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MARKET > Commentary Wednesday, May 23, 2001
by: Jim Booth
Research Analyst

The Winning Streak Comes To An End

After six consecutive positive days, the NASDAQ took a break from its impressive rally. Profit takers have been itching for an excuse to take a little cash off the table and they got what they were looking for today from the political arena.

Republican Senator James Jeffords from Vermont announced that he intends to abandon his current party and become an independent. His move will change the very tenuous balance of power in the Senate. The Democrats will gain a 50-49 advantage in the Senate and will therefore take over committee chairmanships and will control which bills come through committees to the floor of the Senate. The narrow advantage combined with a Republican majority in the house will necessitate continued bipartisan cooperation to pass any significant legislation.

The markets may be a little concerned about the affects these changes may have on Bush's economic policy. For now, the tax cut appears to be safe. However, a second and more widespread tax cut is probably unlikely. Legislation that would be beneficial for the defense, energy and drug sectors would also become less likely.

Technology stocks and semiconductor stocks in particular were hit with some solid profit taking following a report that the April book-to-bill ratio for North American based manufacturers of semiconductor equipment was at 0.42, the lowest level in a decade. The PHLX Semiconductor Index (SOX.X) dropped 34.70 to 660.05.

The selling was also strong within the Dow Jones Industrial Average (INDU), which fell 151.73 points and finished at 11105.51. The final print was very close to the lowest level for the day. Volume came in at 1.13 billion on the NYSE and decliners trounced gainers by a 2 to 1 ratio.

Several DJIA stocks finished down sharply. American Express (NASDAQ:AXP) fell $1.35 to $44.70. Boeing (NYSE:BA) dropped $2.00 to $66.00. DuPont (NYSE:DD) lost $1.92 to $47.39 after expressing a less than rosy forecast for the second quarter. Hewlett-Packard (NYSE:HWP) slipped $1.22 to $29.58 and General Motors (NYSE:GM) tanked $1.71 to $55.18.

There were four stocks on the DJIA that managed to close in the plus column. Philip Morris (NYSE:MO) picked up $0.41 to $49.80. International Paper (NYSE:IP) gained $0.09 to $39.30. Coca-Cola (NYSE:KO) bubbled up $0.90 to $48.70 and Proctor & Gamble (NYSE:PG) recovered $0.19 to $64.19.

The NASDAQ Composite Index (COMPX) was hit for a 70.35 loss and closed at 2243.50, which was just slightly above the low print for the day. Volume came in at 1.83 billion and decliners outpaced advancers by a ratio of 25 to 15.

The most active list saw many technology leaders lose ground. Cisco Systems (NASDAQ:CSCO) fell $1.12 to $22.36. Intel (NASDAQ:INTC) slipped $0.73 to $28.80. Sun Microsystems (NASDAQ:SUNW) dropped $1.27 to $21.49. Applied Materials (NASDAQ:AMAT) was hit for a $3.65 loss to $52.94 and Juniper Networks (NASDAQ:JNPR) lost $3.63 to $53.31.

One noticeable winner on the most active list was Dell Computer (NASDAQ:DELL), which picked up $0.87 to $36.81 after company President James Vanderslice declared a full-scale price war in a bid to increase market share. Additionally, Mr. Vanderslice said that Dell might even make an acquisition with its huge cash reserves.

Some of the largest declines among individual stocks was seen among the biotechs. Protein Design Labs (NASDAQ:PDLI) was squished by $6.77 to $72.08. Human Genome Sciences (NASDAQ:HGSI) fell $6.05 to $67.00 and Abgenix (NASDAQ:ABGX) dropped $5.72 to $39.84. The Biotechnology Index (BTK) was pounded 39.21 points to 600.36. Genome Therapeutics (NASDAQ:GENE) was able to soar in the face of heavy biotech selling. GENE gained after Ladenburg Thalman raised its rating to "strong buy" and set a 12-month price target of $84.00. GENE was up $4.00 to $13.50 on huge volume of 11.23 million shares.

Profit taking on the NYSE extended to the recently strong brokerage stocks. Goldman Sachs (NYSE:GS) fell $3.99 to $99.30. Lehman Brothers (NYSE:LEH) lost $3.10 to $79.15. The AMEX Securities Broker/Dealer Index (XBD) dropped 16.60 to 546.29.

There were some other notable stocks on the NYSE's biggest losers list. Celestica (NYSE:CLS) lost $4.71 to $56.50 following a downgrade from Morgan Stanley. The research firm changed its rating on this major electronic component manufacturer to "outperform" from "strong buy". Universal Health Services (NYSE:UHS) dropped $3.77 to $75.63. International Rectifier (NYSE:IRF) fell $4.03 to $63.07 and BJ Services (NYSE:BJS) slipped $2.89 to $76.35.

