Could It Be, Can It Really Be...A Summer Rally?
After all the suffering of this boring, rangebound market, we finally had a day that we actually can call encouraging. Well, it looks like YHOO came through in the clutch to save the day. Overall market activity continues to heat up, as mega-merger after mega-merger is announced. Consolidation is creeping into the market. Interest rates concerns have subsided since last Friday's job report. Investors have their sights set on an upbeat second half of the year. But, it's still early. We're not out of the woods quite yet. I've said it once, and I'll say it again, we need to have follow-through tomorrow.
Earnings season is certainly in full swing. YHOO was the victor today as investors rewarded the Internet giant for Tuesday night's better-than-expected earnings. Investors seemed to ignore concerns over future advertising revenue growth, and it appears that the markets are focusing on the good news rather than the bad. This says that people are looking for reasons to rally this market. YHOO's 18% gain today sparked the Internet sector, and the NASDAQ as well, into a well-sustained rally today. Looking at the NASDAQ intraday chart below, you can see how convincing the buying was today. Talk amongst NASDAQ traders is that today's pattern exemplifies a greater panic on the buy side. Now that's what we like to hear. After weeks and weeks of hearing "summer rally" echoes, we just might be seeing some action rather than simple talk. This bullish thinking coupled with volume of 1.7 bln shares on the NASDAQ is a very healthy signal that momentum may be returning to the market. For a summer trading session, 1.7 bln is considered strong volume. From here, it is essential that we build on 4100 in order to confirm a breakout.
Technically, the NASDAQ made some very impressive accomplishments today. The aforementioned retest of 4000 support this morning helped give investor confidence in putting some of that sidelines money to work. It very well may have been this event that spurred the panic buying. Secondly, the NASDAQ broke through 4050 which acted as resistance during last Friday's employment rally. Going forward, it is key that the NASDAQ hold 4050 as support. Most importantly, today the NASDAQ broke through and closed above the elusive 100-dma at 4062. All throughout this rangebound trading since June, we have had our sights set on this technical as a benchmark for a bullish breakout. And with a sigh of relief, we finally got it. The significance is great, considering that the index has not traded above the 100-dma since breaking it all the way back on April 11th. It's been three months and a long lesson in rangebound trading. Believe me, it hurt.
Today's triple digit gain of 143 points surpassed another key NASDAQ level, 4069: the starting point for the year 2000. That means that the tech index is out of the red. Now the question still remains whether we can sustain this rally with, yes, follow-through. The driving catalyst undoubtedly will be earnings. Tonight we had a handful of earnings reports in the tech sector. Advanced Micro Circuits(AMCC) chalked up a 4 cent better-than-expected profit, posting $0.21 per share, excluding special charges. With record operating margins and robust sales, this was a 250% increase from the year previous. After an $11.69, or 10%, gain in regular trading, AMCC traded up $4 in after-hours to $129.50. Another favorite NASDAQ stock beat the Street. B-2-B company Ariba(ARBA) came in with a 3 cent narrower-than-expected loss of $0.05 per share. Investors added another $12 after-hours onto the $12.38 gain during regular trading. ARBA is currently trading at $115.75. If these reports have a similar effect to YHOO's today, the NASDAQ very well could confirm its breakout. Internet networker JNPR reports tomorrow after the bell.
On the NYSE, there were a handful of stock that traded at or near all-time highs. In particular, the Brokerage sector had a very strong day. This came on news that Swiss bank giant, UBS, will be buying PaineWebber(PWJ) in a $11 bln stock and cash deal that would help expand UBS' global underwriting reach into the U.S. PWJ, the #4 U.S. brokerage house, advanced 34% on the news, closing up $16.94 to $66.88. UBS lost 9% on the day, off $13.56 to $135.19. The news drove up other brokerage stocks in speculation of further consolidation in the sector. At or near new highs are the following: LEH(+5.19), AGE(+3.19), MER(+2.56), BSC(+2.06), and MWD(+0.63). We will be watching the financials closely to hold and continue their uptrends. They are an essential part of a broad market rally, especially with the economic data due out on Friday. Reporting tomorrow before the bell is JPM, which spiked $4.63 to $122.56 today in anticipation.
Market internals have been very strong at the NYSE as advancers have beaten decliners for seven straight sessions. As a result, the INDU has made great strides at reversing the dominant downtrend that overtook it April 12th. The diamond pattern that Jim has mentioned in his Wraps had been narrowing, and at the point of reckoning, buyers picked up the beaten down index. You can see from the chart below that the INDU not only broke the downtrend line, but also had three days of follow-through. This breakout has turned around the technical health of the INDU. It did, however, encounter resistance at 10800, which is the most recent short-term top from early June.
On the weaker side of the NYSE were the cyclicals. After two days of rallying, investor began the rotation again in favor of techs, financials, and even airlines. Just a month after the UAL bid for U.S. Airways, consolidation continues to be the theme. American Airlines(AMR), the #2 carrier, made an $3.7 bln bid for Northwest Airlines(NWAC), the #4 carrier. This deal would value NWAC at $44 per share, a value that Northwest feels is undervalued. Northwest wants upwards of $100 per share, according to industry analysts. These mega merger talks are clear signs of a growing health in the overall market, as companies see the necessity to say competitive. AMR closed up $1.19 at $30.63. NWAC tacked on almost 6%, or $2.13 to $37.88.
Motorola(MOT) reported earnings tonight and analysts were keenly awaiting the results. MOT's earnings were in line with Street estimates of $0.23 per share. Yet, the silver lining was the company's margins. Wireless handset operating margins came in at 4%, convincingly higher than the 3 - 3.3% expected. Their chip production margins were also higher than expected. After closing up $2.69 in NY trading at $35.31, investor added $1 in after-hours trading.
Looking forward, good ol' Uncle Alan is speaking this evening before the Council of Foreign Relations about Global Crises, but don't expect him to tip his hand. The markets will be digesting the numerous earnings reports from today and tomorrow, yet Friday's PPI and Retail Sales numbers certainly will be looming overhead. Tomorrow's trading should be a bit more subdued to the upside given Friday's data. We will be paying close attention to key technical levels for both the INDU and the NASDAQ to see if this building momentum continues to move the markets out of their recent ranges. Follow-through, follow-through, follow-through. That will be the key. Keep your stops tight in order to protect healthy profits from today's advance. Remember, a small profit is always better than no profit.