Don't Look Now
After breaking through key levels on the Dow and S&P 500 just yesterday, we followed up it with a good ol' fashion follow through session today. The small percentage moves on the broader indices didn't quite invoke shouts of "hallelujah" or "praise the bull" from traders, but the fact that we closed in the black was huge psychologically.
Many traders were anticipating a pullback today, which seemed only natural given yesterday's big gains. However, it was not meant to be, as buyers (retail and institutional alike, judging by the volume) stepped up to the plate to scoop up stocks that had been displaying strength going into the Fed cut. The mood on the day was very upbeat, as most investors are now focusing on how to position themselves for the next run higher.
Adding to the optimistic tone today was the fact that the employment picture seems to be brightening. Initial jobless claims slipped 8,000 to 380,000 last week, which is fodder for those arguing against a recession.
To be sure, many sectors contributed to today's gains, but it was none other than the early cycle sectors that that led the pack higher. These early cycle sectors are the ones that you like to see lead the market out of the grasps of the bear. That being said, it was the cyclicals, retailers, capital goods and basic materials took the baton and sprinted out of the blocks today.
The major indices couldn't get much going to the upside today, but more importantly there were plenty of buyers that kept the averages positive throughout today's session.
The NASDAQ (COMPX) added 27.25, or 1.26%, to close just under the 2200 level at 2193.69. For a while, the NASDAQ hovered above the psychological 2200 level, but found more comfortable footing just below at 2190. Volume, as previously mentioned, was healthy at 2.1 billion shares. Breadth also confirmed the follow through day, with 2392 stocks advancing to 1432 declining.
The Dow (INDU) also advanced on good volume. The old-economy index added 32.66 to 11248.58 on NYSE volume of 1.5 billion shares. It had some help from Dow component Hewlett-Packard (NYSE:HWP), which vaulted higher by $4.16 to $30.90. The computer maker reported earnings last night of $0.18/share, which beat estimates by $0.03/share. CEO Carly Fiorina also reiterated that HWP was on track to meet its third-quarter earnings bogey of $0.15/share.
Over in the treasury pits, action was largely contained to the 30-year bond. The Treasury bought back $1.75 billion of older 30-year bonds, pushing the price up 25/32 to yield 5.80%. The shorter dated maturities sold off on doubts that the Fed will continue cutting aggressively. In addition, Merrill Lynch's global strategy team moved to an "underweight" position in the U.S. treasury market for the first time since June of 1999. The impetus behind the switch was Merrill's belief that the equity markets are set for a turnaround.
Stocks and Sectors on the Move
While today's strong showing was powered by many diverse sectors, it was the biotechs, as measured by the AMEX Biotech Index (BTK.X), that really packed a punch. This may be due to the fact that investors are more enthusiastic on the group in general because many biotech companies are getting close to product approvals. In addition, as investor psychology improves, traders are more willing to take on added risks, which certainly bodes well for these volatile biotech issues.
Some standouts within the biotech sector include: Amgen, Gilead Sciences and Cima Labs. Amgen (NASDAQ:AMGN) added $1.81 to $66.81 and now sits above its 200-dma at $65.47 for the first time since 3/08/01. Gilead Sciences (NASDAQ:GILD) rocketed $5.18 to $57.94 and now sits just $0.14 away from its all-time closing high. Lastly, Cima Labs (NASDAQ:CIMA) just broke out to a new high after rising $3.17 to $75.76 today.
Turning to specific stock news, Dell (NASDAQ:DELL) reported first-quarter earnings of $0.18/share after the bell, matching analysts' expectations. Revenues for the Round Rock, Texas computer maker came in at $8 billion, up 10% from the year ago period. However, Michael Dell lowered earnings estimates for the second-quarter due to continued softness in the U.S. corporate market. Dell was off $0.88 from its close of $25.88 in after hours trading.
The tragedy du jour in after hours trade, however, was Palm (NASDAQ:PALM). Shares of the handheld computer maker plummeted 25%, or $1.80 from Palm's closing price of $7.05 after the company warned for the second time that it would fall well short of fourth quarter expectations. As it turns out, "well short" is an understatement. Palm now expects revenues of between $140 and $160 million, or roughly half of expectations of $300 million.
Not wanting to end on a sour note, I thought I'd toss in Ciena's (NASDAQ:CIEN) good earnings report that was delivered to investors last night. The fiber optic equipment maker earned $0.20/share in its second-quarter, which bested estimates by $0.04. Sales also picked up by 20% over the most recent quarter. And if that wasn't enough, Ciena told investors that for the full year, revenue growth of 95%-105% is "possible." Given all this good news, shares of CIEN finished down $2.15 to $56.75 after being up as high as $62.35 earlier in the day.
Looking Forward, Always Forward
No real big economic reports due out tomorrow (just the trade balance which we all know is figured with a bias towards a deficit anyway). Though I'm not sure if the lack of economic news is a good thing or a bad thing, since most of the news in the after hours session was decidedly negative. We could probably use a big juicy economic report to distract investors from the Dell and Palm news.
If we do get a pullback on the less than rosy news, we will certainly keep our eyes on previous resistance levels on the indices (11,000 on the Dow and 1265 on the S&P) to make sure that they now act as support on any pullbacks. As far as individual stocks go, make sure that the ones that have already broken out don't fall back into their bases.
We got one follow through day today and as long as we get another good one within the next four or five sessions, the best risk- reward still remains to the upside.
One last note: You may have noticed that the Splittrader Current Play list has become rather lengthy. Due to the fact that most all our picks are steadily forging ahead, we haven't been stopped out of many plays recently. While this is a great problem to have, we are tightening up many of our stops this weekend to lock in gains should the market decide to turn around. You may or may not want to follow suit, depending upon your risk tolerance.