Broad Market Rally!

All we've heard for the last month (for that matter, most of last year) is the terrible internals of the broad markets as well as the continuing theme regarding lack of leadership. Meanwhile, the markets, and in particular the tech laden Nasdaq, screamed forward. The story changed in the last week, as the Nasdaq gave back large chunks of the recent gains. The name of the game became rotation into cyclicals and away from the Nasdaq tech stocks and into the old "blue-blood" Blue Chips of the NYSE and the Dow. On Friday, the storyline for Wall Street changed once again, to a tale of BROAD. As in broad-based buying and broad participation among a number of categories and sectors. The buying was not limited to large-cap issues either, as everything from small-cap's to the biggies were snatched up by individuals and institutions. The immediate and short-term outlook conveyed by most analysts and talking-heads prior to Friday called for a continuation of selling among Nasdaq issues, with that money filtering into the cyclical and safe-harbor issues on the Big Board. Given all that, the fact that we saw the Dow and numerous NYSE issues experience hefty gains on Friday was not to be unexpected (although this does discount the potential affect the employment report was expected to have on the overall market-a point we will come back to). What was surprising to many was the rally on the Nasdaq, which had been beaten and bruised over the prior 4 trading sessions due to profit taking, an overextended index and fear of the Fed. We have become accustomed to an "either or market", as in either you buy the high techs to the exclusion of all others, or you sell the high techs anticipating sharp sell offs and rotate back into the large-cap cyclicals. To see a market where buyers diversified their portfolios (which believe it or not used to be the way Wall Street worked) is unusual and somewhat refreshing. Among the sectors that benefited on Friday: telecom equipment, disk drive makers, chip and chip equipment makers, Internets, health care, biotechs, automakers, chemicals, oil service, financials, retail, insurance and airlines. When was the last time you saw such a diverse group of winners? This indeed can and should be categorized as a broad-based rally. Correction, it should be categorized as a "one day broad-based rally". The question now is "how long"? Until we see some follow through of this broad-based buying, the action Friday would have to be considered a phenomenon rather than something to be accepted as the "New Market Norm".

Getting back to Friday's employment report, it was released at around 8:30 EST. The initial interpretations were decidedly negative among equity and bond traders, as they saw higher than expected increases in non-farm payrolls (315K vs 225K, up from 222K) and hourly earnings (+0.4% vs +0.3%, up from +0.1%). Although the overall employment rate remained unchanged and inline with the 4.1% expectations, the increase in wage numbers reinforced the growing fear of a February rate hike greater than the quarter-point supposedly priced into the long-bond and broader markets. The fear was and is justified, as wage cost numbers are one of Greenspan's biggest inflation barometers. Prior to the report being released, both the Nasdaq and S&P futures had crept up (as has been the situation with many of the recent report releases-futures traders trade up the futures in an attempt to front run the reports and their affect on the overall markets), with the S&P futures up +11, although still 2 points below fair value. The long-bond was down 10 ticks, with a yield sitting at 6.58%. After the report was released, S&P futures reversed, dropping over 12 points, indicating a decidedly negative market opening. Given a little time to absorb the numbers, traders did bid the futures back up some by the open, but a negative opening was still expected. Wrong!. The Dow, Nasdaq and S&P 500 opened "up" out the gate and never looked back. So much for relying on the futures and common wisdom to predict the market opening. Despite the euphoria that revisited the markets yesterday, the reality is that we still have signs of growing inflation and yesterday's numbers reinforced that premise. he rally was arguably a relief rally, in that the numbers were expected to be bad and didn't turn out any worse than had been expected. This does little to ward off the fear of a half-point rate hike at the coming FOMC meeting. The question facing traders at this point is whether the 'January effect" has kicked in and is strong enough to drive the market throughout the rest of January and up till the FOMC meeting, or if the prevailing inflation/Fed fear will take center stage and dictate market direction in the coming day(s). Oh, by the way, we do have the PPI and CPI numbers coming out this week, so things can and probably will get "curiouser and curiouser" real fast.

