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Market Wrap

Bluechips Rally on Oil's Weakness

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     06-02-2004            High     Low     Volume Advance/Decline
DJIA    10262.97 + 60.32 10288.81 10197.06 1.52 bln   1695/1120
NASDAQ   1988.98 -  1.79  1998.32  1978.71 1.50 bln   1560/1450
S&P 100   547.58 +  2.47   549.22   544.40   Totals   3255/2570
S&P 500  1124.99 +  3.79   1128.10 1118.64 
RUS 2000  573.56 +  1.07   574.81   570.76
DJ TRANS 3001.85 + 38.35  3005.00  2962.92
VIX        16.08 -  0.22    16.70    15.95
VXO        16.24 -  0.43    16.87    15.00
VXN        22.61 +  0.04    23.17    22.19
Total Volume 3,395M
Total UpVol  1,730M
Total DnVol  1,551M
52wk Highs     218
52wk Lows       63
TRIN          1.15
PUT/CALL      0.91

Positive comments from Saudi Arabia's Oil Minister a day before OPEC's official meeting in Beirut sent crude to a 5.6% decline, its biggest drop in six months. This gave the Dow Industrials a lift but the tech-heavy NASDAQ slipped into the red for the first time in eight sessions.

Memorial day is the unofficial start of summer and the markets wasted no time slipping into their summer doldrums. Volume continues to be low with many traders either still on vacation or sitting on the sidelines ahead of Friday's non-farm payrolls report. Market internals were generally flat but bulls won the day. The NYSE reported 17 advancers for every 11 decliners. On the NASDAQ it was almost a dead heat at 15 to 14, advancers over decliners. Up volume was only marginally above down volume on both exchanges.

The first half of the trading day was mostly sideways chop but an afternoon rally pushed the Industrials through resistance at 10,220 outlined in yesterday's wrap. The same can be said for the S&P 500 index, which drifted lower into lunchtime but then rallied past resistance at 1122. The action in the NASDAQ composite followed a similar pattern and the COMPX tested resistance at 2000 with an intraday high of 1998 before fading in the last hour. At the end of the day the Dow added 60 points to 10,262. The NASDAQ lost less than two points to close at 1988 and the S&P 500 inched up less than four points to 1124.99. Overseas the Japanese NIKKEI slipped 54 points to 11,242. The Chinese Hang Seng climbed 96 points to 12,201. Across the Atlantic the German DAX rose 24 points to 3,888. The French CAC followed with a 21-point gain to 3646 and the London FTSE close nearly unchanged at 4,442.

Concerns over crude oil prices and supplies continued to hog the spotlight. The recent attack in Saudi over the weekend sent crude prices to their all-time high on Tuesday to more than $42 a barrel. Industry experts say the markets are pricing in a fear premium of $8 to $12 a barrel due to concerns that terrorist might disrupt supply lines. Fortunately, Ali al-Naimi, Saudi's Oil Minister, told the press that Saudi Arabia (and OPEC) will continue to target a $22-$28 price per barrel for oil. There had been some speculation that OPEC might be raising their target price, which has been fuel to the fire under oil's rally.

World markets are already concerned that the current record highs for oil is beginning to choke off the best economic recovery the globe has seen in twenty years. Today's drop back under the psychological $40 a barrel level helped ease nervous traders. Crude's decline may have been sharper than normal due to a small but growing expectation that several OPEC ministers will push to temporarily suspend the current quota system altogether as a signal to the markets that they are taking serious action. Of course the move may be largely ceremonial as most of the cartel's members are already cheating above their current quotas and pumping oil at or near their full capacity.

The drop in oil prices gave the airlines and transportation stocks a boost today. The XAL airline index rallied 4.27% with a strong rebound from its 52 level sending it back toward its May highs. The Dow Transports also turned in a big move adding 38 points to breakout and close over the 3000 level for the first time in more than a month. Traditional Dow theory suggests we can't have a sustained market rally without participation by the transports and this has been underlying support for the Industrials.

Impacting the NASDAQ has been the SOX semiconductor index. Investors are cautious over the upcoming Intel mid-quarter update on Thursday night and shares of Intel fell 1.12% to $28.01 today. Currently the unofficial word on the street is expecting Intel to guide to the lower end of their previously forecasted range. This is undermining strength in the SOX, which fell 2.25%. The SOX tried to rebound from its lows this afternoon but it failed under the 480 level and odds are it will test previous resistance at 470 soon. It is a commonly held belief that the semiconductor sector leads the NASDAQ. Should Intel disappoint it will be a major drag on tech stocks just as the NASDAQ tries to breakout over resistance at the 2000 level.

Speaking of resistance the trendline of lower highs for the NASDAQ is just over the 2000 mark as is its simple 100-dma and both will make it that much tougher for the NASDAQ to breakout. Meanwhile the Dow Industrials has broken out above the 10,220 level and its 40 & 50-dma's. This is very impressive but its trendline of lower highs (and top of its descending channel) is near the 10,400 level and near its simple 100-dma.

Chart of the Dow Industrials:

Chart of the NASDAQ Composite:

Chart of the S&P 500 Index:

Wednesday's only "economic" reports were the auto and truck sales numbers. According to reports U.S. vehicle sales rose 3.4% in May despite rising prices at the pump. General Motors (GM) reported its best month ever with sales up 2.8% over last May. DaimlerChrysler turned in a 1.3% jump in sales while Ford said sales slipped 2.8%. Ford (F) continued to see strong sales of its F-series trucks but overall sales slipped due to very steep comparisons to last year's big numbers.

Many of the stock-specific headlines today were made by ALTH, BA, HD, and NT. Allos Therapeutics (ALTH) was a huge winner with a 44% jump in its share price to $2.82 after the FDA issued a surprise approval for its RSR13 treatment. The "approvable" letter was a surprise because the FDA advisory panel had suggested the drug not be approved due to concerns over the patient make up of ALTH's trials. RSR13 is being given conditional approval for patients with cancer that originates in the chest and spreads to the brain but the company will need to complete another round of Phase III trials.

Dow-component Boeing Inc (BA) was a winner today, hitting new two-year highs, after announcing that Air New Zealand had ordered 10 new plans worth $851 million. BA also got a boost from a Merrill Lynch analyst who suggested that BA could benefit from higher oil prices. Surging fuel costs could force the airline industry to upgrade their aging fleet to BA's new more fuel- efficient models sooner rather than later. Boeing added 1.87% to close at $46.47.

Dow-component Home Depot (HD) was an early drag on the Industrials after a Bank of America analyst downgraded the stock from a "buy" to a "neutral". The concern centered on slowing traffic patterns and a potential slow down in the housing market and refinancings due to higher rates. The historically low interest rates and refi boom have lead to a huge increase in home improvements but now with higher rates looming ahead of us the do-it-yourself crowd may not be quite so ready to tap into their equity. This morning the Mortgage Bankers Association reported that applications for loans slipped 1.2% last week with refi's falling 6.6%.

Meanwhile Canadian telecom giant Nortel Networks (NT) fell more than 6% to $3.83. The company said it was still not ready to issue new financials for the last three years. The stock has fallen sharply from its February highs near $8.50 due to its ongoing accounting scandal.

Looking ahead to tomorrow we'll hear a small number of economic reports. Before the opening bell will be the initial weekly jobless claims. After the open we'll get the factory orders for April and the ISM services index for May. Yet the real focus will be on Intel's mid-quarter update after the closing bell and Friday's non-farm payrolls report. If the jobs number comes in too strong many believe the Fed will feel forced to raise rates at its June 29-30th meeting.


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