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Market Wrap

Blue In The Face

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        05-15-2002        High      Low     Volume Advance/Decline
DJIA    10243.70 + 29.74 10349.10 10223.70 1409 mln   1681/1485
NASDAQ   1725.60 +  6.50  1759.33  1694.34 1620 mln   1826/1680
S&P 100   542.02 -  3.58   549.41   541.43   totals   3507/3165
S&P 500  1091.07 -  6.21  1104.23  1088.94
RUS 2000  513.54 +  1.82   515.26   508.50
DJ TRANS 2797.98 + 29.74  2808.79  2762.49
VIX        22.13 -  0.03    22.42    21.03
VIXN       45.29 +  0.00    46.13    43.29
Put/Call Ratio      0.70

Blue In The Face

You wouldn't know it by just reading the closing numbers but the bulls really tried to make it three in a row for the S&P 500 and the Dow Jones Industrials. Unfortunately, with Big Blue holding a much anticipated analyst conference after the bell today, traders were not willing to hold any big bets over the close. However, despite this lack of enthusiasm in the broader markets, tech investors did push the Nasdaq to its own three in a row with a gain of +6.51 points ending at 1725. It's not like the losses on the Dow (-54) and the S&P 500 (-6.21) were big. In reality, today's session was probably just frustrating for investors who have witnessed the strength earlier this week. There was a growing hope that the bull market really had begun and Tuesday's close with the major indices just under resistance was just a tease.

The bad news is that little has changed in the technical picture for the markets since Tuesday. The good news is little has changed. As exasperating as it may have seemed for traders, the sideways action is normal for the markets after a two-day rally. You've heard it before. Nothing moves in a straight line and the dips and pull backs are necessary and can be opportunities for a good entry point when the time is right. Keep in mind that tomorrow morning may not be that time. As we mentioned, Wall Street had another reason to churn sideways today. IBM, one of the leaders in the tech sector would be chatting with analysts at its biannual meeting tonight. What IBM had to say could shape the direction for multiple sectors for the next quarter. Yet before we discuss Big Blue's post-market spin session I want to cover a little intraday action.

The CPI and an Active Rumor Mill

The Labor Department's main gauge on inflation, the Consumer Price Index or CPI, was released this morning before the opening bell. Estimates had ranged from a +0.3 percent to +0.4 percent increase and the actual results surpassed both at +0.5 percent. The core CPI numbers, which exclude typically volatile food and energy prices, rose 0.3 percent on top of a 0.1 percent rise in March. Energy prices were substantially higher with the strong increase in oil prices and these translated into hefty increases for gasoline. A few analysts were nonchalant about the report claiming it was not a huge influence on the FOMC's decision making for interest rates. Despite this attitude, negative comments from a Federal Reserve governor were not constructive for market gains. The good news is an interest rate hike is not likely to occur anytime soon. The bad news is the economy, while growing, is doing so at such a slow rate that the FOMC doesn't want to jeopardize its recovery.

Another byproduct of the CPI report was reflected in the housing sector. Investors reacted to the up tick in inflation by selling homebuilders. The DJUSHB index closed flat but many of the larger, well-known names in the group ended the session down with several falling about three percent. This appeared to be a pre-emptive move by investors since the 10-year and 30-year bonds merely inched higher, which in response trimmed yields with fractional losses.

A big contributor to the profit taking and volatility today was an active rumor mill on Wall Street. Word that British troops were in Iraq had many wondering if the allies would be upping their timetable to dealing with Saddam. Another rumor that was circling the markets today was word that Venezuelan President Chavez was shot today. Reaction to these stories left many in the market indecisive but the price of oil ended the day down over $1.00 with most of the losses in the last twenty minutes of the regular session.

Speaking of oil, the price of crude may have dropped today but the bullish trend is still very much in effect. I know we typically discuss changes in the price of oil due to economic demand and changes in the political climate. However, chart readers will probably notice that the $28.00 level could act as support for oil and if the profit taking did continue, it could see more support at its rising 50-dma near the $26.00 mark. On a related note, the Dow Transports (TRAN) ended the day with its third gain in a row and even the Airlines (XAL.X) followed suit with a minor gain.

