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MARKET > Commentary Monday, May 14, 2001
by: Jim Booth
Research Analyst

Can the Fed Break the Trading Doldrums?

The market was characterized by more listless trading today, as all eyes are focused upon tomorrow's FOMC meeting. The past several rate cuts were accurately predicted. However, while most economists believe that tomorrow's meeting will result in a rate cut of 50-basis points, there is growing concern that the cut may only be 25-basis points. This difference in opinion may result in some added volatility once the official action is revealed at approximately 2:15 EDT tomorrow.

Today, though, the market was relatively calm. The NASDAQ (COMPX) extended its period of profit taking as it dropped for the fourth straight day. Officially, the NASDAQ dropped 25.51 points to 2081.92. Volume was very light with only 1.32 billion shares traded. Losers outpaced winners by a 22 to 16 margin.

There was broad weakness among the major technology stocks. That said, the declines were mostly mild among some of the most active technology names. Intel (NASDAQ:INTC) lost $0.53 to $27.41, Cisco Systems (NASDAQ:CSCO) slipped $0.48 to $18.57, Sun Microsystems (NASDAQ:SUNW) fell $0.74 to $18.11 and JDS Uniphase (NASDAQ:JDSU) gave up $0.55 to $20.14.

A couple of major technology stocks managed to buck the trend. Oracle Systems (NASDAQ:ORCL) picked up $0.14 to $16.04, Ciena (NASDAQ:CIEN) gained $1.22 to $59.95 and BEA Systems (NASDAQ:BEAS) rallied $0.62 to $32.99.

Declines in technology stocks caused a rotation into financial and cyclical stocks, which helped the Dow Jones Industrials (INDU) to rally 56.03 points to 10,877.33. The NYSE saw very low volume of only 846 million shares and advancers slipped by decliners by a rate of 16 to 14.

SunTrust Banks (NYSE:STI) was a noticeable decliner on the NYSE following the company's unsolicited $13.6 billion offer to buy Wachovia (NYSE:WB), which was already in negotiations to be acquired by First Union (NYSE:FTU) for $12.7 billion. Traders reacted to the new bidding war by dropping STI $4.81 to $60.00 and pushing WB higher by $3.85 to $64.75. FTU picked up $0.56 to $30.58.

Shaw Group (NYSE:SGR), a major supplier of piping systems for power plants, saw its share price decline $2.59 to $55.00, apparently in reaction to the announced IPO of Global Power, which supplies equipment to gas-turbine power plants and will trade under the symbol of "GEG" when its IPO is completed later this week. Although the two companies do not directly compete, the IPO is giving traders an excuse to take some profits in the highflying shares of SGR and to perhaps diversify their holdings among other energy equipment companies.

There was a ton of action in the biotechnology stock universe due to several announcements coming from the National Cancer Conference in San Francisco. Some of the decline in the Biotechnology Index (BTK), which fell 12.83 to 530.37, can be attributed to the drop in technology stocks in general. However, some of the specific declines can be attributed to some disappointing clinical trial results that were presented today at the conference. ImmunoGen (NASDAQ:IMGN) reported disappointing results from its Phase I/Phase II study for its new treatments for certain colorectal, pancreatic and small cell lung cancers. IMGN dropped $1.07 to $16.67. OSI Pharmaceuticals (NASDAQ:OSIP) and Genentech (NYSE:DNA) both dropped after showing only modest results for their jointly developed treatment for head and neck cancers. OSIP fell $3.33 to $40.22 and DNA lost $2.56 to $48.04.

There was some good news coming from some of the conference participants. ImClone Systems (NASDAQ:IMCL) reported encouraging tumor response rates and patient survival rates when using its C225 drug for pancreatic and colorectal cancers in Phase II trials. IMCL gained $2.04 to $40.46. Biotechnology leader Amgen (NASDAQ:AMGN) showed some positive trial results as well and rallied $0.35 to $60.95.

Merger and acquisition activity in the oil and gas sector really bolstered the share price of many second tier energy stocks and this trend continued today. Kerr-McGee (NYSE:KMG) has agreed to purchase HS Resources (NYSE:HSE) for $1.7 billion. KMG will pay $66.00 for each HSE share with 70% to be paid in cash and 30% to be paid with KMG stock. KMG slipped $0.48 to $70.09 but HSE soared $11.15 to $64.43.

The merger activity in the oil and gas sector led to continued interest in our Current Play list denizen Cross Timbers Oil (NYSE:XTO), which rallied $0.94 to $28.94. Elsewhere on our list, Biomet (NASDAQ:BMET) gained $0.88 to $41.48, Student Loan (NYSE:STU) picked up $1.03 to $68.68 and OM Group (NYSE:OMG) moved up $58.60.

The previously mentioned rotation out of technology into financial and oil stocks was evident in today's sector results. The PHLX Semiconductor Index (SOX) dropped 15.55 to 602.25. The AMEX Networking Index (NWX) fell 9.76 to 443.83. The PHLX Bank Index (BKX) rallied 10.58 to 881.07. The AMEX Oil and Gas Index (XOI) gained 5.66 to 580.77.

Retail stocks could be the focus of early trading tomorrow because not only is Home Depot (NYSE:HD) reporting its earnings before the market opens but the market will also be watching the pre-open results from Wal-Mart (NYSE:WMT), expected to post profits of $0.31 and J.C. Penney (NYSE:JCP), which is expected to post profits of $0.10.

Early trading will most likely be light, as the uncertainty over the Fed's move will probably keep traders on the sidelines. There could be a continuation of the modest technology declines on the NASDAQ. The critical support is still 2000. If the Fed only cuts rates by 25-basis points, this support may be tested in late afternoon trading. A close below 2000 would be discouraging. However, a bounce off 2000 could signal the end of this current round of profit taking in the technology sector. It is also a bit discouraging for bulls that the MACD just turned negative and has offered a sell signal. Unless the Fed cuts rates by 50 basis points, the NASDAQ could be looking at more modest declines.

The Dow Jones Industrials (INDU) is also probably facing declines if the Fed only cuts rates 25 basis points. Just like the NASDAQ, the DJIA's MACD just turned negative and has offered a sell signal. 10,640 should offer some support but be careful if the DJIA drops and subsequently closes below this level. A solid rally following a 50 basis rate cut could cause the MACD to reverse course and hence render the current sell signal meaningless. There continues to be solid resistance at 11,000 and a meaningful rally probably will not occur until the DJIA can close decisively above this resistance.

Honestly, the most likely scenario is that both the NASDAQ and the DJIA will continue to stay in a consolidation mode for the time being, perhaps through the entire summer. Traders will have to continue to seek profits by staying on top of the various sector rotations.

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

Jim Booth
Research Analyst

 


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