Stocks Finish Mostly Lower on Weakness in the Tech Sector

Indices
S&P 500 1,474.77 -.06%
DJIA 13,266.29 -.25%
NASDAQ 2,696.00 -1.92%
Russell 2000 780.90 +.64%
Wilshire 5000 14,855.40 +.01%
Russell 1000 Growth 613.28 -.73%
Russell 1000 Value 803.80 +.76%
Morgan Stanley Consumer 735.22 +.73%
Morgan Stanley Cyclical 1,017.98 +.26%
Morgan Stanley Technology 634.48 -3.57%
Transports 4,696.73 +.72%
Utilities 526.89 +1.99%
MSCI Emerging Markets 157.79 -.13%

Sentiment/Internals
Total Put/Call 1.24 +15.89%
NYSE Arms .86 -46.61%
Volatility(VIX) 26.16 -1.25%
ISE Sentiment 119.0 +10.19%

Futures Spot Prices
Crude Oil $95.60 -.80%
Reformulated Gasoline 243.65 -.17%
Natural Gas 7.73 +1.43%
Heating Oil 260.15 -.61%
Gold 833.90 +.05%
Base Metals 241.32 -1.77%
Copper 321.75 -1.27%

Economy
10-year US Treasury Yield 4.28% -4 basis points
US Dollar 75.43 +.03%
CRB Index 353.85 -.16%

Leading Sectors
Alternative Energy +2.5%
Utilities +1.99%
HMOs +1.65%

Lagging Sectors
Networking -3.19%
Computer Hardware -3.59%
Internet -4.66%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Most US stocks rose after a final-hour rally in banks from their lowest level in two years overcame a sell-off in technology shares led by Cisco Systems(CSCO).
- Qualcomm Inc. said profit rose 84% after selling more chips. The shares fell 7.4% after a forecast missed analysts’ estimates.
- pricelin.com’s(PCLN) gross travel bookings for the 3^rd quarter rose 54% to $1.39 billion. The shares jumped 9% in after-hours trading.

BOTTOM LINE: The Portfolio finished lower today on losses in my Computer longs, Internet longs, Semi longs and Software longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly negative today as the advance/decline line finished mildly lower, most sectors gained and volume was heavy. Measures of investor anxiety were above about average into the close. Today's overall market action was mildly bearish. Meaningful weakness was almost exclusively concentrated in market leading tech stocks today. Most sectors gained. While today's afternoon rebound, led by financials, was a positive, I would have liked to have seen more evidence of angst at the lows. Copper has broken down through its uptrend that has been in place since January. Oil is near session lows, falling 0.88, but continues to levitate near $100 per barrel on extreme speculation by investment funds. I want to see how Asia reacts to our stock rebound before further shifting market exposure. Nikkei futures are indicating a flat open in Japan right now. The AAII percentage of bulls dropped to 36.19% this week from 44.7% the prior week. This reading is back to below-average levels. The AAII percentage of bears soared to 51.4% this week from 36.5% the prior week. This reading is now at elevated levels. The percentage of bears has only been higher six other times over the last decade. Moreover, the 10-week moving average of the percentage of bears is currently at 36.6%, a high level. The 10-week moving average of the percentage of bears peaked at 43.0% at the major bear market low during 2002. The 50-week moving average of the percentage of bears is currently 37.3%, an elevated level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990 to July 1991 and March 2003 to May 2003, both of which were near major stock market bottoms. The extreme readings in the 50-week moving average of the percentage of bears during those periods peaked at 41.6% on Jan. 31, 1991, and 38.1% on April 10, 2003. We are currently still close to eclipsing the peak in long-term bearish sentiment during the 2000 to 2003 market meltdown. I find this astonishing, notwithstanding the recent pullback, given that the S&P 500 is 107% higher from the October 2002 major bear market lows and just made a new record high three weeks ago.

