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Market Wrap

Earnings Eagerness

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     01-12-2004            High     Low     Volume Advance/Decline
DJIA    10485.18 + 26.29 10491.63 10444.15 2.84 bln   1735/1115
NASDAQ   2111.78 + 24.86  2112.52  2085.15 2.27 bln   2061/1050
S&P 100   559.41 +  2.86   559.61   556.22   Totals   3796/2165
S&P 500  1127.23 +  5.37  1127.85  1120.90
RUS 2000  583.01 +  7.81   583.01   575.20
DJ TRANS 3019.28 + 30.34  3023.20  2987.79
VIX        16.82 +  0.07    17.46    16.79
VXO        16.25 +  0.31    17.05    16.17
VXN        22.56 -  0.45    24.26    22.45
Total Volume 4,495M
Total UpVol  3,245M
Total DnVol  1,183M
52wk Highs     915
52wk Lows       13
TRIN          1.01
PUT/CALL      0.79

Earnings Eagerness
By James Brown

Once again tech stocks lead the rally as investors eagerly await the Q4 earnings season to hit full swing. Consensus estimates are for a 20% to 22% jump in quarterly earnings and it is this strong level of optimism that helped the markets weather such an abominable jobs report last Friday. The NASDAQ closed Monday with a 1.19% gain settling at 2111. The Dow Jones Industrials added just 26 points or 0.25% to close at 10485 and the S&P 500 inched up 5 points. Backing up the NASDAQ's gains was strong buying across the various tech sectors with internets, semiconductors and networking issues drawing the most interest all of which were up more than three percent.

European markets were generally lower on the session as the dollar managed some meager gains against the euro and the British pound despite hitting new lows intraday. The Japanese markets were closed for a holiday. I did notice that the gold and silver index was down 1.65% even though February gold futures were only off 20 cents to $426.60 an ounce. As a matter of fact silver hit new six-year highs with an intraday peak of $6.71 an ounce before closing at $6.617. Recent discussion in the rise of silver suggest a strong part of the metal's rally is being driven by the global economic recovery. Of course that recovery may begin to stumble if oil doesn't halt its current climb. Crude oil rose another 41 cents to $34.72 a barrel on Monday.

Investors have a right to feel cautious given the overextended, way-overdue-for-a-pullback conditions in the major indices but the market internals today were very bullish. There were 17 advancers for every 11 decliners on the NYSE and winners had a 2 to 1 edge over losers on the NASDAQ. New highs hit 815 compared to just 16 new lows on the two exchanges. Overall volume was decent but more importantly up volume was nearly twice down volume on the NYSE and more than four times down volume on the NASDAQ. I will note that the volatility indices added to Friday's gains but that might be explained by this Friday's triple-witching expiration and some increased put buying from investors seeking to protect positions from any earnings disasters.

Chart of the DJIA:

Chart of the NASDAQ:

As is typical during any earnings week there were plenty of story stocks but some of the bigger headlines were produced by broker ratings. Merck & Co (MRK), a Dow component, was the second worst performer in the $INDU losing 2.6% to close at $45.90. The drop was spurred by bearish comments from Credit Suisse First Boston who downgraded the stock from "neutral" to "under perform". The CSFB analyst felt the company's estimates were too optimistic for its domestic sales and a pipeline with not enough new candidates. This put pressure on the DRG drug index, which marked its third day of losses.

CSFB wasn't so critical of Merck's rival Bristol-Myers Squibb (BMY). The broker raised their rating from "under perform" to "neutral" believing BMY is better positioned for growth with a number of drugs currently in development. Another drug company making news is Dendreon (DNDN), which soared 25% to $11.44. DNDN offered very promising results from its Phase III trials on Provenge, a treatment for patients with advanced prostrate cancer. The report unveiled an 89% success rate in increased survival time for those patients with less aggressive forms of the disease (Reuters). The company expects to complete its current Phase III trials in late 2004 to early 2005 and hopes to get Provenge on the market in 2005. At least one analyst firm followed up the news with a "strong buy" for DNDN.

We can blame broker ratings for the best and worst performers in the Dow Jones Industrials today as well. The worst performer was Alcoa (AA), which closed down 3.4% to $35.97. A Prudential analyst cut the stock to an "under weight" from "neutral weight" claiming that aluminum prices would likely fall and AA would probably miss its 2004 and 2005 estimates. Meanwhile the best performing Dow component was Caterpillar (CAT). CAT turned out a 2.48% gain bouncing strongly from its $80 level of support after Merrill Lynch raised their Q4 earnings estimates. We'll get to hear CAT's results on January 23rd.

Odds are that tomorrow will bring more of the same. An after the bell earnings pre-announcement tonight by StorageTek (STK) should keep tech stocks in the spotlight. STK believes that profits will surpass 55 cents a share on revenues of more than $650 million for the quarter. Analysts had been looking for 50 cents a share on just $603 million. The stock was trading sharply higher in after-hours markets and this news could easily fan the flames for the rally in disk drives, storage and hardware stocks.

Economists will also be looking for the latest data on import and export prices for December tomorrow morning but these reports are rarely market-moving events. Wednesday is another story with the PPI for December, the trade balances for November and the Fed's Beige Book report. We'll also be hearing plenty of chatter about the major earnings announcements due out the rest of the week. Wednesday brings us Delta Airlines (estimates -1.67/share), Apple (estimates +14 cents/share), Intel (estimates +28 cents/share) and Yahoo! (estimates 11 cents/share). Thursday we'll hear from Sun Microsystems (estimates -0.04 cents/share) and Bank of America (estimates +1.77/share). Before the bell on Friday we'll hear from General Electric who is expected to turn in 45 cents a share.

Trade carefully. Investors are holding stocks with the expectation that earnings will be a blow out. Even if they deliver on the fourth quarter numbers if companies fail to guide higher it could be a painful run for the exits.


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