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Market Wrap

Mergers help fuel rebound

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Over $60 billion worth of merger announcements helped fuel a strong rebound for the major indices on Monday, while upbeat earnings from Schering-Plough (NYSE:SGP) $20.55 +5.65% and Dow component Merck (NYSE:MRK) $38.95 +4.25% gave lift to broader healthcare and drugs.

Volumes were brisk at both the NYSE and NASDAQ, but come in as average with July average daily volume of 2.31 billion and 1.90 billion respectively.

Merger announcements were plentiful.

Shares of ATI Technologies (NASDAQ:ATYT) $19.67 +18.78% surged and were today's most actively traded (151.6 million) after the manufacturer of graphics and multimedia processing products said chipmaker Advanced Micro Devices (NYSE:AMD) $17.39 -4.76% offered to buy the company in a deal valued at $5.4 billion.

Under the terms approved unanimously by both companies' boards of directors, AMD will pay $4.2 billion in cash, and 57 million of its shares (based on Friday's AMD close of $18.21), which valued ATI's shares at $20.47.

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Shares of NVIDIA (NASDAQ:NVDA) $19.56 +10.07%, ATI's chief rival, jumped after the company's CEO said ATI's coupling with AMD will strengthen his company's hand, because Intel, which sells about 80% of the world's microprocessors, will be resistant to buying graphics chips from a competitor (AMD).

The nation's largest for-profit hospital operator, HCA (NYSE:HCA) $49.48 +3.36% rose $1.61 after the company said it would urge shareholders to accept a $21.3 billion, or $51 per share offer from a private investment group made up of Bain Capital, Kohlberg Kravis Roberts & Co., and Merrill Lynch Global Private Equity.

The Pharmaceutical Index (DRG.X) 342.22 +2.27% closed at a new multi-year high.

Shering-Plough (NYSE:SGP) $20.55 +5.65% said Q2 net income was $237 million, or $0.16 a share, as sales rose 11% to $2.8 billion. Shering's $0.16/share beat analysts forecast by an impressive $0.08/share.

Dow component Merck (NYSE:MRK) $38.95 +4.25% surged to a multi-year high, but not on a favorable jury ruling for its painkiller Vioxx! The drug giant reported net income of $1.5 billion, or $0.69 a share. That was up from $720.6 million, or $0.33 a share, a year ago. Revenue came in at $5.77 billion for the quarter, up 5.6% from the $5.47 billion in the year-ago quarter. Excluding a net charge of $161 million for its ongoing global restructuring, Merck said net income would have been $0.73 per share, $0.08 better than the consensus estimate.

U.S. Market Watch - 07/24/06 Close

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 587.77 +4.10% were atop the percentage gainer's list of my U.S. Market Watch.

Tomorrow at 10:00 AM EDT, existing home sales are expecting to come in at a 6.6 million annual rate (June), compared to 6.7 million.

The S&P Retail Index (RLX.X) 428.26 +2.49% paced itself higher to the close. Tomorrow at 10:00 AM EDT we'll get a look at July consumer confidence. Current consensus is for a reading of 104.0 vs. a prior reading of 105.7.

Dow component Wal-Mart (NYSE:WMT) $44.43 +1.62% gained $0.71 after the company said it hired Leslie Dach, vice chair of Edelman public relations and architect of its stepped-up strategy to combat critics, to a new post as executive vice president of government relations and corporate relations.

September Natural Gas Futures (ng06u) were today's "hot commodity" as traders in that complex monitored Tropical Storm EMILIA.

In this morning's Market Monitor at OptionInvestor.com, I thought traders short gold should be looking to take some profits off the table with the StreetTracks Gold (GLD) $61.14 ($611.40/oz equivalent) nearing the psychological $600.00 level. We're still holding 1/4 position (short basis $62.71) with a stop at $62.00 ($620.00/oz equivalent).

Semiconductors as depicted by the Semiconductor HOLDRs (AMEX:SMH) $29.76 +1.98% got a bounce after last week's continued drubbing.

Shares of Texas Instruments (NYSE:TXN) $27.84 +3.11% build on Monday's regular session gains to $28.96 in tonight's extended session. The chip maker reported Q2 earnings of $2.39 billion, or $1.50 a share, on strengthening demand for wireless semiconductors. Earnings from continuing operations of $0.47 a share topped Wall Street estimates by a penny. Texas Instruments said revenues rose 24% to $3.7 billion. The company said it expects Q3 earnings from continuing operations of $0.42-$0.48 a share on revenue of $3.63 billion to $3.95 billion. (Q3 consensus was $0.45 on revenue of $3.83 billion).

On a Monday-to-Monday measure, the Securities Broker Dealer Index (XBD.X) 207.00 +2.36%, which recouped Thursday and Friday's losses would hold the top spot in the U.S. Market Watch for 5-day Net% gains.

