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Market Wrap

Earnings And Merger News Boost Dow For Third Straight Day

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        10-23-2000        High      Low     Volume Advance/Decline
DJIA    10271.70 + 45.10 10361.30 10216.20 1.03 bln   1279/1578
NASDAQ   3468.69 - 14.45  3523.69  3432.44 1.69 bln   2080/1874
S&P 100   734.35 -  3.81   741.17   729.68   totals   3359/3452   
S&P 500  1395.78 -  1.15  1406.96  1387.75           49.3%/50.7%
RUS 2000  489.96 +  2.51   490.50   487.45
DJ TRANS 2436.86 - 32.21  2471.31  2436.86
VIX        26.98 -  0.44    28.07    26.59
Put/Call Ratio      0.48

Earnings And Merger News Boost Dow For Third Straight Day

While the NASDAQ took baby steps back. After last week's massive rebound in the NASDAQ, the tech-heavy index may have been due for a breather today. The lack of conviction today, in the form of price or volume, left many market watchers debating if last week's rebound was truly a bottom, or just another bounce. Aside from a handful of earnings reports and merger news, many traders called today's trading down right dull. Nonetheless, the INDU's third consecutive day of higher prices and the rebound from day lows on the NASDAQ was encouraging to witness.

The 1.66 billion shares traded on the NASDAQ today might suggest the modest pullback was no more than a natural reaction to last week's big rally. What's more, advancing issues outpaced declining issues by a slight margin. Although the NASDAQ's internals remained relatively strong, the big cap leaders of the COMPX fell especially hard after last week's rally. MSFT and CSCO both weighed heavily on the COMPX, with the latter's weakness resulting from a bearish report issued by Barron's over the weekend. Other notable losers on the NASDAQ included ORCL -$1.19, DELL -$0.94, NTAP -$8.25, VRTS -$9.44, and JNPR -$7.13.

The COMPX fell as low as 3432 before dip buyers stepped in during the final hour of trading, whereupon the index staged an impressive rally into the close. The COMPX has attempted to close above the 3500 level twice in as many days of trading. The COMPX's failure to close above 3500 has caused some concern among market technicians. The 3500 level should prove to be a battleground for the bulls and bears tomorrow as each camp tries to gain control.

The big news of the day involved several Dow components. The Honeywell (HON) story, which Jim mentioned in Sunday's wrap, unfolded this morning, which culminated in General Electric (GE) agreeing to acquire the diversified tech concern for $45 billion. Jack Welch, GE's CEO, and possibly the most highly regarded executive in corporate America, said he would delay his highly publicized retirement to see the deal through. Welch was expected to end his 20 year role as CEO of GE in April. If the proposed merger is approved by government regulators, the combined entity would create one of the world's biggest industrial manufacturing companies. HON will better position GE to capitalize on the aircraft and aerospace markets, and help with contract negotiations with major aircraft manufacturers. As such, analysts are bullish on the deal, especially given the 10 cent boost to GE's EPS in the first year of operations. The merger announcement caused GE to fall well below its 200-dma - a rare event in and of itself. Several analysts defended GE's drop by suggesting the stock is undervalued by as much as $10 relative to its current level. The last time GE traded below its 200-dma for a sustained period of time was during the lows of October 1998. GE's -$2.50 drop weighed on both the Dow and S&P, while HON's +$3.94 gain buoyed the INDU.

GE's acquisition of HON sparked a significant rally in the latter's sector. Rockwell (ROK) rose +$5.06, Raytheon (RTN.B) gained +$2.00, and Litton Industries (LIT) added +$2.25.

The above mentioned merger news, combined with several bullish earnings reports, helped the INDU rally for the third straight day. The blue chip index charged higher after the opening bell this morning, but faded into the close of trading as investors took profits in recent tech winners. Notable losers on the INDU included the aforementioned GE -$2.50, MSFT -$3.31, UTX -$1.50, and IBM -$1.88, which flirted with its 52-week low today. Big winners on the INDU included, of course, HON +$3.94, HWP +$2.38, MRK +$2.88, MMM +$2.56, and SBC +$3.38.

The INDU's fall below 10,000 last week proved to be a bear trap, at least for the time being. The INDU's early morning rally took the index up to the 10,361 level before profit takers impeded its advance. If the INDU's end-of-day retreat turns into selling tomorrow, the index could very well re-test the 10,200 level. On the other hand, if the buyers show up early tomorrow, watch for the INDU to retest its day high, thereafter the 10,400 level will be the next area of resistance.

