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MARKET > Commentary Wednesday, April 25, 2001
by: S.P. Brown

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 tobacco industry.

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 (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 (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 be interesting.

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 seven years.

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.

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.

Of course, neither scenario favors a bet-the-farm mentality, so I'd keep those stop-losses tight.

S.P. Brown


Copyright 2001

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