Regarding the Dow and Big Board trading, the Dow finished up +269.30 at 11522.56. Volume was heavy at 1.2 billion. Advancing volume trounced declining volume as the advance/decline ratio (23 to 9) turned decidedly positive. Trading was active and positive enough that upside trading curbs had to be placed intraday. This is a great indication of the broadening effect we spoke about earlier, as opposed to the norm last year, where we would experience an up day in the index, yet the advance / decline line (supported by up/down volume) would point to narrow leadership, with declines in the majority of sectors and issues. The S&P 500 blue chip benchmark reconfirmed the positive day, gaining +38.02 to finish at 1441.47. Among the many standouts were; EMC +7.13, MSFT +1.44, INTC +3.25, AOL +1.50, MOT +9.94, NT +20.25, WMT +4.94, GE +5.94, MRK +6.25 and PG +8.75. Despite the earnings warning out of LU on Thursday, which saw the stock sell off over 20 points on Thursday, the stock managed to close up 2 points for the day on Friday. All in all, it was a constructive day for the index and blue chips.

Over at the other market, the Nasdaq composite managed to close up +155.49 (record one-day gain) at 3882.62. The index started strong, trading up to the 3800 level, but seemed unable to break through. This prompted traders to fear a reversal as the day wore on. Didn't happen. In fact, the composite grew stronger in the last half-hour of trading, breaking through intraday resistance of 3820 to test 3850, before trading sharply higher in the last 10 mins of the session to finish barely off its high for the day. Volume was steady throughout the day, but spiked at the end, finishing at a healthy 1.6 billion shares. As was the case on the Dow, the up/down volume was decidedly positive (1.2B vs 400M), as advancer beat out decliners 26/16 and in the process, 146 new highs were established vs 73 new lows. Among the Nasdaq standouts; YHOO +39.06, CSCO +5.88, ORCL +7.38, AMZN +4, BVSN +19.09, CMGI +24.75, HGSI +11.19, BRCM +36.63, DCLK +37.44, JDSU +30.19, OCLI +56 and QCOM +9.94. Although there weren't many losers, there were a few notables, including; CMRC -0.88, LNUX -6.13, FDRY -17.81, INAP -10, FMKT -8.81 and KANA -11. Considering the last 4 trading sessions, this was a much- welcomed, constructive trading day for the Nasdaq. It should be noted that there is somewhat of a consensus among many analysts that the rally in the Dow is a little more stable and sustainable, while Friday's Nasdaq rally remains somewhat suspect.

As for other sector indices, the Russell 2000 finished +12.97 at 488.31. The SOX added +21.42 to close at 690.75, approaching the 700 level first broached in December. The Dow Transports finished +27.64 at 2964.72, while the Utilities managed to finish up as well, closing up +5.14 at 297.78. The Internets obviously experienced a rebound day, with the DOT adding +58.49 to close at 1084.89 and the INX.X up +34.34, closing back above 700 at 701.42. Regarding the all-important 30-year long bond, it closed the day up +4/32, with a closing yield of 6.54%.

Among the stories that dominated the market on Friday (aside from the employment report) was the one involving Lucent's competitors. As was reported on Thursday, the Company issued a warning about the current forecasts for earnings due to supply problems. The story Friday was not so much how investors punished the Company in late day trading on Thursday, by rather how they bought up the stock of their competitors throughout Friday. The consensus was that the problem was one with LU and not the sector. The biggest beneficiaries ended up being Nortel(NT) gaining over 14%, JDSU who added over 20%, CIEN who added 26%, MOT who gained 8.3% and CSCO, whose shares advanced a solid 5.9%. Investors were so interested in buying up the sector that they stopped the previous day's selloff in LU's share price, which surprisingly recouped a couple points.

In other news, the biotechs (BTK) bounced back from a 15% retracement earlier in the week to once again establish their recent market leadership. Investors snatched up shares of the leaders such as HGSI, CHIR, PDLI and GILD. The sector promises to remain hot as Hambrect & Quist opens their 18th annual Healthcare Conference starting Monday.

