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MARKET > Commentary Sunday, June 10, 2001
by: Craig Seidler

Chicken Or The Egg

Or in this case, networking companies or the semiconductors. One day after the semiconductor stocks popped higher on good sales news out of Intel (NASDAQ:INTC), they gave back their gains due to bad news out of Juniper Networks (NASDAQ:JNPR). Now investors within the chip arena are back peddling. The big question remains, "Can the semiconductor stocks recover if their biggest customers, the networking companies, are still stuck in a rut?"

On Friday, Juniper said that second-quarter sales would come in between $200-$210 million, just a wee-bit lower than prior estimates of $300-$330 million. In addition, earnings are now expected to be $0.08-$0.09 per share versus estimates of $0.24 per share. Juniper also said that it would be cutting 8-9% of its workforce, resulting in a $45 million charge. Needless to say, investors took a chainsaw to shares of JNPR, trimming $8.61, or 18.5% off Thursday's closing price. The stock closed just off its lows of the session at $38.02.

The recently revived chip stocks took their cue from Juniper and also headed south. Intel closed down $0.47 to $30.67, Texas Instruments (NYSE:TXN) gave up $1.40 to close at $37.99 and Xilinx (NASDAQ:XLNX) surrendered $2.96 to close at $46.41. However, one chip stock that seems impervious to all the doubts about a turnaround is Microsemi Corp (NASDAQ:MSCC). Shares of MSCC have been on fire this year and set a new high Friday by closing up $1.08 to $65.75. The stock just broke out of a tight three-week base on Wednesday and is showing no signs of letting up.

Although the chips and networking stocks were the talk of the town early on, all that changed at around 10 a.m. Eastern time when trading within all of the NYSE's 3,500 stocks was halted due to a software glitch. Trading stopped at about 10:10 a.m. and didn't resume until about 11:35 a.m. This of course put a monkey wrench into any hopes of having a positive end to the week, as the market was clearly shaken by the disturbance.

Friday's Markets

Add one part NYSE shutdown, two parts getaway Friday and three parts earnings warnings and you have the recipe for a market meltdown. Both the NASDAQ (COMPX) and the Dow (INDU) found the floor of Friday's trading ranges early on and were content to lie around at these lower levels for the duration of the trading day.

The NASDAQ had the benefit of not breaking down mid morning like its NYSE counterpart. Although the tech heavy index might have been better off if it too took a morning siesta. Traders used discouraging news out of the networking sector as an excuse to take profits off the table in a number of diverse sectors. On Friday, the NASDAQ closed down 48.90, or 2.16% to 2215.10. For the week, it managed a 65.66 gain.

The Dow didn't fare much better on Friday and in fact was more adversely effected by the NYSE glitch, as most of the stocks within its makeup are listed stocks. The Dow suffered a 113.74 loss on Friday, closing the week at 10977.00. For the week, it was essentially flat, losing only 13.41 points.

Treasurys headed lower on Friday, with the 10-year note losing 9/32 to yield 5.365% and the 30-year bond giving up 5/32 to yield 5.74%. No economic data was released on Friday.

Stocks and Sectors on the Move

Two industry groups that had a hard time putting anything together all week were the financials and the drugs. The S&P Banking Index (BIX.X) closed the week out by continuing to pull back from its four-month high that was set on Tuesday. The BIX.X is looking technically weak and is now testing its uptrend line. One more down day like Friday's and the BIX.X will be headed for the first leg of a new downtrend.

Some stocks worth mentioning within the banking sector are Wells Fargo (WFC) and J.P. Morgan Chase (JPM). The former lost $1.22 to $46.44 Friday on its way to a retest of the bottom of its downtrend channel. The latter gave up $1.43 to $44.20 and has already fallen out of bed, having sliced through the bottom of its three-month base on Thursday.

The drug sector has also produced some goats as of late. What could have been a bullish breakout of an inverse head and shoulders on the S&P Drug Index (DRG.X) this week, instead, looks to be the start of a bearish triple top. The DRG.X was turned back from the 415 level for the third time since March and now appears to be headed for a retest of support at 395.

Investors seem to be turning away from traditional drug stocks in favor of the more exciting biotechs. Some drug stocks that appear to be weakening lately include Merk (NYSE:MRK) down $0.59 to $74.22 and Abbott Labs (NYSE:ABT) down $0.13 to $51.52. Both stocks are having trouble getting above resistance and look ready to rollover.

One group of stocks that I keep expecting to rollover, but that just won't are the retailers. The S&P Retail Index (RLX.X) is recovering nicely from a bout of profit taking in late May and now looks to be ready to start a new uptrend. As such, Splittrader has recently added two retail standouts to our Current Play list, Lowes (NYSE:LOW) and BEBE (NASDAQ:BEBE). Both have recently emerged bullish formations and look to have plenty of institutional support as evidenced by the strong volume accompanying their respective breakout days.

Another retailer that has been outperforming the broader market has been none other than J.C. Penny (NYSE:JCP). The company with the traditional department store business model just posted a new high on Friday, having closed up $0.93 to $23.96. It's now up 117% for the year and won't face any real resistance until the $35 level.

Looking Forward, Always Forward

Speaking of retailers, we won't get anything in the way of economic data until Wednesday when retail sales for May are released. Sales are expected to have risen 0.3%, which will appear soft when compared to April's 1.1% rise. However, due to the relatively robust same store sales figures that we received last week and the low expectations, there is definitely room for some upside surprise in this number.

We also get a good read on the inflation picture later in the week with the PPI number on Thursday and the CPI number on Friday. However, pre-announcement season will no doubt kick it up a notch next week and steal the spotlight, as more companies decide to wave the white flag on the sales and earnings front.

We will be watching to see if the intermittent earnings bombs affect a broad swath of stocks or whether their damage is contained to a select group of competitors. Thus far, damage from these confessionary sessions has been fairly local, which is a good sign that investors are still looking ahead to better times.

Can we get an honest rally before earnings improve? Which comes first, the chicken or the egg?

Enjoy Your Weekend

Craig Seidler

Advanced Chart Reading with Retracements
Online Interactive Seminar This Sunday

Eric Utley, Contributing Editor for OptionInvestor and IntradayTrader, will be presenting a two hour interactive online seminar at 8:00 PM EST, on Sunday June 10th. Eric will teach attendees how to use Fibonacci retracement brackets to better manage risk and increase profits. The seminar will benefit both investors and traders and Eric will incorporate current examples in his presentation, along with requests from attendees.

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