Blockbuster Merger Kicks Off The New Week
They wasted no time getting down to business Monday morning as two major optical networking players announced they would be joining forces. JDSU announced they would be buying SDL Incorporated in a $41 billion dollar stock deal. That would value SDLI shares at a 50% premium based on the Friday closing prices, somewhere near $440. Both firms are in the red-hot optical networking market, making components that allow multiple light signals to travel over a single fiber. The consolidation continues for the Fiber-optics sector, but let me be the first to say, we at OI will miss playing SDLI once the merger is complete. That has been a great winner over the last 12 months. As expected, the stocks were mixed today with JDSU was down on the news to $101.00, down $15.19. SDLI gained $25.38 to $320.69.
JDSU was the most active stock on the Nasdaq today which gave back some of the gains from Friday's breakout. In fact, the composite traded right back down to the top of range it had been stuck in for over a week. The Nasdaq finished at 3980, down 42.90. Volume was a little on the light side at 1.4 bln. The techs traded down for most of the session, briefly entering positive territory in the afternoon before rolling over again. The chart below paints a vivid picture as the Nasdaq sits right on an important support line. You know the theory, old resistance now becomes support. Well, if that is to be the case, we need to see support hold here. Otherwise, it is back to one of those horribly tight trading ranges that we are becoming familiar with. The sad part of all of this is that traders were encouraged by Friday's action which took place on decent volume. Some were hoping to see a follow through. If this is the best they could do, it doesn't bode well for the rest of the month. But, then again, the second half of July is typically slow and smart traders are probably reluctant to buy ahead of a potential drop in the averages.
The DJIA was a different story. The two major indices seem to be heading in opposite directions on a daily basis of late and Monday was no exception. The Industrials traded up to 10,703 before backing off in the afternoon. It was likely buoyed by Alcoa's strong earnings. At least we are seeing some signs that this index, which has been building a tight wedge, may be looking to breakout to the upside (see Jim's market wrap from Sunday for further analysis). You can see from the chart listed below that the average is beginning to turn. I wouldn't call it out of the woods just yet, but a close above 10,750 would help peak my interest. Today's volume was also light at 820 mln. NYSE advancing stocks led decliners by a 9 to 7 margin, while Nasdaq losers topped gainers by 13 to 12.
The first Dow component to report earnings for the 2nd quarter did so this morning, before the bell. Alcoa beat analysts estimates by reporting $0.47 cents per share. That is $0.02 cents better than expectations. The company attributed the strong results to continued concentration on cost control and a focus on profitable growth, a 9 percent decline in aluminum prices and the temporary dilutive effect of acquisitions. The stock rallied on the news, but is really an example of why the DJIA is range-bound. Take a look at this chart. This is an awful chart to try and trade and investors are leaving such companies, despite strong earnings, to invest in stocks with a more promising outlook. Hopefully a DJIA breakout will help to bring buyers back to these fallen stocks.
Other news today included Veeco who saw its shares rise nearly 10 percent after the company said orders rose 55 percent in the second quarter to $125 million. They expect second quarter revenue to come in at $90 million, in line with expectations. Veeco also announced that its Ion Tech subsidiary booked over $35 million in second quarter orders for its SPECTOR(TM) optical coating ion beam deposition systems used by manufacturers of Dense Wavelength Division Multiplexing (DWDM) filters. Veeco's other subsidiaries also received orders from optical telecom customers for process and metrology equipment, bringing their total second quarter orders from this market to over $40 mln.
On the downside, Biogen shares slumped ahead of their earnings release tomorrow as Salomon Smith Barney downgraded the Biotech company to a Hold from an Accumulate. Let's hope this isn't a precursor to their earnings report. SSB said the move was based on valuation and they are maintaining a $70 price target.
After-hours earnings news was active today as well. Aspect said they would miss estimates for the second quarter. The company which is a provider of customer relationship portals blamed the shortfall on the level of business in one of the company's North American regions, a delay in the awarding of multi-million dollar contracts in its Federal government region and a faster- than-expected decline in the company's hardware platform business. ASPT was down significantly in after-hours trading to $22.63 from a regular session close of $43.88. On the flip side though, Alteon Websystems said they would beat estimates for their 4th quarter. They announced that revenues for the quarter were approximately $51 million, which is an 80 percent sequential increase over revenues for the previous quarter. Plus, the company also announced that it achieved operating profitability in the fourth quarter, three quarters ahead of expectations. ATON was trading higher to $114 from a $100.81 regular close.
So the earnings season is just about to kick off into full swing with Yahoo reporting tomorrow. It is already entering the post earnings, sell-off phase by dropping another $6.50 today to a new short-term low on stronger volume. Hopefully it is just the Internet sector suffering woes, but it wouldn't surprise me to see others join in. Just scanning through some charts makes me somewhat hesitant as many are trending lower or looking top heavy. The backdrop for stocks still looks the same...boring. You have to be careful in this market not to get sucked in without a solid trading plan. This range-bound market can seriously alter the look of your trading account.
The VIX closed at 22.87 today, up 1.05. I would call this the low end since we haven't been able to break 22 in awhile. Keep this in mind while you trade. It is telling us to watch out for the bears right now. 4075 is the magic level that I am still waiting for the Nasdaq to close over to re-awaken my bullish interest. Otherwise, trade only when the plan looks rock solid. In this environment, that usually translates to a fair return. Anything less than perfect somehow finds its way into the loss column. Enjoy the summer since the market is giving us less than ideal conditions at the moment, but always keep your eyes open as it could change in a heart beat!