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Market Wrap

Bulls Catch Their Breath

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     10-29-2003            High     Low     Volume Advance/Decline
DJIA     9774.53 + 26.22  9787.27  9724.68 1.91 bln   1744/1085
NASDAQ   1936.56 +  4.30  1937.37  1923.56 1.95 bln   1868/1150
S&P 100   518.66 +  0.02   519.69   516.54   Totals   3612/2235
S&P 500  1048.11 +  1.32  1049.83  1043.35
RUS 2000  531.81 +  5.96   531.99   524.00
DJ TRANS 2901.55 + 18.28  2902.03  2877.64
VIX        16.43 -  0.39    17.02    16.34
VXO        17.15 -  0.69    18.09    17.07
VXN        24.72 -  0.28    25.37    24.61
Total Volume 4,207M
Total UpVol  2,591M
Total DnVol  1,539M
52wk Highs     894
52wk Lows       25
TRIN          1.44
PUT/CALL      0.58

Bulls Catch Their Breath
By James Brown

Momentum in the rally slowed on Wednesday as bulls were left to catch their breath after yesterday's FOMC-inspired sprint higher. The Dow spent most of the day churning sideways as investors battled their urge to sell the losers Johnson-and-Johnson (JNJ) and AT&T (T) versus buying the winners Boeing (BA), Eastman Kodak (EK) and Alcoa Inc (AA). Yet by day's end the major averages ended green making it three straight gains for the markets. The largest gains were seen gold stocks, defense, airlines and homebuilders. Suffering the brunt of Wednesday's selling pressure were biotechs and drugs.

U.S. markets got a boost from a strong Japanese NIKKEI, which added 178 points or 1.69% to close at 10,739. The Hong Kong Hang Seng also posted a gain up 38 points to 12,130. European stocks were mixed but German equities turned in a strong performance with the DAX index up 1.87% to 3615. The Dow Jones Industrials added 26 to close at 9774. The NASDAQ Composite added just 4 points to close at 1936 and the S&P 500 squeaked out a 1.3-point gain to close at 1048, under heavy resistance at 1050. Market internals were positive. The NYSE reported 17 winning stocks for every 10 losers. The NASDAQ turned in 18 winners for every 11 losers. New highs sprung back to live with 761 new 52-week highs between the two exchanges. Volume was strong with more than 1.9 billion shares on each exchange.

Chart of DJIA:

Chart of NASDAQ:

Powering the DFI defense index to a new 52-week high were strong earnings from Boeing (BA) and Northrop Gruman (NOC). The world's largest plane manufacturer was also the biggest gainer in the Dow Jones Industrials with a 6.8% gain after reporting strong Q3 earnings. BA turned in a profit of 32 cents a share, which beat estimates for 27 cents. The company also lifted their 2003 sales guidance from $49 billion to $50 billion. Its defense-sector buddy, NOC, the world's preeminent naval ship builder, add 3.26% to its own stock price and closed above resistance at $90, its 50-dma and its 200-dma. NOC reported Q3 earnings this morning of $1.21 a share, which beat consensus estimates by 21 cents. The company told analysts it expects double-digit profit growth next year.

Suppressing the Dow's gains were components AT&T, Johnson & Johnson and Microsoft. AT&T's troubles produced a 4.4% decline in the stock after the Wall Street Journal reported that BellSouth (BLS) had backed out of merger talks with Ma Bell because the price tag was too high. Those close to the deal said BLS wasn't willing to pay $19 billion for AT&T, the No. 1 long- distance phone company. Meanwhile JNJ clogged up the advance after news hit that the FDA issued a statement on JNJ's Cypher stents. JNJ was the first to introduce stents to the lucrative U.S. market but now the FDA is saying it has received almost 300 reports of blood clotting in patients with more than 60 deaths linked to the devices. A Merrill Lynch analyst said the reaction to the FDA statement is overdone. Even the FDA stated that hundreds of thousands of patients have been successfully treated with the Cypher stent. The agency is ordering a new 2,000 patient study to evaluate the clotting issues. In a tangent to the JNJ story, shares of Boston Scientific (BSX), a rival in the stent market and soon to be approved for a drug-eluting stent that is supposed to reduce clotting occurrences, saw its shares rise 3.5% and closing near all-time highs.

Shares of software titan Microsoft (MSFT) weighed on both the Dow and the NASDAQ, closing down 1.7%. Mr. Softee has agreed to settle several antitrust class-action lawsuits with multiple states for vouchers worth $200 million. This is certainly a step in the right direction but MSFT still has at least four other state lawsuit settlements that have not yet been approved by the courts. Casting another dark cloud on the software giant is a new probe by the European Union. The Financial Times is reporting that the EU commission has sent at least 20 hardware makers formal inquiries regarding their Microsoft licenses. One analyst at Deutsche Bank expects that odds are growing for the EU to issue a negative ruling.

Another stock putting pressure on technology, specifically biotech stocks was Gilead Sciences (GILD). The company reported earnings after the close yesterday but missed consensus estimates. GILD said slower than expected sales of its HIV treatment Viread were to blame for the miss. Furthermore they warned that total Viread sales for the year would likely be 5% less than previously forecast. The stock gapped lower and closed down 12.5% just barely closing above its simple 200-dma.

Tomorrow could be an interesting day for traders. Unlike today we have a full boat of economic reports. Weekly initial jobless claims should come in before the open and Wall Street is expecting close to 385,000 new claims. We'll also get the much- anticipated Q3 GDP report. Most of Wall Street's biggest institutions have come out with estimates in the 6.0%, 6.5% even 7.0% Q3 GDP growth. Thus if we do get strong GDP growth at 6% or better there may not be much of a reaction and we could potentially see a sell-the-news (take profits) sort of move. Economists will also be waiting for the Employment Cost Index, the Help Wanted Index and the FOMC minutes will be released. Let's not forget that we'll still be hearing from dozens of companies reporting their Q3 earnings. It certainly seems like most of the surprises lately have been to the downside.

Speaking of downside, we've made much about the low levels in the VIX, VXN and specifically the VXO or old VIX. The VXO has slipped to another new multi-year low at 17.15 today. This is screaming "market top" but if you remember our previous comments on the volatility indices it is more art than science and any peak in the markets could be still be a couple of days to several days away. There is certainly nothing in the rule books that state the markets can't become even more overbought pushing the VIX to even lower lows. Yet it is worth nothing that market veterans are probably growing antsy and more reluctant to open new bullish plays. More importantly let me remind everyone that it can be dangerous to your financial health if you try and pick the top before the market does. Currently the trend is still up and it's safer to play the trend, just do so with a disciplined stop. That way when the markets turn, you'll be out and ready to start looking for bearish positions.


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