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Market Wrap

Did The Market See Its Shadow?

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     02-02-2004            High     Low     Volume Advance/Decline
DJIA    10499.18 + 11.11 10568.96 10434.67 1.96 bln   1526/1461
NASDAQ   2063.15 -  3.00  2085.49  2053.79 1.90 bln   1319/1639
S&P 100   562.76 +  2.45   566.42   558.69   Totals   2845/3100
S&P 500  1135.26 +  4.13  1142.58  1127.87
RUS 2000  580.54 -  0.22   585.07   576.03
DJ TRANS 2968.02 - 17.93  2892.40  2856.28
VIX        17.11 +  0.48    17.56    16.67 
VXO        16.87 -  0.18    17.19    16.04
VXN        25.81 +  0.75    26.38    25.22
Total Volume 4,296M
Total UpVol  2,052M
Total DnVol  2,079M
52wk Highs     498
52wk Lows       11
TRIN          0.87
PUT/CALL      0.72

Did The Market See Its Shadow?
By James Brown

Saying that stocks were mixed today would be an understatement. A day after the Super Bowl investors seemed undecided on which direction to take the market. As a result the major averages oscillated both directions. As is typically the case the Industrials, the NASDAQ Composite and the S&P 500 index all posted similar moves. The early morning strength looked more like a continuation of Friday's afternoon bounce. Unfortunately, that strength didn't last and stocks quickly faded before finding a bottom just before 11:00 a.m. A quick rebound launched a strong rally that stalled mid-afternoon. Traders began to take money off the table again and the last hour drift suddenly became a sharp drop in the market's last thirty minutes.

Contributing to the market volatility was mixed economic data. The reports were generally positive but the numbers missed expectations. Not helping were mixed to down markets overseas. Britain's FTSE dropped 9 points to 4381 while the German DAX gained 13 to 4071. The Japanese NIKKEI lost less than 7 points to close at 10,776 but the Chinese Hang Seng fell 289 points to 12,999. It could be concerns over the Avian flu or it could be just profit taking but the Hang Seng has dropped more than 750 points in the last seven sessions.

Speaking of the avian flu, which has now spread to more than 10 Asian countries, the XAL airlines index dropped more than 1.88% and marked its third loss in four sessions. Investors could be concerned that this new outbreak will dramatically cut back on air travel to the region. China has already killed 23 million chickens in an attempt to stop the flu's advance. Unfortunately, the virus may be mutating. The U.N.'s health agency reported yesterday that two sisters in Vietnam died from the deadly virus after potentially contracting it from their brother. This would be the first human-to-human transmission if confirmed. Currently the W.H.O. is claiming there is no pandemic in Asia and their level of concern has not risen with just 12 deaths being attributed to the avian flu. Also weighing on the airlines was news of at least three flights being cancelled over the weekend due to terrorist threats. British Airways and Air France had flights from Europe to the U.S. cancelled on Saturday while Continental Airlines had one flight from Washington D.C. to Houston cancelled on Sunday.

Evidence of equities' mixed movements today can be seen in the market's internals. The NYSE reported 15 winners for every 13 losers while the NASDAQ witnessed advancing stocks falling behind decliners almost 15 to 16. Up volume on the NYSE outnumbered down volume but it was just the opposite on the NASDAQ. Market pundits claimed that Monday's low volume exacerbated the moves in the indices. In the futures market we saw crude oil rocket higher with a $1.93 jump to $34.98 a barrel while gold futures slipped $3.60 to $399.30 an ounce. Stock sectors that saw the heaviest buying pressure were insurance, defense, biotechs and drug stocks.

Insurance stocks were up on anticipation of stronger earnings. Several companies in the sector are due to announce this week. A few of them announced tonight. Everest RE Group (RE) missed earnings by 7 cents despite Q4 profits more than doubling. AFLAC (AFL) reported earnings that were inline and announced a 30 million share buyback. Nationwide Financial Services (NFS) reported earnings that beat estimates by 8 cents (estimates were 71 cents). The Principal Financial Group (PFG) sprinted past earnings estimates of 31 cents with net income hitting 46 cents a share in spite of a write down that lowered income from last year's numbers.

