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New Highs!

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      12-14-2004           High     Low     Volume   Adv/Dcl
DJIA    10676.45 + 38.10 10695.07 10621.03 1.97 bln 1967/1263
NASDAQ   2159.84 + 11.30  2163.50  2145.05 2.28 bln 1896/1261
S&P 100   572.42 +  2.01   573.50   569.75   Totals 3863/2524
S&P 500  1203.38 +  4.70  1205.29  1197.84 
SOX       433.02 +  7.90   434.32   425.22
RUS 2000  643.54 +  5.51   643.62   637.67
DJ TRANS 3757.03 + 32.10  3758.41  3721.89
VIX        12.73 +  0.19    12.97    12.21
VXO (VIX-O)13.45 -  0.10    14.07    13.29
VXN        18.58 -  0.20    19.05    18.35 
Total Volume 4,481M
Total UpVol  2,650M
Total DnVol  1,705M
Total Adv  4383
Total Dcl  2936
52wk Highs  479
52wk Lows    49
TRIN       0.94
NAZTRIN    1.16
PUT/CALL   0.77

The markets continued to trade higher before the Fed news today with a quarter point hike already priced into the mix. The Fed did not disappoint but lacking any new bias from the Fed traders were left looking for direction once the Fed meeting was over. Economics continue to be mixed and traders hoping for the Fed to unravel the puzzle were comforted only slightly by the same bias replay.

Dow Chart

Nasdaq Chart

Chain Store Sales finally rebounded from last week with a +1.2% gain but only partly recovered the prior weeks -1.7% drop. The holiday shopping remains lackluster despite the drop in gas prices. All accounts suggest consumers have gotten used to steep discounts in the last two weeks of the season and are patiently waiting for the price slashing to begin.

The International Trade deficit rose to record levels for October at -$55.5 billion. According to the BEA exports increased only marginally but imports soared. The $55.5B number was $5B worse than the $50.9B in September. Alan Greenspan must be losing sleep at night over this soaring imbalance given his comments in November. Consensus estimates were for only a slight gain to $51.6B. During October oil hit its highs over $55 and this accounted for the majority of the jump. The October number was a record high. If oil prices continue to slip the deficit will ease slightly and the weakening dollar should also help.

Industrial Production rose +0.3% in November and less than half the previously announced +0.7% gain in October. That Oct number was also revised down to +0.6%. This was the second consecutive month of gains after flattening over the summer and dipping into negative territory in September. Business equipment and construction production increased +0.4%. This spending on equipment is driven by the tax depreciation incentives which expire on Dec-31st. The accelerated depreciation has produced a mini boom in computer equipment, servers, routers and switches over the last quarter. Capacity utilization is still only 77.6%, 73.5% for durable goods, and still weak enough to prevent any significant escalation in prices or a return of the inflation monster. Until manufacturers have pricing power brought on by rapid increases in demand the inflation component will remain tame. The tax incentives have driven a +10% rise in business equipment production while home electronics production has declined -6.4% over the same period.

Another crack in the economic foundation appeared today in the Richmond Fed Manufacturing Survey. For the first time in over a year the index posted a negative growth number. September of last year began the year long run of growth in the area and it topped in September of 2004. Novembers decline to -3 was the second monthly decline from the high of 22 in September. The rate of decay appears fairly steep with the order backlog falling to -17 from -5 in October. Shipments fell to -3 from 14 in October. New orders fell to -8 from 3 last month. The six month outlook barely budged with a move down to 32 from 35 and its high for the year. All components fell in November, most for the second consecutive month. Given the growth in some areas is stagnating the drop in the Richmond region suggests there is a weakening in the broader economy at the manufacturing level. We must remember that there is normally a slump in the fourth quarter that should improve in Q1. We need to watch these various Fed reports for evidence of that rebound or lack of a rebound in January. On Wednesday we get the NY Manufacturing Survey and it has been very strong with new highs every month.

The Manpower Employment Survey showed the net hiring plans for Q1-2005 were positive in 17 of 19 countries. They were better than Q1-2004 in 12 of 19 countries. The US is showing a net change for Q1 of 21%. The raw numbers show 24% of American companies are planning to hire, 10% are planning cuts and 59% are not planning any changes. This results in a positive outlook for Q1-2005 over Q4-2004 of 21% of companies hiring. Net hiring plans in the US exceed year ago numbers in every region. Only the Midwest is lower for the 4Q comparisons. This has been a reliable survey for tracking the long term trends and the current numbers suggest an average gain in jobs of about 200K per month for Q1-2005.

The Fed met, talked and in the end changed four words in their statement from the last meeting and hiked rates by a quarter point as expected. According to the Fed risks to the upside/downside remain roughly equal, inflation remained contained, output is growing at a moderate pace and labor market conditions continue to improve gradually. Sounds like they are talking about a turtle race. They noted that energy prices had eased and employment conditions had returned to gradual instead of the "have improved" they used in the prior statement. This is a back step after the weak November Jobs report. Leaving the statement the same with the measured pace clause weakened the thought that they could quit at 2.5% and reinforced the prior 3.0% level as a stopping point for 2005.

