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Market Wrap

Markets Rise Again on Monday

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     04-05-2004            High     Low     Volume Advance/Decline
DJIA    10558.37 + 87.78 10558.59 10465.63 1.72 bln   1422/1442
NASDAQ   2079.12 + 21.95  2079.12  2054.34 1.72 bln   1955/1192
S&P 100   562.86 +  4.76   562.86   557.89   Totals   3377/2634
S&P 500  1150.57 +  8.76  1150.57  1141.64 
RUS 2000  606.39 +  2.94   606.42   601.71
DJ TRANS 2955.67 - 10.99  2966.26  2937.95
VIX        14.97 -  0.67    16.64    14.81
VXO        13.88 -  1.68    15.76    13.88
VXN        21.11 -  0.24    22.33    20.97
Total Volume 3,829M
Total UpVol  2,617M
Total DnVol  1,138M
52wk Highs     596
52wk Lows       42
TRIN          0.45
PUT/CALL      0.67

Markets Rise Again on Monday
By James Brown

A new record high on the ISM services index and strong business optimism keep the markets in the green after last week's rally. Although volume was light stocks shot higher in the last hour of trading while bonds sold off again on the stronger economic news. In contrast the ISM numbers sent the dollar higher, which pressured gold futures to a new two-week low.

Investors ignored a new wave of violence in Iraq and chose to focus on the start of next week's earnings season. A positive pre-announcement from Cigna sent the healthcare sector higher. The industry also benefited from news that WellChoice was considering a merger with Oxford Health. Healthcare stocks were the best performers followed by disk drives, biotechs, software and defense stocks. Investors continued to sell interest-rate sensitive issues like mortgage lenders and homebuilders.

Global markets were higher today boosted by the U.S. markets' strong performance last Friday. The Japanese NIKKEI soared 142 points and broke through psychological resistance at the 12,000 mark a few times before closing at 11,958. European stocks were generally higher as well. The English FTSE added 15 to close at 4480. The German DAX cemented its breakout over the 4000 level with a 41-point gain to 4048. The French CAC followed with a 41- point rally of its own to 3781.

The Dow Industrials, the NASDAQ Composite and the S&P 500 were green the vast majority of the session but the three churned sideways until a last-hour rally sent them to their highs for the day. Market internals were mixed as advancing stocks tied declining stocks 14 to 14 on the NYSE. On the NASDAQ, winners outnumbered losers 19 to 12. The volume numbers were more bullish as up volume measured almost twice down volume on the NYSE and nearly three times down volume on the NASDAQ but overall volume totals were light.

The Dow is up more than 550 points from its March 24th intraday low. While today's move is a breakout over resistance at 10,500 and confirms the Friday move above its simple 50-dma there's no denying the index is very short-term overbought. Furthermore it is approaching more resistance levels in the 10,600-10,750 range of congestion from January and February this year. The NASDAQ is in a similar position just to a larger extreme. The Dow is up 5.58% from its March lows. The NASDAQ is up 9.4% from its March lows near 1900. The tech-heavy index did clear minor resistance at the 2060-2070 level today and should be clear for that last 20 points to the 2100 level but breaking 2100 may be a challenge, at least not without some consolidation first.

Chart of the Dow Industrials:

Chart of the NASDAQ Composite:

The S&P 500 has turned in a very impressive run. The index is up 6 out of the last 8 sessions with a gain of 5.4%. The challenge now is the February-March resistance at the 1160 level. The breakout over its 50-dma looks great and it managed to close over the 1150 mark today but like its peers this looks very overbought and due for a pull back. Meanwhile the small-cap Russell 2000 (RUT)'s 8.8% gain from its March lows has almost managed to keep pace with the rebound in the NASDAQ. However, unlike the other indices the RUT has broken out over its first quarter resistance to new all-time closing highs. This is very impressive and says a lot about the breadth in this rally but it too looks in need of a rest.

Chart of the S&P 500 Index:

Chart of the Russell 2000:

Inspiring investor confidence today was the ISM non-manufacturing index or services index. Economists had been looking for the ISM services number to rise from 60.8 in February to 61.2 in March. The markets were surprised to see the index come in at 65.8 percent, a new all-time record. This was extremely bullish for the economy as 15 of the 17 industries surveyed reported gains and confirms that consumer spending is still very robust. The closely watched employment component rose from 52.7% to 53.9%. New orders jumped from 60.3 to 62.8 and the prices paid component spiked from 57.2 to 65.7 percent. All told it was the 12th consecutive month of expansion for the ISM services index and the sixth month in a row for strength in the services employment index (Readings over 50 indicate growth).

Wall Street was also encouraged to hear from the Conference Board's index of business confidence. The survey polls more than 100 CEOs and management confidence soared in the first quarter to 73 from the fourth quarter's reading at 66. Today's number was the highest reading since 1983. The survey also revealed that at least half of the CEOs said they planned to begin hiring again this year.

