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Market Wrap

Indigestion

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      11-21-2001          High     Low     Volume Advance/Decline
DJIA     9834.68 - 66.70  9894.19  9796.41 1.02 bln   1260/1813
NASDAQ   1875.05 -  5.46  1884.49  1853.67 1.54 bln   1717/1772
S&P 100   586.36 -  3.67   590.03   581.93   Totals   2977/3585
S&P 500  1137.03 -  5.63  1142.66  1129.78             
RUS 2000  452.31 -  1.59   453.90   449.95
DJ TRANS 2485.60 -  3.80  2491.34  2468.90
VIX        25.32 -  0.81    26.75    24.77 
VXN        52.68 +  1.27    54.33    52.51
TRIN        1.38 
Put/Call    0.60

Indigestion

Stocks finished with a negative bias Wednesday. Volume was light ahead of the holiday. Bonds were whacked.

The Labor Department reported Wednesday morning that unemployment claims dropped for the fourth consecutive week. It's worth noting that the recent four-week stretch of declining unemployment claims is the longest since early 1999. Jobless claims totaled 427,000 during the most recent reporting period, which was about 15,000 lower than expected. Continuous claims, however, remained historically high at around 3.75 million. The recent retreat in unemployment claims has some economists suggesting that the worst has passed in the job market.

Meanwhile, the University of Michigan reported that its consumer sentiment index rose to a higher-than-expected reading of 83.9 in November. The index hit 82.7 in October.

The two positive economic reports sent prices of treasuries spiraling lower. Bond market participants exited the government's debt, betting that the Fed would bring an end to its benign monetary policy in the wake of the positive economic reports. The sell-off in bonds further pointed to a recovery in the U.S. economy next year. The benchmark 10-year Note (TNX.X) traded above 50.00 (5.00%) at one point Wednesday. The print above 50.00 was the TNX.X's first since mid-August.

The growing consensus is that the U.S. economy will recover next year, but not at the 5 percent annual rate of growth investors grew to enjoy in the late 90s. The economic indicators are revealing that while the economy is still weak, it's on the mend and any recession should be shallow and short. The recent rally in stocks from the September 21 lows discounted part of the forthcoming economic recovery.

On the surface, the sell-off in stocks following the positive economic reports Wednesday morning didn't make sense. After all, good economic news is good for stocks. Right? The markets are forward-looking and as such had already discounted this morning's positive reports. If the forecasts are accurate, the U.S. economy isn't going to grow at an exceptional rate next year. Many investors may still be in the frame of mind that equates economic growth with 100 percent annual returns in stocks. That's just not the case. The period between 1995 and early 2000 was "of biblical proportions," in the words of Jeff Bailey. The economy grew at an exceptional rate as a result of a confluence of several events and catalysts.

This week's weakness in stocks may be a product of investors coming to the realization that while the economy is going to grow next year, it may not be the type of growth that supports doubles, triples, or 10-baggers in a lot of stocks. Earlier in the week, several chip analysts shed cautious comments on the group, suggesting that "sentiment had gotten ahead of fundamentals." Wednesday morning, Salomon Smith Barney software analyst, Richard Gardner, cut his rating on shares of Microsoft (NASDAQ:MSFT). Gardner reduced his rating to a Neutral from Outperform, citing current valuation relative to sales and earnings. The market responded to Gardner's cautious outlook as MSFT slid more than 2 percent.

The pullback across sectors levered to the economy Wednesday, such as Retailers (RLX.X), Banks (BKX.X), Chemicals (CEX.X), and Telecom (XTC.X), left those sectors relatively independent of the business cycle to the bulls. The broader healthcare sector traded well. The HealthCare Sector (HCX.X) was carried higher by makers of defibrillators Wednesday. Shares of Guidant (NYSE:GDT), Medtronic (NYSE:MDT), and St. Jude (NYSE:STJ) boosted the HCX.X to a 1.25 percent gain. Guidant received favorable news that suggested its implantable defibrillator could benefit a larger number of heart patients than previously thought. The good news for Guidant spread to its aforementioned competitors.

Amgen (NASDAQ:AMGN) boosted the Biotech Sector (BTK.X) after its bullish prognosis Tuesday night during its analyst meeting. The company raised guidance for fiscal 2002 thanks in part to sales of its anemia drug. The company had been expected to grow earnings by about 19 percent next year, but raised expectations to the "low 20s." Shares of Amgen finished 7 percent higher and pushed the BTK.X into positive territory.

Completing the healthcare trifecta, Eli Lilly (NYSE:LLY) received regulatory approval for its sepsis drug late Wednesday. Interestingly and separately, Chiron's (NASDAQ:CHIR) sepsis drug had been rejected earlier in the day. Lilly's drug, Xigris, was approved based upon the results of its Phase III clinical trial, which revealed that the risk of death from sepsis had been reduced by 20 percent. Shares of Lilly finished more than $2 higher. Point & Figure aficionados might find it worth while to take a closer look at Lilly. The stock recently completed a bullish triangle.

Lilly's positive development pushed the Drug Sector (DRG.X) through the 400 level Wednesday. The DRG.X has had a nice run over the past four sessions and could have more upside in the short-term. It has some congestion between current levels and 404.

The rally in healthcare may have been the cure for the bulls' indigestion caused by the stocks levered to the economy. There may be a theme developing in healthcare that is worth monitoring in this trader's opinion. Don't confuse that with bearish sentiment on the broader market, that's the farthest from the truth. I believe that we're in a new bull market. I believe that the bottom is in place. But, each bull market is different. When most investors think about a bull market, visions of the late 90s come to mind. This bull market could be different. Maybe it'll be shorter. Of course that's only speculation, but it's a distinct possibility. In the meantime, as Jim has been suggesting, buying the dips has been working.

In the short-term, the major averages could be headed slightly lower. According to daily oscillators, the NDX is closer to oversold than overbought. But the INDU and SPX are still relatively overbought. The bond market, however, is a variable that I don't yet fully understand. The massive amount of money coming out of bonds has to go somewhere. Will it move into corporate and high yield bonds? Is the money coming from bonds being to used to pay for recent stock purchases? Or, is the money coming from bonds earmarked for stocks over the short-term? I don't have the answer yet, but hope to find it soon. Independent of the bond market, stocks appear due for more backing and filling.

Most importantly, have a safe and peaceful Thanksgiving.

Eric Utley
Option Investor

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