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Market Wrap

Stocks Slide Sideways as Oil Rises

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     05-24-2004            High     Low     Volume Advance/Decline
DJIA     9958.43 -  8.31 10045.45  9927.14 1.41 bln   2060/ 780
NASDAQ   1922.98 + 10.89  1934.41  1915.56 1.40 bln   1883/1139
S&P 100   534.04 -  0.29   538.02   532.62   Totals   3943/1919
S&P 500  1095.42 +  1.85  1101.71  1091.77 
RUS 2000  551.72 +  5.91   552.76   545.81
DJ TRANS 2865.36 +  3.61  2889.51  2854.86
VIX        18.08 -  0.41    18.82    17.96
VXO        18.31 -  0.85    18.97    18.05
VXN        24.33 -  0.57    25.58    24.26
Total Volume 3,205M
Total UpVol  2,175M
Total DnVol    967M
52wk Highs     104
52wk Lows      130
TRIN          0.87
PUT/CALL      0.77

Monday turned out to be a relatively quiet session. The lack of any decision from the OPEC meeting could have pushed the market lower but news that Saudi Arabia would volunteer to raise production lent the stock market early strength. The Dow Industrials opened strongly and quickly traded to 10,045. The NASDAQ gapped open and rushed to 1934 but these would prove to be the high for the day. The rally faded into the lunchtime lull before bulls managed a meager afternoon rally into the close. The Industrials ended the session down 8 points while the NASDAQ closed up almost 11 points.

Action overseas was mixed. The Japanese NIKKEI stepped up 31 points to 11,101 while the Chinese Hang Seng added 86 to 11,662. The German DAX lost 36 points to close at 3867. The English FTSE slipped 2.5 points to 4428. Meanwhile the French CAC added 21 to end at 3628.

Here at home the sector-specific averages showed a much more bullish front with only the DRG drug index and the IUX insurance ending in the red. Energy stocks were Monday's best performers. The OSX oil services index gushed +4.38%. The XNG natural gas index rose +2.31% and the OIX oil index added nearly 2%. Gold's XAU index turned in a solid day with a 1.37% gain and the homebuilders rallied 3.2% to breakout over resistance at the 560 level.

Monday's market internals support the widespread drift higher with advancing issues outnumbering decliners 5 to 2 on the NYSE and 18 to 11 on the NASDAQ. Up volume overshadowed down volume with 866 million to 393 million on the NYSE and 942 million to 461 million on the NASDAQ. Overall volume was extremely light.

Chart of the Dow Industrials:

Chart of the NASDAQ composite:

Over the weekend investors were listening for news out of the OPEC and G7 meetings. The world's seven top economic powers met at the G7 meeting and unanimously agreed that oil prices needed to come down to support the world economy. As a group they asked OPEC to increase production. Unfortunately, OPEC wasn't listening. The oil cartel's informal meeting in Amsterdam over the weekend failed to produce any decisions even though all the members agreed that crude prices are too high. Only Saudi, the cartel's largest and most influential member, said they would boost production. The Saudis said they would raise production from 7.1 million to 9.1 million barrels per day starting in June. Furthermore Saudi said they'd be willing to ramp up to 10.5 million a day if necessary.

This was obviously welcome news and one would have expected the price of oil to drop on the announcement. Not so! Crude oil prices rose 4.5% to close at $41.72 a barrel. This is an all- time high. The markets are essentially stating their belief that Saudi alone cannot keep up with global demand. Plus, we have to deal with growing risks to the oil infrastructure. Just this weekend there were three closures. A pipeline in Washington State was closed due to a fire. The Mars oil platform, located in the Gulf of Mexico, was closed due to an oil spill. Third, there were a couple of news agencies reporting that Iraq's northern pipeline was shut down due to another terrorist bombing.

OPEC will get another chance to vote on oil production at the formal June 3rd meeting in Beirut. However, even if the remaining cartel members decide to join Saudi Arabia and boost production we probably won't see any benefit in time to save us from record high gas prices during this summer's driving season. Thus, energy prices will remain a drag on our own economic rebound.

Monday's second biggest story was the legal defeat for the tobacco industry. Altria Group (MO), parent of Phillip Morris, and the rest of the tobacco stocks were hit hard today after federal judge Gladys Kessler decline to limit the amount of fines the government might be able to impose in the upcoming trial set to begin in September. Right now government prosecutors are seeking a disgorgement of profits to the tune of $280 billion. Prosecutors claim that MO and the rest of the industry defrauded smokers by lying about the health risks and by marketing their product to kids who became addicted. The decision today is the fourth legal defeat for the tobacco industry in two weeks. Shares of MO dropped 8.86% to $44.95. RJR fell 6.16%. CG lost 2.99%.

Mitigating MO's affect on the Dow Industrials were positive moves in Alcoa, Boeing and Caterpillar. Alcoa (AA) rose 2.44% to $30.20 after news broke that the company plans to open a smelting operation in Trinidad. Boeing (BA) jumped 2.67% to $44.56 after CSFB upgraded the stock to an "outperform" and raised its price target to $52 on positive expectations for BA's new 7E7 line of aircraft. Caterpillar (CAT) climbed 1.32% to $74 after Merrill Lynch upgraded the stock from a "neutral" to a "buy" with a long- term price target of $102.

It wouldn't be a Monday without some merger news. Today's big merger hails from the drug sector. Omnicare (OCR), a prescription drug provider to nursing homes, added 3.7% by the close after announcing a $1.5 billion unsolicited offer to buy NeighborCare (NCRX) for $30 a share. Normally the acquirer's stock price goes down when such deals are announced. To see OCR's price rise on the news means the street would strongly approve of the union. Shares of NCRX jumped 54% to $27.19 and the company said they are considering the offer. The second M&A announcement today came from Denver-based Forest Oil Corp (FST). FST said it would pay $330 million for Wiser Oil Co (WZR). The deal values WZR AT $10.60 per share.

Looking ahead to tomorrow Wall Street will continue to focus on the oil issue since the record high gasoline prices undermines our own GDP growth. Plus, the markets will have a chance to react to the President's speech on Iraq tonight at 8:00 PM ET. Tomorrow also brings the Consumer Confidence numbers and the Existing home sales report. If Bush doesn't drop any more word bombs and the consumer confidence numbers come in reasonably well I'm cautiously optimistic for a positive day tomorrow. I don't expect any big moves in the Dow but I'm encouraged by what I see in many of the smaller sector-specific indices.


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