Friday's Action:   Shares of Procter & Gamble helped prop up the Dow for much of the session, but Blue Chips followed the Nasdaq lower in late trading. Technologies tumbled for the fifth straight session, with the Nasdaq down about 6% for the week, its biggest decline since September. Major world markets posted mostly lower results on Friday. London's FTSE closed down 0.66%; Frankfurt's DAX closed down 0.59%, and Paris' CAC 40 closed down 0.41%. Japan's Nikkei closed down 2.02%, Hong Kong's Hang Seng closed down 0.52%, and Sydney's All Ordinaries closed unchanged. In economic news, Personal Income in March rose 0.4% and Personal Spending also went up by 0.4%. Consumer Sentiment in April was revised to 94.2 from 93.2, down from 95.8 in March and finally, the Chicago PMI for April came in at 63.9, up from 57.6. Volume came in at 1.63 billion shares traded on the NYSE and 2.18 billion shares traded on the Nasdaq. Market breadth was negative, with NYSE declining issues over advancing issues by 1.41, and down volume over up volume by 2.44; Nasdaq declining issues over advancing issues by 2.31, and down volume over up volume by 5.78. Leading sectors were Hospitals, +0.77%, Integrated Oils, +0.44 and Drugs, +0.22%. Laggards were Internets, -3.64%, Networkers, -3.63% and Hardware, -3.04%. Nasdaq 100 futures closed 33 pts lower to settle at 1403, while the S&P's settled down 8 pts at 1106.10.

Weekly Recap:   The threat of rising interest rates hung heavy on investors minds all week and overshadowed another round of impressive earnings results. The consensus was that rising interest rates will slow the economic recovery and corporate earnings growth. Those worries were exacerbated by reports that China is looking to cool down its hot economy by raising interest rates and curbing lending activity. Escalation of military action in Iraq, rising oil prices and ongoing worries about terrorist activity also weighed on the market.

For the most part, economic news was encouraging as new home sales, existing home sales, consumer confidence, initial claims, and the Chicago PMI were all better than expected. Good economic news is being treated as bad news, however, since it is seen as a catalyst for the Fed to raise rates sooner rather than later. The most important news of the week was the advance Q1 GDP report. It came in weaker than expected at 4.2% (consensus 5.0%), but the market's negative response was linked to the chain deflator which triggered inflation concerns, as it was stronger than expected at 2.5% (consensus 2.0%).

For the week, the Dow lost -2.4%, the S&P 500 finished -2.9% lower and the Nasdaq fell -6.3%. The small cap Russell 2000 lost -5.2%. Next week, market watchers will be anxiously awaiting the FOMC policy statement on interest rates on Tuesday. The market isn't expecting any change in the fed funds rate, as Fed Funds Futures are currently pricing in just 8% odds of a 1/4-point hike at the May 4th meeting. The committee will most likely change the wording of its policy directive to a neutral stance on the economy that will ultimately be regarded as setting the stage for a tightening. If the equity and bond markets don't sell-off following such a shift, it will suggest that the news has already been priced in. The April employment report on Friday will also be an important gauge of market sentiment. Major companies reporting earnings next week include Cephalon, InterActiveCorp, Nanogen, priceline.com, Principal Financial Group, XL Capital, Clear Channel Communications, Dean Foods, Hecla Mining, Marvel Enterprises, Northrop Grumman, Qwest Communications, Safeway, Tenet Healthcare, Wild Oats Markets, Credit Suisse Group, Roxio, CareMark Rx, EchoStar Communications, NVIDIA, Williams Companies, XM Satellite Radio, and Martha Stewart Living Omnimedia.

The Fate of the Dollar:   The major sell off in the US Dollar was halted during the first quarter when it traded above its 50-day average in mid-February. The recent dollar rally off the February low has been the major cause for the decline in commodity prices over the past few months, especially gold. But the Dollar is now facing stiff resistance at its 200-day moving average and the trendline formed by the June and October lows. If the upturn was just a counter-trend rally in a secular bear market, then the dollar should stall soon and start to weaken again.

A major factor for the Dollar's strength is the net position of foreign private investors. Foreigners are heavily invested in the US, but that rate of investment is likely to continue to slow. Over the past few years, the rate at which new private sector investment has flowed into the US has fallen sharply, but that hasn't yet caused a flight of investment capital from the US capital markets. This is because the reduction in the amount of money invested by the foreign private sector has been essentially offset by large investment increases by foreign governments, particularly the Bank of Japan. In other words, foreign central banks have played a major role in propping up the Dollar. This influx is not likely to continue in the future, however. As the US balance of payments deficit continues to grow, dollar support by foreign central banks will eventually become unsustainable.

