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Market Wrap

The Earnings Season Kickoff

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        10-6-99           High     Low     Volume  Advances Decline
DOW    10588.34 + 187.75 10588.34 10399.45   893,046k 1,753  1,257
Nasdaq  2857.21 +  57.54  2857.43  2784.91 1,170,050k 2,084  1,861
S&P-100  694.84 +  11.93   694.84   682.91    Totals  3,837  3,118
S&P-500 1325.40 +  24.05  1325.46  1301.76            55.1%  44.9%
$RUT     429.76 +   3.75   429.76   425.97
$TRAN   3010.03 +  30.30  3012.13  2977.48
VIX       23.53 -   2.54    26.12    23.17

The Earnings Season Kickoff

It all began early this morning just after 8:00am when Alcoa released the quarterly report and earnings numbers for the third quarter. As you know, Alcoa is a Dow Industrial component and is traditionally the first of the 30 Dow stocks to announce. Did we get off to a good start? Alcoa reported earnings of $0.69 per share, which is right in line with estimates. Then the stock promptly sold off. Alcoa had been moving up this week in anticipation of the announcement. So whether or not the numbers were good, we got the standard sell-off after the announcement as investors flee to the next earnings candidate. This may not be the most satisfying trend to long-term shareholders, but as option investors, we like the trends we can identify. Therefore, all things considered, I would say that we par for the course.

Alcoa wasn't the only company reporting today either. Pepsi also announced before the open and Yahoo and Advanced Micro Devices reported after the close. Pepsi is an example of why traders flock to earnings reports as it beat estimates by reporting $0.34 versus analysts estimates of $0.33. This helped Pepsi avoid the post-earnings sell-off that is common among most stocks and charged ahead to close at $33.19, up $1.75 on the day. This proves that is possible to see stock prices increase after an earnings report but since Pepsi has been down over $10 the past two months, it hardly qualifies as a stock that has profits to take off the table. But the underlying thread to both AA and PEP is that analysts are happy with the numbers from both companies. This could be a good signal of things to come as we embark on the adventure that is earnings month.

In case you missed it, the market soared today as investors took long positions despite the Fed's watchful eye. Yesterday's FOMC announcement of a tightening bias towards interest rates didn't seem to scare off traders for long. The market took off right out of the gates this morning and never looked back. The good news is that the rally was fairly broad based with technology leading the way. The strength of the NASDAQ, especially the Internet sector, was the bright spot during the September decline and is leading the market to higher ground. The NASDAQ now stands only 28 points away from a new all-time high at 2784.91. This mark looks extremely reachable off of this springboard we call earnings season. As Jim said on Tuesday, the market confirmed the direction it wants to go today and a good plan is to start nibbling on some positions with a portion of your risk capital. There are a lot of interesting plays in the market in many different sectors.

Here are the final numbers from Wall Street. The Industrials were up 187.75 to 10588.34. The Dow is now up 375 points from the low of last Wednesday. The NASDAQ closed at 2857.20, which is up 57.53 or 2.05% The S&P 500 ended at 1325.38, up 24.03. The advancing issues beat the declining issues in all markets although the gap was narrow. Volume was heavy with the NYSE counting up 893 million and the NASDAQ a whopping 1.123 billion. The Russell 2000 closed at 429.76, up 3.75. (Is it just me or does it seem like the Russell is always stuck spinning it's wheels but not going anywhere). As we said above, it was up, up, and away for most of the day with a slight early afternoon pause. To top it off, we closed right at or near day-highs which is a bullish signal. For the visual confirmation, here are the charts...

Enough of the bigger picture, let's get back to earnings where analysts estimated Yahoo's earnings at $0.09 but the whisper number was $0.11-$0.12. They reported after the close and dusted both of those numbers with a $0.14 operating profit vs. $0.02 for the same period a year ago. Needless to say Yahoo was running in after-hours trading, up around $7 at the time of this writing. But you may remember they surprised the Street in July and traded higher after-hours only to drop for the following 4 weeks. And with no stock split announcement, we could see a similar trend. In all cases, wait for Yahoo to start rolling over if you are looking to grab some puts. The pattern of dropping the day after earnings has held 8 out of the last 9 earnings reports and is now well known. It is usually when the pattern is discovered that it begins to change. YHOO closed the regular session at $175.75, up $2.44.

Advanced Micro Devices also beat the Street after the close by reporting a loss of $0.72 per share. This is compared to an estimate of a loss of $0.97. Not too shabby but doesn't quite live up to the competition. At Intel they count their profits in the billions. AMD closed at $19.44, up $0.81 but was halted after-hours.

In merger news, Asarco agreed to be purchased by Phelps Dodge for $1.1 billion in cash and stock. This is no $115 billion merger like Sprint and MCIWorldcom from yesterday but it does create the world's largest copper producer. Asarco (AR) closed up $1.25 to $28 and Phelps (PD)was down $0.56 to close at $53.

Priceline.com (PCLN) added $8.50 to $72.75 after famed Internet analyst Henry Boldgett resumed coverage with an Accumulate/Buy rating. PSINet (PSIX) broke out of a month long range when the ISP company unveiled it's new virtual store containing Internet connectivity, web hosting, store-building capability, and shopping cart applications. And Lycos surged again as it announced this morning that they have formed a strategic alliance with AOL to design a version of instant messenger for Lycos' 32 million users. The stock us up $7.63 to $64.13, bringing it's 4-day total up over $13. Again the Internets have been the place to be with other participants like ETYS, AOL, AMZN and EBAY gaining $10.38, $6.50, $4.00 and $10.50 respectively.

Other headliners today include the continued strength from the IPO market. There were five IPO's today, all of which were strong. Some investors use the IPO market as an indication of overall investor sentiment. Also the dollar was quiet against the yen. It was higher for most of the day before closing down fractionally. Bond traders ignored the Fed and rallied the 30-year Treasury. The bond closed up one tick bringing the yield to 6.17%.

A couple of items at the top of the agenda tomorrow include the weekly jobless claims numbers at 8:30am. Expectations are for 295,000 new claims which down slightly from the 299K of last week. We also have the second Dow component to report as General Electric hits the stage. Analysts have been upbeat on this company lately so the question is how high will the surprise be. But anything out of line would be a potential weight on the Dow. Analysts are expecting GE to report $0.80 a share.

Despite the magnitude of the market gains in such a short period of time, there is reason for the rebound to continue. You don't want to get caught fighting the momentum trying to pick a top. It can shred away your capital in a hurry. With earnings announcements, improving sentiment, a rebounding dollar and newly discounted stocks, we have seen fresh money entering the markets. We are constantly searching the leading indicators for signs and there is one that is sticking out like a sore thumb. It is the Dow Transports. Technicians will be the first to tell you that the Dow doesn't rise without the Transports. And the Transports did lead the way down in September, collapsing about a week before the broader markets on September 16th. Take a look at what has happened since then on the chart. A definite recovery is underway with more upside potential. Oil prices were down for the fifth straight day, further aiding the recovery.

Earnings season is my favorite time to trade options. There are a lot of stocks in play, offering great opportunities. Most importantly, confirm the trend and don't load all your eggs in one basket. Choose wisely and choose to sell too soon.

Ryan Nelson
Asst. Editor

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