Dealing With Challenges

The biggest hurdle the market had to face today wasn't any rumor or economic report. It was the post-market meeting between Wall Street and IBM CEO Sam Palmisano. This was Sam's first meeting with analysts after stepping in behind previous IBM leading man, Lou Gerstner. Tech investors may have been hoping for some positive guidance by Sammy but the head honcho tried to avoid talking financials and instead used broad strokes to paint a positive picture for Big Blue's long-term growth abilities.

Sam did state that the company was "dealing with challenges" but expects to drive costs down by $1 billion to $2 billion a year. To quote Sam, he said, "[IBM] can continue to drive share growth and productivity across the enterprise, those factors combined support our goal of double-digit EPS growth over the long-term." Die-hard fundamental analysts may be able to stomach this sort of spin but the herd is likely to respond negatively. Wall Street doesn't want to hear long-term growth and cost reductions right now. Yes, those are important elements in IBM's success but the markets are looking for revenue growth and rising sales to soothe our fears that a tech recovery has yet to truly begin.

Shares of IBM began to slip in after hours trading and we would not be surprised if investors took some money off the table considering the $76 to $84 move in the last several sessions for Big Blue. Rumor has it that IBM is likely to cut up to three percent of its work force later this quarter.

Dude, You'd Better Not Miss Estimates

The next big company that could make or break any tech sector rally is going to be Dell Computer (DELL). With revenues of more than $31 billion, DELL has been stealing marketshare from the likes of HWP, CPQ (now HPQ) and GTW but DELL's $27 share price is a far cry from the hey-day of yesteryear. Shares have been climbing the last three sessions and traders could be anticipating strong comments from Michael Dell now that two of its biggest competitors have merged and will be faced with the huge struggle of restructuring their business into a healthy rival for the Texas based DELL. It was only a few weeks ago that DELL said results should be inline with estimates of 16 cents a share compared to the 17 cents a share for the same period last year. The street is probably expecting to hear decent numbers from DELL's retail sales but will be most eager to hear how corporate spending turned out. If things start to get really bad they could always resort to selling apparel with their pitchman, Steven's trademark "Dude" exclamations. Oh wait, they're already doing that. Look for DELL's earnings after the close tomorrow.

More Tech Earnings

Readers know that the SOX can have a heavy influence on the Nasdaq but it appears that analyst opinions of the industry flip flop almost daily. Earlier this week everyone was talking up the praises of AMAT. When AMAT announces earnings after the bell on Tuesday, the press erupted with a number of opinions. Many were bullish on AMAT's report that orders were up 51% but in a sector of dueling analysts views we're seeing a number of new bearish comments. Frankly, I know some readers get frustrated with the deluge of upgrade/downgrade crossfire on stocks like AMAT and INTC. That's why I find it interesting to turn to the charts and see what the price action is telling us. Unfortunately, the SOX looks like a mirror of the Nasdaq composite but the index is holding on to its perch above its 200-dma - at least for now. Shares of Intel have also managed to remain above its 200-dma and claim another close back above the $30 mark. Both are bullish for investors but shares could pull back to fill the gap from Tuesday morning. On the other hand, AMAT has already managed to fill the gap from Tuesday's spike higher and we'd keep an eye on it for leadership in the coming weeks. A pull back to the 50-dma could be a short-term trader's entry point but the stock has strong resistance at $28.00.

