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MARKET > Commentary Monday, May 21, 2001
by: Jim Booth
Research Analyst

Open Season on Bears

Critically wounded and limping into the sunset, bears are under continued attack. There is an incredible amount of cash sloshing around in money market accounts and the fifth consecutive rate cut has inspired some to put their cash to work.

Friday's option expiration related trading was quite impressive and although there is typically a pullback on the Monday following expiration, the momentum is so strong that the rally extended into today's trading, especially among the resurgent technology stocks. It is becoming increasingly evident that the final capitulation is behind us. Investors who wanted to shed their technology stock holdings have probably completed their selling. That said, markets rarely go in one direction forever and the rally will eventually run out of steam as many stocks approach heavy overhead resistance.

The NASDAQ (COMPX) was very strong today with a triple digit gain of 106.66 and a close at 2305.54. The bigger names in the NASDAQ were particularly strong, as the NASDAQ 100 (NDX) picked up 125.00 points to a close of 2053. Volume was solid for a Monday with 2.28 billion shares traded. Advancers trumped decliners by a 13 to 7 ratio.

The surging big names of technology included Cisco Systems (NASDAQ:CSCO) up $2.63 to $22.83, Sun Microsystems (NASDAQ:SUNW) gained $2.99 to $22.96, Dell Computer (NASDAQ:DELL) tacked on $1.17 to $25.96 and JDS Uniphase (NASDAQ:JDSU) rallied $2.30 to $23.49.

There were also some incredible gains among Internet infrastructure and software stocks. Seibel Systems (NASDAQ:SEBL) surged $5.76 to $54.97, Ciena (NASDAQ:CIEN) gained $3.44 to $60.79, Brocade Communications (NASDAQ:BRCD) launched itself $7.35 to $53.26, Veritas Software (NASDAQ:VRTS) picked up $6.19 to $80.00 and Verisign (NASDAQ:VRSN) rallied $6.92 to $67.66.

The PHLX Semiconductor Index (SOX.X) was also in rally mode. Some of the stronger chip stocks included Applied Materials (NASDAQ:AMAT) up $2.52 to $57.52, Linear Technologies (NASDAQ:LLTC) rallied $5.34 to $58.00, Integrated Device Technologies (NASDAQ:IDTI) powered ahead $6.16 to $50.24, Applied Micro Circuits (NASDAQ:AMCC) recovered $2.98 to $26.49, Teradyne (NYSE:TER) surged $4.49 to $47.19 and Texas Instruments (NYSE:TXN) gained $2.15 to $41.86.

Speaking of the NYSE, it was a little slower on the big board than it was in the tech universe. However, the Dow Jones Industrials (INDU) did manage to post a gain despite strong selling in component Proctor & Gamble (NYSE:PG), which dropped $2.23 to $65.25 following the company's announced plans to purchase Bristol-Myers (NYSE:BMY) Clairol unit. Several stocks contributed to the modest rise in the DJIA. Walt Disney (NYSE:DIS) was up $1.68 to $34.28 in anticipation of the release of the company's potential blockbuster film "Pearl Harbor", American Express (NYSE:AXP) gained $1.29 to $44.99, Wal Mart (NYSE:WMT) tacked on $1.16 to $53.20 and Intel (NASDAQ:INTC) rallied $1.14 to $29.90 despite lowered earnings expectations coming from Merrill Lynch.

The DJIA finished the day with a gain of 36.18 points and closed at 11,337.92. The day closed with volume of 1.17 billion shares and there was a very solid ratio of 21 winners for every 10 decliners on the NYSE.

AOL-Time Warner (NYSE:AOL) was noticeably strong and helped the NYSE with a gain of $2.17 to $56.60. Retailing giant Best Buy (NYSE:BBY) powered ahead by $5.96 to $62.11 and Corning (NYSE:GLW) recovered with a positive move of $1.71 to $22.65. Electronic component manufacturer, Celestica (NYSE:CLS) surged $7.16 to $63.01 and Celera Genomics (NYSE:CRA) tacked on $6.07 to $47.22.

Momentum traders were very active today and this fact helped several stocks on the Splittrader.com Play List. In fact several of our stocks surged to new 52-week highs including: Applebee's (NASDAQ:APPB) gained $1.23 to $45.33, Allegheny Energy (NYSE:AYE) picked up $0.80 to $54.60, Black Hills Corp (NYSE:BKH) rallied $2.06 to $58.00, Biomet (NASDAQ:BMET) jumped $1.32 to $45.59, H&R Block (NYSE:HRB) was a solid advancer with a gain of $3.25 to $61.71, Donaldson (NYSE:DCI) moved up $0.93 to $31.70 and GTECH Holdings (NYSE:GTK) plowed ahead by $0.93 to $37.54.

