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MARKET > Commentary Monday, May 07, 2001
by: Jim Booth
Research Analyst

And Then They Rested

There are very strong arguments (as always) for buying and selling and this resulted in a very narrow trading range for the major markets today.

Bulls are pointing towards the strong move on Friday following an employment report that was less than rosy, as an indication of underlying strength in this market. Bears, or more accurately, the cautious set, are pointing towards the huge percentage gains the markets have seen during last month's bounce as a reason to slow down and start selectively protecting profits. This sentiment was publicly expressed by a Lehman Brothers analyst who suggested that it may be time to start buying puts to protect gains in technology stocks. If investors follow this advice (and early evidence suggests that they are) it will result in an increase in put buying, which is a contrary indicator that may result in a breakout to the upside.

Confused? Well, if there is one undeniable fact about stock price movement it is that a difference of opinion is what makes markets work. Bullish and bearish forces are currently even and this will not change until we get some news that can break the impasse.

Today's closing numbers saw the Dow Jones Industrial Average (INDU) slip 16.07 points to 10,935.17. The index had a trading range of about 100 points. 11,000 provided strong resistance again. The volume of 928 million shares on the NYSE was relatively light. Decliners narrowly beat advancers by a 16 to 15 margin on the NYSE trading floor.

The INDU was hurt by a downgrade of JP Morgan Chase (NYSE:JPM) from Prudential Securities. The research firm's new rating is "Sell" from a previous "Hold". JPM lost $1.40 to $49.20. Fellow DJIA financial component, American Express (NYSE:AXP) slipped $0.62 to $43.23. Also on the downside was Minnesota Mining & Manufacturing (NYSE:MMM), which lost $2.09 to $117.90.

The DJIA was helped by positive comments from Morgan Stanley Dean Witter concerning Caterpillar (NYSE:CAT). The research department raised its target price for Caterpillar to $60. As a result, CAT closed up $0.96 to $51.51. AT&T (NYSE:T) also helped the Dow by rallying $0.48 to $22.47.

Helping the broader NYSE was Guidant (NYSE:GDT). Shares of this medical device company were hit hard on Friday following comments from an FDA official that claimed that GDT had made improper claims of safety and effectiveness concerning its heart failure treatment system. The Company denied the allegations. Even though CS First Boston downgraded the stock to "Hold", GDT nevertheless recovered a solid $3.25 to $36.25.

Another big gainer on the NYSE was credit-payment services provider NOVA Corp (NYSE:NIS), which agreed to be acquired by U.S. Bancorp (NYSE:USB) for $2.1 billion in cash and stock. NOVA shareholders will have the option of either receiving 1.407 USB shares for each of their NIS shares or $31.00 in cash. NIS closed at $29.05 with a gain of $5.53 and USB closed at $21.24 with a loss of $1.44.

Overflowing coffers resulted in two major acquisitions in the oil and gas universe. Independent oil refiner Valero Energy (NYSE:VLO) will buy Ultramar Diamond Shamrock Corp (NYSE:UDS) for $4 billion in cash and stock. VLO will swap 1.228 shares for approximately half of UDS' shares and pay $55.00 a share for the rest. VLO was down $2.77 to $42.70 and UDS gained $7.79 to $50.50. Williams Cos. (NYSE:WMB) outbid Shell Oil (NYSE:RD) to purchase Rocky Mountain based Barrett Resources (NYSE:BRR). The complicated deal calls for WMB to offer $73 a share for 50% of Barrett's common stock and follow that up with an exchange of 1.767 shares of common stock for each remaining Barrett share. WMB lost $2.39 to $39.28, BRR gained $2.85 to $70.15 and RD lost $0.05 to $58.70.

These two key mergers may increase pressure on the Bush Administration. The Oval Office is a well-publicized supporter of the oil industry and is already facing constituent outrage over rising oil and gas prices. The slew of acquisitions in the oil and gas sector over the past two years has put more assets into fewer entities, which could lead to even higher prices.

The NASDAQ (COMPX) had closing numbers that were similar to the numbers seen by the DJIA and the NYSE. The index lost 17.99 points to 2173.54. The index had a trading range of just less than 50 points. Resistance was found just above 2000. The volume of 1.72 billion was lighter than previous sessions. Decliners slipped ahead of advancers by a 20 to 18 margin.

Although most of the bigger technology names had modest movement today there were a few exceptions. Juniper Networks (NASDAQ:JNPR) lost $4.05 to $57.08, BEA Systems (NASDAQ:BEAS) dropped $3.09 to $32.89, Seibel Systems (NASDAQ:SEBL) declined $3.80 to $44.10 and Veritas Software (NASDAQ:VRTS) fell $4.68 to $67.31.

One notable disaster was Portal Software (NASDAQ:PRSF), which plummeted $3.35 to $5.93 after guiding analysts lower for its first quarter results. The previous estimates called for a profit of a penny but the company believes that a loss of $0.19 to $0.21 is more realistic. The news resulted in downgrades from Merrill Lynch and Raymond James.