Additional tech stocks that will be influencing their individual sectors are as follows: TXN recently reaffirmed its own Q2 revenue and earnings numbers and the company is looking for revenue to grow 10 percent to $2 billion. While this is a positive for the semiconductor group shares are mirroring the action in the index. Network Appliance (NTAP) was slammed for a 16.5 percent loss after reporting Q4 numbers that met estimates but fell short on the revenue expectations. Goldman came out with less than enthusiastic comments claiming limited upside at current valuations. However, contrasting this negative news for the storage sector was a positive report from Brocade (BRCD). BRCD met street estimates and revenue came in just above expectations. Of course they let the cat out of the bag a day early yesterday and shares suffered some profit taking today. On the software front, BEAS actually rallied 2.6% despite a lackluster earnings report and lower guidance on its revenue forecast for the year. Analyst reactions were mixed with both positive and negative reviews. A bigger influence on the software sector is MSFT and shares of the stock failed to rally above its 50-dma today and despite its recent turnaround we could see more profit taking. The software giant is still up over 10% from its earlier May lows.

Invest Like Bill Gates

Even news that Bill Gates had taken several positions across the drug sector in many of the big name companies could not assuage the selling pressure plaguing the group. The last several days have seen a competition between some of the big cap drug companies on who could come out with the worst news. While JNJ and LLY were in an early lead and latecomer PFE tried to enter the race tonight the new runner up is Abbot Labs (ABT). Shares of ABT were slashed for a 9.3% loss when word hit the street that the FDA claimed that one of ABT's manufacturing plants did not meet their quality system requirements. ABT's investor repelling comments were that the company could not "estimate the financial impact" at this time. While ABT put in a good showing, the big winner in this beauty contest was Schering-Plough (SGP). While the stock was already in a dreadful downtrend, shares collapsed for another 12% loss closing at $25.00 after investors found out about a criminal investigation by the FDA regarding one of SGP's products. The inflammation appears to be a manufacturing plant in Puerto Rico but this is not the first time SGP has had trouble's with their plants and the FDA. One analyst stated that the company had already spent $100 million on bringing their manufacturing processes up to compliance only fall short again. Needless to say the drug sector may not be the safe haven it once was.

Looking Ahead

At the end of the day it would appear that some traders may have been attempting to talk down the markets with a well placed rumor or two. Considering that we were already due for a little profit taking after the Monday-Tuesday rally I'm encouraged that the broader indices performed as well as they did. I've posted a chart of the Dow Jones below that portrays a longer-term up trend in a wide ascending channel. You can also see the regression channel outlining the multi-week consolidation from the March highs to the April-May lows. The market does indeed appear to have broken out of its short-term down trend but given the steep rise I would not be surprised to see the Dow pull back to the 10150 to 10100 levels. Heaven forbid we could even get a dip to the 10K mark but the name of the game here is patience as we look for the next bounce. Fortunately, the MACD had produced a bullish crossover and could be confirming the beginnings of our next leg higher. If you prefer, I'd recommend you keep an eye on the 10300 level and 10400 levels outlined in Tuesday's wrap as overhead resistance for the Dow.

Traders will notice we have a similar breakout in the short-term pattern for the S&P 500. We mentioned in the Market Monitor today that traders could be witnessing another "stealth rally" as investors slowly put money to work in those stocks that should benefit as the economy rebounds. The recent move in the S&P 500 might be the beginning of a new leg up but I would not be surprised to see a pull back to the 1080 level as the profit taking today was relatively mild.

Keep in mind that this bullish trend is still very fragile. Any negative news is liable to hit harder than we like and traders will be looking for a reason to sell and take profits off the table. Tomorrow morning Wall Street will be deciphering the Initial Claims, the Housing Starts and Building Permits. On Friday we'll have to deal with the Michigan Sentiment numbers. However, the event likely to have the biggest affect now will be DELL's earnings report and conference call. After Big Blue's song and dance tonight about a "challenging environment" don't be shocked to see tech investors do a little sell-button shuffle in the Nasdaq tomorrow and Friday. I'd look for support once the gap is filled on the composite around the 1650 level. After all, the Nasdaq is still up 7.8% in the last three sessions and nothing moves in a straight line. Speaking of lines, I bet there's a big line a your local theatre for the 12:01 a.m. showing of Episode II, Attack of the Clones that opens tonight.

James

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