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Market Wrap

Vote of Confidence

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     09-08-2003            High     Low     Volume Advance/Decline
DJIA     9586.29 + 82.95  9599.34  9503.41 1.62 bln   2012/ 814
NASDAQ   1888.62 + 30.38  1888.65  1863.88 2.02 bln   2115/1014
S&P 100   518.50 +  5.53   518.50   512.49   Totals   2960/3263
S&P 500  1031.64 + 10.25  1032.41  1021.39
RUS 2000  517.13 +  8.26   517.21   509.76
DJ TRANS 2761.68 + 14.39  2777.04  2743.36
VIX        18.79 -  0.58    19.54    18.79
VXN        29.55 -  1.15    31.38    29.50
Total Volume 4,058M
Total UpVol  3,350M
Total DnVol    655M
52wk Highs     913
52wk Lows       17
TRIN          1.14
PUT/CALL      0.67

Vote of Confidence
By James Brown

Investors continue to cast their vote confidently to the bulls as the S&P 500 notches a new 15-month high and the NASDAQ composite claims a new 18-month peak. Most of the gains were concentrated in technology and biotech issues but the rally was once again very broad-based with nearly every sector closing in the green save for Retail and Gold. Historically a weak season for the equity markets this September is proving to be anything but.

The Dow Jones Industrial average added almost 83 points to close at 9586. The COMPX rose more than 30 points to 1888 and the SPX inched up one percent to 1031. Contributing to the general mood in the U.S. were positive sessions for the Japanese, English and German exchanges. The market internals for the U.S. were strongly positive with 20 stocks rising for every 8 losers on the NYSE and 21 winners for every 10 decliners on the NASDAQ. New 52-week highs were a little less than what we've come to expect at 463 between the two exchanges but they continue to stomp new lows, which rang in at 10. Overall volume could have been stronger but up volume beat down volume by 3.9-to-1 on the NYSE and more than 6-to-1 on the NASDAQ exchange.

Chart of the NASDAQ Composite:

Chart of the S&P 500 Index:

Chart of the Dow Jones Industrials:

The weekend headlines were all about the President's request for another $87 billion to rebuild and defend Iraq and Afghanistan. Yet when Wall Street opened for business this morning it wasn't the ballooning deficit on investors' minds. Instead traders were more concerned with grabbing their share of the ever-rising tech tidal wave that has swept away the bulls and bears in recent sessions. Shares of IBM lead that charge today after Credit Suisse First Boston upgraded the stock from "neutral" to "out perform" while lifting their earnings estimates for 2004 and raising their price target from $87 to $102.

CSFB believes IBM will be a great candidate to catch any "late- cycle" I.T. spending and shares of Big Blue added 2.47% to close just under overhead resistance at $90. But IBM wasn't the only news contributing to the 1.7% gain in the GHA hardware index. Research firm IDC raised its own forecast for the global PC market this morning. The firm said Q2 PC shipments were nearly 10% stronger than expected and they raised their estimates for all of 2003 by 8.3%.

Semiconductor bears are probably still suffering from a wave of vertigo or is it dj... vu? It was just last Thursday that UBS raised their outlook for the chip equipment sector. Today it was Smith Barney's turn to lift their outlook on the industry from "market weight" to "over weight". The analyst believes that the improving fundamentals and economic conditions can push industry revenue growth to 20 percent in 2004 and 30 percent in 2005, which is a four percent increase from current estimates. Semiconductors also got a boost this morning when Taiwan Semiconductor (TSM) said they expect Q3 shipments to rise 10 percent over previous quarters and they see Q4 tracking inline at Q3 levels. First Albany came out with several opinions today as well and one of them was to raise chip stocks Altera (ALTR) and Xilinx (XLNX) from "neutral" to "buy".

This fresh round of positive chip news was not lost on shares of Intel (INTC) which added 1.6% after launching two new Itanium 2 chips, which will target low-end servers and put more pressure on Sun Microsystems' (SUNW) business. Lastly, shares of communication chipmaker, RF Micro Devices (RFMD), sprang up over 16 percent after raising its Q2 outlook based on strong customer activity.

