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Wednesday July 14, 2004 - 08:07:47 GMT
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Equity Trading Strategies - July 14th 2004

FTSE 100 corrects to 4330, may recover and retest 4400 resistance; DAX retests 3880 support, then rally back to 3940

FTSE 100 may yet fall towards 4340 - 4320 support. But be that as it may, expect a major reversal very soon -- might even happen if the index hits 4330 today. The medium-term outlook remains positive.


- Intel Corp., the world's biggest semiconductor maker, said second-quarter earnings almost doubled to the highest in four years. Profit margins may be narrower than forecast this year as Intel boosts sales of low-priced components and discounts other products to shift inventory. Net income rose to $1.76 billion, or 27 cents a share, from $896 million, or 14 cents, a year earlier, Santa Clara, California-based Intel said in a statement. Sales increased 18 percent to $8.05 billion. Intel Chief Executive Craig Barrett said revenue this quarter will rise to $8.6 billion to $9.2 billion, higher than some analysts expected.

- Gold and silver futures in New York had their biggest declines in two weeks as the narrowing U.S. trade deficit boosted the dollar and made precious metals priced in the currency more costly for buyers using the euro. Gold's decline ends a rally in which prices reached a three- month closing high yesterday as the dollar slid against the euro. Gold for August delivery fell $6.10, or 1.5 percent, to $402.30 an ounce on the Comex division of the New York Mercantile Exchange, the biggest one-day decline since June 29 and the lowest closing price since July 6. Silver for September delivery on the Comex fell 15 cents, or 2.3 percent, to $6.392 an ounce, the largest decline for a most- active contract since June 28. Prices are up 33 percent from a year ago.

Equity Markets Summary

Japanese stocks fell today, with the Nikkei 225 Stock Average having is biggest drop in two months. Advantest Corp. led chip-related shares lower after Intel Corp. said profit margins this year may be narrower than its own forecast. The Nikkei dropped 251.97, or 2.2 percent, to 11,356.65 at the 3 p.m. close in Tokyo. The Topix index lost 14.98, or 1.3 percent, to 1151.49, with computer-related stocks accounting for more than a fifth of the index's decline.

U.S. benchmark indexes were little changed Tuesday amid concern that quarterly results from companies including Intel Corp. would show a slowdown in sales or profit growth. Intel, which released earnings after the market close, fell for a third day in four. The Standard & Poor's 500 Index added 0.79 to 1115.14. The Dow Jones Industrial Average rose 9.37, or 0.1 percent, to 10,247.59. Both indexes gained for a third day, their longest such advance since June 8. The Nasdaq Composite Index shed 5.26, or 0.3 percent, to 1931.66, its lowest since May 24.

European stocks rose on Tuesday. Carmakers including Volkswagen AG and DaimlerChrysler AG advanced after an industry report showed auto sales in Western Europe rose in June for a fifth consecutive month. The Dow Jones Stoxx 600 Index gained 0.2 percent to 236.70. The Stoxx 50 rose less than 0.1 percent. Gains were limited by BT Group Plc's drop after analysts at Dresdner Kleinwort Wasserstein advised investors to trim their holdings of the shares. The Euro Stoxx 50, a benchmark for the 12 countries using the euro, added 0.1 percent. Benchmark indexes gained in 12 of the 17 Western European markets. Germany's DAX Index rose 0.3 percent, France's CAC 40 Index added 0.1 percent. The U.K.'s FTSE 100 Index fell less than 0.1 percent. September futures on the Euro Stoxx 50 climbed 0.1 percent to 2766.

Equity Technicals:

DAX Index - the DAX goes back to 3885 then traded sideways again -- it may yet extend the downmove to 3870, per expectations. But the time for a reversal is almost upon us. It may happen very soon -- probably as soon as 3870 is reached. 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. The idea, from here on,is not to quibble about a cyclical low, but rather start building a long stake at current levels for the medium-term haul.