Rallying on the NASDAQ today were shares of Krispy Kreme Doughnuts (NASDAQ:KREM), which picked up $4.41 to $48.53, graphic chip manufacturer, NVIDIA (NASDAQ:NVDA), which rallied $4.03 to $93.85 and Genzyme (NASDAQ:GENZ), which gained $3.47 to $105.27.

The denizens of the Play List mirrored the listless action seen by the overall market. The best performer was Allegheny Energy (NYSE:AYE), which finished the day in new high ground with a gain of $1.00 and a close at $52.00. American Standard (NYSE:ASD) made a foray into new high ground but pulled back to finish unchanged at $62.50. H&R Block (NYSE:HRB) enjoyed a solid day with a gain of $0.83 to $54.21 and could be on the verge of breaking above its 52-week high of $55.00.

The other major stock indices all closed with mild losses. The S&P 500 (SPX) slipped 3.10 to 1263.50, the S&P 100 (OEX) fell 1.28 to 657.46 and the Russell 2000 (RUT) lost 3.25 to 489.64.

The sector indices were characterized by mixed results with some more substantial pullbacks among two of the major technology stock barometers. The PHLX Semiconductor Index (SOX) fell 8.50 to 631.05 and the AMEX Networking Index (NWX) lost $9.15 to 468.95. The AMEX Oil and Gas Index (XOI) gained a modest 2.42 to 569.04.

The bond market managed small gains despite the prospects of huge new bond supplies to hit the market later this week. There will be a 5-year note sale tomorrow and a 10-year note sale on Wednesday. Additionally, corporate bond traders are bracing for an $8 billion offering due later this week from WorldCom (NASDAQ:WCOM).

The big news after the close came from Dell Computer (NASDAQ:DELL). The PC leader said that it will slash 3 to 4 thousand jobs over the next two quarters. Additionally, the company said that it will be necessary for many of its salaried employees to take unpaid leaves of absence. However, Dell did say that it expects to meet current first quarter estimates calling for profits of $0.17 and sales of $8 billion. After hour traders were encouraged by the news and have driven DELL to $26.64 following the regular session that saw DELL gain $0.07 to $25.91.

The most significant earnings report that occurred after the market closed came from VoiceStream Wireless (NASDAQ:VSTR). The communications concern reported a first quarter loss of $2.54, which was a penny better than the consensus estimates. VSTR closed the regular trading day with a loss of $1.13 to $100.93 and has recovered $0.43 of that loss in after hours trading.

The technology investor will be firmly focused upon Cisco Systems (NASDAQ:CSCO) earnings release after the close tomorrow. The results are unlikely to surprise anyone due to the fact that Cisco has been very forthcoming about guiding analysts about its third quarter numbers. For the record, analysts expect the networking giant to post profits of 2 cents a share and revenues of $4.69 billion. The real influence on Wednesday's trading will probably be the comments during the company's conference call.

The NASDAQ (COMPX) could see a repeat of today's trading pattern tomorrow. An initial rally in the early going, due to the mildly positive Dell Computer (NASDAQ:DELL) news, could be followed by some nervousness ahead of the Cisco announcement.

An early rally will likely find resistance at 2000. Any decline later in the day should be modest with the NASDAQ finding support at 2150, which is just below today's low of 2162. Keep an eye on the MACD. Although this indicator has been rising nicely since early April, it appears to be slowing its ascent. If it crosses back over and subsequently issues a sell signal, we could easily see declines over the next several trading sessions that could take the NASDAQ down to the 2000 support. The next leg up of the NASDAQ rally could be sparked if Cisco can offer encouragement during its conference call that suggests that the worst is behind the company and further hints that solid profits will start to roll again by the end of the year. A breakout for the NASDAQ would become even more likely if bearish sentiment continues to increase.

The technical picture for the Dow Jones Industrials (INDU) is reflecting a lack of conviction to drive the index through the 11,000 resistance. Traders are searching for a catalyst. Perhaps an additional rate cut during the May 18th FOMC meeting will do the trick. Until that happens though, look for the DJIA to continue to flop around between 10,700 and 11,000. Those of you who prefer to track the S&P 500 (SPX) should be conscious of the resistance level of 1275 and support of 1225. Just like the NASDAQ, the DJIA's MACD is slowing its ascent and may trigger a sell signal if we see a couple down days in a row. That said, any declines should be mild and just part of the natural process of consolidating the April rally.

I do believe that traders should seriously consider protecting profits among their NASDAQ and DJIA holdings if either of the MACD's of these respective indices issues a sell signal. The MACD has been an invaluable technical indicator for determining intermediate trends this year.

Good Luck! And may all of your trades be winning ones!

Jim Booth
Research Analyst


Copyright 2001

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