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Market Wrap

One Toe Over The Line!

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        05-10-2001        High      Low     Volume Advance/Decline
DJIA    10910.40 + 43.40 10979.10 10868.80 1.05 bln   1868/1222	
NASDAQ   2128.86 - 27.77  2197.03  2128.69 1.73 bln   1902/1942
S&P 100   651.42 -  0.72   658.85   651.10   totals   3770/3164
S&P 500  1255.18 -  0.36  1268.14  1254.56           54.4%/45.6%
RUS 2000  490.58 +  0.40   494.33   490.40 
DJ TRANS 2899.76 + 34.03  2908.76  2865.73 
VIX        27.24 -  0.58    27.57    26.71
Put/Call Ratio      0.69

One Toe Over The Line!

Slowly it crept, step by cautious step. After a better than expected Chain Store Sales Report the markets gapped open on bullish investor sentiment. The Nasdaq was helped by a report from Morgan Stanley that called the bottom on the chip sector. The sentiment failed to hold and the Nasdaq fell to close -67 points below its open and a -27 loss. The Dow managed to sneak in a close over 10900 if only by 14 points. Could the bulls be testing the bears resolve by sneaking just a toe over their line in the sand at 10900?

The best news of the day was the Chain Store Sales Report which posted a surprisingly strong gain of +3.8%. This was the strongest gain since the +4.8% from January. The gains were mainly due to better weather conditions which prompted consumers to buy summer clothing. Discount stores continue to outperform department stores as consumers are being more cost conscious. The gains in sales took some of the heat off the consumer sentiment bias. If consumers are still buying at a strong pace then their outlook can't be very bad. Layoffs continue to increase and could slow this pace over the summer. Also several analysts said the increase in sales was due to drastic mark downs and inventory clearances which will be negative for profits.

The initial claims for unemployment fell last week to 384,000 from a revised 425,000 from the prior week. The indicator tends to be volatile and the 41K drop in initial claims is not material and does not specifically indicate that unemployment is better and companies are hiring again. This could easily spike even higher than the 425,000 number from last week after the layoffs announced this week take effect.

AMD said today that they felt the PC market had bottomed out. Several analysts upgraded AMD saying Intel could not win a price war and the chips AMD was selling were cheaper and fit with the discounted PC equipment being sold now. AMD gapped up on the news but fell when the competing chip comments began. Morgan Stanley came out this morning with an upgrade of chip equipment makers. They upgraded AMAT, LRCX, KLAC, NVLS and TER to "strong buy" from "outperform." They felt the sector would start to rebound in early 2002 and predicted share prices could rise +40% by years end. They said "the train had left the station" on these stocks.

Immediately afterwards Merrill, Goldman Sachs, Credit Suisse First Boston and Cantor Fitzgerald all disagreed with the Morgan Stanley call. CSFB said they "remain skeptical" about PC orders increasing in the second half of the year. Goldman said the sector could still go down in the near term and rated only a 50% chance that orders would increase this year. Merrill said the Morgan scenario was "not likely." Let's see, one for a rebound and four against. Can you guess what happened to chip stocks after the gap open. Clue - they did not go up.

RMBS was found guilty of fraud by a federal jury on Wednesday. They said Rambus had not informed the organization that sets standards for semiconductors about its patent applications. Infineon had complained that RMBS was not playing by the rules and made it hard to comply with patent infringement requirements. This could impact other cases like the Micron and Hyundai cases. They are claiming RMBS patents are not valid and an attempt to back patent processes that others use. This could halt royalty payments if some patents are found to be unenforceable. Bad news for Rambus, good news for other chip stocks.

While the chip/PC companies were battling it out in the analyst war all day IBM was planning a sneak attack after the close. IBM held its spring analyst meeting tonight to say they were going to spend massive amounts of money on networking going forward. Saying the PC price war was getting ugly they are going to continue to focus on services and networking which is where the corporate economy is going. They said hand held PC devices would eventually dwarf the desktop PC and connecting those devices would be big business. IBM has an $85 billion backlog of orders in their service businesses and things are looking rosy. They said they were only looking for single digit revenue growth but upped estimates for double digit earnings growth. After saying harsh things about the PC box makers and good things about their profits going forward it is likely DELL, HWP and GTW could come under pressure on Friday. Dell and HWP will both release earnings on May 17th.

Oracle took another hit today after Salomon Smith Barney lowered estimates for the quarter. They lowered estimates to $.13 and analysts consensus was $.15. There have been several rumors lately that ORCL would warn for the second consecutive quarter.

The ECB cut rates overnight by a quarter point to 4.5%. This was the first cut since 1999 and helps relieve the pressure on the Fed. The Fed had felt it was on its own to rescue the world economy by slashing U.S. rates. With help from our friends there is a better chance of global success. Bank stocks were up slightly on the news.

Wondering why the markets are listless? TrimTabs.com said today that only $400 million came into stock funds in the week ended on Wednesday. This is compared with $15 billion the week before. Turn off the cash spigot and buyers dry up quickly. There is still a lot of cash on the sidelines and in fund hands but whenever the flows slow the spending also slows.

Where to from here? With the PPI and Retail Sales on Friday, Industrial Production on Monday and the FOMC on Tuesday, it will be anything but boring. There are plenty of things to move the markets and the only thing we are unsure of is direction. The S&P rallied one point over resistance at 1267 and promptly fell back again giving back all the gains and slipping below yesterday's close. The Nasdaq opened higher and fell all day on a constant stream of negative news. The IBM conference should provide a boost to IBM on Friday which would also boost the Dow. The Dow's gains today were on the financials and retailers as well as materials stocks. If Retail Sales tomorrow follow the Chain Store Sales today then retailers could follow through. The banks should hold their gains in front of the FOMC meeting and there is nothing other than profit taking to impact MMM and DD which were big winners today. The downgrade on ORCL and the negative comments by IBM on the PC sector could cause ORCL, DELL, HWP, GTW, SUNW, INTC and CSCO to continue their fall on Friday. This sets the Nasdaq up for a fall although there was no new news. Simply a restatement of known facts. The Dow's close over 10900 is positive and should it hold those gains OR even rise slightly, that would be bullish for the market. Still 11000 is going to be a formidable opponent and any gains between now and the FOMC decision are likely to be hard fought and easily lost.

Enter passively, exit aggressively!

Jim Brown

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