One more day of Summer...
Stocks paused for a breather today after Friday's frenetic rally. Investors had a long weekend to assess exactly what Friday's powerful gains mean and what to expect going forward. Today's activity does not look too much like profit taking, although there are definitely profits from Friday. A more descriptive word for today's market is blasť. Volume was lackluster for most of the day and it appears that some traders chose to extend the Labor Day weekend an extra day. But then, who wouldn't want one more day of Summer?
Many investors were reluctant to put new money in the market today due to renewed interest rate fears. Although many analysts felt that last month's rate hike would be the last Fed action of the year, there is growing sentiment that another hike is coming in October. With four members of the Fed Board speaking this week, including Mr. Greenspan himself tomorrow, and PPI numbers on Friday, there is enough uncertainty to keep many on the sidelines. Inflation fears are also growing. While most recent economic reports have shown that inflation is benign at a pace of about 2%, these reports are trailing indicators and not necessarily projections for the future. Strong commodity prices, particularly oil prices are becoming more of a burden and the soaring stock market have many economists worried about high percentage gains in consumer spending, which some see rising five or six percent from current levels of about three percent. Since the Fed seems determined to err on the side of caution in regards to inflation, another rate raise is very possible, but that alone will not extinguish the stock market uptrend. There is also some concern that the market is following the same pattern of 1997 and 98 in which the market struggled through September and October before rallying. Over the past 49 years, September has been the worst month of the year, with the S&P 500 declining an average of .3% during the month.
While inflation, Fed worries, historical trends or some other indicator always seem to fuel a lingering worry over this market, there is still a lot of optimism among traders. Third quarter earnings are expected to be very strong and most major indices are within one or two good days of all-time highs. Tech stocks in particular have performed admirably and since last month's correction, showing some real strength. The Internet sector has been buoyed by expectations for a very good holiday season as many shoppers begin to become more comfortable with making purchases online to avoid the frenzied malls. Tech bellwethers like Intel, Microsoft, Dell, and more recently Oracle have led the techs higher and are all at or within striking distance of 52-week highs.
The Nasdaq has recently outperformed the other indices lately, advancing more on good days and declining less on negative days. With techs leading the market and the rally being a broad-based advance, it is hard for average traders not to be bullish. Today makes this point well. The tech-heavy Nasdaq finished the day down 5.85, or .21% (please read as two/tenths of 1%) and is held up better than both the DJIA and the S&P 500, which were down 44.32, or .40%, and 6.79, or .50% respectively. Looking at the advance/ decline line, decliners defeated advancers 16 to 13 on 712 million shares while on the Nasdaq losers beat winners 1982 to 1892 on 907.2 million shares. On the NYSE, 73 issues had set new 52-week lows while 74 had touched new highs. On the Nasdaq, 59 issues had set new 52-week lows while new highs totaled 144. Overall the Nasdaq looks stronger, even on down days.
Tuesday was a big day for mergers. Viacom and CBS announced a merger worth about $34.4 billion in stock , the biggest media merger ever. The combined company will be a formidable opponent for competitors such as Fox and Disney. The market reaction was positive as both stocks finished up for the day. CBS, the Big Board volume leader, hit a 52-week high and was up 1 3/4, or 4%, to 50 11/16. Viacom Class B shares, which are the more relevant for the merger were up 1 7/8, or 4.16%, to 46 15/16. In the wake of the deal, PaineWebber raised Viacom to buy from attractive. In other merger news Hilton Hotels announced a 4 billion-dollar merger with Promus Hotel. This move was not a major surprise as the WSJ carried a story about a possible deal last week. Wall Street was not as enthusiastic about this deal. PaineWebber cut Hilton to neutral from attractive, while S&P and Moody's threatened analyst cuts, sighting the enormous debt involved. Hilton was off 11/16, or 6%, to 11 1/8. Promus jumped 3 7/16, or 11%, to 34 13/16.
Among the losers today was the airline and transportation sector. With fuel prices up 25%, more empty seats and very competitive Internet ticket pricing, airline stocks took a beating. Merrill Lynch lowered earnings estimates on US Airways, Delta Air Lines (which hit a 52-week low), Southwest Airlines, and Northwest Airlines. The bad news weighed heavily on the Dow Jones Transportation Average, which stumbled 1.5%. The American Stock Exchange Airline Index was off 6.13 to 147.41.
Lower bond prices weighed on the market as well, taking many interest rate sensitive stocks down with them. The 30-Year Treasury bond dropped about .75 of a point, raising rates to about 6.07%. Banks slipped today after surging on Friday. The Philadelphia Stock Exchange/KBW Bank Index fell 3%.
Lehman Brothers issued a positive report on the wireless services sector which gave a major boost to some stocks in that sector. Lehman upgraded its ratings and boosted its price targets on Nextel Communications, Aerial Communications and VoiceStream Wireless. They also raised their price target on Sprint PCS and Motorola. The report propelled Nextel, Aerial, VoiceStream and Motorola to new 52-week highs.
Other winning sectors were oil services, up as crude oil futures jumped - the Philadelphia Stock Exchange Oil Service Index soared 4.8%, and the computer and Internet sectors, which continued to be very strong. The Philadelphia Stock Exchange Box Maker Index was up 4.47 to 334.21, while the Philadelphia Stock Exchange Semiconductor Index was up 2.83 to 563.73. TheStreet.com Internet Sector was up 5.79 to 601.61
What can we expect going forward? While today's action was about as interesting as reruns of Mr. Rogers Neighborhood, we can glean a few insights. First, interest rate fears and unexpectedly poor earnings are the two main fears that could drive the market lower the next month or so. Fed Chairman Alan Greenspan and Treasury Secretary Lawrence Summers are both scheduled to make speeches tomorrow, which will be watched closely, but will probably not contain any major policy announcement. Their words will be micro- analyzed but hints they may give will be very short-term drivers for the market.
The next important economic report is scheduled for Friday, when the producer-price index is to be released. It would not be surprising if the rest of the week was more of the same, at least until Friday. A positive PPI report could provide the catalyst we need to push stocks into record territory and attract new cash once again. If volume does not pick up it could be an indication of a range-bound market, with resistance on at old highs and support at last months lows.
As usual, investors need to stick religiously to proven trading systems and not allow their decisions to be dictated by emotion. It's always a stock-pickers market you don't need to be a genius or an original thinker to do well in the market. Just stick to proven winners and be quick to admit an error, moving on to the next opportunity, of which there are many.
Plus, let's hope for an influx of volume tomorrow showing us that everyone is back in town. Not only that, pray that an over abundance of Fedspeak doesn't scare the bulls away.