Are You A Believer Yet?
Since my last wrap a week ago, the NASDAQ has made many of us ask ourselves, is this rally for real? Last Thursday, the NASDAQ gapped down to 3521 and staged a 240 point turnaround to close at the highs of the day. No rollover, no looking back. So today, with the NASDAQ closing at 3853, the tech index has made an almost 10% recovery in just five sessions. It has been a little surprising for market-watchers considering the seasonal factors, myself included. I have to say it though, I'm not a believer...yet.
On the euphoria of CSCO's earnings last night, there was no doubt that the NASDAQ was going to gap up. Being the bellwether that it is, CSCO's report boosted many of the other major networking issues yesterday in after-hours, including JNPR and SCMR. Yet, after the open at 3915, that buying euphoria didn't seem to be overly convincing as investors took the opportunity to sell into the rally. Trader Talk on CNBC was that some fund managers were unloading long positions into the strength. The talk on the Street once again is whether or not investors have the conviction to keep this market moving ahead like it has done so impressively the past week. For the second day in a row, market internals show that NASDAQ Decliners narrowly beat Advancers by a 7-6 margin. So in a true battle between the bulls and the bears, the NASDAQ has slowed and settled into another narrow range between 3800 and 3900. In fact, today's intraday chart shows that the NASDAQ traded between 3875 and 3900 for most of the day, lacking any real excitement. It wasn't until the finally half hour of the day that sellers unloaded on the market to bring the NASDAQ to the recent intraday support of 3850.
Notice on the chart below that the NASDAQ trading has been choppy at best, minus the August 3rd launch. With exception of the first hour of trading today above 3900, the NASDAQ has had problems bumping up into this resistance. Also posing as a resistance point are the converging 50-dma and the 100-dma, 3905 and 3904 respectively. Not too far above that is the 200-dma at 3917. Jim pointed out yesterday that all of these technicals are coming together, along with the 15-dma, to either spoil this recent rally or facilitate a breakout beyond belief. Are you a believer?
All in all, it was a boring day on the NASDAQ. There was some individual stock news that did, however, spark some buying interest. In addition to CSCO boost, Raymond James analyst Todd Koffman, coincidentally, upgraded JNPR from a Market Perform to a Strong Buy after a Tuesday evening meeting with company management. He stated that the competitive environment is "very favorable" for JNPR. JNPR, you can thank CSCO for that upgrade! JNPR finished up $6.69 to close at $165.63.
And yet another CSCO-related story that sent two stocks skyrocketing was the announced merger of Phone.com(PHCM) and Software.com(SWCM), which will be headed up by former CSCO Executive VP Donald Listwin. The agreed merger, worth $6.4 bln, had investors scrambling to buy whatever they could. Terms of the deal have PHCM issuing 1.6015 shares for each SWCM. With this union and the expertise of CSCO's Listwin who will be the President and Chief Executive, the merged entity will look to grow as one of the chief providers of software to both wireless and landline phone carriers, portals, and ISPs. Both stocks were handsomely rewarded today with PHCM gaining $13.06, or 17%, and SWCM soaring 32%, or $34.69 to close at $142.44. Man, I wish I owned some calls on that one!
Well, as the NASDAQ drains the boredom from me, the INDU is finally looking interesting again. Challenging key resistance of 11000 for the first time since April 26th has brought some excitement back to the NYSE. After a seven session rally from the depths of 10500, investors were due to take some profits today as the INDU traded in a 85 point range. On the upside, buyers haven't officially run the INDU into 11000 yet, as an earnings warning from WMT dragged the index down. Today, the world's largest retailer urged analysts to cut estimates by two cents from an expectation of $0.33 per share, citing an accounting shift announced last quarter that books their layaway sales differently now. Rather than booking the layaway sale at the time of "laying away," if you will, now WMT is booking those sales when they are paid for. While a creative reason, some analysts are looking to lower-than-expected sales in Germany, which has resulted in the retailer pushing back its estimated time of profitability to 2002. During the past quarter, WMT says they have experienced slowing consumer traffic, but this was countered by the average price remaining high. WMT attempted to lighten the brunt of warning by stating that they expect consumer spending to increase in the 3rd quarter with back-to-school shopping. WMT lost 7% today, finishing off $4 at $53.63. All eyes will be on the Retail Sales numbers and the PPI due out on Friday for more clues to the trend of the economy.
Even with this bad news, the INDU has managed to maintain short-term support 10900, closing 10905. This recent rally has broken the trend of lower highs and has many investors breathing a sigh of relief. Looking at the chart below, the trend is beautiful. After launching from 10500, the INDU put in a few days at the 10700 area, where there is a bit of congestion. Tomorrow will be a critical day for the INDU ahead of the economic data on Friday. Financials have pulled back today with the broader profit taking, and further buying of these issues could be the necessary catalyst to move the INDU to 11000. GE, considered as a good barometer for the INDU, traded to a 52-week high today on some heavy buying burst in the final hour of the session. There was no news that drove the activity. GE closed at $55.94.
The disaster du jour was a court ruling against LLY regarding their Prozac patents. Trading in LLY was halted today at 1pm EDT due to a news release. When that news hit, the sellers didn't hesitate to punish LLY. Previously trading at $107, once reopened, investors ran for the exits at $75. The root of this evil selloff was the judgement from a U.S. Appeals Court, reversing a lower court decision that gave Lilly's blockbuster anti-depressant drug Prozac patent protection through 2003. The drug does, however, have patent protection through 2001. Well, when there's a loser, there's a winner, and that would be Barr Laboratories(BRL). This is a victory for BRL and other generic drug manufacturers, who will most certainly capitalize on the huge market for this popular drug. Prozac represents a quarter of Lilly's bottomline. They might need a little more than just Prozac to relieve this depressing stock performance. LLY plunged $32.54 while BRL jumped $30.25, both closing at $76.
Today's hot IPO stole the show, and attracted much of the limited summer capital. McData(MCDT), the EMC spinoff, opened the day at $73, well above the pre-market price of $28, which was upped from the initial range of $19 to $21. MCDT successfully priced 12.5 mln shares at $28 and shareholders saw an incredible first-day pop, reminiscent of those remarkable 1999 IPOs. In somewhat of a one-up to AOLA's IPO yesterday, MCDT tacked on a healthy $57.56 from the initial offering price, closing at $85.56. McData, headquartered in Broomfield, CO, is a provider of enterprise switches and software for connecting Web servers. EMC plans to spinoff remaining MCDT shares to its shareholders in 6 to 12 months.
Looking forward to tomorrow, the question is, will investors sell into strength on AMAT earnings, like they did with CSCO's today. AMAT surprised the Street by two cents, posting profits of $0.70 per share. Revenues jumped by 83% from a year ago. This may help ease the concerns over the semiconductor cycle that has been the center of debate since Jonathan Joseph's comments last month. After tomorrow's close, DELL will report earnings and investors will be eagerly watching to gauge the outlook for the box makers. With overhead resistance very near on both the NASDAQ and the INDU, it is going to take a strong volume effort to push the markets to the next level. If we continue to sell into strength, a rollover could be imminent. Keep tight stops on your existing positions. The VIX.X (is it still broken?) inched up 0.48 to 21.31, so it is still in the red alert area. PPI and Retail Sales on Friday are lurking. August expiration is just a week away, so use caution in initiating new positions in August contracts. With the market in a moment of flux, it really could go either way. I'm not a believer that we have the catalysts and the conviction to go to new highs. So when you get ready tomorrow to trade, ask yourself, am I a believer? Good luck and when in doubt stay out.