Record close but did you look behind the numbers?
The record gains in the Dow today proved that the third time over 11,100 was the charm. However, the rise was squarely on the backs of only three stocks. IBM soared to a new all time high of $246, up +$37 since we picked it on May 2nd at $209. IBM soared on the news by it's CEO that 25% of it's revenues now come from Ecommerce and Y2K was not a problem for them but was still a plus in their sales. HWP was up +3.75 on excitement for their upcoming earnings on Monday. JPM was up strong on takeover rumors even though the rumors were strongly denied on CNBC late in the afternoon.
The point here is the massive total of Dow points that these three stocks contributed today. The total actual point rise was +$31.88 and this equates to roughly +146 Dow points. Clearly without the IBM blowout (+94 Dow points) and JPM and HWP the Dow would have been negative by about 40 points. There were many Dow stocks that finished only fractionally positive and were up only in sympathy to the +100 point Dow. Had the big three not had such striking gains the rest of the crowd would probably have succumbed to the same market weakness that sank the Nasdaq after lunch.
The Nasdaq had gapped open this morning but somebody rang a bell around 1:30 and it was all downhill from there. The Internets led the sell off and the average took a serious hit. At 1:30 we hit the high for the day of 2632 and we closed at 2582, a drop of -50 points in a very short time to close at the very low of the day. This may not be a red flag since the Nasdaq was up over +150 points from its low last Friday and this could just be normal profit taking. The Dow's +1300 point climb from April 1st has still not met with any serious profit taking and continues to make us cautious.
The PPI report this morning again showed no inflation in sight with only a +.5% gain overall and only a +.1% gain in the core rate. This was another welcome sign for the bond market which closed today with the yield at 5.75% down from 5.83% yesterday. The CPI report tomorrow is expected to confirm the non-inflated growth pattern once again. With the constant stream of positive economic reports it would be practically impossible for the Fed to make any changes at the FOMC meeting next Tuesday.
The number one story today has to be the fantastic rebound by IBM. The amazing resurgence of the tech leader and complete turnaround from the listless giant only a short time ago. IBM has moved from a three month range bound bottom of $165 over the last three months to a company with price targets of almost double that. Merrill Lynch analyst Steve Milunovich reiterated his buy rating and raised his price target to $270. CS First Boston analyst Amit Chopra reiterated his buy rating and said the economy should spur revenue growth and he sees no or little Y2K impact. Soundview raised their price target to $260 on the strong revenue projections. CEO Gerstner, speaking at an analyst meeting on Wednesday, said IBM sold about $2.5 bln of products and services on the Internet in 1998 and expects that number to grow to between $10-15 bln this year. He feels that the growth to his company comes from the back office needs of business America trying to completely change their business model to take advantage of the Internet. The dam has burst and IBM is rushing to take advantage of the flood. IBM is a current play BUT after the +$25 rise the last two days we strongly recommend WAITING FOR AN ENTRY POINT before starting a new play. This could take some time depending on the market. IBM has a 2:1 split coming 5/26. Rock on !!
Far be it from me to throw water on the rally fire but Friday could be a good opportunity for traders to take some of the recent profit off the table. Earnings have dried up and the recent Rubin resignation may not be factored completely into the market. The Fed meeting on Tuesday and stronger words out of China could give traders a reason to go home flat. However the recent trend has been up on Friday morning, down midday and up at the close on bargain hunting. The positive impact tomorrow, other than a good CPI report, may come from the MSFT/ATHM strategic partner announcement after the close today. This could fire up the techs and the cable stocks again. Plan your trades accordingly and be ready to react to changing market conditions.
Wait for an entry point, sell too soon.