Four steps forward, one step back!
After four straight days of advances the Nasdaq rested. After gaining more than +7% in the last four days the Nasdaq finally gave up -31 points in a pause to refresh on its effort to best the previous high of 2864. The rollover on the Nasdaq was all the bears needed to drop the Dow for a -127 loss. No one is concerned about the pullback and simply view it as a normal cycle. After the Fed blessing on Tuesday, we view it as the calm before the rally.
Look at the charts above and you will see several points of interest. First the advance/decline line has stopped its free fall descent but advances did get beaten by declines today by a margin of 6 to 4.
Secondly we try to convince readers constantly that the markets move in tandem and these charts are a prime example. Each includes the Fed spike, the Thursday/Friday sell off last week and the drop today. Also note the GE chart. Do you see any similarities? They are all the same. Stocks follow (or lead) the market. The reason for this quick lesson is to remind readers that any good call plays we currently have or pick in the next couple of days, MAY go down before they go up in the expected Labor Day rally. They can still be good plays but they will follow the market. Sorry for the sideline here but we have a lot of new readers from the Money Show and we want to get them started off right.
Back to the business. The Dow and Nasdaq dropped on simple profit taking from a great run. The chances of a -3% pullback on a +7% gain is almost 100% under normal circumstances. In reality we view any pullback here as a buying opportunity after the Fed blessing. –3% would be –84 points so we are sure not going to gripe about a –31 today.
Part of the drop today was fueled by the drop in oil stocks as well. Oil stocks are reeling from news that Germany is planning to sell 30 mln bbls from its reserves and Iraq pumped more oil last month than any month since the gulf war 10 years ago, 18.8 mln bbls. The news prompted a -.89 drop in oil prices yesterday and only a +.35 recovery today. There is worry that OPEC will now ramp up production to try and capture some revenue while the price is still high. After curtailing production to get prices back up, they don't want Iraq grabbing all the dough. This of course would slam prices back to where they were several months ago and start the process all over again.
Retailers took a hit today after a downgrade from Merrill Lynch but they are expected to rebound quickly. Consumer spending is still running rampant as evidenced by that component of the GDP report today. Actually the GDP was market positive with a weaker than expected +1.8% growth. The previous estimates were for +2.3% growth. While this was market positive the business inventories could have been seen as market negative. They came in less than expected and it is widely believed that manufacturers will now have to ramp up production to build inventories for the holiday season approaching. Consumers have more spendable income and are not holding back. While this could be inflationary the Fed is not expected to do anything else this year.
Bonds were very positive today with yields dropping to 5.86% before bouncing to close at 5.90% on profit taking as well.
Volume was strong today on the Nasdaq with over 1 bln shares traded again but the NYSE was only moderate with 715 mln shares. Strong volume on a down day is not a good sign but we feel the Nasdaq volume was helped by bargain hunting in the Internet sector. Internets were mixed but mostly positive and many are starting to break out again.
Of growing interest in the technical analysis circles is the wide divergence between the Transports and the Dow. Dow theory, as many of you know, requires the transports to confirm any Dow move. If the transports are dropping it will be hard for the Dow to sustain any rally. The index had rallied on Tue/Wed based on the drop in oil prices but dropped -96 points today.
The big news today was the Cisco Systems purchase of Cerent for $6.9 bln. Cerent makes multiplexors for telecoms. Specifically they make a box that takes high speed voice and data from copper wire lines and converts it to fiber and then back again on the receiving end. The technical features of this box are thought to be a breakthrough in the industry. Some industry watchers are very skeptical and concerned that CSCO would pay $7 bln for a company with inception to date sales of less than $10 million. $10 MLN !! Lets see, if I could get that kind of multiple for OIN then we would be worth $10 bln or more. Yes, for that price I am for sale. (I can dream can't I?)
The CSCO purchase sent TLAB stock plummeting but analysts rushed to prop up TLAB. Calling for a buy of TLAB on any weakness and reiterating an $80 price target the stock did manage to close for only a loss of -$5.31. TLAB actually has a bigger market than Cerent based on client types and market share. In 1997 CSCO was selling into a $25 bln data market. With the addition of Cerent and several others recently they expect their market to be $150 bln by 2002.
Speaking of price targets and upgrades, DLJ is really pounding the table on Priceline.com (PCLN) now $72 with a price target of $190. The news stopped a downward slide with a +7.44 gain. Still we need to see a continuation of the upward move before making it a play.
Got any dirty money? How about some IMF loans you want to skim. If so then call the Bank of New York. The big story out today was news of more than $15 bln in money that had been laundered by the Russian Mafia through the Bank of New York. When you hear Mafia you automatically think of the criminal enterprises of gambling and protection among others. In Russia they evidently think big. There are many rumors that the scam may have gone all the way to the Kremlin and involved misdirecting IMF loan money to finance elections and personal fortunes. I hope they got their moneys worth, I thought you could buy Russia for less than $15 bln last summer.
Now if you have some money lying around, dirty or otherwise, then it is about time to put it to work. If you have been reading this commentary for long then you know I am expecting a rally after Labor Day. Actually the bargain hunting should start next week as the early birds try to get a head start. Tom Galvin with DLJ came out today with a 10,800 target for the DOW. He is basing the target on third quarter earnings which are expected to be better than any 3Q for the last four years. This, along with the Fed blessing should propel the market strongly for the next six weeks. If you have cash then start looking for places to put it next week and look at any weakness as a buying opportunity.
Pick your entry points carefully, sell too soon.