NASDAQ TAKES A BREATHER -- CISCO AND INTEL LEAD THE WAY LOWER -- SEMIS REMAIN RANGE BOUND -- HEALTHCARE SHOWS RELATIVE STRENGTH -- BRISTOL MEYERS BREAKS RESISTANCE -- ECONOMIC REPORTS PRESSURE BONDS
NASDAQ PAUSES AFTER BREAKOUT ... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
After breaking consolidation resistance last week, the Nasdaq took a breather and fell back below 2500 over the last two days. The pullback is relatively mild thus far and last week's consolidation breakout is still holding. The consolidation formed a resistance zone between 2450 and 2470 from mid November to early January. With last week's breakout, the resistance zone turns into support and a strong index should hold its breakout. A move back below 2450 would show weakness and be negative for the Nasdaq. Even so, I would still hold out for a break below the 50-day moving average and key support at 2390 before turning bearish.
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INTEL LEADS SEMIS LOWER... Intel fails at resistance after earnings report. Intel met resistance from the November high and gapped down on Wednesday. This gap is short-term bearish and should be considered a breakaway gap as long as it remains unfilled. The stock is now challenging its 50-day moving average and the next support level is around 19.5-20. This zone stems from the late December high, the 200-day moving average and the September resistance break. Further weakness below 19.5 would be most bearish for Intel and the Semiconductor group.
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SMH FORMS ANOTHER LOWER HIGH... Intel is the biggest component of the Semiconductor HOLDRS (SMH) and weakness weighed on this ETF. SMH formed a bearish engulfing on Tuesday and moved sharply lower on Wednesday. This confirms the bearish engulfing and this short-term reversal formed a lower high over the past week. A triangle is now taking shape and SMH has gone nowhere since first moving above 35 in mid September. The ETF has yet to actually break down, but its performance is hardly inspiring. Watch the triangle boundaries for a decisive break.
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CISCO DROPS TO SUPPORT... Broker downgrades push Cisco sharply lower. Cisco was also a big loser on Wednesday with a decline below 27 on heavy volume. The decline over the last two days may seem sharp, but it is relatively minor compared to the run-up since early August. CSCO is up over 35% since early August and this advance is pretty much straight up without a correction. The two day decline reached support from the 50-day moving average and December lows. Further weakness below these support levels would argue for a deeper, and much needed, correction.
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HEALTHCARE PICKS UP THE SLACK ... While the Semiconductor HOLDRS moved sharply lower on Wednesday, the HealthCare SPDR (XLV) moved sharply higher and recorded a new 52-week high. XLV shows excellent relative strength and money is moving into HealthCare stocks. The HealthCare SPDR is one of the top performing SPDRs this year. This was not the case for 2006 and 2007 is already shaping up to be a better year for HealthCare.
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NEW HIGHS FOR BRISTOL MEYERS... Within the HealthCare SPDR, Bristol-Meyers Squibb (BMY) is leading the way with a 52-week high this month. The stock took a big hit in August, but quickly recovered most of its losses by the end of September. The stock broke consolidation resistance in early December and forged its first 52-week high in late December. BMY continues to show relative strength in January and remains above resistance at 26.
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ECONOMIC NEWS PUSHES BONDS LOWER... There were at least two reports weighing on the bond market today. The Producer Price Index rose slightly more than expected and Industrial Production strengthened in December. The rise in wholesale prices puts upward pressure on inflation and strength in industrial production reflects a strong economy. Taken together, these reports dampened the prospects of a rate cut from the Fed and bonds fell. Remember, rates rise when bonds fall. The 10-year T-Note Yield ($TNX) moved higher on Wednesday and is closing in on resistance from its October high. Rates bottomed in early December and the current advance shows no signs of reversing. The Utilities sector is the poorest performing sector in 2007 and rising interest rates are partly to blame.
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