The Play List was not immune from the market's slump. Appleby's (NASDAQ:APPB) fell $2.30 to $42.75. PerkinElmer (NYSE:PKI) sank $3.24 to $71.87 and Investment Tech (NYSE:ITG) lost $1.99 to $52.51. There were a couple of winners on the list. American Standard (NYSE:ASD) picked up $0.25 to $65.40 and Allegheny Energy (NYSE:AYE) extended its gains with a rally of $0.39 to $54.79.

The broad market indices reflected the negative tone for the day. The S&P 500 (SPX) was hit for a loss of 20.35 to 1289.05. The S&P 100 (OEX) fell 10.86 to 665.20. The Russell 2000 (RUT) was pounded 9.87 points to 507.36.

Most of the widely watched sector indices also declined. The Pharmaceutical Index (DRG) dropped 4.78 to 401.78. The Bank Index (BKX) slipped 4.94 to 921.62. The AMEX Oil Index (XOI) was tagged 8.65 to 586.93 and the AMEX Networking Index (NWX) dropped 20.91 to 475.61. The Dow Jones Utilities Index (UTIL) actually climbed 3.64 and closed at 398.31.

Bonds were unable to stage a major rally even though stocks were dropping. The 10-year Treasury note was up 1/16 to a yield of 5.395% and the 30-year government bond fell 1/8 to a yield of 5.79%. Bond trading may pick up tomorrow following the release of the weekly initial claims and the April new home sales numbers. Also, Greenspan will be speaking in New York late Thursday and may make comments that affect the markets.

We have seen some negative developments after the close that could encourage more selling in the early going tomorrow. TriQuint Semiconductor (NASDAQ:TQNT) guided analysts lower for the remaining three quarters of its fiscal year. TQNT said it expects to post profits this quarter of only three cents. Analysts had previously expected profits of 11 cents. The company blamed weakness in bookings and customer order delays for the shortfall. TQNT dropped $3.13 to $24.81 during the regular session. It is trading at $22.71 in the after hours session.

TQNT's merger partner, Sawtek (NASDAQ:SAWS), also guided analysts lower. The company cited the continued slowdown in the wireless communications sector for the disappointing results. Analysts previously expected SAWS to post third quarter profits of $0.18 but the company believes that a range of six to eight cents is more realistic. SAWS finished the regular trading session down $3.46 to $28.25. SAWS is trading at $25.55 in the after hours session.

The news was not all bad after the close, however. Enterprise software solutions giant, J.D. Edwards & Company (NASDAQ:JDEC), reported a profit of three cents a share. Analysts had actually expected the company to post a loss of four cents a share. JDEC dropped $0.70 to $11.93 during the day but has bounced back to $12.70 in after hours trading.

Synopsys (NASDAQ:SNPS), an electronic design automation tools company, beat analysts earnings estimates after today's close. SNPS posted profits of $0.24, a full four pennies above the consensus estimates, according to First Call. SNPS dropped $2.07 to $60.00 during the day and is currently inactive during the after hours session.

The NASDAQ could easily slip some more tomorrow. Short-term momentum now looks to be negative. This is evident in the way that the NASDAQ sold off right into the close and finished the day just slightly above the low print of the day. The NASDAQ may be under pressure from weakness in the semiconductors following the negative news from SAWS and TQNT. Some of that weakness may be buoyed by strength among smaller software firms following the SDRC takeover.

The NASDAQ is no longer severely overbought according to the RSI. The extent of this pullback may be dependent on what happens to the MACD tomorrow. If this indicator crosses over and issues a sell signal, this correction could easily drop the index to the 2000 support. Traders will also be closely watching the initial support of 2200. A bounce off this support would be an encouraging sign that the NASDAQ is getting stronger and might be able to extend its recovery and take out the 2328 resistance.

The Dow Jones Industrials (INDU) slipped below the minor uptrend line support of 11,160 today. The much needed breather may take the INDU down to a test of the 10,750 support. The RSI had been indicating a very overbought condition so it is not surprising that the INDU is pulling back. There is some concern that the selling could continue for the next few days because the MACD is getting ready to issue a sell signal. Traders will be looking for the INDU to hold support at 11,000. A close below this support would probably result in the test of the major support of 10,750, perhaps by the end of next week.

Those of you who were using trailing stops probably got out of a few of your stocks with some nice profits today. Cash is king, and now that the market appears ready to correct its recent advance, many of you will have the ability to pick up stocks at support in anticipation of the next advance.

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

Jim Booth
Research Analyst


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