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Market Wrap

Momentum is positive

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     01-26-2004            High     Low     Volume Advance/Decline
DJIA    10702.51 +134.22 10705.18 10702.51 1.82 bln   1668/1199
NASDAQ   2153.83 + 29.96  2153.83  2115.34 1.93 bln   2000/1094
S&P 100   573.44 +  8.03   573.44   565.29   Totals   3668/2293
S&P 500  1155.37 + 13.82  1155.38  1141.00
RUS 2000  601.50 +  5.36   601.50   592.46
DJ TRANS 3066.71 -  6.23  3074.45  3037.70
VIX        14.55 -  0.29    15.78    14.52
VXO        14.32 -  0.55    15.28    14.21
VXN        20399 -  0.28    22.77    20.99
Total Volume 4,160M
Total UpVol  3,012M
Total DnVol  1,088M
52wk Highs     934
52wk Lows        6
TRIN          0.51
PUT/CALL      0.58

Momentum is positive
By James Brown

Overheard in a conversation between to bearish traders about the current rally, "It can't be bargained with! It can't be reasoned with! It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever!" Okay, I'm joking. I didn't actually hear that but anyone short this market might feel that way (and my apologies to any Terminator fans). Investors definitely appear fearless as they quickly stepped in to buy Friday's and last week's dip. The Dow Jones Industrials added 134 points to breakthrough resistance and close at 10,702. Only one Dow component closed in the red and that was Alcoa, which lost 5 cents on the session. The strongest performers in the Dow were HPQ +3.24%, MRK +3.1% and GE +2.8%.

The NASDAQ posted a strong rally as well, up nearly 30 points or 1.4%. This puts both the DJIA and the NASDAQ at 2 1/2 year highs while the S&P 500's rally leaves it at 22-month highs. Positive earnings news and a better than expected existing home sales numbers helped fuel a widespread rally today. Only a handful of sectors closed negative. Under performing were gold and silver stocks, airlines, utilities and transports. Investors focused their buying power on networkers, hardware (think LXK, HPQ & IBM), semiconductors and tech stocks in general. Even the dollar managed a bounce against the euro after Friday's rumors that the G7 summit next week might finally address the soaring euro. This put more pressure on gold, which fell $1.30 to $406.70 an ounce.

The U.S. stock markets had to power today's rally on their own. Overseas markets weren't much help. Asian stocks traded mostly lower with the Japanese NIKKEI down 96 points to 10,972 and the Chinese Hang Seng down 23 points to 13,727. European stocks lagged as well. The British FTSE fell 15 points to 4445 and the German DAX dropped 23 points to 4128. The ramp higher today in the DJIA and the NASDAQ really began to pick up speed in the afternoon and by the close market internals had turned strongly positive. The NYSE reported nearly 17 winners for every 12 losing stocks. Meanwhile advancers out numbered winners almost 20 to 11 on the NASDAQ. Up volume was about 2.7 times stronger than down volume on both exchanges.

Chart of the Dow Jones Industrials:

Chart of the NASDAQ:

The only economic data out this morning was the December Existing Home Sales report. Economists were looking for a small jump of 0.3 percent to 6.08 million but were surprised with a 6.9% jump to 6.47 million (at an annualized rate). The historically low interest rates continue to fuel a strong increase in home ownership and that's great news for the economy. Home sales tend to generate additional consumption with new furniture, new appliances, etc. This was the largest one-month jump in existing home sales since January 2001. Later this week we'll get to hear the December new home sales figures due out on Wednesday. Estimates are looking for a small rise to 1.1 million, up from 1.082 million in November. This mid-week report should have an affect on the homebuilders.

Not quite an economic "event" but any time Alan Greenspan talks Wall Street is going to want to listen. Today he spoke to a conference in London via satellite. He didn't say much about the Fed's monetary policy but strongly suggested that the various free-market governments should avoid the recent signs of protectionism (hint, hint to the U.S. government). He also discussed the "creative destruction" of capitalism as we rotate from old technology to new technology. Jobs will also have to follow this process. He was confident that the U.S. can generate new job growth but not "without a high degree of pain" for those in the job-losing segment in this technology creation job- shifting turnover process. We'll hear from Alan again this week as the Federal Reserve begins its two-day FOMC meeting tomorrow. The decision on interest rates will be announced on Wednesday afternoon and no one really expects any change. Of course there is a lot of conjecture over the Fed making any changes in their bias and if they will continue to use the "considerable period" wordage.

The Fed meeting this week is expected to take center stage but it is going to have to share it with a parade of earnings announcements. This week alone some 30% of the S&P 500 companies are expected to report. American Express (AXP), a Dow component, reported today and beat estimates by a penny with 60 cents a share. Revenues were up 14% to $7.07 billion and above consensus estimates. AXP cited strong fee growth for its financial advisory unit and its credit card business for its performance.

Also announcing earnings today was drug giant Schering-Plough (SGP). SGP reported net loss of 12 cents per share, which was worse than expected. Revenues dropped almost 18% to $1.95 billion, below analysts' forecasts. The company also guided lower for 2004 but this was old news and shares actually turned higher painting a bullish engulfing candlestick pattern with a bounce off its simple 50 & 200-dma's.

