Dow Makes It Five Straight
While the NASDAQ called it quits after three in a row, the Dow was propelled higher today by the oldest of the old economy stocks. Investors focused upon those companies that are not inundated with inventory build up and visibility issues, namely the heavy machinery, drugs and retail names. As we get closer to the March 20th Fed meeting, it seems that traders are starting to place bets on those companies that are more likely to turn it around with further rate cuts.
As more analysts continue to talk down a tech rally in the third and fourth quarter of 2001, stocks like Caterpillar (NYSE:CAT), Weyerhaeuser (NYSE:WY) and Alcoa (NYSE:AA) continue to pop higher. It makes good sense really. These old economy stocks have not been subjected to daily downgrades, earnings revisions and profit warnings like their baby brothers (age wise), the tech stocks.
In addition, unlike the tech stocks, analysts have been covering these issues through every market condition and know how these companies react to interest rate cuts and economic slowdowns. There are no pressing inventory, build out or CAPX spending issues plaguing the old smokestack companies.
The only thing that worries me about the big moves higher in these mature companies is that the growth rates of these firms have obviously stabilized. Therefore, it doesn't take much to bid these stocks up to rich valuations. I realize that there is value in stability and dividend yields, but it won't take long for investors with a renewed interest in fundamentals to figure out that these stocks may not deserve the high P/E's that they will inherit as the P's move up and the E's remain stable.
It was the big cap tech stocks that sank the NASDAQ today, aided by rumors of a 25-basis point cut instead of a 50-basis point cut at the March 20th Fed meeting. A few Fed governors have hinted at this, but I believe it may just be an overly pessimistic interpretation of Fed-speak by a few loud individuals.
The NASDAQ (COMPX) gave up 55.19, or 2.48%, settling back down at 2168.73. Volume came in on the light side at 1.7 billion and decliners beat advancers 2178 to 1438.
The DOW (INDU), on the other hand, continued higher, adding 128.65 points to close at 10858.25. Volume on the big board was also light at 1.1 billion shares traded.
Traders were more than likely hesitant to place big bets ahead of tomorrow's Employment Report. This report certainly has the potential to move markets and is looked at closely by the Fed. Economists are expecting the non-farm payrolls number to come in at 75,000 and for the unemployment rate to stay level at 4.2%.
Turning to the fixed income market, bonds were volatile, but closed virtually flat on the day. The 10-year note finished unchanged to yield 4.90% and the 30-year bond moved up 2/32 to yield 5.305%.
Stocks and Sectors on the Move
If the warning out of Yahoo! (NASDAQ:YHOO) last night wasn't enough to get the NASDAQ boulder moving downhill this morning; a sweeping downgrade of the storage sector by Salomon Smith Barney sure nudged it over the edge.
The brokerage firm downgraded its ratings on EMC Corp. (NYSE:EMC), Network Appliance (NASDAQ:NTAP) and Brocade Communications (NASDAQ:BRCD). The stocks finished off $3.85 to $37.15, $3.13 to $25.00 and $5.88 to $32.88 respectively.
Joining the storage sector in the dumps were the biotechs as measured by the AMEX Biotech Index (BTK.X). The index tanked 13.13 to 544.50 on the heels of a downgrade of Biogen (NASDAQ:BGEN) by UBS Warburg. The stock ended off $2.44 to $63.56. Other casualties included Amgen (NASDAQ:AMGN) down $2.50 to $68.69 and Immunex (NASDAQ:IMNX) down $1.06 to $29.31. A quick perusal through some biotech charts will reveal that many of them are breaking down through key support levels and most look like they are in for at least one more leg down.
In a continuation of the sector rotation game, defensive issues moved higher while the techs sold off.
The drugs rebounded from two days of steep declines to post modest gains across the board. Merck (NYSE:MRK) climbed $0.39 to $74.79, Eli Lilly (NYSE:LLY) gained $0.63 to $77.40 and American Home Products (NYSE:AHP) closed up by $0.81 to $59.40.
Retailers continued ringing up gains today on the heels of some good same store sales figures. Wal-Mart (NYSE:WMT) bounced $0.95 to $51.65 after reporting a February same store sales increase of 4.3% and Best Buy (NYSE:BBY) rocketed $4.91 after indicating that it sees its fourth-quarter could well come in ahead of expectations. Even Ann Taylor (NYSE:ANN), which warned of a shortfall for its first and second quarter, managed to put on $1.73 to close at $27.98.
The big news after the bell today was word out of Intel (NASDAQ:INTC) that the company believes its first-quarter revenues will fall 25% from fourth-quarter levels. This was expected by most, but the thing that caught analysts and investors off guard was the admission by Intel that the current downturn has spread into the networking, communications and server sectors. In addition, Intel admits that the current slowdown will affect gross margins, shrinking them 7% to 51%. The stock was off $2.25 in after hours trade.
Looking Forward, Always Forward
Between the employment report and the Intel mea culpa, tomorrow's market could be a frothy one.
This has been one tough market to read. All the usual tried and true market signals have often proved to be mere mirages, disappearing just when you think that you are ready to dive in. If that has not been enough, just when you think that, OK, I'll just do the opposite of those market signals, the dang market goes right back to being sane and reasonable, leaving the confused investor to chase whatever is working at the moment. That is what has led to the massive sector rotations and the whipsaw action.
Splittrader has remained true to the charts during this whole milkshake market, and has come out unscathed on balance. The charts have led us to nibble in oil, healthcare, retail and defensive issues. Sure our picks have their down days when the technology sector decides to reassert itself, but they have not yet suffered from the mass exodus mentality indicative other sectors.
So for the time being, we will keep picking stocks that are breaking out from well-formed support levels, are displaying good relative strength and are not displaying increased volatility.
Loews (NYSE:LTR), a recent play pick, has rewarded us for being patient. We waited until the stock could get above resistance at $105 before adding the stock to our list. Breakouts have often come right back into their bases during this crazy market, so we are confirming any breakout with at least two other indicators. In this case, LTR's MACD was turning positive and the breakout move came on excellent volume, confirming that this breakout had a good chance of gaining traction and going higher.
Keep those stops in place and have a great weekend. I will be atop a mountain in the Rockies tomorrow witnessing two old friends tie the knot. With snowshoes on my feet, my daughter on my back and my wife by my side in the snow, the stock market is going to feel worlds away; that is until everyone in the wedding party starts complaining about their 401(k) accounts being in the crapper! Oh well, we can never get enough of this, and of course, that is what keeps us coming back to the charts for more.