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Market Wrap

Thank You Mr. Greenspan

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      02-12-2004           High     Low     Volume Advance/Decline
DJIA    10694.07 - 43.60 10735.29 10688.36 1.86 bln   1357/1848
NASDAQ   2073.61 - 16.10  2091.22  2072.06 1.94 bln   1291/1872
S&P 100   569.43 -  2.96   572.39   568.97   Totals   2648/3720
S&P 500  1152.11 -  5.65  1157.76  1151.44 
W5000   11239.00 - 54.40 11293.42 11234.38
RUS 2000  592.75 -  4.32   597.07   592.13 
DJ TRANS 2950.33 -  1.60  2960.52  2936.59   
VIX        15.31 -  0.08    15.72    15.23
VXO (VIX-O)14.90 +  0.02    15.46    14.73
VXN        23.53 +  0.00    23.88    23.00 
Total Volume 4,074M
Total UpVol  1,517M
Total DnVol  2,386M
Total Adv  3041
Total Dcl  4195
52wk Highs  708
52wk Lows     5
TRIN       0.93
NAZTRIN    1.08
PUT/CALL   0.55

After sending the Dow to a new two year high on Wednesday the master of disaster carefully avoided any comments today that would have reversed that gain. The positive comments about GDP growth, job growth and the Fed's patience comforted bulls and despite some minor profit taking today the markets held those gains.

Dow Chart - Daily

Nasdaq Chart - Daily

Even negative Jobless Claims failed to put the skids on the gains from Wednesday. Claims rose to 363,000 for this week and the prior week was revised up to 357,000. Even a two-week rebound over 350K failed to spoil the party. Continuing claims fell another 23,000 to 3.083 million. Blame it on the weather was the general analyst assumption as the four-week average rose back to the 350,000 level. I am surprised there was not a bigger reaction to the two week jump especially when Greenspan himself said there was little evidence of hiring. 350K is the line in the sand below which job growth appears and above that level we historically tend to see job growth decrease.

Retail Sales fell -0.3% in January and far below expectations for growth of +0.2%. A larger than expected decline in auto sales was targeted as the culprit. I assume you could blame that on the weather as well since car buyers seldom brave blizzards to test drive new cars. The number ex-autos soared to +0.9% with apparel, grocery and sporting goods stores leading the gains. Building materials dropped -0.9%, again probably due to the weather. Electronics only rose +0.1% and furniture fell -0.9%.

Business Inventories rose +0.3% in December and inline with estimates but an increase in sales pushed the inventory to sales ratio to another record low of 1.34. Retailers showed a modest increase in inventory but manufacturers remained flat. In fact manufacturing inventories have declined for three consecutive quarters. Everyone keeps pointing out the record low levels as a sign there is a massive rebuild cycle in our future but it continually fails to appear. This rebuild cycle should add significantly to the GDP for Q1 as retailers restock from the holiday sales.

The Greenspan relief rally on Wednesday shook off the minor economic glitches above and the Dow clung to the 10700 level with a grip of steel. The Nasdaq did not participate in the Wednesday gains to the same extent as the Dow. The Nasdaq gave back those meager gains today but held above 2075 support until earnings fears prompted a late day down tick.

Those earnings fears did not come to pass with Dell beating estimates by a penny, ADI beat by two cents and NVDA beat by three. Dell traded up in after hours and NVDA got killed. Dell was the real threat. There was a concern that Dell had felt the HPQ heat in the 4Q and had to cut margins to the bone to sell computers. They were afraid that Dell could report inline, show margin shrinkage or even guide lower going forward. None of that came to pass. Dell was pleased with their results, but then they normally are. Dell said IT spending was increasing although at a slow and steady pace.

Ironically Dell traded up in after hours despite a relatively subdued conference call. Dell said that despite the steady rise in IT spending they were not seeing any growth from the large companies. The spending was coming from small to medium size businesses with growth slowing as the size of the companies grew larger. Revenue was inline with guidance and shipments rose +25%. Dell also said January was strong and they were refusing to discount prices further in their battle with HPQ. Notebook sales which had been fueling profits over the last two quarters were slowing and lower priced computers were seeing stronger sales in 2004.

Dell said sales would decline -3% for Q1 due to seasonal patterns. HPQ is hurting Dell and sometimes selling at a loss to get the business. The battle for bragging rights for first place has been tough and the lead tends to shift quarter by quarter. Dell was quick to point out that its printer business grew by +100% and they were continuing to offer new models to compete with HPQ. Based on the flat tone of the call and the flat guidance I am surprised that they traded higher after hours. I suspect it was a relief rally that they did not do worse as the whisper numbers had suggested. Dell had traded at a six month low of $31.75 just last week.

