Markets Anticipate Greenspeak

Were you thinking of jumping into the DOW stocks Tuesday? Think again. Market pundits who saw two straight days of solid gains and declared the DOW to be staging a recovery may have been premature. We've seen this sector rotation before. When the tech stocks show weakness, institutional money flows to the DOW stocks, but repeatedly the Nasdaq has bounced back and money flows right back to the tech stocks. Although Tuesday's advance in the DOW was impressive, the downward trend line wasn't crossed - the DOW is still in a declining trend.

Wednesday's DOW slide was initiated by the Housing Starts report, which came in higher than expected at 1.775 million. Consensus estimates were 1.645 million. Once again, interest sensitive stocks such as banking, cyclical and retail stocks were on the defensive.

The Nasdaq (COMPX) needed an excuse to rally Wednesday, after several days of weakness. The Biotech and Semiconductor industries answered the call. Biotechs surged after Human Genome Sciences (HGSI +33.25) announced a new patent on a gene that acts as a receptor for the AIDS virus. Semiconductors traded higher on split announcements and great earnings from Applied Materials (AMAT +6.88) and Analog Devices (ADI +7.12).

We are concerned that the COMPX lost its gains late in the day. One of Wednesday's leading indices, the Semiconductor Index (SOX), actually retraced, losing all of its gains and closed at a slight loss. Although the AMEX Biotech index (BTK) finished strong (up 12%), some profit taking developed on the biotech leaders in after-hours trading. We'll talk about what that means for tomorrow's market after we discuss today's trading.

Across both markets, Wednesday's leading sectors were biotech, software and networking stocks, while the trailing sectors were cyclical, financial, drug, retail and Internet stocks.

The DOW finished down 157 points to close at 10561. As we have been saying all week, internals were poor. Advancing stocks trailed decliners 1292 to 1722 on the NYSE. Volume on the big board composite was heavy at 1.02 billion shares traded. There were 56 new highs, 147 new lows Wednesday.

DOW standouts included AXP, down $5.28 on interest rate worries, INTC lost $3.31 in a slide from Tuesday's price jump. WMT lost $5.25 on interest rate worries, after the company reported slightly better than expected 4th qtr numbers. On the upside, HWP gained $7.25 in a pre-earnings run. (Those numbers came in $0.03 per share better than expected after the market close.)

The COMPX finished up 6.88 points to close at 4428. This was down nearly 50 points from the day's high at 4477. It was a rather disappointing day, considering the mid-day euphoria we had working. Market internals weren't great either. Volume was heavy at 1.79 billion shares traded. Advancing issues trailed decliners, at 2047 to 2164.

On the broad market, the S&P 500 was down 1.0%, while the small caps gained. The Russell 2000 index was up 1.39%.

Bond yields rose marginally higher on the strong housing news. The 30-year bond stands at 6.23%, up 2 basis points.

In company news, takeover rumors pushed up shares of Ciena Corp. (CIEN +18) after trading desks circulated the idea of a takeout by Juniper Networks (JNPR +7.62). It's conceivable, especially given that JNPR recently filed for $500 million in notes to be used for working capital and acquisitions. Both companies specialize in Internet networking.

In case you are wondering about the biotech stocks that screamed higher Wednesday, here's a short (not all-inclusive) list: PDLI +69.90, MLNM +42.75, HGSI +33.25, CRA +28.00, CRGN +16.75, INCY +21.54, and HYSQ +8.12. If you are thinking about jumping into any of these Thursday on the hope of some carry-over buying, be careful. Reversals after a huge runnup in price are often fast and hard.

Traders listen to the analysts at Janus these days. Conexant Systems (CNXT +9.94) jumped when it was reported that the mutual fund giant is bullish on the stock.

Doubleclick (DCLK -4.81) was conspicuously absent at today's closing bell. Trading in the stock was halted mid-day after the company admitted that the FTC is doing an informal probe after a suit alleged deceptive practices in collecting data on Internet users. New privacy initiates from DCLK were introduced Monday, allowing users to opt-out of the user tracking system. The suit wants DCLK to stop the practice completely.

We scratched our heads Tuesday when Nextlink (NXLK +2.12) failed to announce a split with earnings. We only had to wait a day. They announced a 2 for 1 split after the market Wednesday. The stock was up 10 points in after-hours trading.

CheckFree (CKFR +32) surged after they announced the acquisition of leading competitor Transpoint. That's usually bad news for a stock, but analysts think that CKFR now has a tight grip in online bill paying.

Thursday's Market:

Notable earnings reports scheduled for Thursday include Agile Software (AGIL), Brocade Communications (BRCD) and Ciena (CIEN). All three companies are on our Split Candidate list.

Interest rate worries will take center stage Thursday. PPI numbers will be released before the market, consensus estimates are a 1% increase. As everyone knows by now, Alan Greenspan is giving his semi-annual address to congress Thursday at 10:00 ET. Given his track record, don't expect anything substantially indicative of future Fed plans.

Technically, the DOW is still trading under the downtrend line, so we haven't seen any buy signals yet. It is encouraging that the DOW is once again trading above support at 10500. This market is still captive to interest rates and oil prices, so the PPI and CPI numbers will likely indicate short-term direction. Our key number for resistance is a close above 10750, which would pull the DOW above the trendline. On the downside, a close below 10500 would be very negative and may signal a move to 10300.

Doesn't it feel like the Nasdaq is all-over the place? This market has now been consolidating around the 4400 level for seven sessions. Tuesday's intra-day dip to 4300 tidied up the worrisome gap between 4320 and 4360. We still have a market top at 4500 that is holding the techs down. Underneath, it looks like 4300 is our support, but midway we have support at 4400 and the 10-dma at 4371.

We can point to a number of factors that have held the Nasdaq back this week - the Greenspan effect, trend line resistance, psychological resistance at 4500 and overbought indicators. This market did (and does) seem poised for some profit taking, but the resilience so far has been surprising. It now seems very possible that this market could once again rally if the economic and Greenspeak reports are benign.

Good Luck and Happy Trading

Steve Pekarek
Ass't Editor