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Bulls may be BANKING on tech rally

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The very broad NASDAQ Composite (COMPX) rose more than 1%, where for the first time since July 21, volume breached the 2 billion share mark with chips, networkers, software internet sectors all recording 3% gains.

While not listed at the NASDAQ, Dow component SBC Communications (NYSE:SBC) $25.68 -2.95% provided today's catalyst for technology sectors when the telecommunication service provider said it was accelerating plans to spend as much as $6 billion to connect 18 million households within the next three years. SBC had previously said to would continue to build out its high speed fiber-optic network over a 5-year period.

But the stepped-up rollout comes after the company reported quarterly net income of $2.1 billion, or 63 cents a share, up from $1.22 billion, or 37 cents, a year ago.

SBC's stepped up plans had the company awarding Alcatel (NYSE:ALA) $14.24 +11.25% a 5-year contract worth $1.7 billion, to build out SBC's Project. The Networking Index (NWX.X) 226.01 +3.09%, which Alcatel is a component, lifted from curling higher 21-day and 50-day SMA's with CIEN $2.39 +9.13%, ADCT $2.23 +7.21% and CMVT $20.75 +5.7% leading the sector's gains.

Bulls that were looking to add some fiber to their diet bid up shares of JDS Uniphase (NASDAQ:JDSU) $3.56 +7.22% and Corning (NYSE:GLW) $10.73 +2.77%.

The AMEX-listed Internet Infrastructure HOLDRs (AMEX:IIH) $3.95 +10.33% surged above their 200-day SMA ($3.66) on unusually heavy volume of 174, 500 shares.

In SBC's conference call, the company said earnings were primarily drive by the addition of 402,000 high-speed DSL customers in the third quarter.

As SBC was adding customers to its high-speed DSL service, online auctioneer $99.59 +9.00% added to its string of new all-time highs to trade as high as $100.18 and have the CBOE Internet Index (INX.X) 186.02 +3.10% springing higher from its 200-day SMA (180.64) and moving above its April high-August low 61.8% retracement of 183.45.

In a very confusing, yet highly anticipated earnings report, Internet search giant Google (NASDAQ:GOOG) $149.38 +6.32% slid to $140 when it reported headline revenues (ex-traffic acquisition costs) of $503 million and adjusted EBITDA of $321 million. Nobody really knew what to expect, but the stock now ticks at $161.30 as it was confirmed that analysts' consensus estimate of $284.51 million was comparable.

GOOG's mysterious management team would not speculate on the ad market, but said demand for their advertising is large and unmet. Analysts reported kept asking GOOG execs to break down the divisions to get metrics for performance, but GOOG officials had their own itinerary to follow, saying that Adsense is half of revenues and is an "incredible success" and content portion is now becoming significant contributor. As far as CapEx is concerned, management said historical investment rates will likely prevail and utilization rate is "very high."

How's that for some fundamental analysis?

Are tech bulls BANKING on a continued rally?

They may be. While the S&P Banks Index (BIX.X) 354.41 -0.07% finished down fractions, some may have noted that Silicon Valley Bankshares (NASDAQ:SIVB) $39.10 +3.3%, while not a component of the BIX.X, jumped higher in today's session.

While that regional bank fund manager has not yet returned my phone call (10/10/04 Ask the Analyst), he may well be busy accumulating shares of SIVB on thought that a second leg of capital investment does present itself with telecom spending suddenly accelerating.

U.S. Market Watch - 10/21/04 Close

Chip giant Intel (NASDAQ:INTC) $21.69 +1.11% closed at its highest level in more than a month, where I think it was Analog Devices' (NYSE:ADI) $40.30 +5.33% management saying this year's slowdown in profits has been largely due to industry inventory corrections, not necessarily an economic slowdown. We'll remember Intel (INTC) being slammed lower this summer when it said margins were under pressure after the company misjudged demand and ramped production and misjudged customer demand.

ADI also said that in China, an inventory buildup in handsets combined with a government-engineered credit squeeze had a considerable impact on sales. But CEO Jerald Fishman added that "feedback from customers in China indicates inventory levels are low and government constraints are likely to end later this year or early next year," factors that could signal better growth prospects ahead.

Analog Devices' comments seemed to echo those of Intel's CEO Andy Bryant when Intel reported its recent quarterly results, where Mr. Bryant noted that inventory builds had started to abate, and he was hopeful that improved margins would return by the end of the year.