Defense stocks were higher due to an increase for defense spending in the just released White House budget plan. Biotechs were higher lead by a strong day for Amgen (AMGN) and news that Chiron (CHIR) had launched a new clinical trial for its latest HIV/AIDS treatment. The DRG drug index hit a new relative high after Pfizer (PFE), the largest drug company on the planet by market cap, announced that the FDA had approved two new drugs. The new hypertension/cholesterol treatment, named Caduet, combines their cholesterol fighting treatment Lipitor with Norvasc for high blood pressure. The second new drug is Spiriva, developed by Germany's Boehringer Ingelheim and co-marketed by Pfizer. Spiriva is designed to treat Chronic Obstructive Pulmonary Disorder (COPD), which affects millions of smokers. Analysts believe both drugs can eventually top $1 billion and potentially reach $2 billion in annual sales each. Shares of PFE broke out above resistance at $37.00 to a new 52-week high.

Also in the news was SBC Communications (SBC) who announced a rise in DSL prices. Both Bank of America and Goldman Sachs offered positive comments on this news. Meanwhile speculation that SBC might bid on AT&T Wireless (AWE) appears to be cooling. Shares of SBC rose 3.8%. The lead front runner for an AWE acquisition seems to be Cingular. Ford also made the news with a "sell" rating from Deutsche Bank, who downgraded the stock from a "hold". Last week we noted the rollover in shares of General Motors (GM) and today's downgrade for rival Ford sent Dow component GM even lower.

Of course the biggest news story of the day, aside from the halftime show "incident", was the ISM index. After two quarters of strong GDP growth the Institute for Supply Management's factory index reached 20-year highs as manufacturers geared up to replace low inventories and meet rising demand. January's ISM number hit 63.6. This passed December's 63.4 but missed economists' expectations for 64. Readings above 50 indicate economic growth and this was the eighth month in a row the index came in above 50 and the third consecutive reading above 60. The last time the ISM was this strong was back in December 1983, which read 69.9.

Looking deeper into the ISM factory index's components we see that the new orders index, a major factor of growth, slipped from 73.1 to 71.1. The production index rose from 69.2 to 71.1, another 20-year high dating back to December 1983. The order backlog index slipped from 61 to 60.5 and the new export orders index fell from 60 to 57.5. The employment index also slipped to 52.9 from 53.5, but marked its third month in a row over 50 (a sign of expansion). Today's ISM number corresponds with last Friday's GDP number. Both fell below expectations but together they confirm steady growth.

The ISM wasn't the only economic report out this morning. Investors also had to digest the December construction spending numbers, which rose 0.4%. This was below the 0.7% growth expected. Making this potentially troublesome was November's downward revision from 1.2% to 0.5% growth. The Commerce Department also announced that real disposable personal incomes were flat while wages slipped for the first time in over a year.

On a more positive note the Semiconductor Industry Association (SIA) once again reiterated their belief that chip sales would grow nearly 20 percent in 2004. Meanwhile the World Semiconductor Trade Statistics group reported that global chip sales did rise 18.3% in 2003. Unfortunately, this wasn't enough to keep the chip stocks in the green and the SOX semiconductor index slipped lower in the afternoon sell-off.

Tomorrow will be interesting. Nearly two thirds of the S&P 500 have reported their December quarterly earnings and this week we'll hear from another 75 companies. The big tech stock to report this week is Cisco Systems (CSCO). CSCO is due to report after the bell on Tuesday with estimates set at 17 cents per share. The stock had traded strongly higher midday on Monday but gains slipped to just 1.9% amid the afternoon pull back. Expectations are pretty strong for CSCO, especially given the blow out numbers and guidance from rivals Juniper and Nortel Networks.

It will also be interesting to see it the semiconductor index (SOX) can hold support at the 500 level. Many people believe the SOX tends to lead the NASDAQ. If that's true then tomorrow may be a down day. After the bell tonight I heard a note that Goldman Sachs was downgrading the chip sector to "neutral". Unfortunately, I was unable to confirm this announcement.

We still have a week full of economic news with the next major report on Wednesday with the ISM services index. Friday is the big event with the non-farm payrolls report. Currently Bloomberg is reporting an average estimate of about 165,000 jobs being created in January. Let's hope it doesn't disappoint this time or we may be in store for a stock market freeze. In the mean time button up those coats. Punxsutawney Phil, the most famous groundhog prognosticator, saw his shadow today indicating six more weeks of winter.


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