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Market Wrap

Consolidation Or Distribution

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For four days the markets have moved sideways with neither the bulls nor the bears able to find traction. Some say this is consolidation after sprinting to new highs and some say this is a sign of distribution at those highs. Distribution occurs when institutions slowly unload positions after a strong market gain and transfer those holdings into the weaker hands of speculators who buy at the highs hoping for a continued rally. Both of those events could be occurring but most likely it was caution ahead of Cisco earnings due to the National Semi warning this morning.

Dow Chart - Daily

Nasdaq Chart - Daily

There were no major economic reports today with the Job Openings and Labor Turnover Survey (JOLTS) the only report to dissect. Gross hirings fell slightly to 4.9 million fro 5.0 million and those leaving their jobs declined to 4.5 million from 4.7 million. That was good news but the even better news came from the number of new job openings, which rose to 4.4 million from 4.3 million. More jobs opening and fewer people changing jobs should be good for the consumer since it implies employers will have to pay a more competitive salary to keep workers. The +3.5% increase rate in job openings was the highest rate since the economic recovery began back in 2002. This should be a bullish report since it underscores the recovery in the job market but it is also slightly inflationary.

Wednesday reports include the Mortgage Application Survey, Productivity and Costs, Consumer Credit and the Oil and Gas inventories. None of these reports are market movers.

We also had several Fed heads speaking today including Ben Bernanke. Bernanke made some bullish comments but did not really address the economy or Fed policy so his speech was ignored. Treasury Secretary Paulson testified before the House Ways and Means Committee and said the U.S. economy was declining from previously hot levels to a more sustainable pace. Sounds like he is about a year behind the times.

Most of the talk today was concern ahead of Cisco's earnings after the warning by National Semi. After the bell Cisco reported earnings of 33 cents compared to estimates of 31 cents and year ago earnings of 26 cents. Revenues were also slightly higher at $8.44B versus estimates of $8.28B. Cisco shares fell sharply after the release as investors were disappointed about the Scientific Atlanta numbers within the Cisco structure. That division posted revenue that was below what many analysts had hoped. Once the conference call began CSCO spiked nearly +$2 from the after hours lows to close just over $28.55. The spike was due to guidance John Chambers gave on the conference call. Chambers said sales for the current quarter would rise 19-20% compared to prior expectations of 17% growth. Cisco had rebounded nearly +60% since the August lows and there was plenty of optimism already priced in. It will be interesting to see if CSCO can pierce the strong resistance at $29 in trading on Wednesday.


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Business Objects (BOBJ) announced earnings of 60 cents compared to estimates of 56 cents. This was only a small +2% rise in profits. Their guidance for the current quarter was for higher sales than current estimates but earnings were projected to be 35-39 cents and the street was already looking for 39 cents. BOBJ rose about 50 cents in after hours. BOBJ has been rumored to be an acquisition target by Oracle.

National Semi declined -3% after warning that sales in the current quarter would decline more than previously anticipated. This put a cloud over the entire chip sector but the selling was muted. Rambus fell -1.20 the day after a sharp +4.50 gain Monday on a favorable royalty ruling by the FTC. The FTC issued an order capping royalties Rambus can charge on its older chip technology. While that sounds bad there was a chance they could have eliminated the royalties completely. Half a loaf is better than no loaf at all. The order allows Rambus to charge .25% to .50% for four of its older chip products for the next three years. After three years the royalties will stop. Rambus had been charging 1% to 2% for those same royalties. It was a mixed 3-2 decision and brought a lot of hostility from the panel. The FTC wanted to penalize Rambus even further for deceiving the Joint Electron Device Engineering Council (JEDEC) regarding its technology in the past. The JEDEC is responsible for standards in the chip industry. Rambus was lucky to get out with anything and one commissioner wrote in her dissenting opinion that without "zero royalty rates" Rambus "will continue to reap the fruits of its ongoing violation of antitrust laws." Two of the commissioners wanted to cap royalties on its more popular DDR2 memory.

About the only market finding a bid today was bonds. Even with the $18 billion refunding in three-year notes there were plenty of buyers in bonds. Tomorrow will see $10B in ten-year notes go to auction. Treasuries were bought so strongly that yields on the ten-year notes fell to 4.76% and a new two-week low. 4.75% should be a level where the enthusiasm ends.

Microsoft lost ground for the 4th consecutive day and a streak not seen since October. The slowing adoption of Vista and numerous reported problems is dragging on the profit prospects for the software giant. MSFT closed at $29.51 with strong support at $28.85.