As for the performance of companies with currently announced stock splits, Friday brought about some welcomed relief. As has been the case for most stocks that recently experienced momentum run-ups, the companies on current split runs had a tough week. Friday saw many rebound significantly from the selloff most experienced through Thursday. Among the better performers: MSTR +10.13, BVF +5.94, CHKP +8.66, KLAC +5.88, JNPR +12.88, NVLS +7.06 and CTXS +6.63, as well as some of the others mentioned earlier such as JDSU, ORCL, HGSI, CMGI and DCLK.

As for the coming week, the earnings calendar is packed full of big names, including several Dow components. AA is set to report on Monday prior to the bell. Semi maker VTSS will report after. Tuesday is a huge day, as IP is slated to report during trading (which will definitely effect trading in the cyclicals), followed up with earnings releases after the market out of YHOO, AKLM, ARBA, ETEK and SEG. The obvious focus will be on the YHOO release, as this will surely effect trading both Tuesday and Wednesday. Thursday is set for the heaviest round of reporting, with the likes of BA, FNM, GY, MGIC reporting prior to the open, followed up in the afternoon by AMCC, BGEN, ZOOX, RMBS, SILK and the other major company set to report this week-INTC. As is the case with YHOO, the Intel number's release is likely to influence trading across many of the high tech sectors, with the ability to propel or knock down the Nasdaq. On Friday, the calendar lightens up, with the only notables reporting being SCH and FTU (both could affect the financial and brokerage sectors) prior to the open and MCAF after the close. This week marks the beginning of the earnings season in earnest.

As for the economic calendar, it's loaded and will most definitely affect the overall market. We start out the week with the Wholesale Inventory's number on Tuesday (11th). Expectations are for the number to come in at 0.6%, up from 0.3%. Thursday the 13th is loaded, with Retail Sales, Initial Claims and the PPI numbers set to be released. The consensus for the Retail Sales figure is to come in unchanged at 0.9% (minus auto sales=0.7% vs previous of 0.4%). As for the PPI, the street expects the number to come in at 0.3% versus the previous period of 0.2%. The more crucial Core PPI is expected to report an increase of 0.1%. The figure for the Core PPI was previously unchanged. Friday promises to be equally significant as the government releases numbers for Capacity Utilization (unchanged at 81.1%), Industrial Production (unchanged at 0.3%), Business Inventories and most importantly-the CPI and CPI Core. Expectations call for the Core (minus food and energy) to remain unchanged at 0.2% and the CPI to come in at 0.3%, up from 0.1% in the previous period. It goes without saying that all of these numbers can and may significantly affect the market both for the coming week and beyond. Any combination of bad numbers will surely send the bond yield up, which would have an expected negative affect on equities. The main things traders will focus on will be the release of the PPI and CPI numbers. One thing to keep in mind as we await those numbers is the fact that in recent months the numbers have actually not come in negative for the most part. Their release over the last several months has actually sparked rallies as traders and investors alike used the numbers to point to a lack of inflation in the economy.

This week promises to be both volatile and unpredictable. There are many conflicting variables and undercurrents in the market that will probably come to a head. On the positive side, this past Friday's action tended to verify that the institutional money (from 401-k plans) was indeed flowing into the market. In fact, we saw big players buying up the high fliers on the Nasdaq once again, despite the fact that the so called correction in that index lasted all but 4 days (if in fact the correction is over, which is very debatable). In addition, we have earnings from ome of the aforementioned biggies. This week starts the official beginning of the reporting season, and the consensus is that this earnings season will be a good one. With that in mind, the numbers to be released this week (more importantly the markets reaction to them) will be important. A good start might go a long ways towards reassuring investors that the market is in good shape and that this past week's sell-off was enough. At a minimum, expectations concerning the INTC and YHOO numbers may in fact help the Friday rally continue into the first part of the week. The flip side is the fact that few see Friday's rally in the Nasdaq as convincing, so confidence if shaky and could be easily undermined. If so, the Nasdaq decline will restart, with a serious possibility of a retracement all the way back to support at the 3500 level- a big time correction. The economic numbers set to be released may very well be the catalyst for such a decline. If that occurs, the first quarter promises to be a long one for market bulls and we will probably see a return to the old style of value investing that seems to have disappeared on Wall Street. You have to love the market to appreciate a week like this one promises to be!

Louis Horkan
-Chief Editor