Market Snapshot / Internals - 10/21/04 Close

The Dow Industrials (INDU), which has been leading decline, lagged gains in today's session. Price heavyweight Caterpillar (NYSE:CAT) $77.03 -4.16% turned lower at the open, after bidding as high as $83.75 in this morning's pre-market. The heavy equipment giant said business was the strongest it has seen in years, but was cautious going forward due to higher materials prices potentially being a negative should an expected slowdown present itself in 2005.

Insurer American International Group (NYSE:AIG) $56.45 -1.99% also weighed on the Dow after saying a federal grand jury is investigating products it sold that companies might have used to make their earnings look better. That continued the fallout in the insurance sector that began a week ago when New York Attorney General Eliot Spitzer sued insurance broker Marsh & McLennan (NYSE:MMC) $24.85 -0.28% and said the company involved other insurers in a bid-rigging scheme.

Pivot Matrix - Index Trader Wrap

Correlative near-term support for the NDX/QQQ moves higher to WEEKLY R1 and MONTHLY R1, where broader technology gains had the NDX/QQQ as well as the SOX.X trading and closing at, or slightly above their WEEKLY R2s.

NASDAQ-100 heavyweight Microsoft (MSFT) $28.56 -0.48% slid to $28.10 in tonight's extended session after saying profits rose to $2.9 billion, or 27 cents per share, including stock-based compensation, which compared to a profit of $2.6 billion, or 24 cents per share, a year earlier.

The Redmond, Washington-based software maker said revenue rose to $9.19 billion from $8.22 billion.

For the current quarter, Microsoft forecast a profit of $0.28 per share, including stock-based compensation.

The company said it expected to record revenue of $10.3 billion to $10.5 billion, which was shy of Wall Street's consensus estimate of $10.63 billion.

NYSE Composite ($NYA.X) Chart - Daily Interval

Last night we looked at the 10-year YIELD Chart ($TNX.X) as the benchmark bond's yield was sitting at a level I felt/feel is rather important. As I review the NYSE Composite Chart ($NYA.X) it too is sitting on a rather important near-term level of support and its 50% retracement of 6,505.

When we look at the NASDAQ Composite (COMPX) 1,953.62 +1.06% we will see it sitting just BELOW its 200-day SMA, but just recapturing its 50% retracement from its January highs to recent August lows. More on this in a minute, but let's take a quick look at the BIX.X, as I want to tie it with the NYSE and the 10- year yield chart.

S&P Banks Index (BIX.X) Chart - Daily Intervals

We can make a tie between the NYSE pullback and "double bottom" it is trying to find at its 50% retracement, with the S&P Banks (BIX.X). One comment I've seen more than a couple of times in recent quarterly earnings is that the decline in Treasury YIELD, which sets the interest rate for CONSUMER borrowing, is starting to narrow the spread between what a bank is borrowing at and what they're generating new loans at.

As the 10-year YIELD ($TNX.X) pulls back into a "zone of support", so has the BIX.X.

As noted back in May, we can't necessarily tie a "finite level" of Treasury YIELD to the BIX.X, but we should understand its impact on the banking industry.

It was a partial negative that YIELD rose, as it made it a little more difficult to entice consumers to borrow. Conversely, the main reason the banks surged from their May lows, is because the spread between what they were borrowing at, and lending at, widened considerably. Think of that "widening" of the spread as a technology company's "gross margin."

NASDAQ Composite Index (COMPX) Chart - Daily Intervals

Now, the COMPX looks nothing like the BIX.X, but after looking at the NYSE Comp chart, and its BLUE conventional retracement, we're looking at the NASDAQ Comp. and its conventional retracement. Both very near their 200-day SMAs and 50% retracement.

I've noted that the INX.X has broken above its recent high, which would equate to the recent NASDAQ Comp high of 1,970. Great!

Oh shoot! The Disk Drive Index (DDX.X) 101.51, rather representative of "storage," was looking so strong a couple of weeks ago as it broke above its 200-day SMA after a strong move from then 100 resistance.

We get the distinct feeling that momentum players are in, then they're out, then they're back in again, rotating quickly from sector to sector.

Now the SOX.X is back to challenge its recent 412 relative high set on 10/04/04, which came days after the COMPX had that one-day close above its 200-day SMA.

Software continues to show up as the stronger sector, not only on its bar chart, but its sector bullish % from Dorsey/Wright.

Software, software, software.... internet, internet, internet.... telecom spending on fiber for broadband, broadband, broadband.

While there's plenty of cash in the nations M2 supply (see this morning leading indicators and 10/17/04 Ask the Analyst) I still think equity markets want to see some selling in Treasuries.

Jeff Bailey

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