Another drug giant making headlines today was Merck & Co (MRK), a Dow component. MRK was up more than 3% after Barron's published a positive story over the weekend suggesting the stock was undervalued to its peers. Some investors also see MRK as a potential takeover or merger target and news of Sanofi- Synthelaob's hostile bid for Aventis (AVE) might be contributing to MRK's strength. Sanofi (SNY) is a French drug company who announced a $60 billion hostile takeover offer for fellow French- based Aventis. AVE's board of directors rejected the bid claiming it doesn't accurately reflect their company's value. The AVE website stated SNY's bid only represents a 3.6% premium from their recent closing price. The merger news and MRK's performance today pushed the DRG drug index to a new relative high and levels not seen since last June.

One of the biggest earnings reports out today was released very early this morning. I'm referring to Lexmark Intl (LXK). The printer manufacturer reported earnings of $1.05 a share, which were 13 cents better than expected. Revenues were also above estimates at a record setting $1.37 billion for the quarter. LXK said its December quarter showed the fastest growth since first quarter 2000. "Our fourth-quarter revenue growth was significantly over our guidance, driven by strong printer sales," said Paul J. Curlander, Lexmark chairman and chief executive officer. "Lexmark's earnings for the quarter exceeded our expectations as we achieved higher revenue and were able to hold gross profit margins fairly stable both sequentially and year-to- year." (source: LXK's press release). "While we do see some indications of market improvement, we continue to remain cautious due to the uncertain economic environment and the potential for aggressive price competition." LXK's caution did not rub off on investors and shares soared more than 7% to $84.50, breaking out over major resistance at $80. Their strong earnings news also lifted shares of rival Hewlett-Packard (HPQ) boosting shares 3.24%.

The closing bell brought even more earnings news and making headlines were NVLS, TXN and MCD. Novellus Systems (NVLS), a manufacturer of semiconductor production equipment, announced earnings of 7 cents a share, which was significantly better than last year's 2 cents a share and above current estimates by a penny. Revenues came in at $226.5 million and beat analysts' estimates but the company warned that the current quarter could turn soft. The stock fell 7.6% after hours as it issued earnings guidance at 8 cents a share versus analysts' current range of 7 to 11 cents for the first quarter.

Eclipsing NVLS' report was Texas Instruments (TXN). Analysts were looking for 19 cents a share on revenues of $2.72 billion. When TXN's earnings report first hit the wires it sounded like net income hit 22 cents, or 3 cents better than expected. Unfortunately, the real number was closer to 20 cents. TXN did beat but only by a penny. However, revenues were above estimates at $2.77 billion and above their own guidance from December in the 2.64-2.76 billion range. Unfortunately, shares were lower in after hours trading despite guiding higher for the current quarter's net income and revenues. It is notable that TXN plans to raise its capex spending from $800 million to $1.1 billion in 2004.

McDonalds (MCD) served up its December quarter's earnings results after the bell and met estimates at 35 cents a share. The real net income number was 10 cents a share due to a 25-cent charge for its sale of Donatos Pizzeria back to its founder. Q4 same- store sales numbers were up 7.4% and revenues for the quarter were up 16.8% to $4.56 billion, above estimates of 4.33 billion. This is a definite improvement over last year's Q4 loss, its first quarterly loss ever. Sounds like the Mad Cow scare never really hit MCD and their current "I'm loving it" ad campaign might be working. Its rival Burger King has seen two months of slipping same-store sales, down 5.4% in November and down 6.9% in December.

One of the biggest stories out this evening is Agilent Technologies (A). The company came out with an upside surprise and raised its earnings guidance from 5-to-15 cents a share to 20-to-24 cents a share. It now expects revenues to hit $1.63- 1.68 billion, above estimates of $1.61 billion. Agilent is a manufacturer of electronics and testing equipment and this positive surprise may counterbalance the disappointing news we got from NVLS tonight. Agilent's press release unveiled these comments, "We have not seen the normal seasonal decline in first quarter activity," said Ned Barnholt, Agilent chairman, president and chief executive officer. "Both semiconductors and semiconductor capital equipment have been particularly strong. We have also been successful bringing the benefits of lower structural costs to Agilent's bottom line." The stock closed at $33.91 during the normal session but shot to $39.90 after the news before settling near $37.98 in after hours trading.

It will be interesting to see how investors react to these various earnings announcements out tonight but the markets will also have to digest a handful of major reports out tomorrow morning as well. Announcing before the opening bell is Caterpillar (CAT), Countrywide Financial (CFC), DuPoint (DD), Lockheed Martin (LMT), Merck & Co (MRK), SBC Communications (SBC) and Xerox (XRX) just to name a few. Wall Street will also have to interpret the Conference Board's consumer confidence index. Estimates are for a jump from 91.3 in December to 95.1 in January. On top of it all the New Hampshire Democratic primary will be held tomorrow night and will almost guarantee some volatility on Wednesday. Whoever wins will be the frontrunner for the Democratic nomination and thus the major competitor to the current President. We already know it's going to be a close race this November and merely having one democratic candidate to focus on will create the one thing the stock markets hate - uncertainty!

Let me finish with a quote from billionaire George Soros from an interview on Bloomberg TV. Whether you love him or hate him he has accurately summed up what we and other market pundits have been saying for a while. "Whether stocks are overvalued or not doesn't actually determine whether they go up or they go down... so they may be overvalued, but they can get a lot more overvalued, and I would say that right now the momentum is positive."


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