Fed Rally Slides Into The Close
Another day of Fed-watching, only to get what was anticipated: no rate hike. The markets rallied throughout the day right up to the Fed announcement that they would stand pat, keeping the fed funds rate at 6.5%. While this outcome was widely expected, there still was a nervousness surrounding the moments of the decision. Recall that after the last rate hike, also expected, the markets sold off fast and furiously. Being a call holder, this flashback to May 16th brought chills as the markets popped and then plunged at the first word from the Fed. But, what we got was continued move to the upside that stalled into the close.
So as investors scour the economic landscape, the question is what will drive trading going forward. After the 50 basis point hike, most investors concentrated on the hawkish commentary that the Fed released, rather than the actual action. Today, maintaining deliberate ambiguity, the Fed spoke out of both sides of their mouths, leaving the door open for the August meeting. Reinforcing some of the most recent economic data, the Fed sees that "the expansion of aggregate demand may be moderating toward a pace closer to the rate of growth of the economy's potential to produce." So as supply and demand find common ground, we can be sure that the economy is slowing at this point. Yet, the Fed added that these signs "are still tentative and preliminary." And as a standard closure to their statement, the Committee believes that there are risks "that may generate heightened inflation pressures." Overall, the rhetoric was much more mild than in the past and the markets were somewhat relieved by the lack of a hawkish tone.
After climbing in the morning, the markets flat-lined before the announcement. There was strength in the Biotech sector as investors poured back into the high-fliers, despite the "buy the rumor, sell the news" sell-off after Monday's human gene mapping announcement. The Biotech Index(BTK.X) added 6.18% today behind gains in MLNM(+16.50), MYGN(+12.50), HGSI(+11.38), and PDLI(+10.00). They managed to avoid the selling pressure that hit the broader markets. Also posting early gains was the Semiconductors. Yet, the SOX.X was one of the first sector to be met by the sellers and gave up its gains to close down fractionally. This general trend of profit taking in the Semis is bringing them back to levels prior to the most recent run. INTC(+1.06) led the way, selling off sharply but holding on to small change. SDLI(+10.25) continued its impressive march back to $300, brushing off the bears. BRCM(+4.69) tacked on 2.5% today on strong volume.
Bringing down the Semi sector was TQNT(-9.56), which fell on negative comments about QCOM's chipset sales in South Korea. Merrill analyst Chris Danely defended TQNT, stating the there would be "little to no impact" as QCOM only represents 1% of TQNT's revenues. Investors punished TQNT but QCOM(-0.13) was spared since this news was already priced into the stock. Even though QCOM's performance today didn't reflect it, First Union downgraded the stock to a Buy from a Strong Buy. ABN Ambro and Prudential Securities cut QCOM's earnings estimates for the year. It just goes to show that sellers are quick to pull the trigger when bad news hits, especially when it goes straight to the bottomline. This type of action shows how the focus may shift from interest rates to earnings, which will be in full swing next week.
Despite the late session slide, the NASDAQ managed to hold on to an 81.38 gain on decent volume of 1.6 bln shares. Briefly, after the Fed move, the index traded above the 3950 level but failed to close above that level. We won't complain with today's performance considering that the pre-Fed rally that began on Monday didn't result in a major train wreck. After the decision was released, the NASDAQ faltered but found key support at 3750 on the NASDAQ 100(NDX.X). Note in the chart below that although choppy, the NASDAQ has been making another run at 4000 after last week's fallout. A slide through the bottom of this regression channel to the sub-3900 level would be disheartening. If earnings momentum can spark any kind of tech rally, the NASDAQ could make that run to the 100-dma of 4100. When today's trading was all said and done, many techs showed impressive gains. VRSN(+14.81), RBAK(+12.50), JNPR(+10.00), and CIEN(+5.88) led the techs to a positive day. We will be watching money flow into stocks like these to indicate a broader market rally. An old NASDAQ stock that has been out of favor lately did make a move today. WCOM(+4.81) soared an amazing 12% after yesterday's news that the Justice Dept was filing a permanent injunction against the Sprint merger. WCOM investor breathed a sign of relief as the stock has been stuck in a strong downtrend.
Speaking of the new focus on earnings, PALM announced earnings after the bell for its first full quarter as an independent and public company. Just one day after COMS, the former parent company of PALM, posted better-than-expected earnings, PALM earned 3 cents per share, excluding separation charges related to the spinoff. This beat Street consensus estimates of a penny per share and the previous year's EPS of 1 cent. Impressive year-over-year growth indicates that consumers and businesses are embracing the wireless solutions that PALM offers. PALM said it delivered a whopping 1.1 mln devices in the quarter.
At the NYSE, the INDU built up to the Fed announcement. Although the INDU traded through the 10600 level today, profit-takers dragged the index down in the final moments of trading. Managing only a 23 point gain, INDU is looming just above the key level of 10500, currently the 10-dma. A bounce from this level would prove to be essential to a INDU recovery. Today's high of 10620 was right between two key technical levels, the 100-dma at 10606 and the 50-dma at 10632. Both will provide resistance going forward. A break through the 50-dma could indicate a mild recovery to the recently ill INDU. After the initial post-Fed pop, the INDU slid into the close. But a gain is a gain, no complaints. Leading the charge were NYSE Biotechs, Techs, and Financials. CRA(+9.50) recovered today from a two day slide following its landmark genetic mapping on Monday. HWP(+7.19) got a boost today from Lehman Brothers, who included the tech giant on its Uncommon Value List, a top-ten list that has regularly outperformed the market since 1949. KO(+2.13) surprisingly posted a 3.72% gain, continuing its recent uptrend. Today, KO said it expects its earnings to rise in line with Wall Street's expectations.
On the weaker side of the NYSE, phone stocks stumbled as investors digested the blocked merger of WCOM-FON. FON(-5.59) lost almost 10% today on the fallout. It appears that FON is still on the auction block as consolidation is far from over in the telecom sector. In sympathy, other phone stocks fell: T(-1.13), USW(-3.06), Q(-1.94), and BEL(-1.03). Food, airline, and some retail stocks were sold as investors shifted their focus towards the biotech and tech holdings.
Lastly, a piece of bizarre news regarding business espionage. Today, ORCL chairman Larry Ellison admitted to hiring a private investigator to look into "covert activities" of MSFT during the ongoing anti-trust suit. He passed it off as ORCL doing its "civic duty." Reported today in both the WSJ and NY Times, Ellison said that the detective work turned up evidence that MSFT paid the Independent Institute of Oakland, CA, and the National Taxpayers Union of Arlington, VA, to influence public opinion in MSFT's favor during the Federal trial. No illegal actions are thought to have occurred but it goes to show how deep these competitive feelings run between two of the most powerful and richest men in big business.
Looking forward, tomorrow will be a very telling day for the markets. Holding on to the gains today in the face of the the Fed decision is encouraging. Yet, investor sentiment will be confirmed with tomorrow's trading session. Focus is now shifting to the heart of earnings season and we may be poised to rally into the weekend. Money managers will be looking to add strong stock performers to their end-of-the-quarter books during "window dressing." Expect volatility and choppy trading like we have seen and remember to take your profits when they are in front of you, as this market can turn on a dime.