Three In A Row
After hitting the equivalent of a homerun on Wednesday, the market followed up with two well-earned base hits to end the week on a positive note. The homerun was thanks to a slow, belt-high creampuff of a pitch served up by the Fed on Tuesday in the form of a 50-basis point interest rate cut. Although it took the market until Wednesday to take a whack at the pitch, it knocked the cover off the ball, with the Dow (INDU) rising 342.95 and the NASDAQ (COMPX) adding 80.86.
While Wednesday's standing-ovation worthy performance was impressive to say the least, it was how the market finished the week that will have investors emptying out their money markets by this Monday's close. The simple fact that the market would just not go down after Wednesday's run was proof that there is something fundamentally different going on this time around.
Believe me when I say that there were plenty of big players in the market on Thursday and Friday trying their damnedest to put the train back in the station so that they might purchase a ticket to this next leg higher. But, as evidenced by all the buying we saw on every intraday pullback, the market now has all the determination of that runaway train that cruised through Ohio cities and farms for nearly 70-miles on Wednesday without anyone at the helm. Just like the engineer that jumped onto the hell- bent runaway train while it was still moving, investors are just going to have to get a running start and take the plunge if they want to participate in this next bull market.
More evidence to support that we are indeed at the dawn of a new bull market came in the week's revival of IPO activity. Three successful initial public offerings hit the market and promptly proceeded to rise (just like in the good ol' days).
Newly offered shares of Instinet (NASDAQ:INET), the Reuters electronic stock trading system, were priced at $14.50 and rose $3.15 to $17.65 right out of the gate. Joining INET on the NASDAQ were shares of optical switch maker Tellium (NASDAQ:TELM), which promptly added 40%, to close at $21.80. Meanwhile, over on the big board, shares of gas turbine equipment maker Global Power (NYSE:GEG) plowed ahead $11.45, or 57%, to $31.45 on its first day of trading.
Finally, if the market was going to succumb to its old ways, it would have done so on Thursday and Friday, as poor profit reports from Dell Computer (NASDAQ:DELL) and Agilent Technologies (NYSE:A) and a profit warning from Palm (NASDAQ:PALM) gave it every reason to head south. Instead, investors chose to focus upon an improving economy and shrugged off the bad news. If this trend holds up, then the upcoming earnings warning season might not pose the threat that most market mavens are anticipating.
While it appeared at first as if the averages wanted to simply drift lower into the weekend and take a well-deserved respite, last minute buyers came in to lift both the Dow and the NASDAQ into the black. Remember not too long ago when the markets sold off on just about every Friday because folks were too skittish to hold stock over the weekend? Well nowadays it seems buyers want to get in on Fridays to get jump on the following week's trend.
Evidence of this showed up in the fact that the NASDAQ rose 20- points in the last hour on Friday to close up 5.20 for the day. The tech heavy index rose 91.45 or 4.3% for the week. Volume came in on the light side at 1.7 billion on Friday, as many traders started their weekend early.
The Dow also finished the week out with a bang, closing higher by 53.16, to 11,301.74. For the week, the old-economy average added 480.43, or 4.4%. The Dow is being powered by stocks like General Electric (NYSE:GE), which is finding its stride after breaking out of a cup and handle formation on Wednesday. GE closed up $0.88 to $52.99 on Friday.
The broader market, as measured by the S&P 500 (SPX.X) also continues to roll higher. The SPX close up 3.47 to 1291.96 on Friday and will most likely test resistance again at 1300. If it clears 1300, resistance does not show up again until the 1335 level.
Turning to the treasurys market, the long-end of the curve continues to outperform the short-end. The 10-year note added 1/32 to yield 5.41% and the 30-year bond rose 3/32 to yield 5.765%.
We did get some economic data in on Friday in the form of the U.S. trade deficit. The deficit rose by a greater than expected $4.3 billion to $31.2 billion in March. Economists had widely expected the gap to widen to $29.2 billion. The larger than expected deficit was driven by a 2.9% rise in imports and a 1% slip in exports. The result of this higher than expected trade deficit will be a downward revision of the previously announced 2% GDP figure. Economists expect the GDP to be revised down to 1.4% this coming Friday.
The recent trend in foreign trade has been slower domestic imports due to weak consumer demand, but even slower export activity due to a global slowdown and a strong dollar. Economists expect this trend to worsen as Europe starts to fell the effects of the global situation.
Stocks and Sectors on the Move
No other stock typified the mood felt up and down Wall Street this week than Krispy Kreme (NYSE:KKD), formerly (NADASQ:KREM). The stock started the week on the NASDAQ at $49 and ended the week on the big board at $63.85, a 30% move.
