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Market Wrap

A Day for Breakouts

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     06-23-2004            High     Low     Volume Advance/Decline
DJIA    10479.57 + 84.50 10486.87 10359.46 1.77 bln   2007/ 810
NASDAQ   2020.98 + 26.83  2023.23  1990.78 1.78 bln   2016/1029
S&P 100   557.80 +  4.33   558.30   551.72   Totals   4023/1839
S&P 500  1144.06 +  9.65  1145.16  1131.73 
RUS 2000  580.15 +  8.26   580.79   571.23
DJ TRANS 3139.27 + 61.44  3139.27  3073.52
VIX        13.98 -  0.33    14.82    13.75
VXO        13.63 -  0.47    14.56    13.37
VXN        18.98 -  0.31    19.71    18.78
Total Volume 3,894M
Total UpVol  3,168M
Total DnVol    667M
52wk Highs     314
52wk Lows      108
TRIN          0.41
PUT/CALL      0.83

Express courier Fedex got us started on the right foot when the company announced earnings this morning and raised its earnings guidance for the next quarter. Unfortunately, the markets continued to trade inside its three-week trading range - that is until the last hour. Suddenly, volume surged and stocks, lead by technology issues, charged into the last hour and broke through the top of the trading range. The Dow and the NASDAQ Composite actually closed positive for the year with the Industrials at new two-month highs and the NASDAQ at new two-week highs above the pivotal 2000 mark.

Jim was on the right track yesterday when he said the market felt like it wanted to go higher and that traders were getting nervous that stocks could rally without them. We have been staring at the June 30th deadline non-stop for the last three weeks so everyone who wanted to sell to avoid any event risk certainly had their chance. Now that the June 30th-fever has broken there is a lot of money on the sidelines that could really lend some momentum to today's gains.

I noticed a number of significant breakouts across the board with stocks and sector indices hitting new highs or breaking through technical resistance like their 50-dma's. Dow theory fans will point out that the Dow Transports are partly to blame for today's gains. The transports soared another 2% to breakout over resistance at the 3100 level to hit new three-year highs. The move in transports was boosted by a down tick in crude oil prices to $37.57 a barrel. Yet this failed to stall the rally in energy stocks. The OIX oil index and the XNG natural gas index soared to new all-time highs while the OSX oil services index hit new two-month highs.

Chart of crude oil (August contract):

While we still have the Russell shuffle ahead of us the Russell 2000 still managed to hit new two-month highs. More importantly the Dow Industrial's 84-point gain broke through resistance in the 10,440 area. The NASDAQ's 26.8-point or 1.34% rally pushed the index back through the 2000 mark and confidently back above its descending trendline of resistance and its simple 100-dma. The S&P 500 index also managed a new relative high.

Chart of the Dow Industrials:

Chart of the NASDAQ Composite:

Chart of the S&P 500 index:

Overall it was a very widespread rally with every sector-specific index closing higher. The largest gains were seen in networking stocks, semiconductors, Internets, biotechs, airlines, and homebuilders. Meanwhile defense stocks managed to hit new all- time highs again. The rally in the networkers was fueled by yesterday's news that telecom giant SBC Communications (SBC) was discussing plans to spend $4B to $6 billion over the next five years on a new fiber-optic network. Gains for the several networking stocks have been substantial as traders speculate on who might win such a lucrative contract. Over the last two days Lucent (LU) has rallied 8.5%, Juniper Networks (JNPR) has soared 15% and JDS Uniphase (JDSU) is up 18%.

Market internals were strongly bullish as you might expect. Advancing stocks outnumbered decliners 5-to-2 on the NYSE and 2- to-1 on the NASDAQ. Up volume was approximately three times stronger than down volume on both exchanges. More importantly overall volume was relatively strong at 3.5 billion across both exchanges. This is a significant improvement to what we've experienced over the past couple of weeks and adds a little bit more confidence to today's rally.

Fedex (FDX) deserves some credit for both improving investor's moods with their positive earnings forecast as well as contributing to the rally in transports. The company reported earnings this morning of $1.36 per share, which was above estimates at $1.33 and well above last year's 92 cents for its fourth quarter. FDX's revenues jumped more than 20% to $7.04 billion compared to just $5.8 billion a year ago. FDX now sees next quarter (Q1) falling in the $0.90-to-$1.00 range compared to analysts' estimates at 80 cents per share. Shares of FDX jumped more than 2% to close at $80.05 - a new all-time high. Don't look now but the closer FDX edges toward $100 the closer we are to hearing another stock split announcement. Its last 2-for-1 split was back in May of 1999.

RJ Reynolds Tobacco (RJR) made headlines today after the FTC gave its approval last night to the company's long-awaited merger with Brown & Williamson, a division of British Tobacco (BTI). The newly formed company will be the No 2 cigarette maker behind Phillip Morris. Shares of Phillip Morris, now Altria Group (MO), added 1.3% and helped lift the Dow Industrials. Meanwhile RJR received a credit upgrade from "negative" to "stable" from Fitch.

There were plenty of tech stocks hitting new highs but none of them performed quite as well as Salesforce.com (CRM). The company's IPO came to market today with 10 million shares at $11 per share. This was above the expected offering price in the $9 to $10 range. CRM's claim to fame allows customers to truly use their application software "on demand" for as much or as little as they need. The stock soared 56% to close at $17.20 per share on volume of 10.89 million.

Alas the day was not without its losers. Mylan Labs (MYL) lost about 7% to close at $20.86 after the FDA chose to extended JNJ's patent protection on its Duragesic pain relief patch by another six months. MYL had planned to offer a generic version. The company plans to fight the decision and sue the FDA. Meanwhile Career Education Corp (CECO) plummeted another 24.7% to $44.11 after the company confirmed that the SEC had formalized its probe into the ongoing scandal involving falsified student records. Merrill Lynch and Bear Stearns downgraded the stock to "neutral" and "peer perform", respectively. I wonder how BAC and ThinkEquity feel after the two firms reiterated their "buy" and "strong buy" ratings on CECO in the previous two sessions.

AT&T was making headlines after the closing bell when the company lowered its financial outlook for fiscal year 2004. T is lowering its revenue outlook from $31-32 billion for the year to $29.5-30.5 billion. AT&T separately announced it would stop selling local and long distance services in seven states as it continued to fight with competition from the regional Bells. Existing customers would be allowed to keep their current service. AT&T (T) was trading down more than 4% in after hours markets.

Tomorrow should prove interesting. Now that the major indices have broken through the tops of their trading ranges will we see any follow through? The Dow could struggle with the 10,500 level but I suspect it will be the 10,550-10,600 region that will be the next hurdle. The NASDAQ has plenty of overhead resistance but the strength in the two-day rally should encourage investors who have been sitting on the sidelines to jump on the bullish bandwagon before they "miss" the rally. Thursday does bring a few economic reports. Before the opening bell will be the May durable goods orders. Economists are looking for a small gain of 1.5% after April's 3.2% loss. We'll also get the weekly initial jobless claims before the open. After the bell will be the May new home sales. The economic data continues on Friday with the final Q1 GDP numbers, the chain deflator numbers, existing home sales and the Michigan sentiment index.

Finally, let me leave you with a word of caution. The breakout today looks great. I believe we should trade what we see. However, the volatility indices are waving huge red flags as they drop back to the low end of their trading range or to new all- time lows like the VXN. Traditionally, these would be huge sell signals but one thing we've learned over the past 18 months is that the volatility indices can continue to slip lower than we would normally imagine.



 
 



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