AMD slid to $15.31 and a 21-month low on fears that it will be forced to cut prices even further to hold off the technology wave coming from Intel today. Intel may have been caught napping a couple years ago when AMD beat them to the punch on a couple key releases but Intel has come back with a roar and they are gaining speed. It could be years before AMD catches up, if ever. AMD was once regulated to be the second source for processors and maintained market share by selling so cheaply they enticed a few low dollar buyers away from Intel. They are rapidly falling back into that slot but the Intel lead today would require AMD to nearly give processors away to stay in business. This price crunch is what analysts fear and why they are downgrading AMD. At $15 AMD is a long way from its $42 high in January of 2006. That is a -63% loss in value in just 12 months and it could get a lot worse.

March Crude Oil Chart - 60 min

Oil prices continued their climb and tagged $60 at 9:AM this morning but that was the high of the day and we saw a steady decline into the close. The cold front gripping the northeast is continuing although the short term forecast for the next 11-15 days was for slightly warmer weather. We are rapidly coming to the end of winter and the impact of cold weather on prices is only temporary. The EIA also announced what we already knew that OPEC production cuts had fallen far short of their 1.2 mbpd target as of November 1st with shipments down only 600,000 bpd over the fourth quarter. Shipments in January fell another 110,000 bpd but Angola, a new OPEC member as of Jan-1st with no official quota, raised production +200,000 bpd. Iraqi production fell -250,000 on bad weather offsetting the Angola increase. The new round of cuts of 500,000 bpd slated to begin on Feb-1st are only expected to be 60% effective with a net reduction of -300,000 bpd coming mostly from Saudi Arabia. With winter winding down it will be up to OPEC to control their own fate. The oil inventories announced tomorrow are expected to see an increase in crude by +2.2 mb, gasoline +2.0 mb and a decline in distillates, which includes heating oil by -3.4 mb. This should already be priced into the market.

Interest in earnings is really slowing with Cisco about the only company in focus on Tuesday. There are plenty of companies still to report but few big names. 321 of the 500 S&P companies have reported. 65% beat estimates, 20% reported inline and 15% missed estimates. Earnings growth is still hovering in the +10.4% range and will qualify as another double-digit quarter if the numbers hold as the remaining 179 S&P-500 companies report. Earnings estimates for the rest of the year are 5% for Q1, 5% Q2, 5% Q3 and roughly 4% for Q4. Some analysts feel those numbers are too low by as much as 100% based on the recent economic signs. Let's hope they are right in their claims.

The Dow sprinted +125 points after the Fed announcement last Wednesday to hit 12665 and has done absolutely nothing since that sprint. Today's close was 12664. The Dow has been locked in a very tight 50-point range for the last four days between 12630-12680. Is it consolidation or distribution? It appears to be consolidation given the lopsided internals. New 52-week highs were 659 compared to only 83 new lows. However, volume was less decisive with 2.7B advancing and 2.4B declining. That is nearly a dead heat and suggests there is also some distribution under way as we hold at the highs. It is a tough call given the mixed messages but the bulls continue to buy every dip no matter how small.

The Nasdaq was the surprise of the day. After a sharp decline to 2454 at the open on the NSM warning the Nasdaq rebounded to end the day slightly positive at 2471 nearly +20 points higher. With Cisco reporting after the close you might have expected tech traders to be a little more cautious before buying the dip. This shows the underlying bullish sentiment and the problem the bulls are going to have if we ever do see a real correction.

SPX Chart - Daily

NYSE Composite Chart - Daily

The S&P tagged 1450 today and promptly sold off but recovered into the close. The SPX is not as bullish as the Wilshire-5000 and the Russell-2000. Both of those broad indexes finished right at their record highs from last week. The strength in those broader indexes is what is giving me a bullish bias for the market. The Russell appears poised to breakout over 810 to a new historic high from its 809.86 close today. The Wilshire is also pressing its historic high of 14659 with its close at 14644. Meanwhile the NYSE Composite did close at a new historic high at 9343.96. 9400 should be strong resistance for the NYSE Comp. The broader market looks very bullish but unfortunately the market is simply a bull that is led around by the Dow ring in its nose. Where the Dow goes the broader market goes except in very rare occasions.

Russell-2000 Chart - Daily

Wilshire-5000 Chart - Daily

For the rest of the week I would continue to remain long and buy the dips above SPX 1440. Below 1440 I would maintain a short bias with a dip buy target again at 1420. There is nothing material on the economic calendar and the markets will be looking for an excuse to move. The Cisco guidance may be that excuse but the futures are not showing any excitement in overnight trading. The various contracts are positive but only fractionally. Be careful and follow the recommendation above.

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