This sweet move by the purveyor of the world-renowned glazed doughnuts came amid a hyped-up move from the NASDAQ to the NYSE, in which the company set up a conveyor belt on Broad Street to distribute 40,000 of the fatty treats to both floor brokers passers by alike. As if the move to the big board was not enough, the Winston-Salem based company also declared a 2:1 stock split after just splitting its shares in March. I have tried the devilishly good treats favored by two out of three police officers nationwide, and I just don't get the fixation. If you want further proof that the bull market is back, some kind soul bought KKD at a p/e of 104.16 on Friday!
In other specific stock news, shares of The Gap (NYSE:GPS) fell $0.95 to $33.95 on Friday after reporting first-quarter profits of $0.13/share. This came in a penny ahead of analysts' estimates, but The Gap reiterated that it doesn't see the trend of negative same store comparable numbers reversing until the end of the year at the earliest.
While some of the larger companies like the Gap will need time before the full effects of the rate cuts effect their bottom lines, many of the mid-sized companies (mid-caps) are already racing ahead on anticipation of an improved corporate outlook. As compared to the S&P 500, the S&P 400 (the mid-cap index) has been performing relatively better since the April low. In addition, it has recently bounced 2.7% higher from its consolidation base while the S&P 500 has only bounced 1.5% higher.
The S&P 400 type stocks might be a good place to focus your attention in the near term. It is obvious that the institutions are betting that they will outperform the big-caps, as evidenced by their two month run. A complete list of the 400 stocks that make up the S&P 400 can be found on the AMEX website by referencing the S&P 400 ishares. In addition, an easier way to play this segment of the market is to purchase the mid cap SPDRS, or the MDY. It trades as a stock but tracks the S&P 400.
From the Splittrader split candidates list, the following stocks are also included in the S&P 400: ACF, ASD, BKH, MKC, MDU and NNS.
Also outperforming the broader market last week were shares of natural gas, oil, oil service, electric and nuclear power stocks. All of these sectors received a boost from President Bush's energy plan that was presented to the public in St. Paul, Minnesota on Thursday.
Although Bush has tried to mix both conservation goals with exploration and production goals, the main theme of his plan is clear; to expand the power infrastructure and to become less reliant on outside (read Iraqi) sources of fuel. To accomplish these goals Bush has proposed developing thousands of new power plants, opening up Alaska to drilling, increasing gas exploration in the Rockies and bring more nuclear power plant online.
If you have been paying attention to what's going on in the energy sector, you know that these stocks just won't quit. They have been rising on increasing gas and oil prices and on the hype that the Bush plan has been creating. Now that the plan is out in the open, many of these energy plays might have all the fluff built into them already, but bottom line is that they probably will make good long-term investments.
In the power plant area look at: Calpine (NYSE:CPN), Dynegy (NYSE:DYN), NRG Corp. (NYSE:NRG) and Reliant Energy (NYSE:REI). In the nuclear power area look at: Exelon (NYSE:EXC) and Entergy (NYSE:ETR). In the oil drilling area look at: Halliburton (NYSE:HAL), Schlumberger (NYSE:SLB)and Lone Star (NYSE:LSS). In the natural gas area look at: HS Resources (NYSE:HSE), Devon Energy (NYSE:DVN), Patina Oil & Gas (NYSE:POG) and Apache (NYSE:APA).
Looking Forward, Always Forward
Looking at the Dow and S&P 500, we have already breached resistance levels and are in the clear technically speaking. Therefore, we will be watching the NASDAQ next week to see if it can muster enough strength to hurdle minor resistance at 2232 and then more significant resistance at 2250. While we don't need the NASDAQ along for the ride in order for the market to be healthy, it will become a sticking point psychologically speaking if the other markets leave the NASDAQ behind.
Next week also brings with it the release of oil and gas inventories on Wednesday, which might effect those energy stocks that we were talking about. In addition, we have the ever- present initial jobless claims on Thursday and home sales and durable goods orders on Friday. Also, Greenspan is due to address the Economic Club of New York on Thursday, so traders will certainly have at least one ear bent in the Fed Chairman's direction listening for more clues as to what the Fed's next move might be.
So next week becomes another pivotal piece of the puzzle for those bullish on the market (including myself, if you couldn't tell). We will be watching for traders to continue to shrug off bad corporate news and for the averages and individual stocks to stay above their consolidation bases. We would like to see the NASDAQ end the week on the sunny side of 2550 but will be equally encouraged if the tech heavy index can trade sideways.
It has become a stock pickers market again, so pick your battles wisely. Traders are more than ever focusing in on value, so watch out for those extended stocks. If you have some gains, think about ratcheting up some stops and don't be afraid to pull the trigger on trades that "feel right" because stocks are acting rationally again.
Enjoy Your Weekend