A Battle With Boredom Ends As Markets Rally
Investors were taking a Wait-and-See approach this morning to two key news items: MSFT and the PPI. The former is a surprise no longer as Judge Thomas Penfield Jackson announced his decision on whether to break up the company shortly after the close today. It was originally scheduled for 3pm EST, or an hour before the close, but, wisely, they moved it to a half an hour after the close as not to affect trading. This is what traders were waiting on all day today, creating lots of time for option traders to put a MSFT straddle together. Come on, admit it. You thought about it, didn't you? If only MSFT moved like it did in the old days, is what I was thinking. So I remained a spectator for this decision.
Well, the decision was announced and MSFT was jumping around like a jackrabbit in after-hours trading. The Judge elected to order the break up of Microsoft into two companies. One segment will run the operating systems business while the other is to handle the software and Internet business. Jackson said that the US Department of Justice would have 60 days to respond to Microsoft's plan, and that Microsoft would receive another 30 days to file a rebuttal to the Justice Department response. Bill Gates responded in a taped statement that this is a new beginning to this case as they enter the appeal stage. It was already widely assumed that not only would they appeal, but also have a better chance of winning in appellate court. MSFT was halted at the time of the decision, but opened soon after and traded as high as $72.
Otherwise the market remained very dull and range-bound for most of the morning as traders wait ahead of the PPI report due out Friday morning. Although, the action we have seen so far this week has been healthy. It is normal consolidation after a strong move last week. The fact that we haven't seen a big sell-off just confirms the bullish trends. I had to close out my QQQ puts this morning for a small gain, realizing the market just wasn't acting like it wanted to sell-off. It's a good thing too since the DJIA took off just after 2pm EST when Goldman came out with bullish comments on IBM. Laura Conigliaro, Goldman Sachs analyst, met with IBM today and she commented that unit server growth was picking up, which will help IBM meet top-line estimates. She also commented on strong services booking projections. Before the announcement, IBM was sitting around $112, but quickly found its way above $120 on the news. As a Dow Industrials component, the DJIA caught fire as well. Note the point of the IBM announcement in the chart below. The DJIA finished up 77 to 10,812 on volume of 850 million shares.
Not only the DJIA rallied on the IBM news as buyers quickly returned to the tech sector. I think we were all waiting around for the past couple days in search of entry points and this finally put the buyers back to work. The Nasdaq shot forward after lingering around the unchanged mark all day. Look at some of the tech winners today...JNPR +23.31, VRSN +19.75, BRCD +10.75, YHOO +9.44, CHKP +15.06 and AETH +13.44. This all combined to help lift the COMPX by 82.63 to 3839. Yep, back above 3800 on a closing basis after slipping below that level yesterday. The trend still looks good and the VIX is intact at 25.18. Nothing like a good, middle-of-the- road Volatility Index to maintain a stock-pickers market, instead of a momentum frenzy. The volume was fairly light at the Nasdaq though with 1.4 billion shares traded.
For the second day in a row, Fed governor Robert Parry was pounding the newswire and going on record to say that the Fed may not be done raising rates yet. He said the next few weeks economic data may not be enough to convince the Fed that the economy is slowing down. Whether or not they decide to raise rates, the Fed governors are doing their best to talk down the markets, just like Jim stated in the Wrap from yesterday. It's standard procedure for the Fed to do a little jawing instead of having to hike rates just to stop the stock market's advance. So watch out why the Feds are on the warpath against the markets, but remember, this is their best tool to corral the stock prices and is typically used when they know they shouldn't raise rates.
In other news, Intel fell from the open on Wednesday based on a downgrade from ABN Amro analyst David Wu from Buy to Outperform. This comes just one day after he upgraded INTC's competitor Altera. The move was based on uneasiness over Intel's Pentium IV (also known as the Williamette) being able to move into the PC segment. Mr. Wu was quoted as saying, "The failure of RDRAM to achieve more than a high-end niche product to date and the looming shortage in SDRAM beginning in the second half of calendar 2000 lasting through at least 2001, present Intel with a challenge for positioning Willamette competitively in mid CY2001." This dropped the stock down, but it looks more like an entry point for the split run, rather than an end of the trend. INTC finished at $128.94, down $0.63.
After the bell yesterday, IMNX received an expanded FDA approval for use of its flagship drug, Enbrel. It is already used to treat patients with moderately to severely active rheumatoid arthritis. The expanded approval will now allow IMNX to market this drug for early stage treatment of the disease. IMNX expects sales of Enbrel to jump 10% in its second fiscal quarter. Last year sales of the drug totaled $367 mln. Paine Webber analyst, Elise Wang, predicts that sales will increase year-over-year from $650 mln this year, $864 mln next year and $975 mln in 2002. According to an Immunex spokesman, currently 300,000 patients use Enbrel and this expanded approval opens up treatment to an additional 700,000 qualified patients. Investors applauded the news as IMNX gapped up today on the open, posting a 12% gain, up $3.91 to $36.25.
Even though Intel was downgraded today, the Semiconductor sector did receive some good news. Lehman Brothers foresee capital spending on semiconductors in the year 2000 to exceed 1999's by over 50%. Furthermore, the brokerage firm said that given this outlook, semiconductor stocks look very attractive at current valuations. They also expect this spending cycle to continue through 2002, possibly 2003. The semiconductor sector has emerged as a market leader during the past two months of decline. On Lehman's list of companies poised to have high earnings growth are: AMAT(+4.25), KLAC(+2.81), and TER(+2.94). SG Cowen also sees chip demand to be strong in the 3rd quarter and reiterated its support for KLAC and TER as Strong Buys.
The laggard today for the semiconductors was AMCC. The company announced that sales to one of its larger customers, Nortel Networks(NT), would be lower than expected for the current quarter. NT accounted for 43% of AMCC's revenues in the previous quarter. Yet, CFO William Bendush reassured that AMCC is on track for this quarter's estimates and that non-Nortel sales would make up for the shortfall. SG Cowen came to the company's defense, stating that revenues will continue to grow sequentially for both Nortel and non-Nortel sales. Regardless, AMCC shares were punished in the trading session, falling $10.19 to $96.63.
So I expect more of the PPI waiting game tomorrow. Investors are taking this Wait-and-See attitude in hopes that even more benign inflation data will surely halt the Fed. The interesting thing to watch is tomorrow afternoon to see if the markets start moving. We have seen the markets move in the direction the outcome of the PPI report in the hours leading up to Thursday's close. Will it jump the gun once again? If so, resistance should be solid on the Nasdaq at 4000. A positive report could put it at that level on the open Friday. A less than favorable report may land the Nasdaq back to 3600, which technicians would say has to happen anyway to close the gap up from last Friday. Ample support should be found there.
Although I wouldn't mind seeing a retreat to open some new positions, I have to side with the Bulls here. The recent money inflows are just too much. This cash has to be put to work somewhere and it has been building up for eight weeks. I still think the summer rally is for real, especially when you factor in earnings which will begin in a month. During the last few weeks, I viewed a minor market retreat as a bear trap, but am now looking at it as a time to buy. Watch the VIX and plan your trades ahead of time.