What A Way To Start The Week...
It was an Old Economy rally today over at the NYSE as the INDU soared another 148 points. The NASDAQ caught the buying bug too, following the INDU's cue and closing up 60 points. The intraday technical outlook was picture-perfect for both indices as they steadily climbed to close at the highs of the day. Too good to be true? I've always been told that if something's too good to be true, it usually is. Now, I'm not here to throw cold water on the bulls in the crowd, but just issuing a word of warning about summer trading.
It was a typical summer "no news is good news" trading day. Both major indices had impressive gains today on very light volume. The NASDAQ only clocked in with 1.2 bln shares, the sixth lowest volume day of the year. The overall breadth on the tech index was just about even, with advancers slightly edging out decliners, 21-19. Traders overtook the 3800 level this afternoon and the NASDAQ rallied right up into the close at 3849. This level has been a point of contention for the NASDAQ in the month of August and really leaves us asking whether or not the momentum will carry us through tomorrow. Trader Talk on CNBC has many short term traders(1-3 day positions) on the Street calling the past two days a sucker's rally. This wouldn't be out of the question considering the choppiness that the past month has brought us. We'll have to see. Let there be no mistaking, the NASDAQ is a trader's market. Up and down, back and forth, getting whipped like this can make a trader dizzy. Now, I'm not crying doomsday or market crash. I am saying that in the short-term, it's not easy to predict what each day will bring. Looking down the road into the Fall, things look good, but being option traders, our outlook normally is myopic.
In the chart below, the NASDAQ is right at that point. Will we go higher and test 3900 or will the traders take some of their profits once again? Above 3850, technical resistance may be encountered at the 100-dma of 3876. With the prospects of any action by the Fed at next Tuesday's FOMC meeting just about dead, the fear appears to be out of the market. So much so that I even heard the words "rate cut" on CNBC last Friday. Now let's not get too far ahead of ourselves. Sensationalism in the media? Can you believe it? At any rate, no pun intended, the NASDAQ is going to be controlled by technical trading as it poises itself for the Fall rally. Speaking of no fear, the Volatility Index, VIX.X continues to be on red alert, closing at the low of the day at 20.25. Being a contrarian indicator, this type of market complacency normally results in somewhat of a sobering sell-off.
Salomon Smith Barney analyst Jonathan Joseph was talking again today about the semis, in particular, MU. He came out today and raised MU's 4th quarter earnings estimate from $0.78 to $1.00. After his bearish comments on the Semiconductor sector back in July, he is now picking and choosing individual issues that appear attractive. As a result, the SOX.X jumped 7.7%. Joseph also reiterated his Buy rating and $125 price target on MU, sending the stock to $80.50, up $4.88. KLAC(+6.31), NVLS(+7.13), and AMAT(+5.63) benefited from these comments as investors felt that the sector may have been oversold.
Jim has been mentioning the convergence of the NASDAQ's moving averages over 3900. You can see below that the 50-dma and the 200-dma are looming overhead, further strengthening the already established resistance at 3900. Once we can get through the 3930 level and successfully test it as support, the NASDAQ will be ready to get back to its old ways.
So going forward for the NASDAQ, we'll be looking for momentum to come back with the volume as we approach Labor Day. Until then, don't expect a defined trend. The tech index has been rangebound since mid-April and appears that it will remain there until the volume comes back to play. Watch that time premium if you own options! The decay can be catastrophic in times like these. Believe me!
Now, the INDU has been on a tear lately! It finally came back to life with the arrival of August and continued its run today, closing 11176. To put this level in perspective, the last time the INDU traded this high was April 12th, the exact day the correction began. And there is good reason for the Old Economy stocks to be on the move up. The markets have essentially written off the Fed on August 22nd. With the odds of a rate hike next week being slim to none, investors are breathing a sigh of relief as pressure on future profits ease. They threw money at the Financials once again today as some of the Retailers. Strong performers on the day were: HWP(+4.25), JPM(+4.06) to an all-time high, HD(+3.69) ahead of tomorrow's earnings, INTC(+3.13), IBM(+2.63), C(+1.56), and EK(+1.44). As you can see, a broad array of sectors benefited from today's buying spree. Oil service stocks also had a good day on concerns with the global supply and increasing oil prices, closing just below $32 a barrel at $31.94.
Last Friday, the INDU finally broke out of the narrow range that was supported by 10900. The April 12th high before the correction was 11425, and the INDU could make a run for this level. The prospects look very good for the INDU, yet volume today was extremely light on the NYSE, coming in at a mere 785 mln shares. There certainly appears to be momentum with the INDU, especially with the Financials breaking out to new highs. You know what they say, "Never short a dull market."
Although there were really no broad market macro factors to move the markets today, there was a slew of acquisition news. Rupert Murdoch's News Corp. outbid Viacom for Chris Craft in a $5.4 bln cash and stock deal. News Corp., which also owns Fox Entertainment, will now have duopolies in New York, LA, Salt Lake City, and Phoenix with the acquisition.
In the Fiber Optic sector, BRCM plans to buy privately-held NewPort Communication, not to be confused with Newport Corp. that trades publicly under NEWP. NewPort Comm. is a maker of technology in optical networking. BRCM will issue 5.5 mln shares of its class A common stock to the private company, valuing the deal at $1.2 bln. BRCM will get Ethernet products from NewPort as well as the "world's highest speed" technology for optical communications, according to the company. Investors applauded the acquisition as BRCM gained $15.69, or 7%, to close at $240.75.
Intel continued on the acquisition path as it has been doing aggressively the past year. They are buying private circuit board manufacturer Ziatech Corp. for $240 mln in cash. In a company release, INTC said this deal will "enhance Intel's presence in the rapidly growing market segment for communication infrastructure products." Ziatech will be a Intel subsidiary under their Communication Product Group. INTC was up almost 5% to $66.94.
Looking forward, the increasing acquisition activity is a very good sign as company's foresee the advantages of consolidation and increasing efficiency. The INDU looks like it may have some legs to sustain this move into the Fall, but volume will be the key. Tomorrow's HD earnings report before the bell will likely direct the INDU. The NASDAQ has literally turned into a crap shoot in the near term, but Fall prospects look nice. Thin trading is still the main concern. With thin trading, the big money can move the markets whichever way they feel, depending on what side of the bed they awoke. Just be cautious, it has been a difficult market to trade. Once again, the VIX.X is at extremely low levels, and if history means anything, some selling should be right around the corner. Stick with the strong stocks and protect your positions with stop losses. Financials look great with the no hike bias in the market. They will continue to drive the INDU. Remember, the trend is your friend.