The Other Big Three
Auto makers are no longer the big three. We are right in the heart of earnings season again, but no one is looking to Ford, General Motors, and Daimler Chrylser to lead the charge. Instead we got the earnings reports of IBM, America Online, and Apple Computer after the close today. AAPL reported strong numbers with a $1.00 per share earnings vs. an estimate of $0.90. AOL finished the final quarter of last year strong too by earning $0.09 cents per share versus a First Call estimate of $0.08. IBM earned $1.12 per share, which was $0.06 cents ahead of lowered estimates, but revenues were somewhat soft. Big Blue claimed the Y2K issue hurt the 4th quarter. All three stocks traded higher during both the regular session and after-hours.
The Dow Industrials also had three companies reporting earnings with Boeing, Honeywell, and United Technologies all coming in with numbers that met or beat estimates. Boeing beat the street by $0.05, UTX by $0.03, and Honeywell's earnings were in line with estimates. These positive numbers did little to help the struggling Dow though. UTX ended -2.06, HON -4.75, and BA was +2.63.
Today the indices mirrored the sentiment from Tuesday as the Dow continued to slide while the Nasdaq powered ahead. The Nasdaq closed at 4151.29, up 20.48. The Dow closed at 11489.36, down 71.36 and the S&P 500 inched up to 1455.90, up 0.76. Even the Russell 2000 kept the momentum flowing by trading up to another record close at 520.02, up 6.56 today. The volume was heavy at over 1.6 billion on the Nasdaq and over 1 billion on the New York as well. The advancers beat the decliners by 11-9 on the Nasdaq, but were dead even at 15-15 on the NYSE. The internals on the Nasdaq were incredibly strong with 317 new highs against 53 new lows. Here are the charts for a closer look at today's action. Notice the weak opening for the Nasdaq before trading higher for most of the session. The Dow opened weak too, but never really maintained a comeback. It's general trend for the past two days has been lower. Look at the charts in Jim's Market Wrap from Tuesday for a better indication of what support and resistance lines we are watching.
Chart of the Nasdaq
Chart of the Dow
The market also had to digest the Housing Starts numbers that came out this morning. Housing construction rose by a much stronger than expected 7.0%. Economic analysts were expecting to see an unchanged number. New home construction grew from 1.60 million units to 1.71 million. This is the biggest jump in over a year and was aided by unseasonably warm weather. You would expect this kind of surprise to spook the bond market, but it had little effect. In fact, the bond rallied slightly today after Tuesday's drubbing. This is probably due to bond traders looking at the current weather situation for January, with the record-breaking cold temperatures, and figuring these numbers will decline. The 30-year Treasury yield ended down at 6.72%.
The tech sector saw Internet stocks showing strength today. That helped to lift the Nasdaq despite the weak software sector. Other strong sectors included Drug, Biotech, Utilities, Gaming, Chip Equipment and Fiber Optics. Software was weak on the heels of Microsoft's earnings which were announced after the close on Tuesday. MSFT, like always, beat the estimates, but showed some concern for near-term PC demand and corporate sales. Also weak were Gold, Airlines, and Automakers.
So who was moving among the hot Internets? YHOO +22.81, MSTR +23.63, FMKT +69.69, VERT +19.50, AGIL +14.00, and INSP +12.69.
Biogen rose sharply today after being added to Merrill Lynch's "buy-focus 1" (don't ask, we don't know what that means either). Merrill previously had BGEN rated at a Buy. They cited BGEN as having a more compelling valuation among Biotech stocks. Merrill also issued a price target of $100 a share for BGEN.
The markets are in the thick of the reporting season right now and trying to digest all the numbers can sometimes cause an upset stomach. Fortunately, the volatility has remained low so far. The VIX traded in a tight range between 23 and 24 today, indicating a general calmness amongst traders. This is refreshing compared to the increasing volatility of the past couple months. It turns this into a stock-picker's game instead of a market-timer's game.
On Thursday the government will release the latest trade gap numbers which are forecasted at $25.3 billion. That is one giant IOU, but not out of the realm of what we have seen in the past. This will be out before market open, but barring any major surprises, shouldn't impact the markets.
Our real lingering question for the evening is relative to the Dow Industrials. It closed one point above the 10-dma. Now the last time we broke the 10-dma on a closing basis, the Dow dropped to the 50-dma. That would mean another 300 point move to the downside. The Nasdaq continues to look stronger. It closed at another record high today and the volume continues to support this market. Investors are still turning to tech stocks despite the rising 30-year bond. That factor would typically kill the tech group. This shows just how strong the fundamentals are for technology. Why would you want to own a bond paying you 6.75% when you have the potential to double your money on some of these technological advances?
The downside to this market is evident to those who have watched the market cycle over the past two years or so. We are entering a period after first quarter earnings which is typically weak for stocks, last year being a prime example. It was right about this time that the markets went into a lull until mid-March. There weren't any massive declines (at least in the Dow), just a lot of deteriorating premiums. Not what we need in the options market (but then that may be a matter of strategy)!
January options expire on Friday so most of you will want to start switching to February's if you haven't already. January contracts should only be played by high-risk, gun slingers at this point. One piece of advice for all options traders? Sell too soon.