Markets Rally, but Resistance Holds
Just last Monday, Microsoft took a beating from the Street for coming up short on revenue and forward growth prospects while not even knowing what fate it awaited last Friday at the hands of The Justice Department. One week later, investors are muttering to themselves, "gee, the worst is over - maybe a breakup isn't so bad." No matter what you think of Baron's, a positive article run over the weekend, along with many analysts coming to MSFT's defense, boosted the stock $3.69 to $73.44, back over its 52-wk. low point of $73 set a few days before earnings. It's like investors care nothing at all about what happened to MSFT last week, and today's volume of nearly 54 mln shares (21% over the ADV) proves it. The fact is that MSFT's challenge to the DOJ's breakup proposal will be tied up in an appeals process that could last years. In effect, the downside appears gone (for now), while many analyst's today defended the breakup value of the parts as between $100 and $135. In his own words Goldman Sachs' Rick Sherlund says the value will remain "stuck" or range-bound for quite some time. A boost from $70 to $135 is "stuck"? No matter, with the broad stroke of a Microsoft brush, we got a rally on the Dow and the NASDAQ today. The big question is, can it be sustained?
The big answer is "no". But before you rush to unload every position you've opened this week, recognize that it's only because the threat of rate increases on May 16 at the next FOMC meeting is keeping investors from lunging back into the market with their pent up piles of cash. We simply don't know if there will be a 50 basis point increase by then or just a 25 basis point increase, the latter of which is already priced in. Based on the NASDAQ's inability to get through the 4000 mark today, and the 30-year bond rate ticking up to 5.98% resulting from some inflationary signs last week, mild fear seems to be building for the 50 BP hike - just the kind of thing to take prices back down as the May 16 date approaches. Not only that, but recall too that as the market rises, many traders who recently (accidentally) became long-term investors will be looking for a chance to bail out at even money. On the NASDAQ, that happens at about the 4000 level. For the Dow, the magic number is around 11,000. In short, that spells "range-bound" on both indices until May 16. Interestingly, both the new world and old world stocks are participating in the rally and that's good news. It tells us that traders aren't swapping one sector for the other and that the moves are broad based - a short-term positive.
So how did those indices do today? Pretty well, thank you. The Dow for its part closed up nearly 78 points at 10,811 (though intraday it was much better, up almost 193 points from Friday's close) on 953 mln NYSE shares traded. Compared to recent memories of 1.3 to 1.5 bln share days, today's volume was not enough to confirm any major change of direction. Internals though were excellent with advancers beating decliners almost 2:1. Up volume was in fact more than twice the down volume, while 80 new highs had the edge over just 35 new lows. 35 new lows are downright nice to see since anything under 35 would be really bullish. But 80 new highs coupled with today's low- average volume, while acceptable, are nothing to write home about (but we'll take it!). The things to notice today are the resistance at 10,925 followed by a 115-point rollover in the afternoon and lower volume. The index isn't sick. It just lacks the enthusiasm of a true winner.
The NASDAQ tracked similarly, locking up another 98 points to close near resistance (4000) at 3958, though it too could not break through resistance at 4000 and suffered from unenthusiastic volume of 1.5 mln shares. Thanks to renewed confidence in MSFT, other issues in biotech, Internet, telecom and networking rebounded too. Surprisingly, semiconductors did not participate even with positive comments from the Hardware Heaven conference sponsored by Merrill Lynch. HWP, though not a NASDAQ stock certainly showed the value of the conference, as it rebounded from $1 in the red to over $6 in the green when Carly Fiorina, HWP's CEO wrapped up her presentation. Similar to the SUNW mantra where the network is the processor, Carly pushed the notion that the printer is an interactive appliance. Anyway, advancers beat decliners by a 13 to 8 ratio, while up volume trounced down volume 3 to 1. However new lows actually beat out new highs 60 to 55. While the internals were fairly strong compared to recent weeks, the tests of resistance on merely average volume are telling us that the rally is not likely to lead us to a breakout over 4000 anytime soon. In fact, using the cyclical market theory, with three days up in a row, we would not be surprised to see the NASDAQ take a breather for a day, especially since many "accidental investors" will jump at the chance to break even. Today's move to a high of 3982, then rollover may have been NAS's best attempt and investor's nearest hope of unloading those underwater positions from the recent selloff.
Let's cover some news highlights quickly too.
First, Warren buffet spoke to his flock at the annual Berkshire Hathaway shareholders meeting held over the weekend. Long reputed to shun tech stocks, the Omaha sage conceded that he finally owned some - about 100 shares each of MSFT and INTC just so could read a copy of the annual report. Nonetheless, he's staying away from them, but still notes that he doesn't see many investing opportunities. Does that mean that the market is still over valued? Heaven help us on the day that Warren thinks there are many deals to be had.
Second, TWX pulled the plug on Disney-owned ABC affiliates in the New York, L.A., and a few other major markets across the country. ABC is a high margin cash cow that carries Regis and Kathy Lee in the mornings and the wildly successful "Who wants to be a millionaire?" (makes you wonder why more people don't stand up and yell, "MEEEEEE!!!!" instead of just clapping). The FCC makes it illegal to remove station signals during certain measurement periods like the sweeps that begin this week. Sweeps determine audience reach, which then helps determine advertising rates. No viewers equals reduced revenue. However, the FCC also mandates there be a contractual agreement to carry the signal, and that contract has expired until a new one can be reached. Prolonging the rift hurts both TWX and DIS in the long run, but puts DIS over a barrel in the short run given the importance of ratings.
Next from the "lovely parting gift" department, Jill Barad, the former CEO of Mattel who stepped down under threat of termination by the board will receive a golden parachute valued at $40+ mln. it includes some debt forgiveness, $26 mln in cash, a pension worth over $100,000 per month for 10 years, and a full vesting of stock options (two thirds are worthless at today's price of $12.13). While we're sure most of us would like to be fired that way, shareholders have filed numerous lawsuits as this comes at a cost of $0.09 per share to earnings - that's $9 to Jill for every 100 shares an investor owns. No wonder shareholders are hopping mad.
Finally in some good news for tobacco companies, the Florida Legislature is contemplating a bill that would put a limit on the amount of any bonds posted under an appeal process if a tobacco company is found to be liable in any of the current Florida tobacco lawsuits. The truth is that governments don't want tobacco companies to go away. The tax revenue they generate is too huge to risk losing. They would be killing the goose laying the golden eggs despite how unappetizing the goose looks. MO closed up $1.69 at $23.44, its highest level since January on the news.
OK, back to the markets. . .how do we play the next few days? On both the Dow and NASDAQ, the lack of big volume tells us that there was no conviction to move the indices (thus its components) higher. Greenspan/FOMC/inflation/interest rates loom heavy in the next two weeks and should serve to keep a limit on enthusiasm. With earnings season too coming to an end, there's not much left to move the market up. AT&T reports tomorrow morning; GBLX tomorrow after the close; and DIS reports Wednesday. Other than any surprises there, lack of volume is confirming that range-bound sentiment. Don't get us wrong, we are optimists by nature. However, given the current technical climate where we meet strong resistance at 11,000 on the Dow and 4000 on the NASDAQ, it appears the markets could squeeze in one more downdraft before we see a rally in front of the FOMC meeting. In short, we're at resistance and there's no good reason for the markets to go up before May 16.
Consider dusting off some put plays or writing covered calls during the sideways markets. And as always, confirm market direction and sell too soon. As Jim says, don't buy too soon either.