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Equity Trading Strategies - July 7th 2004
Corrective decline in the stock markets may end today -- a new bull market rally poised to take off thereafter
What we're looking for in the markets is a small pullback -- a test of the low -- before the main bull market rally resumes. We may see this test end at SPX 1110 - 1105, at DJIA 10,100, at NDX 1425.
DEVELOPMENTS TO WATCH TODAY: July 7 EUROPE
A measure of the U.S. service economy fell more than expected in June, suggesting the pace of the expansion may be cooling, and indexes for prices and employment rose to records. The Institute for Supply Management's index of financial services, construction, retail and other non-manufacturing industries dropped to 59.9, the lowest since December, from 65.2 in May. The drop of 5.3 points is the largest since October 2001, in the aftermath of terrorist attacks on New York and Washington. The services report follows figures last week that showed job gains and auto sales were less than expected in June. The index still has been above 50, showing expansion, for 15 straight months.
Equity Market Summary
Japanese stocks fell today, after Lehman Brothers Holdings Inc. cut its profit forecast for Intel Corp. and some U.S. technology companies said earnings will miss estimates. The Nikkei 225 Stock Average lost 153.82, or 1.3 percent, to 11,321.45 at 9:10 a.m. in Tokyo. The Topix index slipped 14.03, or 1.2 percent, to 1134.96, with computer-related shares and automakers, Japan's two biggest export industries, accounting for a quarter of the index's drop. Nikkei 225 futures for September delivery fell 1.3 percent to 11,320 in Osaka and sank 1.6 percent to 11,315 in Singapore.
U.S. stocks fell Tuesday after Veritas Software Corp. and Conexant Systems Inc. reported disappointing results and Lehman Brothers Holdings Inc. cut its earnings estimate for Intel Corp. The Nasdaq Composite Index had its biggest decline in almost four months. The highest oil prices in a month also helped push benchmark indexes lower for a third day. The Standard & Poor's 500 Index lost 9.17, or 0.8 percent, to 1116.21, with technology shares accounting for half the drop. The Nasdaq, which gets two-fifths of its value from computer stocks, fell 43.23, or 2.2 percent, to 1963.43. The Dow Jones Industrial Average shed 63.49, or 0.6 percent, to 10,219.34. The Nasdaq's drop was the biggest since March 15, and sent the index to its lowest close since June 3. The S&P 500 closed at a level not seen since May 26.
European stocks fell Tuesday, after UBS AG advised investors to sell shares of the reinsurers Munich Re and Swiss Reinsurance Co. on concern that increased competition is eating into premiums. The Dow Jones Stoxx 50 Index shed 0.5 percent to 2648.67. The Stoxx 600 also fell 0.5 percent, with insurers accounting for a fifth of the drop. The Euro Stoxx 50, a benchmark for the 12 countries sharing the euro, slid 0.7 percent. National benchmark indexes fell in all 17 Western European markets, except Greece and Norway. Germany's DAX Index slipped 1.3 percent, France's CAC 40 Index dropped 0.7 percent and the U.K.'s FTSE 100 Index lost 0.7 percent. September futures on the Euro Stoxx 50 shed 1.1 percent to 2764.
DAX Index - the DAX fell further -- it has been to as low as 3935 -- and it is still susceptible to further declines, and we extend the downward potential to 3870, a sell-off process which may take place later in the week. The medium-term outlook remains unchanged -- expect a new upwards cycle thereafter which should go on and challenge the 4175 top further out, and perhaps go on and focus at a 4500 upside target later in the year.
FTSE 100 Index - no change in view -- the index fell to as low as 4365; the technical picture has deteriorated so much that the index may keep on going towards the 4305 - 4290 baseline. The medium-term outlook remains positive nonetheless. The next upwards phase from there may kick off a new upside sequence which will go on and challenge the 4600 top, and perhaps extend gains further towards 4750 later in the year.
S&P 500 - we did se a corrective decline which is set to test 1110 and may extend to 1105. What we are looking for is a small pullback before the main rally resumes -- a test of the low. Recent action is indeed supportive of the view that the new bull market cycle has began and would accelerate higher at some point. The new upwards phase may go on and challenge the 1165 top, and thereafter extend gains to 1300 later in the year.
Dow Jones Ind Ave. - no change in view aas the Dow fell sharply Tuesday -- we may yet see a sell-off to 10,100 . We are looking for a middling correction before the main uptrend resumes. A new bull market waits in the wings -- and eventually, we expect to see a rally to the 10,800 top, and perhaps further appreciation towards 12,000 later in the year.
NDX 100 - The index has been to 1440 area, and may extend to 1430 - 1425. But the uptrend should reassert thereafter. The medium-term view remains strong -- a new bull market has taken the first steps -- we expect to see a test of the 1560 top thereafter, and perhaps further appreciation towards 1750 later in the year.
Nikkei - a pullback to 11,200 was seen, but we now take a shot at 11,000 before support firms up. However, a new bull market should initiate soon from those support levels, which may have 15,000 - 15,500 as the major goal late in the year.
Hang Seng - the index may pull back to 12,000 then ratchets higher to challenge the 12,600 resistance. The scenario of a corrective decline back to 11,800 - 11,700 may be running out of time, as the rest of the market gets set for a new bull market rally. The uptrend should then resume and may target the 16,500 - 17,000 area later in the year.
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