We are happy to report that our entire list saw gains today with one exception; American Standard (NYSE:ASD), which dropped a modest $0.20 to $65.25. If there is another rally tomorrow, most of you will probably want to pay close attention to Tuesday's Play Updates, which will likely include the raising of several of our suggested trailing stops. At some point this rally will have to correct and we want to lock in profits. In the meantime, enjoy the ride!

In addition to the previously mentioned rally among semiconductor stocks several other sector indices were quite strong. The AMEX Networking Index gained 26.07 to 487.26. Brokerage stocks surged late in the day presumably due to the much better investing climate. The AMEX Broker/Dealer Index (XBD) powered ahead by 26.26 to 562.06. The Biotechnology Index (BTK) joined the technology rally with a gain of 37.44 to 638.40. Biotech's were lifted by a positive article in Barron's over the weekend that highlighted some of the promising developments in the fight against cancer. There was a little profit taking in the oil patch, as the AMEX Oil Index (XOI) slipped 3.2 to 603.12.

The broader market indices all enjoyed gains today. The S&P 500 (SPX) picked up 20.90 to 1312.85. The NASDAQ 100 (OEX) rallied 10.22 to 678.60 and small cap stocks, represented by the Russell 2000 (RUT) were also strong and pushed this index up 9.63 to 515.91.

The bond market was able to rally despite the strong advance among technology stocks. The 10-year Treasury note was up 6/32 to a yield of 5.385. The 30-year government bond gained 11/32 to a yield of 5.74%.

Much of the technology stock rally has been driven by hopes that economic conditions will start to improve in the upcoming quarters. That said, there was yet another warning within the tech sector after the close. Chartered Semiconductor (NASDAQ:CHRT) told the investment community to expect a huge 48 percent sequential decline in revenue for the second quarter. Previously the company had expected a more modest decline of 25 percent. CHRT now expects to report a loss of 76 to 78 cents. CHRT finished the regular trading session up $1.65 to $32.75 and has subsequently dropped to $32.00 in after hours trading.

Looking ahead to tomorrow, the early trading could be concentrated among the retail stocks. Several high profile retailers will be reporting earnings before the market opens. Here is a partial list and the expected profits; BJ's Wholesale (NYSE:BJ) $0.29, Staples (NASDAQ:SPLS) $0.09, Talbots (NYSE:TLB) $0.62 and Target (NYSE:TGT) $0.28.

There are also several technology stocks that will be reporting their earnings after the close. Agile Software (NASDAQ:AGIL) - $0.05, Computer Associates (NYSE:CA) $0.45, ECI Telecom (NASDAQ:ECIL) -$0.14, Intuit (NASDAQ:INTU) $0.53, Novell (NASDAQ:NOVL) $0.02, Semtech Corp (NASDAQ:SMTC) $0.18 and VA Linux Systems (NASDAQ:LNUX) -$0.40.

Today's move on the NASDAQ saw the index take out the 2250 resistance and keep going. The extension of the rally could have been due to many bears scrambling to cover their short positions once the resistance was surpassed. We saw a similar reaction last week when the INDU finally closed above the important 11,000 resistance. The NASDAQ's technical picture is nevertheless neutral. While the MACD was able to turn positive, which usually is a buy signal, the RSI is telling us that the NASDAQ is clearly overbought in the short term. A positive open tomorrow may extend the overbought condition, a rally to the 2450 resistance is possible by the end of the week. The continued strength of the rally will depend upon how many more bears need to be squeezed and how many bulls fear the train has left the station without them.

In my opinion, I believe that a modest pullback is the more likely scenario. Bullish sentiment is rising and this is a contrary indicator. A pullback to the 2100 would be very healthy for the market and it would alleviate the overbought condition. It would also enable the market to regroup, consolidate and build a base that could help the NASDAQ make its next push, perhaps above 2500. We are fast approaching the June earnings season and we will start to see pre-releases next week. The June quarter has historically been the weakest quarter of the year for technology firms, even in good years.

The worst is probably behind us, but that does not mean that the NASDAQ is ready to start moving higher by leaps and bounds every day. Picking a top for this rally is, as always, impossible. That is why we continue to be aggressive with our trailing stops. Selectively taking profits enables one to raise cash for the next trading opportunity.

The DJIA has a couple of technical characteristics that are similar to the NASDAQ's. The MACD is positive again after offering a false sell signal last week. However, the RSI is indicating an overbought condition. Incredibly, the INDU is less than 200 points away from its all time closing high. This fact makes one question whether the economy has (or will) improve so dramatically as to justify a renewal of the bull market so quickly. That said, there are still some very good looking individual stocks out there and as long as momentum investors keep driving them up one can probably go with the flow. Just be wary of pullbacks that can eat into profits. Long term investors can probably take heart and with a little patience these types of investors will probably be able to pick up some of his or her favorites at lower prices over the next couple of weeks.

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

Jim Booth
Research Analyst

 


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