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Market Wrap

Chipping Away

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      12-01-2004           High     Low     Volume   Adv/Dcl
DJIA    10590.22 +162.20 10590.22 10425.76 2.19 bln 2012/ 830
NASDAQ   2138.23 + 41.42  2138.32  2104.58 2.20 bln 2075/ 989
S&P 100   566.21 +  8.74   566.21   557.47   Totals 4087/1819
S&P 500  1191.37 + 17.55  1191.37  1173.78
SOX       440.09 + 16.22   440.24   426.36
RUS 2000  643.68 +  9.91   644.21   633.77
DJ TRANS 3736.79 + 78.08  3738.08  3656.78
VIX        12.97 -  0.27    13.12    12.77
VXO (VIX-O)13.46 -  0.08    13.85    13.26
VXN        18.24 -  0.60    18.89    17.83
Total Volume 4,393M
Total UpVol  3,533M
Total DnVol    817M
Total Adv  4087
Total Dcl  1819
52wk Highs  619 
52wk Lows    20
TRIN       0.61
PUT/CALL   0.73

Ignoring dire headlines such as "British Pound Advances to Twelve-Year High against the Dollar" and downgrades in several semi-related stocks, indices chipped through overhead resistance in Wednesday's trading. Futures rose pre-market, chiseling into that resistance. Indices built on those chiseled steps, climbing from the open into the close, through several economic releases. They climbed on strong volume, with the SOX, NWX, DDX, XBD, HMO, TRAN, DJUSHB, GSO and GHA among the sector-related indices that posted gains in excess of two percent. Some posted gains much in excess of that figure.

Before the open, an attempt was made to whittle enthusisam for semi-related stocks. That effort couldn't dent enthusiasm ahead of Intel's mid-quarter update Thursday, especially in the face of good news from two of the sector's stocks. The SOX gapped above its 200-ema and traveled straight up to test its 200-sma, gaining 3.82 percent.

Annotated Daily Chart of the SOX:

Efforts to whittle enthusiasm came from several sources and did pressure European semi-related stocks. Merrill Lynch had warned that analysts might be too optimistic about Intel's earnings ahead of its mid-quarter report on Thursday. The U.S. Semiconductor Equipment and Materials International reported its expectation that demand for chip manufacturing equipment would rise 59 percent this year but then perhaps fall as much as 5.1 percent next year. Although markets reputedly look ahead and discount future developments, U.S. markets appeared to concentrate more on this year's expected sharp gains than on next year's expected declines.

In addition, European chip-related companies Infineon Technologies and STMicroelectronics received downgrades. Merrill Lynch downgraded Infineon Technologies to a sell rating from its previous neutral rating. The firm cited specific problems within Infineon as well as industry pricing and inventory surplus problems. Deutsche Bank downgraded STMicroelectronics to a hold rating from the previous buy rating.

U.S. investors ignored that news and focused on better news from Fairchild Semiconductor (FCS) and Novellus (NVLS). Both countered the drearier reports, with FCS revising its Q4 outlook to the higher end of previous forecasts for a decline of 5-10 percent. FCS did note that gross margins would come in at the lower end of previous estimates. NVLS said that its Q4 results would likely be in the top half of its predicted range, despite a business climate for chip manufacturing equipment that remained listless.

Pre-market, pharmaceuticals also garnered attention, with Pfizer (PFE) reaffirming its earnings forecast for the full year and telling investors that it has twenty more drugs for which it will seek approval by the end of 2006. PFE closed 1.65 percent higher. Geopharma (GORX) also announced that its Belcher Pharmaceuticals unit had received FDA approval for a drug used to treat mucositis, an oral inflammation sometimes suffered by cancer patients receiving radiation or chemotherapy. That stock was halted mid-afternoon, however, with some confusion persisting as to whether that approval had been gained after all.

Drugmakers had also been a focus sector in Europe, with AstraZeneca (AZN) and GlaxoSmithKline (GSK) gaining ahead of our open. Gains in pharmaceuticals had helped lead the FTSE 100 higher, and our markets followed.

Annotated Daily Chart of the SPX:

Annotated Daily Chart for the Nasdaq:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Russell 2000:

A grouping of mostly encouraging economic news helped indices chisel through resistance. The first of the reports wasn't the most encouraging. The latest slate of survey information from the Mortgage Bankers Association revealed that mortgage activity slowed during Thanksgiving week. The Composite Index dropped 5.8 percent; the Purchase Index, 0.6 percent and the Refinance Index, 12.3 percent, all on a seasonally adjusted basis and in comparison to the previous week's numbers.

Although the MBA pegged most of the blame on Thanksgiving week, the later release of the Fed's Beige Book suggested otherwise. The MBA noted that the percentage share of FHA loans to all loans had dropped markedly during 2004. This suggests that first-time buyers dropped away, perhaps signaling trouble for the home builders. Mortgage payments cheaper than rent had helped drive new home sales, but those buyers might be tapped out. The news didn't impact the DJUSH, the Dow Jones US Home Construction Index, negatively, with that index posting a 2.56 percent gain for the day, one of the many indices posting more than 2 percent gains. The average interest rate for a 30-year fixed-rate mortgage rose to 5.78 percent, up from the previous week's 5.64 percent.