While the markets were tame most of the day while waiting for the Fed announcement there was plenty of stock news. Symantec got crushed with a -16% drop of -5.41 to $27.75 after news broke that they were in talks to buy Veritas Software. While this might be a logical progression for Symantec it immediately posed questions that the virus business may be easing. AOL now gives away Macafee software and analysts were questioning if this acquisition might be out of a need to diversify rather than just a new business opportunity. SYMC split 2:1 on Dec-1st and there had been very little post split depression despite the very strong gains. It appears it all hit on the same day.

RIMM was hammered for a -$4.65 drop to $85 after a very volatile day. The appeals court handed down a ruling in their long running patent case that voided part of the lower court judgment but posed additional questions in other areas. In the initial excitement the stock spiked to $103.56 from 87.50 and then fell back to 92.50 before trading was halted. Once the news was disseminated the stock opened again for trading at 92.50 and fell to 82.18 once the news was fully understood. I won't waste the space here with the long description but it was a ruling in part for NTP and threw the case back into a hostile court. Analysts have been expecting an out of court settlement to remove the cloud if the ruling did not go the way RIMM was expecting. This could accelerate that process. RIMM is also trying to get the NTP patents overturned which would make all the court rulings obsolete. There is a strong argument that they will be successful in this endeavor. That makes it even more likely that NTP and RIMM will settle and business will continue without the cloud. It should be noted that RIMM has escrowed the full amount of the prior judgment and will not suffer any material damage regardless of the final outcome. RIMM was the editors play last Sunday in anticipation of this verdict. I am still positive on the stock and would buy it on the dip once it appears a bottom has formed.

MSTR rounds out the lineup of losers with a -14% drop of -9.67 to $56 after it was announced the president and CFO was leaving to take over as president of Mcafee. Eric Brown had been seen as the instrumental force behind the Microstrategy rebound from the 2001 disaster. Several brokers downgraded the stock to a hold from buy until a new face takes charge. Support is well below the current $56 level so this one could have some more to lose.

GE confused investors today with an early affirmation of guidance and a positive outlook on the future. GE said it expects double digit growth in Q4, all of 2005 and for the foreseeable future. Jeffery Immelt told investors that GE had excellent momentum going into 2005 and the right businesses with the right team to sustain growth for years to come. GE expects to earn slightly less than $5.5 billion in Q4 with a 15% rise in revenue. In 2005 GE expects profits to increase 13-17% to nearly $20 billion. Cash is expected to grow at double digit rates as well despite a $15B stock buyback program announced last week. The surprise announcement spiked GE to $37.75 from $32.18 and sent all the indexes higher in late afternoon. Unfortunately for GE the good news could not keep the stock positive and it closed slightly negative after a four day ramp from $35.50. GE has been moving steadily higher although excruciatingly slowly since May. Investors sold the news today at $37.75 and probably glad to exit before hitting resistance at $40.

Merck said today that 475 suits had already been filed due to the Vioxx drug withdrawal. They went to great lengths to paint a positive picture of their prospects without Vioxx and promised to defend themselves vigorously. The stock closed up +57 cents at $29.60 and a six-week high after rebounding from $25.60 in late November.

Bill Gates was appointed to the board at Berkshire Hathaway and that is probably where he belongs. He and Warren Buffet both feel rich people don't pay enough taxes. My suggestion to them is send a check to Washington. $10 billion each should be just fine. I am sure they can find a use for the money. Talk is cheap and without action it rings hollow.

The markets continued their end of year push higher today with the SPX and the Nasdaq closing at new three year highs. The Dow is gaining altitude but needs to pass 10753 to join the party. Abby Cohen made the CNBC guest list again and repeated her targets from last week for SPX 1350 and Dow 11800 for 2005. Since her target for year end 2004 was SPX 1250 she is getting a lot of face time on the networks to talk up the market. She is expecting a +10% gain for the S&P for 2005 and a GDP at +3.5%. She favors tech stocks in the S&P-500 and said we should see a continued rise into January from here. According to Abby tax selling is over and the flood of end of year retirement deposits has begun. Abby, nothing would please me more for you to be right.

The Dow closed at 10681 and very near the highs for the day at 10695. This breakout for the industrials comes on the back of the small caps which have reversed their decline from last week and are challenging new highs again. The Russell closed at 643 and less than two points from an all time high.

The Nasdaq finally closed over its January high at 2153 and came very close to setting a new intraday three year high. The Nasdaq is on the verge of a breakout as is the Russell and Dow and with the S&P leading the way they should not be far behind.

However, we are looking at the highs being tested after a very strong four day rebound and we could be running out of traction at the end of a reasonable extension period. Nothing says we can't move higher but old highs are obvious places for sellers to wait and for longs to take profits. Once over these highs the short covering should increase and buyers hoping for a bigger dip will be forced to chase prices.

I have to admit I am please with the markets performance and look forward to future gains. Unfortunately there is a historical trend for the day after the Fed to be weak regardless of the decision. That coupled with the close right at the highs on the Nasdaq, RUT and very close on the Dow could combine to produce a pause. One analyst called this a honeymoon rally on the drop in oil and the influx of year end cash. While honeymoons do end the marriage continues. I would look at any dip as a buying opportunity in anticipation of a continued rise into the year end. All that worry last week about Santa's failed appearance has been forgotten.

Time is slipping away for the end of year renewal special. Don't wait for the last minute!

Buy the dips until the trend changes.

Jim Brown
Editor

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