Nvidia on the other hand felt the wrath of traders despite beating estimates by +3 cents. The win was helped by a low tax rate and a reduction in liabilities for tax contingencies. Earnings were less than half of the prior 4Q on basically the same revenue. NVDA also said sales of X-Box chips to Microsoft had declined -$90 million and current sales would be flat to down -5%. This was not really a surprise as most sales come in the 3Q for units sold over the holidays. The drop was slightly more than had been forecast. NVDA was down to $21.90 in late trading.

On the flip side of the earnings coin was ADI, which posted earnings that were nearly twice the same period a year ago. ADI posted 30 cents for the 4Q compared to only 16 cents from the prior year. Revenues were up and gross margins rose to a whopping 57.1%. They also declared a dividend of four cents. They guided analysts to 34-35 cents for Q1 and well over the prior estimates of 32 cents. ADI shares jumped over $2 in after hours trading.

In related news INTC actually dropped -25 cents despite announcing a discovery that could accelerate data transfer inside a PC by as much as 50 times the present rate. The discovery is a way to pulse light beams through silicon to represent the on/off state of a common bit of information. By using different colors of light in the same beam they anticipate being able to increase the transfer rate even more. It will be sometime before this discovery makes its way into real production but the path is clear. During Dell's earnings they also alluded to the 64bit AMD chip but suggested they would wait for the Intel offering that is expected shortly. The problem is not the chip but the software that runs on it. Until the software catches up there is no rush for anyone to jump ship to the AMD chip. Intel obviously knows this and are taking their time.

The biggest news of the afternoon was a sudden drop in Imclone stock just before the stock was halted for news pending. IMCL was trading just over $42 at 1:25 when the stock suddenly dropped to $33.50 in a single tick with volume indicated at over 600,000 shares. Several seconds later the stock was halted news pending. The news was a successful approval by the FDA of Erbitux. The IMCL drop was explored by Nasdaq and the stock did not open again for trading until 4:20. It closed the after hours session back over $44.00. No answer for the drop was ever given and whoever took the other side of that 600,000 share sale should be a happy camper tonight. The FDA originally declined to approve Erbitux and that led to the current Martha Stewart trial and prison for Sam Waksal. IMCL was trading just over $60 when that first denial was made.

The second day of testimony by Greenspan concluded without any problems and traders breathed a sigh of relief. The market fell slightly on the conclusion suggesting there was a "sell the lack of news" event. The trading day was actually very boring. We opened down on profit taking on the weak economic news but the Dow then traded in a very narrow 35 point range the rest of the day. 10700 became the battle ground and traders appeared content to let time expire on the clock rather than press the battle.

The Nasdaq held 2075 until a minor sell program in the last ten minutes pushed the index to close at 2073. The techs have not been as strong as the Dow but are holding their own. The close at 2075 resistance, now support, and the bump in the futures after the close could suggest there are further gains ahead but it is very tough to draw any kind of conclusions at these levels. Bullish sentiment is still very strong but we are in the period where historical consolidation occurs. We need to hold these levels for at least another week until the April earnings cycle begins with mid quarter updates.

Fueling this earnings cycle will be a very strong surge in tax refunds and the beginning of the spring home buying cycle. Greenspan clearly indicated that the Fed was planning on being patient about raising rates. He also suggested the recovery was still on track despite the lack of jobs. This is the green light for equities and he removed any suggestion of a change in conditions for at least the next 90 days.

The lack of any material sell off after the Wednesday gains shows that the bullish sentiment is alive and well despite the two year highs. The key for Friday will be the Nasdaq. If the Dell and ADI earnings based on a broad customer base can overpower the disappointment from NVDA which caters to a niche market then we should be in good shape. The Nasdaq pulled back to its 50 dma last week and the rebound from that level has yet to catch fire. After four days we are still trading at the level reached on that initial rebound. The Nasdaq needs to at least hold its ground on Friday. We need to get above the 2080 level and notch another higher high to give traders confidence the rebound is going to stick. We may need a catalyst to push us higher but we are still in dip buying mode until something changes.

Tomorrow is Friday the 13th and Monday is a holiday. The only economic report tomorrow that could move the market is the Consumer Sentiment. The consensus is 104.9, up from 103.8 in the last reading. As I reported last week there was an AP sentiment survey for late January that dropped substantially to 91.7 from 106.3. Should the Michigan Survey tomorrow show any significant drop traders might think twice before making big bets before the long weekend. Flights were cancelled again today for terrorist reasons so there is event risk to consider.

Lest you think market historians have nothing left to compute you might be interested to know that on this Friday in 2003 the Dow showed the first gain in twelve years. Yes, after eleven straight years of declines the string was broken. Wonder what it is about President's Day that prompted the selling? Could it be they needed money for Valentines presents? Yes, guys, there is only one shopping day left until Valentines. Get off the couch and head for the mall.

Enter Passively, Exit Aggressively.

Jim Brown
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