected to have grown from $30.8 billion in September, up from $29.4 billion in August. As I've state many times in the past, the trade deficit is a non-issue. I know some economists make a stink over the deficit, but that's only because they are equating cash balances with wealth. However, wealth is much more than cash; it's also goods and services, direct and indirect investments and real property. This little fact seems to get overlooked in all the fretting.

On Wednesday, look for the University of Michigan Confidence Index, which measures consumer sentiment regarding the economy and personal finances. The index for November is predicted to show consumer confidence abating to a reading of 106, off from its prior estimate of 107.7. Again, don't look for the index to have much sway on market sentiment.

As for earnings this week, don't look for any table rattlers here, either. The only big name scheduled to report is Agilent (A). On Monday, the Hewlett-Packard (HWP) spin-off is expected to post earnings of $0.42 per share.

With so little happening this week, expect a flat, range-bound market (so what else is new?); that is, if the election fiasco isn't finally settled. If the issue is resolved in favor of Bush, look for the markets to rally. On the other hand, a Gore victory likely will keep indices depressed or even force them lower, at least over the short-term.

Longer-term I don't think it matters much who wins. Either way, we are assured of gridlock, which is good for the market. For that reason, I remain optimistic despite investor worries over the election and a slowing economy. In fact, I think that investors have built up a sufficient wall of worry for the markets to start climbing. The CBOE put/call ratio closed an inordinately high 0.89 on Friday (it's usually around 0.50), which means investors are excessively bearish in my opinion.

In addition, institutions are squirreling away cash at levels not seen in nearly two years. According to the Wall Street Journal, U.S. stock funds are now holding 5.3 percent of their assets in cash as of September 30, up from 4 percent on March 31, which means about $57 billion more greenbacks are sitting on the sidelines. The September 30 cash level is the highest since November 1998, when it stood at 5.5%. That cash will eventually have to be put to work. After all, investors don't give their money to fund managers to invest in cash and cash equivalents.

Another reason I like this market is that the Federal Reserve has been taken out of the picture. Yes, I realize the Fed maintains an inflation bias, but I don't think that necessary precludes it from standing pat on interest rates, or even cutting them. To that end, the fed funds futures market is confident that no moves will be made for the remainder of the year, as the futures price puts the expected federal funds rate at 6.48 percent in January. An expected rate of less than 6.375 percent is needed to say that the futures market foresees the probability of a 25 basis point cut. We are talking only a 10.5 basis point fall in the fed funds future contract here, so a rate cut is not out of the question.

With that said, still trade cautiously this week. Don't look to jump the gun. I don't see much improvement in either major market barometer until the election is settled. As for the INDU, it again closed below its 200-dma this week, which makes me think the average will likely trade between 10,500 to 10,700 sans a major catalyst.

As for the COMPX, I think it will be equally as range-bound. Look for support at 3,000 and resistance at 3,200. However, should the COMPX break 3,200, I think 3,400 is a distinct possibly given the index would have pierced a significant short-term and intermediate resistance level.

Whatever you do this week, be sure to keep your stops tight and your plays conservative, which is how we've been playing this market over the past three weeks. What's more, we will continue to do so until the market demonstrates some conviction towards a sustained rally.