Email Version, Section 1, Wednesday 04/25/2001
The SplitTrader.com Newsletter Wednesday 04/25/2001 1 of 1
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In This Newsletter:
Market Commentary - Markets Reverse Course
Definition of the Day
Wednesday's Split Announcements - GENZ
Thursday's Play-of-the-Day - SOTR
Markets Reverse Course
In Sunday's commentary I said that the equity markets would
likely trade flat to down this week. Until today, I've been
proven prophetic, if not lucky, because the market has indeed
been trading flat to down (mostly down). Unfortunately, my gifts
for prophesy ran amok today (at least in the latter part of the
session), as the three major market indices surged in afternoon
trading to end a three-day skid.
The mastermind of this market U-turn was today's latest slate of
economic data, which convinced more than a few traders that this
market might not be as lugubrious as originally thought,
particularly if the housing market proves to foreshadow the
direction of the overall economy.
If that's the case, things are indeed looking up. March new home
sales rose 4.2 percent to a 1.02 million annualized pace, the
strongest month on record. For a perspective on the magnitude of
this number, any pace over 900,000 is considered a strong market.
Additionally, the used housing market was equally robust.
According to the National Association of Realtors (NAR),
existing home sales hit an annualized 5.44 million units, near
the peak of 5.45 million units reached in June of 1999.
One significant reason for such strong housing demand is low
mortgage rates, which, so far, have been more than able to offset
the weak equity and labor markets. Fixed rates are near a 30-
year low of 7 percent. With housing demand remaining robust,
there is a good chance the broader economy can avoid a recession.
But keep in mind, money can be as dirt cheap and people won't
borrow if they are tentative about the future. Thankfully, it's
become apparent that households are indeed more confident in
their financial situations than recent measures of consumer
confidence would suggest.
It took awhile, but this little exercise in deductive reasoning
finally sunk in around 1:00 PM EDT when stocks started to rally
off their intra-day lows. The biggest percentage gainer of the
day was (surprise, surprise) the Nasdaq Composite Index (COMPX),
which rallied 50 points over the final three hours of trading to
close at 2,059.60, up 43.19 points, or 2.14 percent, for the day.
The COMPX was lifted nearly single-handedly by software king
Microsoft (Nasdaq:MSFT), which gained $2.14 to $69.69. As for
the other two large-cap COMPX stocks, Intel (Nasdaq:INTC) and
Cisco Systems (Nasdaq:CSCO) both traded lower.
Another notable COMPX stock trading lower today was Sun
Microsystems (Nasdaq:SUNW), which lost $1.03 to $16.05 after
announcing it was making a very Old-Economy move by shuttering
its operations for a week. If Sun's imitation of U.S. Steel
proves anything, it's that no privately-held company is immune
from the business cycle. What's more, no privately-held company
ever will be. (Keep this platitude in mind when the next tech
bubble comes rolling down the pike.)
As for the Old Economy, the Dow Jones Industrial Average (INDU)
rose 170.86 points, or 1.63 percent, to 10,625.20 thanks in large
part to General Electric (NYSE:GE), Honeywell (NYSE:HON) and
Philip Morris (NYSE:MO). GE rose $1.82 to $47.81 after it was
reported that it may change its pricing and sales policies to
overcome European regulatory opposition to its planned purchase
of fellow INDU component Honeywell. For its part, Honeywell rose
$2.12 to $47.51.
The big INDU winner, though, was cigarette king Philip Morris.
The world's largest tobacco company rose $2.75 to $50.70 after
the Washington Post reported that Justice Department lawyers have
warned that the budget proposed by George W. Bush includes
insufficient funding for the government's lawsuit against the
In unrelated news, Big Mo said it would raise the wholesale price
of cigarettes $0.14 cents a pack. Of this, Credit Suisse First
Boston says $0.12 may be implemented by Friday.
In the broader market, the S&P 500 Index (SPX) put in a yeoman's
effort, rising 19.28 points, or 1.59 percent, to 1,228.75. The
big winners on the SPX were the homebuilders. Lennar (NYSE:LEN),
KB Home (NYSE:KBH), Toll Brothers (NYSE:TOL) and Pulte Home
(NYSE:PHM) all posted impressive gains.
Earnings were again on everybody's mind today, and everybody
seemed to like what he heard. To that end, Walt Disney
(NYSE:DIS) rose $2.23 to $30.81 after reporting second-quarter
earnings late Tuesday. According to the Mickey Mouse outfit,
earnings came in at $0.19 a share, beating the First Call
estimate by $0.06.
Also reporting earnings (and I use the word loosely) late Tuesday
was Amazon.com (Nasdaq:AMZN). The Internet retailer posted a
narrower-than-expected loss of $0.21 a share for the first
quarter, which was $0.03 better than the $0.24 loss that First
Call had been anticipating. In regular hours trading today,
Amazon added $0.41 to $16.09.
Meanwhile, Internet portal GoTo.com (Nasdaq:GOTO) surged $3.75 to
$15.32. The Internet search service said it had a first-quarter
loss of $0.13 a share, narrower than analysts' had forecast.