The Peak Open Interest Indicator:   The Peak Open Interest Indicator (POI) has predicted where the S&P 100 Index (OEX) will close on options expiration day with a high degree of accuracy. The OEX tends to be attracted to price levels where the largest amount of open interest exists. The indicator is simply a chart showing the amount of call and put options open at each strike price in any given expiration month. Typically, a stock or index will be attracted to the strike price that has the most combined open options contracts for the front month, or the month closest to expiring. What makes this indicator particularly useful for the OEX is its low implied options volatility index. Below is a chart of the POI for the April OEX options contracts with one week to go before expiration.

A review of some previous months' options activity illustrates how the indicator functions. February's expiration saw the OEX close at 564.88, only -0.90% from peak open interest at the 570 strike level. In March, the 550 strike held the most open interest. The OEX was once again attracted to that strike level, this time closing at 543.88, or just -1.15% away. In fact, over the past 13 months, only twice (November 2003, and March 2004) did the OEX close more than one percent away from its peak strike price on expiration day. Below is a table of the previous 13 months of data displaying this phenomenon.

The peak strike level will obviously change as expiration draws closer. But that does not diminish the usefulness of this indicator. Of note is the fact that the peak strike level does not normally changed at least one week prior to expiration. One strategy employing this indicator is be to put on either a bearish call spread or bullish put spread. For example, in February, a trader could have put on a bullish put spread, selling the Feb 560 Put and simultaneously buying the Feb 555 Put. The spread credit was good for $190 per contract. Since the OEX closed at 564.88 and above the 560 strike, both puts expired worthless. The trader would have received the full credit amount less commissions. A $5,000 investment (10 contracts) would have returned $1,900 for a 38% gain. The March peak open interest settled at the 550 strike during the last week before expiration. We recommended opening a Bullish Put Spread, selling the Mar 540 Put and buying the Mar 535 Put, for a $1.35 credit. Since the OEX closed at 543.68 on expiration, both of our options expired worthless and we captured the full credit, less commissions. We were only "in the market" for four days and realized a 27% return on the trade.

The April peak open interest settled at the 560 strike during the last week before expiration. We recommended opening a Bullish Put Spread on Tuesday, April 13th, selling the Apr 550 Put and buying the Apr 545 Put, for a $1.30 credit. Since the OEX closed at 554.94 on Friday, both of our options expired worthless and we captured the full credit, less commissions. We were only "in the market" for four days and realized a 26% return on the trade.

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Commercial Hedgers were better buyers in the S&P's last week, but still remain net short. For the intermediate term, their position should be considered a bearish sign.

Sentiment Surveys:   The latest Investors Intelligence survey showed that the percentage of bullish newsletter writers came in at 50%, while the percentage of bears was 22.4%. The bullish ratio (bulls/bulls +bears) was 69%.

The latest AAII survey showed no change at 50% bulls, and a decrease to 22% bears. The bullish ratio came in at 70%, while the 4-week moving average remains high at 74%. One thing to note about the AAII survey is that, while membership in this organization is quite large as investor groups go, the number of members that actually participate in the survey is very small. Thus, large fluctuations in survey results from week to week are not uncommon.

The latest Market Vane survey came in at 60%, indicating that the majority of commodity trading advisors (CTA's) remain bullish on the future direction of the S&P's.

The Short Term Outlook; 1-5 Days:   We said in Thursday night's column that the odds favored making lower lows on Friday, and that happened. Friday's price action favors making lower lows on Monday. The Nasdaq Composite continued to lead the market lower, dropping -1.97% Friday versus -0.20% for the NYSE Composite. The COMPQ:NYA Ratio chart below underscores the weakness in the Nasdaq since it made a short-term peak one week ago. In our Thursday night comments, we wrote, "The next support level for the Nasdaq is it's 200-day moving average, which is roughly 25 pts below today's close. A bounce off that long-term support line during March prevented a more serious market decline and led to a short-term bounce. A retest of the 200-day ma will be important for the Nasdaq and the rest of the market, and that could well happen tomorrow." The Nasdaq did close below it's 200-day ma on Friday, bringing the next support zone at 1887-1897 into play. Almost all of our technical and sentiment indicators are extremely oversold (see our Short Term Indicator graphs), suggesting that the market is very close to putting in a tradeable low. We suspect the Nasdaq will attempt to rally Monday and into Tuesday before the Fed announcement, but then sell off again, possibly undercutting the March low.

