Betting On The Fed

There was a solid rally today among those stocks that should benefit from the Federal Reserve's FOMC tomorrow. In other words, there was a solid rally in the Old Economy issues.

The Dow Jones Industrial Average (INDU) staged a huge advance of 210.46 points and closed at 10,645.42. The close was only 34 points below the high for the day. What's more, volume was a solid 1.16 billion shares traded on the NYSE and there were 19 winners for every 11 losers.

Driving the Dow's gain was financial services behemoth American Express (AXP), which gained $2.13 to $56.75. JP Morgan (JPM) did its part by picking up $6.63 to $166.63. Alcoa (AA) moved up $1.38 to $32.31. Home Depot (HD) was up $2.19 to $44.13. Philip Morris (MO) continued its advance with a gain of $1.25 to close at $41.31.

Winners on the broader NYSE included Cooper Cameron (CAM), which rallied $7.13 to $66.13. BJ Services (BJS) moved up $5.88 to $69.75 after a positive oilfield services industry outlook issued by Salomon Smith Barney. Smith International (SII) also benefited from the same report, as it gained $5.25 to $70.50. Other notable winners included Schlumberger (SLB), which added up $5.06 to $77.00, and Apache (APA), which moved up $5.19 to $64.31.

Unfortunately, the technology universe was another story. Microsoft's (MSFT) revenue and earnings warning last week killed the comeback rally among the biggest technology names. Technology investors are shedding stock as the year comes to a close. The fact is, there are many institutions that still have huge positions in Microsoft, Intel (INTC), Cisco Systems (CSCO), EMC (EMC), Sun Microsystems (SUNW) and Dell (DELL). Fund managers do not want to show these gigantic under- performing stock positions in their portfolios by year's end. A complete liquidation is unlikely, but these managers are trimming their holdings.

Obviously, as Microsoft, Intel and Cisco go, so goes the NASDAQ. In other words, the NASDAQ Composite Index (COMPX) did not participate in today's rally. For the day, the COMPX dropped 28.74 points and closed at 2,624.53. Volume was heavy with 2.04 billion shares traded. Decliners beat gainers again by a 25 to 16 ratio and there were an incredible 325 new lows compared to only 46 new highs, meaning the COMPX suffered its fifth-straight losing session.

Among those stocks making new lows today were a number of the big names -- the biggest being Cisco Systems, which fell $5.25 to $42.94. On Friday, the networking routing and switching giant said that its was going to increase its cash reserves to cover losses from non-paying customers.

Broadcom (BRCM) had a terrible day, as it dropped $17.69 to $105.44. Extreme Networks (EXTR) continued its tumble from Friday following a negative report about the company's health from the Center for Financial Research and Analysis. EXTR was down $17.31 to $54.94. Brocade Communications (BRCD) lost $14.31 to $185.81. Redback Networks (RBAK) was pummeled $11.69 to $71.31. Powerwave (PWAV) slipped $8.31 to $51.88 and PMC Sierra (PMCS) lost $7.00 to $96.44 after the $100.00 support failed.

There were some nice gains out there on the NASDAQ. It appears that Oracle (ORCL) has found a bottom, as this bellwether gained $3.44 to $32.00. IDEC Pharmaceuticals (IDPH) picked up $15.81 to $225.25. Protein Design Labs (PDLI) rallied $7.00 to $94.00. Micromuse (MUSE) was solid, as it increased $8.00 to $124.00. Professional Detailing (PDII) soared $12.00 to $84.00. The company has scheduled a conference call for tomorrow that will detail their financial outlook. Qualcomm (QCOM) enjoyed an advance of $5.81 to $85.38.

The broad market indices were mostly higher. The S&P 500 (SPX) moved up 10.6 to 1322.75. The S&P 100 (OEX) gained 4.88 to 694.36. Smaller stocks had a good day, too, as the Russell 694.37. 2000 (RUT) picked up 5.22 to a close of 463.25.

Treasury traders were in a holding pattern today ahead of tomorrow's Fed meeting, as the 10-year Treasury note picked up 7/32 to a new yield of 5.155 percent, while the 30-year bond lost an eighth to a yield of 5.425 percent.

The auto industry is one of the biggest barometers of overall economic health due to its huge revenues and equally huge workforce. The economy is definitely slowing and each of the "Big Three" have recently acknowledged this fact. GM was down $1.69 to $52.13. Daimler/Chrysler (DCX) slipped $1.13 to $42.36 while Ford (F) was up $1.00 to $23.50.

The early action tomorrow is likely to be dominated by the brokerage industry. The AMEX Securities Broker/Dealers Index (XBD) was up a healthy 8.9 points to 528.54 today. Before the market opens, major players Goldman Sachs (GS) and Morgan Stanley Dean Witter (MWD) are scheduled to release their quarterly results. Current consensus estimates are calling for Goldman Sachs to earn $1.44 and MS Dean Witter to earn $1.31. After the close, look for important earnings releases from Jabil Circuit (JBIL), Nike (NKE) and Manugistics (MANU).

The markets are likely to be quiet with a possible bullish bias leading into the Fed meeting. In a speech two weeks ago, Mr. Greenspan hinted that he may be softening his stance on inflation. The economy is clearly slowing and the goal now is to ensure a soft landing and avoid a recession. Market participants are not expecting a rate cut, but they are expecting an official statement that the Fed has changed its bias to neutral.

The five-day drop in the NASDAQ could be close to running its course. Despite the huge drop in Cisco Systems, the NASDAQ managed to hold support just slightly below the important 2,600 level. If the NASDAQ fails to stay above this support, then it is likely to go take a look at its 52-week low of 2,523. The MACD is still just barely positive, so it is important that the NASDAQ holds here or this indicator will trigger a sell signal. Although the RSI has been declining, it is not yet indicating a major oversold condition. If the NASDAQ can get its act together, then look for resistance at today's high of 2726. The next major resistance level is 3000 and we could easily take a look at it if we can get a surprise rate cut.

As nice as the comeback rally was today on the Dow, the average still fell short of Friday's high of 10,783. This is important resistance to get through, but if we can get through it, we could be on our way to a holiday rally. The MACD is currently neutral and the next move will likely indicate the short-term trend and perhaps the trend for the rest of the year. Support has slipped to 10,450 followed by trendline support at 10,400.

Although there are likely some good technology stock trades out there, as many of the big names are quite oversold, momentum investors are likely to stick with financials, pharmaceuticals and perhaps oil & gas stocks.

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

Jim Booth
Research Analyst