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MARKET > Commentary Thursday, April 19, 2001
by: Craig Seidler
Assistant Editor

Fed Is On Our Side

With the Fed out in front blocking, investors are now more willing to take the ball and run. Today, as it turned out, was no exception. Buyers again stepped into stocks, even after heady gains yesterday put many issues into overbought territory.

Although it might be quite some time before we can all do our touchdown dance (tech won't come back overnight) we can be rest assured that the Fed is done playing chicken with the economy. The sigh of relief that the market let out yesterday was heard around the world and in corporate boardrooms everywhere. If Pfizer (NYSE:PFE) could only bottle this euphoria, Prozac would be a thing of the past and PFE would be at $300 by next week.

To put this fourth rate cut by the Fed in perspective, you'd have to go back to the 1930's to witness a time when the market didn't react positively to a fourth rate cut. Otherwise, historically speaking, 126 days after the fourth rate cut the market has been up 9.57% on average. After 190 days the market has been up 13.8% on average, and after 252 days, up 18.99% on average.

To further illustrate how investor psychology has done a flip- flop over the course of just two trading sessions, you need only look to the trading action in tech stocks due to report earnings. You would never have seen traders pile into tech stocks that were about to report earnings last year, but that is precisely what has been going on as of late.

Optimism has washed over the Street and traders are obviously now willing to take on more risk. The spate of better than expected earnings from big tech names lately has certainly helped fuel this optimism. The question remains, however, will the market keep its chin up now that the Fed has acted and earnings again take center stage.

Today's Markets

It was up, up and away again today. Knowing how the average investor thinks, I bet every Joe 401(k) participant was frantically calling their administrator to switch back into aggressive growth funds yesterday afternoon. The result of this sudden activity was massive amounts of cash inflows that mutual funds had to put to work. And judging by the closing figures, it looks like most of that cash found a home in tech stocks today.

The NASDAQ (COMPX) jumped 102.50, or 4.93% to 2181.68 in heavy trade of 2.6 billion shares. Advancers beat decliners 2404 to 1510. Up volume swamped down volume by more than 5 to 1.

The DOW (INDU) took a less direct route higher today. After dipping negative in the morning and again in the afternoon, the DOW finally made a decisive move higher into the close. NYSE volume totaled 1.4 billion shares and advancers beat decliners 1630 to 1428. The DOW's gains were slightly misleading, however, as IBM, Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and Proctor and Gamble (NYSE:PG) made up the lion's share of the move. They were up $8.20, $2.59, $1.21 and $1.53 respectively.

Teasurys floundered while stocks continued to see strong bids. The 30-year bond slid 1 full point to yield 5.735% and the 10- year note fell 1/2 to yield 5.215%.

Stocks and Sectors on the Move

As expected, the big movers today were those companies reporting earnings. On the downside, we saw continued weakness in the drugs, utilities, tobacco, and brokerage stocks as money rotated out of defensive issues back into tech.

On the earnings front, EMC Corp. (NYSE:EMC) reported profits of $0.18/share, which was in line with analysts' previously lowered expectations. The stock took off after the news and ended the day up $6.15 to $42.81.

Turning to computer hardware stocks, Apple Computer (NASDAQ:AAPL) ripened by $2.93 today, ending the day up at $25.72, a level not seen in the stock since last October. This move higher was in response to blowout earnings of $0.11/share, which beat estimates by $0.10! Needless to say, other computer makers reveled in Apple's good news. Dell Computer (NASDAQ:DELL) added $2.02 to close at $30.49 and Gateway (NYSE:GTW) was lifted by $0.72 to close at $18.02.

In after hours earnings news, Microsoft (NASDAQ:MSFT) reported profits of $0.44/share, besting estimates by two pennies. In addition, MSFT beat revenue and sales estimates for the quarter, much to investors' delight. The stock was up strongly in after hours trade.

Also joining the earnings parade after hours was Sun Microsystems (NASDAQ:SUNW). The server company had mixed news for the Street. SUNW reported earnings of $0.08/share, hurdling estimates by a penny, but it indicated that sales fell well below par. In addition, revenues were only up 2% over the year ago period, a far cry from the sizzling 45% growth rate that the company had previously enjoyed. At last check, SUNW was up slightly in after hours trade.

Checking in on analyst actions, Morgan Stanley Dean Witter put a charge into software stocks by upgrading their rating on Oracle (NASDAQ:ORCL) from "neutral" to "outperform". They sited a move up in Oracle's roll out date for its flagship product as the impetus behind the upgrade. On the kind words from Morgan, ORCL moved ahead by $2.39 to close at $20.31.

Other software stocks such as Siebel Systems (NASDAQ:SEBL), Computer Associates (NYSE:CA) and Agile Software (NADAQ:AGIL) also received upgrades form Morgan Stanley and were richly rewarded by reinvigorated tech investors.

Looking Forward, Always Forward

It looks like investors have come full circle and are back to the buy-the-dip mentality. And with no economic data due out until next week and encouraging earnings news staring us in the face, it may be more of the same; namely the last one into tech buys the beer.

However, I will have to concur with my Splittrader counterpart, S.P. Brown, when he mentioned yesterday that he doesn't think this rally can go on much longer. It is a simple fact that markets don't go parabolic for long. Additionally, hedge funds and short sellers are no doubt out there chomping at the bit to short this NASDAQ market as it nears resistance at 2250.

When stocks start moving 10, 20 and 30% in a spate of just a few days (as many have over the last week) it helps to step back and take the market's real pulse. To this end, we will be again watching the cyclicals, as measured by the Morgan Stanley Cyclical Index (CYC.X), to see that they hold up after the recent rate cut. It is important that these stocks hold up, as they are the old economy, brick and mortar companies that have the funds to buy products from the tech companies. For the tech rally to really take hold, the rest of the economy has got to show signs of life.

After a week like this, it often helps to take a deep breath and evaluate. I know we won't be making any major shifts in our Splittrader plays until the market settles back and gives us a clearer picture of what is really going on behind the scenes.

There will be plenty of opportunities to grab some tech on the eventual pullbacks. We will be looking for previous resistance levels in the big techs to act as support on these pullbacks and will time entries near levels of support to keep the down side risk at a minimum. That being said, if you have a long-term investment horizon (one year plus) and feel comfortable with more market gyrations, now might be a good time to go shopping in the biotech, financial and semiconductor sectors instead of trying micro-manage as we do when shorter term trading.

Have A Nice Weekend

Craig Seidler
Assistant Editor


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