A Cool Down In Spending Spurs Market Rally
All eyes were on the Retail Sales report due out this morning and the outcome further signaled the economy is slowing. It was apparent that consumers kept their wallets idle this past month as sales fell 0.3% versus an expected 0.1% rise. The icing here was an unexpected downward revision for April Retail numbers. They were revised down from an 0.2% decline to an 0.6% decline for the month. All of this was construed on Wall Street as further evidence that the Fed's rate hikes were doing their job and, perhaps, no further hikes are needed. Despite that, the market was nervous about the CPI report due out tomorrow and most major indices spent the morning below the unchanged line.
So where did the rally come from? The main man himself, Alan Greenspan, spoke to the New York Association of Business Economics early this afternoon. In prepared remarks, he said there's evidence of an improvement in the productivity growth. What? He went on to say that "most of the gains in the level and the growth rate of productivity in the United States since 1995 appear to have been structural, largely driven by irreversible advances in technology." Wait a minute. Did I hear that correctly? Is he now stating that productivity will help curb the tide of inflation? Many analysts walked away unsure as to what he may do this month at the FOMC meeting, but you can tell from Wall Street that some are assuming Greenspan feels less inclined to make a move.
This speech from the Fed Chair put the buyers into action and they quickly erased the losses. When it was all said and done, the DJIA climbed by 57.63 to 10,621. Volume was so-so at 915 million shares. The Nasdaq really started to cook on those comments and closed right smack-dab on the day high at 3851.07, up 83.16 on the day. Volume came in just under 1.4 billion. The S&P 500 finished up 23.44 to 1469.44. All in all, it was an encouraging day for stocks, despite many players sitting out ahead of tomorrow's CPI.
For those that know me (or for those that don't), I am a Nasdaq watcher and I like the looks of today's action. We have been stuck in a range for some time, but 3700 support held up just fine today. The levels I am watching are support at 3700 and resistance at 3900. Some of the individual charts are just as pleasing to look at, most breaking out over resistance. SDLI took off again after some recent consolidation, +21.09 today. RMBS broke out over $240 on a nearly $30 move. CHKP rallied by $18.41 and is sitting right under resistance at $230. RBAK scorched a $15.15 gain from yesterday, but more like a $20 move from the intraday lows. Thank goodness we had the four highest point gainers on our call list, right? Even GLW added another $9 after yesterday's mammoth move.
One of the sectors that looked strong included the Drug group. Shares of large U.S. drugmakers jumped because investors are concerned about a possible slowdown in the U.S. economy and rotated into the sector, which is considered a safe harbor. Other sectors on the move were Retail, Insurance, Fiberoptics, and Healthcare. The losers included Transports and Cyclicals.
The individual stories were just as impressive with big moves all around. NBCI sticks in my mind as the loser of the session after they warned they will miss estimates. The company blamed a soft advertising market and expenses due to acquisitions as the culprit. Investors took it out on their stock by sending NBCI down $7 to $17.63. First call had expected a $0.70 loss for the quarter. Hewlett-Packard also dropped today on word that investment firm Sanford Bernstein cut their rating and earnings numbers for the HWP. This caused the stock to drop seven dollars to $119 and took about 35 points off the DJIA.
There were winners in this market too. Shares of ENT jumped more than 14% on takeover rumors. The report says that either Global Crossing or France Telecom are the potential suitors. ENT finished up $6.75 to $49.13. CMGI was the big news after the close today. The Internet incubator reported earnings far ahead of expectations with a loss of $1.53 per share. This was $0.30 better than First Call expectations, but down versus last quarter when they only lost $0.74. The real numbers to watch were the revenues which grew by nearly 50% from the first quarter. They reported net revenue of $225.9 million for the fiscal third quarter ending April 30th. Shares of CMGI were being well received in after-hours trading, moving up to $60 from a $56.63 regular session close.
The interesting thing about some of the big movers from today is, given the two weeks of consolidation, they haven't really got away from us. I don't endorse running out and buying something that traded up $25 in one session, as we've all been skinned doing that before. But, considering some of the individual charts is what is leaving me with an upside bias. Lots of stocks are looking healthy as we head into July on an earnings run. CMGI will definitely help that cause with their stellar report. Nothing like 47% quarter-over-quarter revenue growth to justify the current PE levels.
Obviously though, the key will be the CPI. The expectation is for a gain of 0.2%, with the core rate also growing by 0.2%. With the PPI coming in under expectations on Friday, I don't expect the CPI to be out of line. The question is, how will traders react? Strong volume would be nice. Maybe to the tune of 2 billion shares like we did in the old days...way back in March! A breakout over 3900 is the key. The lines have been drawn between buyer and seller at this level for the past week. A good CPI and the inability to crack resistance at 3900 would be disheartening. Speaking of disheartening, one of those gap up openings that slowly bleed and leave you with the high of the day on the first trade would do the trick too.
As for me, barring any CPI disaster, I expect a rally. It could be delayed with a sell-the-news morning, but I doubt it. Support on the Nasdaq has been strong and an earnings run is starting to take shape. One of the sectors I have been watching for past two weeks and that will continue to stay on the top of my radar is Fiber-optics. The momentum is strong in this group of late.
Two quick items on after-hours news which will be important in tomorrow's action. First, NVLS was added to the S&P 500 to replace Champion, who is being purchased by International Paper. America Online will take the place of CHA in the S&P 100 as well. Tiffany (TIF) is also being added to the S&P 500. The second big non-earnings news was on Microsoft. It was announced that the U.S Circuit Court of Appeals, acting at the earliest opportunity, would hear MSFT's appeal of the breakup order imposed last week. This was announced even before Judge Thomas Penfield Jackson could hear the government's case to bypass the Court of Appeals. The court said it was acting "in view of the exceptional importance of these cases." Needless to say, this is a legal victory for MSFT. After-hours MSFT was up $2.50 to $70.25, NVLS was up $4.50 to $56, AOL traded up fractionally, while TIF had not traded.
Keep your eyes on 3900 tomorrow. As I said above, this is the battle line and something has to give eventually. Plan your trades accordingly.