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MMM Soars, LXK Crashes

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     07-21-2003         High     Low     Volume Advance/Decline
DJIA     9096.69 - 91.46  9187.80  9075.19 1.51 bln    328/1164
NASDAQ   1681.41 - 27.09  1706.29  1675.18 1.47 bln    367/1096
S&P 100   492.80 -  8.70   501.50   497.16   Totals   1326/2718
S&P 500   978.80 - 14.52   993.32   945.63
RUS 2000  457.17 -  7.59   464.76   456.54
DJ TRANS 2572.55 -  3.74  2571.87  2559.75
VIX        22.12 +  0.76    22.78    21.76
VXN        33.07 -  0.34    34.62    33.04
Total Volume 3,233M
Total UpVol    728M
Total DnVol  2,471M
52wk Highs     259
52wk Lows       37
TRIN          1.29
PUT/CALL      0.81


MMM Soars, LXK Crashes
By James Brown

Monday turned out to be another day of consolidation with individual stocks making headlines instead of economic reports. The market bounce on Friday was too tempting a target and bears pounced after some disappointing earnings guidance from the likes of Lexmark Intl (LXK) and Merck & Co (MRK). However, offsetting those losses were shares of 3M Company (MMM) who single-handedly kept the Industrials above the 9000 mark.

Market internals were negative with declining issues out numbering advancing stocks 20 to 7 on the NYSE and 2 to 1 on the NASDAQ. Down volume was more than three times stronger than up volume across both exchanges.

Chart of the Dow Jones Industrials:

Chart of the NASDAQ Composite:

Monday's declines swept across market sectors leaving all of them in the red save the XAU gold & silver index and the XAL, which managed to squeak out a 0.02-point gain. Those sectors hardest hit were the GHA hardware index (-2.99%), the GSO software index (-2.58%), the SOX semiconductor index (-2.0%), the DDX disk drive index (-2.13%) and the DRG drug index (-2.14%).

The hardware group took the worst beating because of the violent reaction in shares of Lexmark Intl (LXK). The problem with LXK wasn't their Q2 results. Yes, they did miss consensus estimates of 78 cents a share by a penny but the real culprit was their forecast for the third quarter. First Call lists LXK's Q3 estimates near 80 cents a share. However, LXK now expects its Q3 numbers to come in between 63 cents and 73 cents a share. Management said revenue growth would be in the low to middle single digits. The company blamed weakness in both corporate and consumer spending as well as tougher competition. Shares of LXK plummeted from $73.50 to close at $59.40, down 19 percent. Their negative Q3 forecast put the brakes on printer-rival and Dow component Hewlett Packard (HPQ) who's shares dropped more than three percent on the session.

Breaking down through support today was the DRG drug index, which lost more than two percent to close below support at 320. Fueling the move was this morning's earnings announcement from Merck & Co (MRK). The headline number was 83 cents a share, a penny below estimates. Revenues were up four percent to $13.28 billion but below general estimates for $13.69 billion. The company said many of its biggest drugs only saw modest sales growth and it is lowering projections for sales of Zocor, which will soon be losing patent protection in some European countries. The company also claimed that overall sales were impacted by wholesalers stocking up on inventory in previous quarters. MRK also told investors that its on-again/off-again spin-off of its Medco unit was now "on". However, instead of issuing an IPO it will issue shares to current MRK shareholders. The stock lost more than three percent and was a drag on fellow Dow component Johnson & Johnson (JNJ), which lost more than 2.5 percent on the session.

Not everyone knows that the Dow Jones Industrial average is a dollar-weighted index. The higher dollar the stock the more weight it carries in moving the average. The single-most powerful stock in the index is MMM, which was trading near $130 before investors pushed it to a new all-time closing high of $136.35 (+4.73%). Vaulting the stock higher was its pre-market earnings report where the company blew past analysts' estimates by 5 cents. The $1.56 a share equaled a net profit of $619 million, which according to the company's chairman was the highest second quarter earnings in the company's 100-year history. Revenues jumped from $4.16 billion in the second quarter last year to $4.58 billion this year. 3M admits that the weak dollar boosted its net income and helped the company post 17 percent sales growth overseas (compared to just 2 percent growth here in the U.S.). More importantly MMM raised its full-year forecasts to $5.90 to $6.05 a share, which is significantly stronger than current estimates of just $5.91 a share. Not that there was a large amount of shares shorted on this stock but the close above $136 could have bears scrambling to cover. Yet at the same time a quick glance at the chart shows that a stock like this tends to consolidate its big gains and that could spell bad news for the Dow (remember, it's the highest weighted stock in the index).

The stream of earnings will continue to take center stage with another one third of the S&P 500 expected to report this week. Last week's announcement saw plenty of mixed results with the general consensus being that earnings are up over six percent overall. However, corporate America still seems way too cautious about the third and fourth quarters to justify current valuation levels. With investors starting to question the reality of a 2H recovery they're going to be looking at any and all indicators to help shape market direction. The following are charts of the dollar and the price of oil; which can be influences on market direction and strength.

The U.S. dollar has risen strongly off its June lows but the daily oscillators all suggest the rally is fading and we could see a retracement of its recent gains. The chart below is actually a weekly chart of the dollar illustrating how it appears to be rolling over near the top of its descending channel.

Chart of the U.S. dollar:

Next is the price of crude oil, which has moved strongly off its April-May lows near $25.00 a barrel. Currently, the August light, sweet crude futures are trading under $32 a barrel almost at its highs prior to the start of the Iraqi war. As Jim mentioned in his Sunday commentary this is an unspoken tax on the economy to the tune of billions of dollars. Higher oil prices are felt throughout our economy from transportation to manufacturing.

Chart of August crude oil:

Fortunately, short-term traders may have some hope. Texas Instruments (TXN) announced earnings after the bell this evening and the results were positive. TXN said its Q2 profits rose 27 percent. Earnings were 7-cents a share beating consensus estimates by a penny. Sales rose by more than 8 percent to $2.34 billion. Chip analysts realize that TXN beat vastly reduced expectations but Wall Street can have a short memory and the stock is trading up in after hours. This could have a positive affect on the SOX, which has been pulled back to its rising 50- dma (support).

Tomorrow it's another full day of earnings announcements and two previous tech high fliers, Amazom.com (AMZN) and Sun Microsystems (SUNW), will be announcing after the bell tomorrow.



 
 



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