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MARKET > Commentary Wednesday, May 02, 2001
by: Jim Booth
Research Analyst

The Quick and the Nearly Dead

The story of the week has been the rally in technology stocks, particularly in the stocks of networking, semiconductors and Internet companies. The money appears to be coming from the sale of oil and gas issues, and, to a lesser extent, from financial stocks.

Networking stocks, as represented by the AMEX Networking Index (NWX), bottomed on April 4th at 340.05 and have subsequently rallied to 493.10 as of today's close after picking up another 27.70 points today. This rally represents a gain of 45% in less than a month. Some of the key components of this index include, Cisco Systems (NASDAQ:CSCO), which rallied $2.20 to $20.00, Juniper Networks (NASDAQ:JNPR), which gained $1.86 to $65.11, and Sycamore Networks (NASDAQ:SYCM), which picked up $1.14 to $12.02.

The rally among networking shares today was likely prompted by reports (or more accurately, opinions) that Cisco has begun to stabilize and will be able to reverse the course of rising inventories. Although a few analysts are publicly saying they see the light at the end of the tunnel for Cisco, most are not raising their ratings on the company due to continued valuation concerns.

The semiconductor stocks, as represented by the PHLX Semiconductor Index (SOX), managed a modest gain of 4.20 to 670.65 today; however, it is up an incredible 216.80 points, or 48%, from its April 4th low. Some of the key components of this index include Intel (NASDAQ:INTC), which gained $0.76 to $32.15, and Texas Instruments (NYSE:TXN), which picked up $0.38 to $39.95.

One index that tracks Internet stocks is the CBOE Internet Index (GIN). This index rallied an impressive 7.66 points today and closed at 154.58. This index is up 66.44 points, or 75%, from its April 3rd low. Some of the key components of this index include CMGI (NASDAQ:CMGI), which had a huge rally of $1.67 to $5.75, Yahoo! (NASDAQ:YHOO), which managed a gain of $0.61 to $2.79, and Amazon (NASDAQ:AMZN), which rallied $0.22 to $16.98.

The rally in Internet shares was prompted by a positive earnings report from (NASDAQ:PCLN) after yesterday's close. The name-your-own-price Internet company posted a narrower than expected loss of 3 pennies when analysts were expecting a loss of 5 pennies. The company further said that it expects to show a profit of a couple of pennies in the next quarter when analysts had been expecting a break-even quarter. Incredibly, PCLN is up $5.90 from its 52-week low of $1.06. As amazing as this rally has been, it is probably of little consequence for investors who bought PCLN near its high of $64.50.

For the record, the NASDAQ (COMPX) enjoyed a solid day by gaining 52.34 points and closing at 2,220.58. The volume of 2.6 billion shares was very impressive. Advancers beat decliners by a 12 to 7 margin.

The biggest winner of the day on the NASDAQ was Simplex Solutions (NASDAQ:SPLX), a software maker for the chip industry. SPLX, an IPO that had a $12 offering price before it began trading today, finished its first session up $9.20 to $21.20 on solid volume of 7.25 million shares. The success of this IPO is a very important indicator that the NASDAQ has likely seen its bottom and investors are becoming more confident about a technology recovery.

Other big winners on the NASDAQ included many former favorites from the software, communications infrastructure and data storage world. Brocade Communications (NASDAQ:BRCD) soared $6.98 to $49.94, Verisign (NASDAQ:VRSN) gained $6.85 to $59.40, Veritas Software (NASDAQ:VRTS) picked up $6.15 to $72.16 and Broadcom (NASDAQ:BRCM) cruised $6.40 to $48.36.

The Dow Jones Industrials (INDU) took a break today after yesterday's healthy recovery. The INDU dropped a modest 21.66 points to 10,876.68. Volume on the NYSE was decent with 1.3 billion shares traded. Advancers and decliners were pretty much even.

The NYSE declining stock list was dominated by oil and gas companies. In fact, the AMEX Oil and Gas Index (XOI) dropped 23.97 to 560.16. Among the notable decliners were Smith International (NYSE:SII), which dropped $7.06 to $74.99, and previous winner, BJ Services (NYSE:BJS), which fell $5.69 to $75.21.

Speaking of, it was another relatively slow day for the denizens of our Current Play List. We did see gains in Lear Seating (NYSE:LEA) of $0.52 to $36.45 and Williams-Sonoma (NYSE:WSM) of $0.60 to $31.70.

The bond market saw some gains today. The 10-year Treasury rose 3/32 and is now yielding 5.28% while the 30-year government bond rallied 17/32, knocking the yield down to 5.70%. Bond traders are now preparing themselves for Friday's employment numbers which may help to determine the Fed's next interest rate move later this month.

Moving on to after hours activity, which may give us some clues about tomorrow's opening. At the time of this writing, we are seeing neutral to slightly negative news. Macromedia (NASDAQ:MACR), a Web design software company, missed consensus estimates of $0.20 a share by 5 pennies after reporting its quarterly results. MACR finished the regular trading session up $2.88 to $26.58 but is losing all those gains and more as it trades around $21.00 in after hours trading. Chip maker Cirrus Login (NASDAQ:CRUS) met consensus estimates of 6 pennies a share but offered less than an encouraging forecast for next quarter citing inventory issues among it customers. Nevertheless, CRUS is slightly adding to its closing price of $16.70 during after hours trading. Also in the chip sector, Vitesse Semiconductor (NASDAQ:VTSS) announced that it is cutting 12 percent of its workforce and will have to take a charge against earnings in the next quarter to pay for the move. VTSS is dropping just less than a point to $37.00 in after hours trading.

The NASDAQ (COMPX) closed just below its intra-day high of 2232.66. Considering the strong volume that accompanied today's rally, it would not be surprising to see the NASDAQ open strong and test the 2250 resistance in the early going. If the NASDAQ starts to turn negative later in the day, we may see a couple days of a modest correction. It is important to note that the NASDAQ is in the process of forming a base. Markets rarely jump to bull markets from bear market in just four weeks. A pullback to 2000 may be just what the market needs to gather strength to make the next move to 2500. Having said that, the rally could easily continue if the NASDAQ closes above 2250 tomorrow. Otherwise, short term traders should start thinking about locking in their profits either through hedging or the use of stops.

The Dow Jones Industrials continues to flirt with the 11,000 resistance. This resistance will probably hold for a while because a move above it could foretell a rally attempt to test the all-time high of 11,518. Personally, I do not think that traders are ready to make that kind of commitment. We are probably at least one and maybe two quarters away from a resumption of the bull market. Market participants probably want to see more financial results before coming to the conclusion that the economy is ready to resume a more robust rate of growth. Nevertheless, a close above 11,000 would probably be a good signal to buy for a quick rally.

I would like to reiterate what I said on Monday. Sector rotations are the key to making profits in this consolidating market. If your group starts to decline one should probably look around for a group that is going up or vice versa if you play the short side.

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

Jim Booth
Research Analyst


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