You know the road signs, the ones on the highway that warn you at you will be "experiencing" construction hazards over the next ten or so miles. Well, there is no more appropriate place for one of those big orange placards than on the corner of Wall and Broad. This will be a designated hardhat area for the next three months at least, as the bulls and bears battle it out, and the market attempts to trade in the demolition ball for the cement truck (to build a foundation, of course).
Although today's session was not the best as far as the end result, we saw more signs that the market believes that we are in the clear. As I mentioned last week in this piece, the cyclicals (the early cycle stocks) have to start rallying before the rest of the market can join the fun. Today we saw the Morgan Stanley Cyclical Index (CYC.X) jump 7.83. It closed just under where it left off on that fateful date last week when the Fed cut rates by 50-basis points.
The basic material stocks that do best when the economy is turning around also continue to amaze. The steel stocks and aluminum stocks, which have been slowly moving higher, are now breaking out to new highs and are actually holding up for now.
Rounding out the "signs of a turnaround" trifecta today, were the financial stocks. The brokers, insurance companies and some of the banks are finally starting to stir. This may signal the possibility of increased lending, more trading, more underwriting and more merger activity. All this of course means more profits for the financial companies that have a hand in all these transactions, but more importantly, all these types of transactions serve to goose the economy and corporate profits.
An illustration of the recent resurgence in the financials can be seen in our Splittrader Current Play, SouthTrust (NYSE:SOTR). The stock broke out to new highs today after emerging from a tight base pattern. Even if the banks decide to pull back a bit, most have sturdy bases, which should provide support in the near term.
So it's these areas that will be pouring the cement and laying the groundwork that will enable the tech area to come in later to really start raising dust.
The above-mentioned sectors helped to lift the old-economy DOW (INDU), and served to attract money away from the NASDAQ (COMPX) in today's session.
The NASDAQ fell by 24.92, or 1.21%, to close the day at 2034.88. Volume came in at 1.9 billion shares traded. As long as the NASDAQ can stabilize here and move sideways, more and more folks will get comfortable and will decide to commit capital to four lettered stocks. Although, a little more distance from the psychological 2000 level would certainly do the job as well.
The DOW mustered a 67.15 gain, which lifted the old-economy average back over its 200-dma at 10615. The DOW ended the day at 10692.35 after peaking at 10766.98 earlier in the session. Volume was moderate, with 1.5 billion shares trading hands. Of particular note is the fact that new highs beat new lows 163 to 22.
On the treasurys front, long-dated issues that heretofore had been taking a beating, decided to reassert themselves on the heels of a Treasury buyback in the 30-year. The 30-year bond added 30/32 and the yield sank back to 5.705%. The 10-year note jumped 19/32 to yield 5.185%.
Thursday also brought the release of the Employment Cost Index (ECI) and the weekly jobless claims number. The numbers, as expected, were bad, which means the market liked them. Huh? Well, since the market is a forward-looking instrument, it takes the bad economic news as a sign that the Fed will continue easing, thus the positive slant to the weak jobs figures.
Specifically, the first-quarter ECI rose by 1.1% versus expectations of 1.0% (largely due to higher healthcare costs) and the weekly jobless claims rose 18,000 to 408,000. Jobless claims broke above 400,000 for the first time in five years, as layoffs have been mounting across many different sectors.
Stocks and Sectors on the Move
Energy stocks were again the darlings of the day, as earnings and higher gas/oil prices continued to rise. May unleaded gasoline futures rose as high as $1.109 a gallon, the highest in ten years, as analysts expect tight supplies for this summer's driving season. In addition, there are concerns that the power issue in California will affect the oil refineries in the Golden State.
On the earnings front, Halliburton (NYSE:HAL) rang in with profits of $0.25/shares versus expectations of $0.22/share. The oil service stock gushed $3.51, or 9.09% to $42.13.
Challenging the energy sector early in the session was the software index, as measured by the GSTI Software Index (GSO.X). The sector was lifted in the morning by Peoplesoft (NASDAQ:PSFT), which reported first-quarter earnings of $0.11/share as opposed to estimates of $0.09/share. PSFT rocketed on the news, gaining $6.69, or 22.35% for the day to close at $36.62.
Microsoft (NASDAQ:MSFT) also woke up on the right side of the bed, as it appeared it wanted to breakout to new highs early in the day. Instead, it got cranky and headed back under the covers with the rest of tech land to end off $0.56 at $69.13.
The telecomm sector finally had reason to turn its frown upside down and smile for a while. Unfortunately, the smile turned into a pucker later in the day as investors stopped to ponder the upside catalyst, Worldcom's (NASDAQ:WCOM) earnings release.
WCOM reported in line first-quarter earnings of $0.25/share but also enthusiastically reiterated that they see a pick up in business in the second half of the year. After being up more than 10% on the news, WCOM settled back to close up by just $0.35 to $19.74, as investors obviously doubted Worldcom's projections.
Lastly, in after-hours earnings news, Corning (NYSE:GLW) reported profits of $0.29/share versus estimates of $0.28/share. And of course, the almost obligatory job cut announcement followed. In Corning's case they will lay off 4,300 workers by the end of the month. They also trimmed their full year earnings from $1.20- 1.30/share to $0.90-$1.00/share. At last check, the stock was little changed form its closing price of $21.00.
Looking Forward, Always Forward
Keep your eyes on the first-quarter GDP release before the bell on Friday. Economists are expecting a rise of 1% over the fourth-quarter figure, but estimates are all over the board. Some are expecting a blow out number due to accounting quirks in how the government recognizes imports, and some are expecting a much lower number because of all data we have received to date points to weakness in the economy.
This is the thermometer reading we have been waiting for in order to check the health of the economy. Either we are in need of antibiotics, or it's back to the playground for another trip on the merry-go-round.
So as this week wraps up, you will notice that there is still no tech on our Current Play list. I kind of figured we would be sitting pretty in at least one semiconductor stock by now, but as S.P. Brown waxed so eloquently in yesterday's commentary, we still feel the risk/return is setting up better in the old- economy stocks. That being said, if the GDP figure comes in hot tomorrow, the charts could be singing a different tune.
Enjoy Your Weekend