Market Week in Review

S&P 500 1,107.30 -2.92% for the week.

U.S. stocks finished lower last week on fears over rising inflation, escalating violence in the Middle East and China's cooling economy. The NASDAQ had its largest weekly decline in two years as networking, semiconductor and disk drive stocks fell substantially. Nortel Networks, North America's biggest maker of telephone equipment, tumbled 35% after it fired its CEO because of an accounting misstatement that will cut last year's earnings in half. Furthermore, JDS Uniphase, the world's biggest maker of fiber-optic network parts, sank 28% for the biggest decline in the S&P 500. The company said it may lose more money than analysts expected this quarter. Defensive sectors, such as utilities, tobacco and pharmaceuticals all displayed relative strength for the week.

There were a few positive developments last week. Most of the economic and corporate reports were better-than-expected. As well, Genentech and OSI Pharmaceuticals soared after saying their experimental Tarceva medicine extended the lives of lung-cancer patients who no longer responded to other treatments. This is the first time any drug in this class has shown a survival benefit. United Healthcare agreed to purchase Oxford Health Plans for about $56.79/share. Finally, more than 80% of S&P 500 members have reported results and profit at those companies has climbed 27%, with 75% beating expectations. The average positive surprise has been 8%.

Bottom Line: The semiconductor index broke substantially below its 200-day moving average last week, while many other sub-sectors of technology are hovering near this key technical level. Investor psychology has deteriorated a great deal in the last few weeks as the media's obsession with negativity and terrorism over-shadow all positive news. The many exceptional economic and corporate reports have been ignored by investors for the few that have been troublesome. Even as China attempts to slow-down its scorching economy to 7% growth from 10%, investors focus on the damage this will do to companies that sell to China rather than the positive affects this will have on inflation. While inflation has accelerated from its historically low levels, it is not a problem as of yet and does not appear it will become one for the foreseeable future. Historically, stocks perform exceptionally well during periods of slightly rising inflation as companies regain pricing power, boosting profits. I also believe it is very positive for the sustainability of long-term world growth that China is addressing its problems now. This should prevent a collapse in their economy, which is what the China "bubble" bears have been predicting. Technology "bubble" stocks dropped substantially numerous times in the 90's, only to rebound to higher highs, before peaking in 2000. I think companies that sell to China will outperform for many more years before their eventual peak. These stocks are in a bad correction within a long-term secular bull move in my opinion.