Stocks Lower into Final Hour, Weighed Down by Tech

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Software longs, Internet longs and Computer longs. I added to my (IWM)/(QQQQ) hedges on the slightly higher open this morning and then covered some of them and some of my (EEM) short this afternoon, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is lower, most sectors are falling and volume is heavy. Investor anxiety is above-average. I am seeing some positive developments. Banks are now 1% higher, and the Broker/Dealer Index is about even. Market leaders are cutting losses. The NYSE reported recently that short interest on the exchange rose another 2.4% the last two weeks of October. Here are the 25 stocks with the largest percentage increases in their short interest relative to their float over that time period:

1. XJT +13.3%
2. RDN +9.2%
3. PFB +9.0%
4. VMW +9.05
5. CMG +8.7%
6. HAR +7.8%
7. SPF +7.7%
8. SCA +6.8%
9. HCR +5.7%
10. IMB +5.4%
11. ABK +5.2%
12. WCI +5.0%
13. MTG +4.9%
14. NDN +4.8%
15. CFC +4.7%
16. HOS +4.6%
17. DSL +4.5%
18. UA +4.5%
19. ETH +3.9%
20. MIR +3.9%
21. MGI +3.8%
22. USG +3.7%
23. EMS +3.7%
24. FED +3.5%
25. CEC +3.5%

It is also noteworthy that short interest on the Amex rose 4.2% over the last two weeks of October, led by a 20,582,364 share increase in short interest in the Financial Sector Select SPDR (XLF). The XLF is now has the second largest short position on the exchange behind the SPDRs (SPY). I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Kenneth Brusda, president of North Star Asset Management, said he expects “headline news” on writedowns from losses related to subprime mortgages will be “over in the next couple of quarters.”
- Copper is falling to an 11-week low as rising supplies and the prospect of slower economic growth raised speculation that demand will slump.
- The US dollar will keep its status as the “world currency” for 15 to 20 years, said Stephen Roach, chairman of Morgan Stanley Asia Ltd.
- Petroleo Brasileiro SA(PBR), Brazil’s state-controlled oil company, said its Tupi field may contain as much as 8 billion barrels of oil and natural gas, an amount that could boost the country’s reserves by 62%.
- US Treasury notes rose to the highest since 2005 as Federal Reserve Chairman Ben S. Bernanke told Congress he expects the US economy to “slow noticeably.”

NY Times:
- India’s Solution for Oil Prices: Ban Speculation by Banning Trading. There are “no supply constraints right now, and demand has not escalated out of control,” Mr. Srinivasan said. Rather, trading on Nymex, is contributing “enormously” to high prices, he said. If crude were eliminated from the commodities traded on Nymex, Mr. Srinivasan predicted, the world would “see a drastic reduction in the price.” Mr. Srinivasan’s idea is based on the widely held belief that investors are artificially driving up oil prices. Hedge funds, banks and pension funds have poured capital into oil trading in recent years, betting that demand will increases. Analysts say these bets have become self-fulfilling prophecies, helping to push prices higher.
- US troops have driven al-Qaeda in Iraq out of every Baghdad neighborhood, according to Major General Joseph Fil, the US commander in the city.
- The Democratic chairman of the House Ways and Means Committee has proposed legislation that would effectively halt some current tax break audits of people who get a tax break for living and operating a business in the United States Virgin Islands.

NY Post:
- AQR Capital Management LLC, a hedge-fund company with about $38 billion in assets, pulled a planned IPO after several investors withdrew their funds.

Financial Times:
- BP Plc(BP) CEO Tony Hayward may increase capital expenditures, because BP’s recent polity of being conservative in spending on alternative and other higher-cost fuel sources makes less sense if oil prices stay high.

Job Market Still Healthy

- Initial Jobless Claims for this week fell to 317K versus estimates of 325K and 330K the prior week.

- Continuing Claims fell to 2579K versus estimates of 2560K and 2583K prior.