Wednesday's slate of economic releases also included October's Personal Income and Personal Spending, both released at 8:30. October's Personal income rose 0.6 percent, beating expectations for a 0.5 percent climb. September's rise had been only 0.2 percent. Personal Spending rose a respectable 0.7 percent, with September also having seen a respectable rise of 0.6 percent. Expectations had been for a rise of 0.4 percent. The savings rate was troubling, however, with the 0.2 percent rate touted as the lowest since October 2001.

October's Construction Spending and November's ISM Index were both released at 10:00, with one a disappointment and one an upside surprise. Construction Spending was flat against an expected rise of 0.8 percent, with lower spending on homebuilding responsible for the flat number. November's ISM surprised to the upside, rising to 57.8 percent from October's 56.8 percent. Economists had expected a flat number.

Perhaps the drop in crude prices did more than all those economic releases to help equities chip at resistance. Crude prices dropped from the open, with that drop accelerating after the release of crude inventories near 10:30 EST. With winter upon us, distillates are the new focus of those numbers because distillates include heating oil. Distillates rose 2.3 million barrels according to the Department of Energy. Crude inventories rose 900,000 barrels and gasoline inventories increased 3 million barrels, with both those figures also supplied by the Department of Energy.

Annotated Daily Chart for Crude Futures for January Delivery:

November's Auto and Truck Sales were also released, with the figures showing that Ford's (F) sales declined seven percent, with the company also revealing that it would trim Q1 production by eight percent. DaimlerChrylser (DCX) saw sales increase by four percent. Nissan North America (NSANY), Toyota Motor (TM), and Subaru saw sales increase, although Nissan outshone the others by posting a 31 percent gain. Mazda North American Operations saw November sales 8.7 percent lower than last year's for the same month.

The Fed's Beige Book followed at 2:00, with the Fed generally upbeat about continued economic growth. All districts except Chicago reported increases in economic activity.

The Fed noted that overall consumer spending and lending activity were uneven or mixed throughout the districts, while manufacturing and service sector activity were strong or increasing throughout the districts. Not all districts report service sector activity. As has been apparent from recent MBA reports, residential mortgage lending and refinancing ebbed.

Demand for transportation services was characterized as robust. So was residential real estate activity, although some districts reported some cooling. Commercial real estate presented a different story. High vacancies and pricing pressures remained, although some districts noted that the excess capacity was being reduced. Information on commercial real estate was mixed across the districts, with the situation in Dallas and Richmond appearing to improve while that in New York appeared to be worsening.

The Fed noted that large or even record crop production might be seen in many regions, with quality and yields both expected to be above average. Labor markets improved.

The section dealing with prices detailed increased price pressures, with energy-related costs rising. Some industries were able to pass cost increases on to consumers, with retailers less able to do so than manufacturers. Costs for building materials, particularly cement and steel, rose at the same time that home sales cooled. Dallas, particularly, saw a softening in home sales.

With mostly encouraging economic news and a steep fall in crude prices, investors were willing to overlook the dollar's weakness, worries about the U.S. deficit's effect on foreign investment in U.S. companies and bonds, and bothersome signs from analysts commenting on the semi-related stocks. Bulls want to see excitement from Intel's mid-quarter update, a continued decline in crude prices and a building on the breakouts made today. If those breakout levels are lost tomorrow, trade carefully, especially ahead of Intel's mid-quarter update after the close tomorrow. Charts look great, the breakouts are there, but sentiment measures perhaps show too much bullishness in the markets, as if they're banking a bit too much on gains that will come due to the MSFT dividend and Intel update.

Late-day developments include a shakeup in California's pension giant Calpers, with President Sean Harrigan voted off his seat on the board of directors. Harrigan had been guiding the pension giant into a leadership role in business reform, and was reportedly targeted by pro-business groups that had the ear of Governor Arnold Schwarzenegger.

After-hours developments included same-store sales and a few earnings reports, with same-store sales continuing tomorrow. Software maker Synopsis (SNPS) dropped after hours, last at $18.23 after closing at $18.64. The company reported a $0.19 per share loss against an expectation of a $0.03 gain for the fourth quarter. Dollar General (DG) reported, saying that higher gasoline prices were responsible for the company's eight percent decrease in net income. Starbucks (SBUX) same-store sales rose 13 percent, Men's Wearhouse (MW) gained 7.8 percent, and American Eagle's (AEOS) surged 24.3 percent, with these among other companies reporting.

Thursday's economic releases include the usual 8:30 release of jobless claims, followed by the 10:00 release of October's Factory Orders. Intel will provide its mid-quarter update on Thursday after the close, so investors have a full day of pre- Intel-release volatility to maneuver around on Thursday.


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