FTSE 100 Index - the index looks weak again -- it may yet fall towards the 4340 - 4320 baseline support area. But be that as it may, expect a major reversal very soon -- it might even happen if the index hits 4330 today. The medium-term outlook remains positive. 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. Therefore, the idea, from here on,is not to quibble, but rather start building a long stake at current levels for the medium-term haul.

S&P 500 - the index may yet rise back towards 1120 - 1122, then retest the 1107 low thereafter. It the index survives the test, then the upside trajectory will probably accelerate. The corrective decline may have ended on Monday, but we should know for sure once the recovery survives this minor scale +test of the low+ which may take place later in the week. Recent action is indeed supportive of the view that a bigger scale +test of the low+ phase is about to end and that a new bull market cycle, which started at 1076 in May would shortly resume. The new bull phase may go on and challenge the 1165 top, and thereafter extend gains to 1300 later in the year.

Dow Jones Ind Ave. - the Dow may yet rise further to 10.290 - 10,300, then retest the 10,160 trough thereafter. If the test fails, then the uptrend resumes and should and should accelerate further. We may have seen the low of the corrective cycle at 10.160, but we only know for sure once the rally has gone past 10,350, or if the low survives the forthcoming test. But all of these details should be immaterial from an investment point of view -- start building a portfolio now for a medium-term haul. We are looking for this middling correction to end soon -- the main uptrend which started at 9820 from the May low, should resume shortly. The bull market's revival 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 may yet rise back towards 1445 -1450, but another test of the 1418 trough is probably forthcoming. The development since the 1418 low tells us that a new uptrend may be in the offing. We will know for certain once the 1418 low survives the forthcoming test. But is it important that medium-term investors should start building a new portfolio, as the uptrend should reassert soon. The medium-term view remains strong -- the new bull market started at 1372 in May, and should go on to test the 1560 top, and perhaps further appreciation towards 1750 later in the year.

Nikkei - the index has likely bottomed above 11,200 and should reaffirm that with a move towards 11,800 later in the day. It is time to take the bulls case again -- a new bull uptrend may have already initated from the 10,450 low in May, which may have 15,000 - 15,500 as the major goal late in the year.

Hang Seng - no change in view --- the index should find support at 12,000 and should ratchet higher from here in order to challenge the 12,600 resistance. The market gets set for a new bull market rally. The uptrend should then resume and may target the 16,500 - 1 7,000 area later in the year.

Market Data Preview:

RETAIL SALES (June) – Wednesday, July 14, 8:30 AM EST

Why it’s important – This is the first comprehensive look at consumer spending for June, giving the most complete sense to date on consumption conditions in the quarter just completed. Recall that retail sales jumped 1.2% in May, bouncing back from a 0.6% decline in April. Auto sales rose 2.7%, while retail excluding autos posted a solid 0.7% gain.

What to expect – Background data and mathematical odds favor a sizable decline. Expect a drop in retail sales of around 1.0%, which would be the largest decline in 16 months. The main force behind this likely to be disappointing number was the 13% plunge in unit light vehicle sales reported for June earlier. Excluding autos, expect sales to have risen a minimal 0.1%, a smaller gain than in May based on evidence that chain store sales slowed significantly last month. Falling gasoline prices also pulled down this nominal number for the month in all likelihood.

What the market expects – The market consensus is only for a 0.3% decline in the headline retail sales along with a 0.3% rise ex autos. The consensus far underestimates the likely impact of the month’s sizable drop in vehicle sales on the retail number.

The key risk – The key market risk is a bigger than expected decline -- which proves that the market consensus is too optimistic. Such a large negative number would reinforce the sense that the economic is cooling (apparently evident in other recent indicators such as factory orders, payroll employment, and the ISM business survey of service industries). This would keep downward pressure on bond yields and, obliquely, equity prices. The alternative market risk, though probably less likely, is a markedly better than expected retail sales number. Though it’s not clear how it would happen, another sizable jump in headline retail sales would send bond yields up sharply.


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