BOTTOM LINE: The number of Americans filing first-time claims for unemployment benefits fell more than forecast, suggesting the job market remains resilient, Bloomberg said. The four-week moving average of jobless claims rose to 329,750 versus 327,750 the prior week. The unemployment rate among those eligible to collect benefits held steady at a historically low 1.9%. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- First Solar(FSLR), a Phoenix-based power-module maker, said third-quarter profit soared 10-fold on rising demand for its thin-film technology. First Solar gained as much as 24% in after-market trading.
- Copper fell to an eight-week low on concern that rising inventories are signaling weaker demand for the metal used in pipes and wires.
- China, the world’s second-largest energy users, plans to increase natural gas production by 50% from last year’s levels by 2010.
- Washington Mutual(WM), the largest US savings and loan, fell the most in 20 years after Democratic NY Attorney General Andrew Cuomo said he found a “pattern of collusion” on mortgage appraisals linked to the company.
- Morgan Stanley(MS) said its subprime mortgages and related securities lost $3.7 billion in the past two months, after prices sank further than the firm’s traders expected.

Wall Street Journal:
- More than four million Chinese-made toys sold in the US as Aqua Dots are being recalled after reports that children became seriously ill after swallowing beads containing a chemical that causes a reaction in the body that mimics a date-rape drug’s effect.

MarketWatch.com:
- Tax bill has small businesses seeing red. The House’s top tax-writer claims that small business owners would enjoy “overwhelming” relief under a major reform bill he recently introduced. So why are small business advocates underwhelmed – and in many cases downright worried?

BusinessWeek:
- As Oil Nears $100, Look Out Below. Analysts say that if speculators flee the market en masse, prices could drop even more quickly than they’ve risen. Speculators have played a growing role in the oil market in recent years. There are 595 hedge funds that engage in at least some energy trading now, more than triple the 180 funds involved just three years ago. The assets involved in such trading total more than $200 billion, up more than 60% from the beginning of the year.

Reuters:
- Fed officials hint at potential for lower rates.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MHS), target $112.
- Upgraded (FWLT) to Buy, target raised to $197.
- Reiterated Buy on (UTHR), raised target to $130.
- Reiterated Buy on (RL), target $85.

Night Trading
Asian Indices are -3.0% to -2.50% on average.
S&P 500 futures -.90%.
NASDAQ 100 futures -1.48%.

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Earnings of Note
Company/EPS Estimate
- (BRL)/.72
- (DF)/.15
- (LAMR)/.14
- (URBN)/.24
- (CVC)/-.07
- (CEP)/.46
- (HANS)/.49
- (MMC)/.31
- (GBE)/.08
- (CCU)/.38
- (ENER)/-.07
- (DYN)/.14
- (ROK)/1.06
- (F)/-.47
- (STN)/.41
- (CELL)/.13
- (QCOM)/.53
- (CPKI)/.23
- (HTCH)/.09
- (DIS)/.41
- (CEPH)/.85
- (NVDA)/.36
- (DLB)/.26
- (PCLN)/1.29
- (PSUN)/.13
- (CXW)/.25
- (FORM)/.40

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for this week are estimated to fall to 325K versus 327K the prior week.
- Continuing Claims are estimated to fall to 2560K versus 2588K prior.
- The Trade Deficit for September is estimated to widen to -$58.5 billion versus -$57.6 billion in August.
- The Import Price Index for October is estimated to rise 1.2% versus a 1.0% gain in September.

10:00 am EST
- Preliminary Univ. of Mich. Consumer Confidence for November is estimated to fall to 80.0 versus 80.9 in October.

Other Potential Market Movers
- The Fed’s Bernanke speaking, ECB Policy Meeting, (QLTI) analyst day, (BBI) analyst meeting, (MEI) Investor Day, (BRCM) analyst day, (JDSU) analyst meeting, (CY) analyst meeting, (JNJ) analyst meeting, (ATHR) analyst day, (DNR) analyst meeting, Merrill Lynch Global Energy Conference, Goldman Sachs Industrial Conference, Goldman Sachs Capital Goods Conference and Bank of America Investment Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by financial and automaker stocks in the region. I expect US equities to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the day.