Continuing with the theme of good news Cigna Corp (CI) raised its first quarter earnings estimates to $1.75-1.95 per share. Consensus analyst estimates were significantly lower at $1.33 per share. In CI's press release the company said "stronger than anticipated performance from the company's health-care business" lead to the higher outlook. The news launched an 11% gain in Cigna's stock to $67.55, a new one-year high. It also inspired a 4.55% rally in the HMO.X healthcare index to 993.60, a new all- time high. CI probably can't claim all the credit for investors' positive outlook for healthcare stocks. A Wall Street Journal article revealed that WellChoice (WC) was considering a bid to buy Oxford Health Plans (OHP). Shares of OHP rallied 15% to $57.97 on massive volume while shares of WC slipped 36 cents to $37.09.

It wouldn't be a Monday without merger news and today was J.C.Penney's turn to announce one. JCP has long been seeking a buyer for their Eckerd drugstore chain. The problem was solved when they found two buyers. JCP will sell its Northeast and Mid- Atlantic stores to Canadian firm Jean Coutu Group for $2.4 billion. It will sell the remaining stores throughout the southern states to CVS Corp (CVS) for $2.2 billion. The news didn't do much for shares of JCP but investors cheered the acquisition for CVS, the nation's No 2 drug store operator, whose shares jumped 7.4% to $37.35.

Monday's remaining big headliners were BA, NT and CPTH. Boeing Co (BA) rallied 1.67% and broke out over resistance at $42 and its 50-dma after announcing it was close to a deal with the U.S. Air Force that would allow BA to start bidding again for government contracts. You may remember that last summer the Air Force recalled a $1 billion contract after it was discovered that BA had illegally gained thousands of pages of documents from its rival Lockheed Martin.

Meanwhile Nortel Networks (NT) relations with the Securities and Exchange Commission took a turn for the worse. Last October NT said it would have to restate some of its previous earnings but the markets took the news pretty well. The SEC decided to look into it but it remained an informal investigation. About three weeks ago NT announced it was putting its CFO on paid leave and launch an independent audit. Investors were less forgiving and sent the stock lower. Today shares of NT fell 3.65% to $6.06 after the SEC stated it had initiated a formal probe into the accounting issue.

Falling under today's category for biggest percentage gain is probably Critical Path (CPTH). Shares of CPTH soared 150% to $5.08 after announcing a deal with conglomerate General Electric (GE). CPTH makes security software for identity management and news that it had won a contract with GE gave investors a huge boost of confidence.

Speaking of confidence investors are feeling pretty bullish right now. The markets are breaking out above resistance. Earnings expectations are strong and negative pre-announcements have been few and far between. We've actually seen a strong number of positive upside guidance. Case in point, Kellogg Co (K) raised its Q1 and full year numbers after the bell this evening citing strong sales momentum with double-digit sales growth in the first quarter. Kellogg is upping its FY 2004 numbers to $2.07-2.11 versus $2.05 to $2.09. Focusing back on the larger picture the recent string of economic news has been good. The jobs number last Friday has done a lot to confirm the economic recovery and today's ISM service index blow out is another sign of strong growth. As a matter of fact some economists are starting to think that 4% GDP growth may be too low. There was chatter today that the second quarter may come in closer to 5.5% growth if the current trends remain in place. Furthermore the short-term picture looks good. According to the Stock Traders Almanac the bulls have historical trends as a tailwind. April is the single best month for the Dow Industrials with an average gain of 1.9% over the last 50 years. Plus the Passover/Easter holiday week is typically bullish and the Thursday before Good Friday has been up five years in a row.

How do we reconcile all this bullish momentum with the fact that the indices are so overbought? That's a great question. While I expect the general trend for stocks to remain up, especially as we move into earnings season, the odds of us seeing some "sell- the-news" reactions as companies report is strong. Tomorrow we'll hear from Dow component Alcoa (AA) who reports earnings after the close. Current estimates are for AA to earn 42 cents per share, up from 23 cents last year. Tech investors will be watching YHOO and RIMM who report after the bell on Wednesday. Currently analysts expect YHOO to report 11 cents a share versus 3 cents a year ago and RIMM is expected to earn 49 cents compared to a loss of 7 cents a year ago. Both YHOO and RIMM have seen some very big bounces off their late March lows and unless they just crush the numbers and the revenue estimates and issue positive comments for the current quarter then I'd expect them to see some profit taking.

Let me repeat, I think the trend is still up despite being overbought but the gains might get smaller as we approach the 10,600-10,700 level on the Dow and the 2100 level on the NASDAQ and the 1160 level on the S&P 500. Look for the parade of earnings to hit full force next week.


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