Merger activity along with some still rather brisk summer-time volumes has this group of stocks adding some stability to the S&P 500 Index (SPX.X), but faces another formidable challenge at its still ascending longer-term 200-day SMA.

It is my "top sector" to monitor this week!

Securities Broker Dealer Index (XBD.X) - Daily Intervals

I touched on just a couple of today's merger announcements, but the brokers may not be a bad place for bulls to hang out with a portion of their bullish capital in the latter part of this year.

I like to "challenge" what appears to be a stronger sector/index and there's no better challenge presenting itself in the XBD.X than a sharply trending lower 50-day SMA (intermediate-term) and ascending 200-day SMA (long-term), and trying to round-out 21-day SMA (short-term).

Take note of the upward trend, where I've anchored that trend to the October 2005 lows, and attached to the recent June relative lows. For many bulls, in just about every sector, July 3, which was a trade-shortened session ahead of the July 4th holiday has been anything but celebratory fireworks.

In last Monday's Market Wrap, we looked at "financials" comprising the greatest weight for the S&P 500 Index (SPX.X) 1,260.91 +1.66% and S&P Depository Receipts (AMEX:SPY) $126.21 +1.82%.

Here's a quick look at the stocks that comprise the EQUAL-weighted XBD.X.

AMEX Broker/Dealer Components - 07/24/06 Close

My "top pick" among brokers at this point is Goldman Sachs (NYSE:GS) $146.90 +3.42%, and I profiled a bullish position in the GS Oct $140 Calls (GS-JH) on Thursday. You name it (stock, bond, commodity), Goldman Sachs probably has some trading exposure or advisory exposure from which it derives trading revenues.

Aha! Financials! Last week's "big bull move" was in the S&P Banks Index (BIX.X) 381.93 +0.44%. And that move in the banks might have caught some overly critical Fed watchers off guard after Fed Chairman Ben Bernanke's testimony.

Surely they are, or were do for a rest after Wednesday's move. That is one reason I also profile some S&P Depository Receipt (SPY) $126.21 +1.82% puts again on Friday.

S&P Banks Index (BIX.X) - Daily Interval

Surely the BIX.X would retrace some of last week's gains, but Friday's lows seemingly peg the 50% retracement, or mid-point of the May to June decline. That hints to me there may be some "Fed bashers" as I like to call them, overly short the banks and concerned with getting some short positions covered. Just in case Dr. Bernanke and the rest of the FOMC have things under control.

For the BIX.X, I also marked the July 3rd intra-day high, and we can see this group of stocks has extended gains above that date of benchmarking.

If the FOMC, or the Fed is doing such a terrible job, I can't for the life of me figure out why the banks are performing so well.

While technology stocks have been a "major drag" on the broader S&P 500, anchoring trends from the October lows to recent relative lows for both the XBD.X and BIX.X should give us some observation of strength, and helping support the S&P 500 after last week's test of the June relative lows.

S&P Depository Receipts (SPY) - Daily Intervals

The SPY looks very, very, very similar to the Securities Broker Dealer Index (XBD.X) as it would relate to trend from the October 2005 relative low to June lows. The "difference" I would note is that the XBD.X hasn't come anywhere close to re-testing its June lows (0% blue retracement).

Friday's close below July's $125 "Max Pain Theory" had an ominous look to it, as if market participants were saying "I don't want to take possession/assignment of SPY $125.

With financials such a "heavyweight" in the S&P 500, and S&P 100 (OEX.X) for that matter, the XBD.X is my "sector of the week" for S&P traders to be monitoring closely.

That takes care of some "strength," now let's check out the "weakness" and the Semiconductor HOLDRs (SMH)

Semiconductor HOLDRs (SMH) - Daily Intervals

I tend to remember my "terrible trades" more than I do the good ones. Only a Market Monitor reader will understand the $31.51 level. On July 13, I profiled a "go long 1/2 bullish position" in mid-session trade at $31.51, and I picked the afternoon high as that trade was stopped for a loss at $30.75 before that session's close. To be safe, and having just had a bullish trade crammed down my throat, I set an alert at $31.51, so if that level were traded again, I might be alert to selling.

On Wednesday (07/19/06), just ahead of Intel's (INTC) $17.48 +1.92% quarterly earnings report, the SMH traded $31.51 and once gain got smacked.... to another 52-week low!

"Fool me once, shame on you!"

"Fool me twice, shame on me!"

Find a close above $31.51 and I (Jeff Bailey) might just start to look bullish this group, but that's a starting point. Yeah, yeah, yeah. Wait until $31.51 and I'll have missed the bullish move? My trade blotter doesn't suggest so.

I like to also monitor weakness, and the semiconductors would be the group for that.
 

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