All the financial media, including this column, is starting to sound like a broken record. The markets are just not moving as investors wait for the June 30th deadline for the Iraq handover of "power" and the interest rate decision by the Federal Reserve. The challenge for traders is the lack of volume and volatility. The stock market is stuck going sideways and we could easily remain here for the next seven sessions.
Monday's market actually started bullish as stocks pushed higher on several merger and acquisition announcements and up beat comments from Dow-component Intel. Unfortunately, the positive glow began to fade on news that three British boats and their eight soldiers were all captured after straying into Iranian waters on a narrow river between Iran and Iraq. The majority of the session was spent trading sideways. Not counting the first and last hour of the day the Dow Industrials were stuck in a 30- point range. The NASDAQ traded in a 9-point range and the S&P 500 traded in a 3-point range. Then suddenly in the last 90 minutes of the day all three indices broke down through their intraday ranges and began to sink into the closing bell.
Overseas indices didn't fair much better and most closed near the unchanged mark. The Japanese NIKKEI was the exception with a 218-point gain but this failed to erase all of Friday's 225-point loss. The Hang Seng index closed down almost 10 points to 11,845 after its recent breakdown below the 12,000 mark. The German DAX lost just over 10 points to 3989. England's FTSE dipped 3.6 points to 4502 and the French CAC lost less than a point to 3740. Like their U.S. counterparts the world indices all appear to be waiting for the June 30th deadline and the onset of the Q2 earnings season.
Here at home the Dow Jones Industrials lost 45 points to close at 10,371. The venerable index could be headed to the bottom of its two-week trading range at 10,300. The NASDAQ looks weaker with its 12-point loss to close at 1974. The NASDAQ composite is only a couple of points above its simple 200-dma and appears to be headed toward its June lows near support at 1960. Technical traders will notice the fresh MACD sell signal.
Market internals were mixed most of the day but turned bearish by the close. Declining stocks outnumbered advancers nearly 15 to 13 on the NYSE and about 17 to 13 on the NASDAQ. Down volume was almost 50% stronger than up volume on the NYSE while down volume was almost double up volume on the NASDAQ. Overall volume was extremely low and ranked as one of the lowest volume days of the year with less than 2.75 billion shares trading on both exchanges. The downturn in the last two hours of trading made for a market wide decline with only four sectors: airlines, retail, natural gas and utilities; closing in the green.
Chart of the Dow Industrials:
Chart of the NASDAQ Composite:
It shouldn't come as a surprise that the markets are churning sideways ahead of the June 30th handover in Iraq. The White House has warned us for months that violence and terrorist activities would rise sharply ahead of the deadline. Last week we heard about the terrorists in Saudi Arabia kidnapping and beheading American Paul Johnson. According to reports this weekend Saudi security forces killed terrorist leader Abdul Aziz al-Muqrin and three more terrorists responsible for Paul's death. Unfortunately, there is a new kidnapping case. Insurgents in Iraq have captured a S. Korean man and have threatened to kill him if S. Korean doesn't change its mind about sending 3,000 soldiers to help with Baghdad/Iraq security.
The big story in Iraq today was the capture of three British boats and their crew by Iran. This news put a wet blanket over the markets and probably raised a number of eyebrows after last week's headlines that Iran was massing troops on the Iraq-Iran border. Iran continues to butt heads with the U.N. over its on going nuclear energy/weapons development program so any negative headline involving Iran is sure to grab the markets attention. It might be surprising that the rising "geo-political tensions" did not send oil prices higher. Fortunately, news that one of Iraq's recently damaged oil pipelines was working again and pumping 42,000 barrels an hour helped alleviate some of crude's recent rise. Crude futures slipped $1.23 to $37.77 a barrel and appear to be building what looks like a bear flag pattern. Now if Norway, the globe's third largest oil exporter, could solve its oil-worker strike, currently on its fourth day, we might see oil prices truly begin to ease lower.
Speaking of lower the SOX semiconductor index edged closer to breaking support at the 450 level in spite of bullish comments from Intel Corp (INTC). Intel, the world's largest producer of semiconductors, expects that its Q2 numbers will be strong and near the record setting pace of their Q1 report. The report comes from Intel CEO Craig Barrett who was interviewed by a Spanish newspaper. You might remember a few weeks ago that Intel narrowed its revenue forecast to the upper half of its previous guidance. This surprised the market, which was expecting Intel to guide lower. Barrett was quoted as saying the recession in the semiconductor industry is over. Wall Street firm J.P.Morgan (JPM) decided to raise its earnings estimates for Intel based on the news. Investors will need to keep an eye on the SOX. If it breaks support at the 450 level the NASDAQ will have a hard time making any sort of recovery with the chips sinking lower.
Market analysts traditionally look at rising M&A activity as bullish. If companies are willing to make acquisitions it usually means that management has a positive outlook on the future and they're willing to spend money on improving their competitiveness. If that's the case then today's spat of acquisitions looks pretty bullish for the market.
Monday's biggest deal was between banking giant Wachovia (WB) and SouthTrust (SOTR). WB announced it was buying SOTR in an all- stock deal worth $14.3 billion. This valued SOTR at a 20% premium over Friday's close. Unfortunately, Wall Street thought the deal was a little expensive and issued concerns over some of WB's expectations on what the merger might be able to do for WB's earnings. SOTR soared 13% while shares of WB slipped 4%.
The second biggest deal was a consolidation in the mall business. Simon Property (SPG) announced it was buying rival Chelsea Property Group (CPG) for $3.5 billion in cash and stock. Finishing out the M&A news were announcements from MHR, BFD and OXM. Magnum Hunter Resources (MHR) declared it was buying $243 million in oil and gas properties in New Mexico from EnCana (ECA). MHR will be gaining 458 oil and gas wells and close to 44,000 acres of undeveloped land to explore. Meanwhile BostonFed Bancorp (BFD) announced it was buying Banknorth (BNK) for $195 million in cash and stock. Finally Oxford Industries (OXM) reported it was purchasing Ben Sherman, an English clothing designer, for $146 million.
In other news HMO providers Aetna (AET) and Cigna (CI) announced a major win at the Supreme court. The court voted 9-0 on two cases in favor of the HMO's saying patients can't sue their HMO for refusing to pay for doctor-recommended treatments. The decision will help protect companies like AET and CI from the 72 million Americans currently covered by HMO's. Consumer groups are likely to take their cause to Congress.
After the closing bell today Priceline.com (PCLN) raised its earnings guidance for the second quarter. PCLN had previously forecast 25-30 cents per share while analysts were expecting 28 cents per share. PCLN said business is strong and they now predict earnings in the 29 to 32 cent range.
The next couple of days are devoid of major economic reports so stocks will be left to trade on their own news or any new developments coming out of Iraq. The current market forecast calls for stocks to remain range bound until the end of the month. Contributing to this lack of direction will be 16 IPOs this week sucking up capital that may have been spent elsewhere. Traders can keep an eye on the brokerage stocks tomorrow. Before the opening bell we'll hear earnings reports from Goldman Sachs (GS) and Morgan Stanley (MWD). Estimates for GS are $1.95 per share. Estimates for MWD are $1.05. In the past these companies tend to beat estimates only to see their stocks trade down on the news. Now that both MWD and GS are near two-week lows there is a chance they could pop higher instead.