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MARKET > Commentary Monday, February 26, 2001
by: Jim Booth
Research Analyst

Anticipation

According to the classic Carly Simon song, anticipation is something that is making us wait, but market participants are not waiting. The bulls, desperate for any positive news to justify buying stocks, have concentrated on the possibility that the Fed will announce a rate cut sometime this week.

The anticipatory rally began in earnest on Friday when Wayne Angell, a respected Fed analyst and the chief economist at Bear Stearns, claimed there is a 60% chance that the Fed will cut rates well before their next meeting scheduled for March 20th. The bounce rally really took off today when Mr. Angell raised the probability for an early rate cut to 80% during today's trading.

The Dow Jones Industrials (INDU) rallied impressively late in the day and closed up 202.25 points and closed at 10,642.12. The closing price was the high print of the day. This fact bodes well for a continuation of the rally in the early going tomorrow.

Some of the Dow's bigger winners included Home Depot (NYSE:HD), which gained $3.74 to $43.75; General Electric (NYSE:GE), which tacked on $1.80 to $47.98; and Citigroup (NYSE:C), which posted a solid increase of $2.10 to $50.30.

There were some notable winners on the broader NYSE. Wellpoint Health Networks (NYSE:WLP) is quickly approaching $100.00 with a gain of $5.96 to $97.75. Oil services leader Schlumberger (NYSE:SLB) bounced nicely with a gain of $4.64 to $64.65. Lowe's Companies (NYSE:LOW), the second leading home building supplies company behind Home Depot (NYSE:HD), picked up $4.33 to $58.91.

The broader NYSE saw decent volume of 1.08 million shares traded. Market breadth was impressive with 21 advancers for every nine decliners.

The Nasdaq Composite Index (COMPX) staged a similarly impressive rally that saw the index gain 45.99 points. The COMPX closed at 2,308.50. This price was just slightly below the high print of the day. The fact that the Nasdaq closed above the recent resistance level of 2,300 is a good indication that the rally could continue tomorrow.

The Nasdaq enjoyed an active day with 1.79 billion shares traded. Advancers compared favorable with decliners by a ratio of 24 to 13.

Microsoft (Nasdaq:MSFT) was an important contributor to both the INDU and the COMPX with a gain of $2.81 to $59.56. Today, during opening arguments before the seven-judge panel of the U.S. Court of Appeals, Microsoft began its efforts to reverse trial court findings that it broke antitrust laws and should be split in two.

The Nasdaq was also helped by Veritas Software (Nasdaq:VRTS), which picked up $6.56 to $68.94. CIENA Corp (Nasdaq:CIEN) also did its part to stabilize the Nasdaq with a gain of $2.75 to $77.25. I2 Technologies (Nasdaq:ITWO) enjoyed a rally to $35.50, an increase of $5.94.

Some of the most impressive gains by individual issues on both the NYSE and the Nasdaq came from the Biotechnology sector. The Biotechnology Index (BTK) gained a whopping 39 points and closed at 611.54. Two current Splittrader plays participated in this rally among biotechnology and medical supply stocks. Becton, Dickinson and Co. (NYSE:BDX) rallied $1.36 to $36.56 and Biovail (NYSE:BVF) gained $1.44 to $45.61.

Another sizable gainer among individual sectors was The Amex Securities Broker/Dealer Index (BDX), which soared 20.08 points to 545.82. The rally was understandable due to the potential positive effects that a rate cut would have on this financial sector. The PHLX Bank Index (BKX) was similarly impressive for the same reason, with a gain of 25.37 points to 894.81.

Bringing up the rear of most watched indices was the PHLX Semiconductor Index (SOX), which was down a disappointing 8.50 points and closed at 599.85. The decline can be attributed to growing concerns that Intel's (Nasdaq:INTC) plans to spend $7.5 billion in capital spending are somewhat optimistic in light of the weakening economic climate. Intel is the leading semiconductor company and any reduction in capital spending would reduce the trickle down effect enjoyed by many semiconductor equipment companies. KLA-Tencor (Nasdaq:KLAC) lost $1.06 to $42.31 and Novellus Systems (Nasdaq:NVLS) dropped $1.75 to $43.63.

Two widely held stocks moved today due to growing speculation that AT&T (NYSE:T) will likely sell its 25.5% stake in AOL Time Warner (NYSE:AOL) in the open market. AT&T appears to be unimpressed with AOL's offer of between $9 and $10 billion for the equity position. Both stocks rallied on the report. AOL picked up $2.82 to close at $46.12, while AT&T gained $0.89 to close at $21.84.

It's time to say goodbye to eToys (Nasdaq:ETYS). This former high flyer of the dot-com world, which peaked in October of 1999 at $86.00 a share, closed today at $.094 after announcing plans to file for bankruptcy. It's amazing that the stock has any value because the company said that the stock is now worthless and the it plans to cease operations in March. eToys once sported an unbelievable market capitalization of roughly $1.5 billion. The Company is one of the first high profile dot-coms to go out of business. It is unlikely to be the last. Those of you who want to go out and start buying one of the slew of former $100+ dot- coms that are now trading below $5.00 would be advised to take a close look at the balance sheets of these stocks.

We are encouraged by the action we have seen among some of the stocks in our Current Play list today. International Gaming Technology (NYSE:IGT) continues to display fantastic relative strength as this stock made another 52-week high today. Callaway Golf (NYSE:ELY) also made a new high today and could be ready to drive higher. A rate cut would likely help three more of our plays, Polaris Industries (NYSE:PII), Lockheed Martin (LMT) and Granite Construction (NYSE:GVA).

Speaking of a rate cut, anticipation of a between meetings rate cut has helped to improve the technical picture for the Nasdaq (COMPX). The index is bouncing off a severely oversold condition according to the Relative Strength Index (RSI). Whether this is just a bounce or the beginning of a more sustainable rally remains to be seen. The MACD is still negative but it has certainly flattened its descent. If the Nasdaq can rally for a couple of more days this important technical indicator will issue a buy signal. If this does occur, we could see a sustained advance to at least the 2500 resistance and possibly even to the 2750 resistance. All bets are off if the Fed does not cut rates this week. We would definitely want to have some cash on hand if the Nasdaq fails to hold the 2150 support.

The Dow Industrials (INDU) came very close to a clear oversold signal according to the RSI on Friday. The Industrials Index would directly benefit from a Fed rate cut this week, due to its preponderance of financial, cyclical and retail issues. A move above 10,700 tomorrow could carry the Dow to resistance of 11,000 (yes that number yet again) by the end of the week. Just like the Nasdaq, it is important to watch the Dow's MACD, which is currently still negative. A buy signal according to this indicator may cause a more sustainable rally. The bear market will continue if the Dow fails to hold support at 10,250.

Good Luck! And may all of your trades be winning ones!

Jim Booth
Research Analyst

 


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