Finally, Qualcomm (Nasdaq:QCOM) reported earnings after today's
close that matched analysts' estimates. The wireless
communications specialist logged a second-quarter profit of $0.29
a share. For the third-quarter, though, the company said it will
earn $0.21 cents a share, missing the average $0.33 estimate of
First Call. Shares of Qualcomm rose $3.48 to $62.98 on Nasdaq
ahead of the earnings news; however, in after-hours trading they
were changing hands as low as $54.50, so tomorrow's open should
This beating lowered earnings estimates is becoming quite the
lucrative gig for companies willing to throw in the towel far
enough in advance to let traders forget the pain before actually
reporting. Anymore, it seems that beating lowered estimates by a
penny is good for at least a 15 percent pop.
On the Treasury front, government issues continue to fall and
yield spreads continue to widen. The two-year note closed down
1/16 to yield 4.13 percent, the 10-year Treasury note was off
14/32 to yield 5.27 percent and the 30-year bond erased 6/32 to
yield 5.77 percent. The yield spread between the two-year and
30-year securities has widen to 1.63 percent, which means we are
looking at yield curve that hasn't been this normal in nearly
As for trading tomorrow, I'm sticking with my Sunday sentiment of
flat to down. I know some traders were heartened by the COMPX
holding 2,000 as well as its 50-dma at 2,036, but I'm concerned
about the index getting away from its April uptrend support. If
it does, it could try to fill the gap caused by last week's
breakaway. A close of 1,850 would just about do it. On the
other hand, if the COMPX can hold 2,000, we could be looking at a
200-point move north to 2,250.
At this point, I think the risk and reward scenario on the COMPX
is wash, which is why I wouldn't be surprised should the tech-
heavy index finish the week flat.
Chart of the NASDAQ Composite:
As for the Methuselah issues, I see the same problems. Like the
COMPX, the INDU is below its April trendline support, which means
it could make a move to 10,300 (it's only 200 points away).
However, I think the risk/reward scenario is more favorable for
the INDU. At this point, I think we are looking at 200 points of
downside compared to 300 points of upside.
Chart of the Dow Jones Industrial Average:
Of course, neither scenario favors a bet-the-farm mentality, so
I'd keep those stop-losses tight.
Definition of the Day
Help Wanted Index (United States)
Help-wanted advertising is an indicator of trends in the job
market. If the employment situation is expected to stay strong,
the jobless rate will likely decline and wage growth will
For the complete definition, please go to:
Wednesday's Split Announcements
Wednesday, April 25, 2001, During the Market
Genzyme has announced a cure for the common stock: a 2-for-1
During regular trading today, Genzyme General Division
(Nasdaq:GENZ) announced the Board of Director's approval of the
Company's second two-for-one stock split on its common stock. The
payable date is set for June 1, 2001 to shareholders on record as
of May 24, 2001.
For the complete announcement, please go to:
Thursday's Expirations by Payable Date
The PLAY LEGEND:
SplitTrader.com Play Recommendations.
Play-of-the-Day is our number one play recommendation for the
following trading day.
Updates are just that - updates on continuing plays
New plays are brand new for the newsletter.
Closing plays are plays that we feel have lost the advantage.
You will see:
Stock Symbol, Company Name, Closing Price, (change for the week)
Picked at date and Change since picked
BoD = Board of Directors meeting
ADV = Average Daily Volume
dma = daily moving average
At the SplitTrader.com website, we have comprehensive profiles
for each stock that we are playing or have played in the past, as
well as hundreds of others. Please take the time to visit the site
to view the profile of the stock(s) you wish to learn more about.
Wednesday, April 25, 2001
SOTR - SouthTrust Corporation $46.85 +0.89 (+1.04)
SouthTrust Corporation has been consolidating in the $44-$47
range after hitting an all-time high last Thursday. On Tuesday,
shares of SOTR traded to an intra-day high of $46.76 but the
stock reversed directions along with the rest of the market. The
stock ended the day at $45.96 on volume of 755,000 shares. SOTR
has lost its short-term upward momentum and volume is trending
lower. On the positive side, the long-term trend remains in tact
as we approach the 2:1 stock split, payable on May 11th. SOTR
may need a volume surge to push the stock to new highs. Going
forward, support is the 10-dma at $45.55 with additional support
at $44.93, the 20-dma. Resistance has fallen to Tuesday's intra-
day high of $46.76 and then the all-time high of $47.20. Look
for a bounce off of $45.55 or a move above $46.76 on midday
volume of at least 500,000 shares before opening new positions.
We are keeping our stops at $44 to limit potential losses.
It only took four interest rate cuts by the Fed, but bank stocks
appear as if they finally want to go higher. The CBOE Bank Index
(BIX.X) has found support at its short-term up trend line and
looks to be stabilizing around its 50-dma at 628. As for our
play, SOTR moved higher by $0.89 on lighter volume of 650,000
shares on Wednesday. The good news is that SOTR had a strong bid
all day, which served to gradually lift the stock right into the
close. Looking at the chart, we can see that SouthTrust's up
trend is still well in tact and that we are just $0.35 away from
a significant breakout to the upside. A breakout would be
defined by a close above the previous high of $47.20. After this
point, SOTR has no previous resistance, but sellers are sure to
show up at the $50 level. New entries could be considered on a
break of the $47.20 level or on a bounce off the 10-dma at $45.75
on volume of at least 400,000 by midday. We are keeping our
stops at $44.00 to limit downside risk.
Picked on April 19th @ $46.96
Change since picked -0.11
Stop Loss @ $44.00
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