The positive profit reports scattered across several sectors, which inspired buying in select areas of the market today, helped the INDU hold onto much of its gains. One such report was delivered by Minnesota Mining and Manufacturing (MMM). Shareholders to the manufacturing giant breathed a profitable sigh of relief after the company reported third-quarter results that edged past Wall Street consensus estimates by one penny. Many on Wall Street had speculated MMM would miss estimates due to the weak euro, which had afflicted many other multinational concerns during the third-quarter. Shares of MMM gained a respectable +2.56 on the day.

Optical giant, Corning (GLW), reported third-quarter profits of 35 cents per share - a penny ahead of estimates. The company recorded $317 million in income, which more than doubled from the same time last year. During its conference call, GLW officials guided analysts to 25% earnings growth for 2001. Despite the blowout numbers and upbeat guidance, GLW slid -$4.56 after running up +$10.75 last Friday. The buy the news and sell the rumor-effect pressured the optical-related issues with CIENA (CIEN) falling -$7.38 and JDS Uniphase (JDSU) shedding -$1.19.

Financial sector heavyweight, American Express (AXP), reported third-quarter numbers that met analyst expectations. The company's earnings rose 15% from the year-ago period, in part from strong consumer spending with its Amex charge cards. AXP slid -$1.69, in what was a generally weak financial sector.

Not all the earnings news was positive today. After lowering earnings estimates, again, officials from Lucent Technologies (LU) said this morning acting CEO, Rich McGinn, had been replaced by former chief, Henry Schact. Before announcing the CEO change, the company trimmed revenue estimates by 7% for its fiscal first-quarter. LU watchers began speculating about the removal of McGinn after the company lowered earnings estimates last month; its third warning in less than a year, before today's announcement. The company's decision to remove McGinn came with little surprise and actually gave the stock a nice boost in early trading. But the sellers quickly took advantage of the early morning strength to unload stock. LU finished down -$0.56 in the regular trading session. The company was expected to announce fiscal fourth-quarter results tomorrow, but moved its earnings announcement to this afternoon. Lucent met its much reduced estimates and edged higher in after hours trading.

National Semiconductor (NSM) warned of lower-than-expected earnings during its next two quarters. The company said sales of its chips used in cell phones would fall between 6 to 8 percent. The company blamed its shortfall on irregularities in orders from its cell phone-related customers and also on a slowness in the PC area. Shares of NSM fell nearly $13, or 35%, in after hours trading. The semiconductor sector held up quite well today as measured by the 3.23% gain on the Philly Semi Index ($SOX) today. However, the semis recent strength may come under pressure if the market receives NSM's warning with bearish tendencies.

Tomorrow's earnings calendar is filled with a diverse group of companies, who are likely to set the tone for the day. Wall Street will be listening closely to the reports from the energy sector in light of the high price of crude oil. Several integrated oil concerns are expected to report, including Chevron (CHV), Exxon Mobil (XOM), and Texaco (TX). Oil service heavyweight Haliburton (HAL) is also expected to release third- quarter results.

In tech-related issues, Nortel (NT), Qwest (Q), LSI Logic (LSI), and Amazon.com (AMZN) are all expected to report profits. And, in the drug sector, Schering-Plough (SGP) and Pfizer (PFE) will be worth watching, especially after the positive report from Merck (MRK) last Friday. Aided by its upbeat earnings guidance late last week and an upgrade from Salomon Smith Barney today, MRK gained an impressive +$7.19 over the last two trading days.

Beyond tomorrow's earnings reports, the market will be anticipating two key economic reports scheduled for release later in the week. The Labor Department will report the third-quarter Employment Cost Index (ECI) on Thursday. And on Friday, the market will get its first look at third-quarter gross domestic product (GDP). Both numbers could prove to be market moving as the Federal Reserve is sure to be watching for a slowing economy, and lessening threats of inflation. The consensus estimate for the ECI is right at 1%, and the GDP estimates range from 3.1% to about 3.4%.

Before the economic numbers later this week, traders will continue to monitor third-quarter earnings reports for signs of slowing corporate profits. Volatility will be the name of the game as traders sort through the remaining earnings reports. The volatility should continue to provide opportunities, but will require trading with your head and not emotions.

Good trading! See you at the seminar this weekend!

Eric Utley
Assistant Editor


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