SMT's Pivot Point Forecast; 1-2 Weeks:   Our Pivot Point RS indicator is on a SELL signal. Our next Pivot Point is forecast to occur on or near May 7th.

The 60-mn NDX chart below shows that the StochRSI indicator is in the BUY zone. For Monday, resistance for the S&P's comes in at 1118 and then 1126. Support lies at 1097 and then 1091.50. For the Naz, resistance comes in at 1441.50 and then 1452. Support lies at 1390 and then 1377.

The Intermediate Term Outlook; 2-6 Weeks:   The Risk Aversion Indicator, represented by the NDX:Dow Ratio, has been a good forecaster of the general market trend over the last couple of years. As the chart below shows, the ratio crossed below its 70-day exponential moving average at the end of January, coinciding with the year-to-date high for the Nasdaq Composite on Jan 26th. The slope of the EMA has now turned flat however, confirming the trading range the market has been locked in over the last three months.

Our Market Trend Indicator (MTI) is currently negative and trended lower on Friday.

Good Trading!

Charts and data appearing in today's column are courtesy of:
StockCharts.com

"keep in mind that there is nothing in the way of support underneath, and so consider waiting for a reversal to emerge before jumping in"

Have you traded any of our recommended plays along the way? We'd love to hear from you and how you did. Please send your stories to comments@talkingpoints.com.

The computer hardware sector of the stock market has struggled somewhat, even with the apparent upswing in the economy. However, there is reason to believe this could definitely change as economic growth confidence continues to grow and the long awaited business spending starts to increase. There are a handful of hardware stocks poised to take advantage of this anticipated uptick in capital spending.

The first hardware issue that comes to mind is International Business Machines (IBM). Granted hardware is just one of the many things IBM is into but hardware sales still play a significant role in the over all revenue picture. The product offerings range from their traditional mainframe z-series to the midrange servers i-series to the UNIX servers p-series. Their footprint is in virtually every industry and when business spending finally picks up look for these product lines to benefit tremendously. The partnerships and delivery capabilities are certainly a strength, which puts IBM in a very good position to capitalize on the expected market growth in hardware sales.

Another hardware company that is well positioned to take advantage of an increased investment in hardware is Sun Microsystems (SUNW). This company has a wide variety of servers starting with the entry-level servers used for the Web and host ERP database. The midrange servers address larger databases, server consolidation, and data warehousing needs. You can also choose from their high-end servers that are designed for large-scale mission critical applications like offloading mainframe applications and high performance computing.

In addition, the company possesses specialty type servers such as the NEBS-Certified server, which is for harsh environments that need continuous availability and easy management. This also includes the Server Appliances product that is built specifically for Internet web hosting and security. These wide range of hardware applications coupled with Sun Microsystems’ strong client base and partnerships has the company more than ready to pounce on any uptick in capital investment.

Hewlett Packard (HPQ) is also a company that should significantly benefit from future growth in the hardware sector. Much like Sun Microsystems this firm has a nice line of servers designed to meet many different needs. The lower end of the server line is compatible with the Windows, the Linux, and the Netware environments. They also have reliability servers with their HP integrity offering along with the HP 9000 servers for more robust applications. The current customer base along with some key partnerships should allow Hewlett Packard to capitalize on improve market conditions in the hardware arena.

Dell Computer (DELL), a company that has traditionally been known for their desktop and notebook sales, is in a very good position to profit from their server technology especially when it comes to the small and medium sized businesses. The PowerEdge 700 server and the PowerEdge 750 server give Dell great traction for companies where cost and ease of management is a significant issue while at the same time meeting the necessary technical requirements of these small to medium sized firms. This niche should serve Dell well if the economy continues to pick up speed because of the demand that has built up in this area for that last couple of years.

To be sure there are other hardware infrastructure type vendors that should also profit with the expected increase in business spending such as Emulex (ELX) and Iomega (IOM) to name just a few others. However, the companies mentioned in this article should do quite well on an uptick in business spending given their diverse product line and financial strength. In addition, these are very liquid issues that have actively traded options including LEAPS, which gives the savvy investor even more flexibility when it is time to pull the trigger. Keep tracking the capital expenditure number because this will be a key indicator on determining when to enter this area of the technology market.

Happy Trading.