Tech issues were also buoyed by EMC Corp (EMC) who received an "out perform" rating and a $16 price target from SoundView. Plus, Nextel Communicatoins (NXTL) reaffirmed its full-year guidance of $1 a share backed by growing revenues and subscriber growth.

Out performing the 2.84% gain in the SOX semiconductor index was the booming biotech index. The BTK added 3.89% inspired by a 32 percent gain in shares of Regeneron Pharmaceuticals (REGN). REGN announced that French company Aventis would pay $125 million down and up to 50 percent of the profits for REGN's experimental VEGF Trap treatment to fight cancer. The deal is estimated to be worth upwards of $500 million for REGN. The VEGF trap treatment uses anti-angiogensis, which blocks blood vessel growth to the cancerous area. Shares of Amgen (AMGN) and Genentech (DNA), the No. 1 and No. 2 biotech firms, respectively, were up strongly on the day. DNA previous reported success earlier this year with their Avastin drug, which also uses anti-angiogensis to treat colon cancer.

Overshadowed by the big gains in biotech was a strong day for the DRG drug index. Last Friday in the Market Monitor I outlined a bullish breakout of the descending channel in the oversold DRG.X and suggested that bullish traders who would prefer not chasing the tech train look here. Barron's apparently agrees. Over the weekend a Barron's article highlighted the low P/E's in the group combined with the 2% and 3% yields for big caps like Pfizer (PFE), Merck (MRK) and Johnson and Johnson (JNJ) making them tempting values, especially compared with to the tech sector. The news pushed Merck to the top gainer in the Dow Jones Industrials with a 3.1 percent gain.

The FDA was in a giving mood today as well. Barr Labs (BRL) rocketed 8.4% by the close after the FDA approved BRL's Seasonale Extended-Cycle oral contraceptive. The new drug can reduce a woman's menstrual cycle to just four times a year. Watson Pharmaceutical (WPI) also received an FDA approval for its generic version of the Percocet pain reliever produced by Endo Pharmaceuticals (ENDP). By the end of the day WPI was up 7.2%, the DRG.X was up 1.94% and even ENDP added 3.8%.

Last week we continued to suggest that traders needed to stay sharp because the rally has come so far now that analysts could start to downgrade stocks based on valuation concerns. We started to see a couple of these opinions late last week and they've begun anew today. This time the Retail sector was the main target. Sanford Bernstein's retail analyst cut their ratings on Wal-Mart (WMT) and Target (TGT) from "out perform" to "market perform". The research note was actually titled "Time to take some profits" as the analyst felt that these shares had already priced in a strong second half for 2003 and double-digit growth for 2004. This came on the same day that WMT said their weekly same-store sales are on track to meet their September goals of 3-5 percent growth. RBC Capital Markets chimed in with two downgrades of their own for Gap Inc (GPS) and Ann Taylor Stores (ANN) from "out perform" to "sector perform". Lehman Brothers actually disagreed and felt that the retail sector was poised to perform well heading into Christmas after the stronger than expected back-to-school season.

Speaking of end-of-year projections, The S&P Investment Policy Committee raised their year-end forecast for the S&P 500 from 1030 to 1085 or about +5 percent. They're really stepping out on a limb since the SPX closed at 1031 today. The outlook is based on improving economic conditions and rising corporate earnings. However, Smith Barney's institutional equity strategist, Tobias Levkovich, was less enthusiastic. Tobias is targeting a year-end target of 1075 for the S&P 500 but forecasts 2004 will be bearish with a year-end target of 1025. Levkovich believes that the markets will remain range bound and that contrary to popular belief we are not in a new bull market.

Whatever the long-term outlook is, short-term traders have to contend with the trend this week. Honestly, I'm surprised to see the markets higher ahead of the September 11th anniversary and we could still see some profit taking in the next couple of sessions. Yet until that occurs the best bet may be to just keep raising your stops on any current profitable positions. Look for news on Nokia (NOK) tomorrow with their mid-quarter update and headlines from the Bear Stearns Healthcare conference, Lehman Brothers Financial Services conference, and the Merrill Lynch Media & Entertainment conferences which are all in session tomorrow.


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