Option Investor
Market Wrap

Tech Stays Positive

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   05-26-004            High     Low     Volume Advance/Decline
DJIA    10109.89 -  7.73 10128.77 10077.81 1.70 bln   1687/1144
NASDAQ   1976.15 + 11.50  1976.16  1957.58 1.57 bln   1794/1245
S&P 100   542.60 +  0.21   543.43   540.10   Totals   3481/2389
S&P 500  1114.94 +  1.89   1116.71 1109.91 
RUS 2000  567.77 +  2.38   567.77   562.47
DJ TRANS 2939.92 + 74.56  2940.32  2911.62
VIX        15.97 +  0.01    16.30    15.78
VXO        16.15 +  0.24    17.06    15.95
VXN        21.63 -  0.41    22.53    21.56
Total Volume 3,635M
Total UpVol  2,457M
Total DnVol  1,115M
52wk Highs     140
52wk Lows       90
TRIN          0.70
PUT/CALL      1.01

The Dow Industrials may have ended in the red today but bulls can still claim a victory. After yesterday's big 159-point gain the INDU only lost about 8 points due to weakness in SBC and VZ. The NASDAQ Composite posted its fourth straight gain and the S&P 500 index marked its fifth straight gain despite disappointing economic data and renewed terror concerns.

The morning started out on a sour note when the government raised concerns about the growing threat of terrorist actions on American soil. Fortunately, the 10:30 AM low proved to be the low of the day and stocks slowly drifted higher throughout the session. Later in the afternoon Attorney General John Ashcroft held a press conference and pointed out seven specific individuals the government was looking for and asked citizens to help. What could be challenge for stocks this summer are the number of high-profile events that could be targets for terrorist actions. On the list are the soon to be dedicated WWII memorial, the G8 summit in Georgia, the Democratic convention in July and the Republican convention in August, the Olympics in Athens, and the November elections here at home.

Speaking of home the U.S. durable goods orders for April fell a worse than expected 2.9% to $191.3 billion. Economists had been looking for a mild decline of 0.9% after February's 3.9% gain and March's upwardly revised 5.7% jump. The drop in durable goods in April was the biggest slip in almost two years. While the number was disappointing Wall Street didn't seem too worried and won't be unless there is a repeat in May.

The second biggest economic report out today was the April new home sales. Economists were expecting a dip from the record highs near 1.239 million in March to 1.19 million in April (annualized pace). The Commerce Department surprised the markets with an 11.8% drop to 1.09 million homes. This was the largest one-month drop in a decade and immediately sent the home building stocks lower. The decline was fueled by significant slow downs in the South with a 22% drop in sales and the West with a 9.4% drop in sales. Contributing to the decline was a strong rise in 30-year fixed rate mortgages to 6% and the price of homes hitting new all-time highs.

Oil remained in the spotlight as well but confusing supply data produced a volatile session for crude. The Energy Department released their supply numbers that showed no change in crude oil stocks and a drop in gasoline stocks. Yet shortly thereafter the American Petroleum Institute released their supply numbers showing a rise in crude and gasoline inventories. Crude oil futures ended lower on the session down 44 cents to $40.70 per barrel. Investors took it as a cue to do a little profit taking in energy stocks and the OSX oil services index lost 1.72% while the OIX oil index fell 0.74%.

Fortunately the volatile session for oil and our own disappointing economic data didn't appear to have much impact on global stock exchanges. The Japanese NIKKEI jumped 189 points to 11,152 in response to our own rally yesterday. European stocks were mostly higher as well with gains for the English FTSE, German DAX and French CAC.

Looking at a chart of the Dow Industrials you can see how yesterday's big rally broke out of the recent consolidation phase and above its simple 200-dma. The good news is today's minor decline held above the 200-dma and the 10,100 level. A chart of the NASDAQ looks encouraging too. Yesterday's gain broke out above its 200-dma and today's gain closed above its 50-dma. The tech-rich index is also above resistance at 1950 and 1970, which leaves the next hurdle at the 2000 mark.

Chart of the Dow Industrials:

Chart of the NASDAQ Composite:

Overall market internals were bullish with advancing issues running past decliners almost 17 to 11 on the NYSE and 3 to 2 on the NASDAQ. Up volume was 50% stronger than down volume on the NYSE and nearly three times stronger than down volume on the NASDAQ. Money was flowing into tech, biotechs, some financials and gold while investors were selling oil service stocks and home builders.

The Dow probably would have closed in the green today if it hadn't been for a one-two punch from VZ and SBC communication. Verizon Communications (VZ) was the biggest drag on the Dow Industrials with its 2.96% decline and SBC was close on its heels with a 2.28% decline. Both stocks are dropping due to rising competition from the likes of Comcast. Comcast Corp (CMCSA), the nation's largest cable company, announced today that it would offer 40 million households the opportunity to use VoIP or voice- over-Internet protocol to make their phone calls through their high-speed cable modems by 2006. This is a huge threat to traditional phone companies.

Another Dow component making headlines was Boeing (BA). Last year BA suffered from a scandal over its controversial leasing deal for 100 Boeing refueling tankers. Today the Pentagon announced that it would postpone any decision on the $23.5 billion deal. Defense Secretary Donald Rumsfeld has ordered two new studies done on the project as the Pentagon considers other options that might be less expensive. A decision might be reached in November but already some analysts feel that BA may lose the deal and be forced to take a $300 million charge. Shares of BA closed up 6 cents to $44.76.

Some of Wednesday's biggest movers were in the lucrative heart stent industry. We've seen a lot of news come out this week with Medtronic's disappointing clinical trials data on Tuesday sending shares of Boston Scientific (BSX) and rival Guidant (GDT) higher. There was a reversal of fortunes for GDT today who announced they were encountering some manufacturing challenges with its Champion drug-coated stent and it may require a design change. Such a move would delay its filing for FDA approval and that's good news for rival BSX with its Taxus drug-coated stent. GDT fell 11% to $53.71 while BSX rose 11% to $44.82.

Looking ahead to Thursday we have a handful of economic reports to wade through. On the list is the help wanted index, the preliminary chain-deflator data, and the weekly initial jobless claims but the biggest report tomorrow is the preliminary GDP numbers. Economists are expecting the first quarter of 2004 to show the economy growing at 4.5% compared to 4.2% for the fourth quarter of 2003. This report will set the tone for the day and probably the rest of the week. What could be exciting is that any moves tomorrow and Friday could be sharper than normal due to extremely low volume. We've had low volume the last couple of weeks and it's only going to get worse as we head toward the long weekend. Trading will dry up quickly Thursday afternoon and Friday is likely to be a ghost town with traders already gone for the Memorial Day weekend.


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