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Adrift in an Eddy of Earnings.

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     01-21-2004            High     Low     Volume Advance/Decline
DJIA    10623.62 + 94.96 10643.55 10490.96 2.31 bln   1759/1073
NASDAQ   2142.45 -  5.53  2150.11  2120.20 2.40 bln   1455/1636
S&P 100   568.64 +  4.89   569.47   562.02   Totals   3214/2709
S&P 500  1147.62 +  8.85  1149.21  1134.62
RUS 2000  597.48 -  0.50   598.75   591.51
DJ TRANS 3063.60 + 43.60  3063.77  3008.12
VIX        14.34 -  0.87    36.55    14.24
VXO        14.43 -  0.48    15.64    14.37
VXN        20.71 +  0.22    21.72    20.58
Total Volume 5,182M
Total UpVol  2,341M
Total DnVol  2,759M
52wk Highs    1120
52wk Lows        7
TRIN          1.18
PUT/CALL      0.67

Adrift in an Eddy of Earnings.
By James Brown

Earnings, earnings, earnings. The markets ran higher for weeks in anticipation of strong Q4 earnings numbers and now that they're finally here we're getting good news. There are exceptions to the rule and we are still seeing investors exercise their tendency to "sell the news" but investors are still in a buying mood. Traders took advantage of the recent weakness and bought the dip. Yesterday's worst performers in the Dow are now some of today's best performers as MMM, UTX, HD, BA, WMT, CAT and more all bounce higher. Together the DJIA and the S&P 500 managed another positive session and reached new 22-month highs.

The second theme today, in addition to buy the dip, was a rotation of money out of tech stocks and into financials and energy issues. JPMorgan and Citigroup were two of the top three performers in the Dow today and I noticed several electric utilities and natural gas stocks breaking out to new highs. Of course it's probably not a surprise to see some profit taking in technology. The NASDAQ has been hitting 30-month highs and it took an earnings warning from the biggest hard drive maker on the planet to finally convince investors to take some money off the table.

Market internals were mixed, which would be expected considering the closing numbers on the major indices. Advancing stocks outpaced decliners almost 18 to 11 on the NYSE. The view wasn't so rosy on the NASDAQ where decliners edged past advancing stocks 8 to 7. Up volume did outrun down volume on the NYSE but up volume was only half down volume on the NASDAQ. Overall it was a very heavy volume day with 2.3 billion on the NYSE and almost 2.4 billion on the NASDAQ. Today also marked another new record on the NASDAQ as volume traded over 2 billion for the 12th day in a row. The strength in the S&P 500 helped push the volatility indices back towards their lows, which indicates extremely little fear by investors.

As mentioned earlier, earnings news from the major player in the computer hard drive industry last night set off a round of profit taking across the technology sectors. The culprit was Seagate Technology (STX). Not only did STX miss analyst estimates for its December quarter numbers but it warned for the next quarter. Estimates for last quarter were 45 cents and STX only hit 41 cents on revenues of $1.76 billion, also below consensus estimates. Current analyst projections for the current quarter were 39 cents a share but STX warned that the March quarter would probably fall in the 20 to 30 cent range. STX gapped significantly lower this morning and closed with a loss of more than 20 percent. Its news took the DDX disk drive index (-5%) with it and fellow hard drive makers MXO and WDC both lost more than 12%.

Not surprisingly STX wasn't the only one to blame for the tech sell-off today. Lackluster results from Motorola and another warning, this time from RF Micro Devices, sent the semiconductor sector slipping to a 2.6% loss on the session. Networking issues didn't fare any better. The NWX lost 3.3% after Lucent Technologies (LU) slipped 6.9% after reporting its Q4 numbers. Fortunately, LU's decline wasn't related to bad news. The company actually beat estimates this morning on better than expected revenues. LU's decline was more of a "sell the news" variety and it help up pretty well considering a 65% gain for 2004 already under its belt.

Investors now had to decide what to do with this money they were taking out of tech. Biotechs and airlines stocks saw a strong surge in buying interest today but one of the real winners were the financials. Dow component J.P.Morgan Chase (JPM) added 2.6% after turning in a very strong fourth quarter performance. Analysts had been estimating 77 cents a share but JPM turned in a net income of 89 cents. Making this more dramatic was the year ago comparisons against a 20 cent loss in Q4 2002. Another Wall Street blue chip to announce earnings was Merrill Lynch (MER). Our nation's largest brokerage house reported net income of $1.18 per share, well above estimates at $1.01. Unfortunately, revenues were just $4.92 billion and below consensus estimates. This sent shares of MER lower on concerns that the profit numbers were achieved on cost cutting and not an increase in business.

Another big story today was the housing market and the December housing starts. Considering the snow, the cold and the previous red-hot pace for homebuilders economists were expected a mild slow down to a seasonally adjusted rate of 1.95 million homes. This morning the Commerce Department reported an increase to 2.09 million for new home construction. The U.S. hasn't seen monthly housing starts that high since February 1984. This set the homebuilders on fire again and the DJUSHB home construction index roared to a 4.97% gain. It was the perfect news to frighten shorts and inspire new buying in the sector. Of course this data is nothing new for the builders. Most of the builders have been projecting strong growth for the next two years and a few have disclosed record-high backlog for orders. In related news Fannie Mae (FNM), the nation's biggest source for residential financing, announced Q4 earnings that beat analyst estimates by 2 cents. FNM began to rebound a week ago after the index of mortgage applications reported its biggest increase in three years sparked by a drop in mortgage rates this January.

The earnings parade picked up the pace again after the close and topping the list was EBAY. The world's largest online auctioneer reported net income of 24 cents a share, 2 cents better than estimates. Revenues soared more than 57% to $648 million, well above the consensus estimates. Furthermore the company guided higher for its 2004 full year estimates by 8 cents. EBAY was trading higher after hours, up $2.65 to $67.03.

San Diego-based QUALCOMM also reported after the bell tonight. Reuters was reporting consensus estimates at 48 cents a share and QCOM beat those numbers with 51 cents. Revenues rose 13% to $1.24 billion, passing revenue estimates. Strong royalty and licensing income help boost its Q4 profits but the company was cautious about the first quarter and told investors that revenues would actually decline.

Probably the most encouraging earnings announcement this evening was from Symantec (SYMC), the computer-virus software maker. Analysts had been looking for 29 cents and SYMC beat that number by a nickel. Revenues soared more than 30% to $493.9 million, well above estimates for $460 million. Making the report even sweeter was SYMC's positive guidance for the current quarter. Analysts had been looking for 29 cents a share on revenues of $471 million. Now SYMC expects earnings closer to 32 cents on revenues between $500 and $520 million. Given the current market environment for investors to only hear what they want to hear this is a strong catalyst for traders to buy the technology dip tomorrow, at least in the software sector.

Chart of the DJIA:

Chart of the NASDAQ:

Viewing the action in the major averages it's tough to imagine that the bears will be able to mount a solid offense tomorrow. The NASDAQ looks poised to break the 2150 mark and if not there will probably be traders waiting to buy the dip to 2115-2100 near its simple 10-dma. The DJIA looks even stronger with a bullish engulfing candlestick pattern on top of another bounce from its rising 21-dma as well as a close above the 10600 level. Now cross your fingers and hope that AT&T (T), BellSouth (BLS), Eastman Kodak (EK), Ford (F), Nokia (NOK) or Pfizer (PFE) don't blow it for us. This list of companies represent the major earnings announcements before Thursday's opening bell.

Aside from the earnings buffet Wall Street will also be digesting the weekly jobless claims numbers, which are expected to come in flat, and the December leading indicators.


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