A Little Holiday Boom

Welcome to round three of what has been a memorable year for equities. The third quarter began in an upward trend, aided by the usual pre-holiday bullish bias. In fact, all the major market indices finished the session firmly in the black.

The Nasdaq Composite Index (COMPX) continued with Friday's rally, gaining 25.81 points, or 0.6 percent, to 3,991.92. Some of the big COMPX winners include Wavecom (WVCM) up $12.75, Cree (CREE) up $9.56 and Check Point (CHKP) up $8.88. Meanwhile, human genome leaders Millennium Pharmaceutical (MLNM) and Human Genome (HGSI) appreciated $8.38 and $7.88, respectively.

A few of the big-cap technology leaders also began the quarter with decent moves. Intel (INTC) gained $3.19, Cisco Systems (CSCO) rallied $1.06, Yahoo! (YHOO) moved up $4.00 and Apple Computers (AAPL) increased $0.94.

The Dow Jones Industrial Average (INDU) also had a strong run today, buoyed by a rally in financial stocks. J.P. Morgan (JPM) led the INDU by gaining $5.63, while Citigroup (C) added $2.19. These two financial powerhouses helped propel the INDU forward 112.78 points, or 1.1 percent, to 10,560.67.

As would be expected, volume was exceedingly light today (only three-and-half hours of trading). 600 million shares were exchanged on the COMPX, while 449 million shares changed hands on the NYSE.

In stock news, the surprise resignation of Oracle's President and CEO Ray Lane late Friday night helped to make ORCL the big loser among the major technology stocks. The resignation may have a connection with ORCL's admission that the company had retained private investigators to examine Microsoft's association with a couple of lobbying groups that had helped MSFT in their efforts against the Federal Government. ORCL dropped $3.88 to $80.19.

After its failed merger attempt with WorldCom (WCOM), Sprint (FON) is now involved in merger talks with Germany's Deutsche Telekom (DT). The huge deal would have far reaching implications concerning outside ownership of such a huge American company as well as regulatory obstacles in Europe. A team of American legislators has already fired the first shot suggesting that there may even be a threat to national security if the deal was to finalize. Sprint's attorneys are a very busy group. I wonder if there is a way to go long on that posse of barristers. Anyway, FON tacked on $3.31 to $54.31.

Another possible indication that the economy may be slowing down is the drop in new vehicle sales. Both General Motors (GM) and DaimlerChrysler (DCX) reported the second consecutive drop in monthly sales. Overall sales dropped about 2% in May and 1% in June. The declines are blamed on rising interest rates and rising consumer debt. GM's drop in light vehicle sales came in at 5.5%. Still, GM closed up $1.56 to $59.56, while DCX added $1.00 to $53.06.

Technology stocks also rallied, despite an earnings warning from Informix (IFMX), a major software player that is attempting to reinvent itself. The company stated that earnings should be well below what Wall Street was previously expecting. The company is blaming flat revenues and a strong dollar for the shortfall. Consensus estimates believed that INFX would earn 12 cents this quarter but the company believes a more accurate figure is in the one to three cent range. IFMX dropped $2.75 to $4.69.

Bonds staged a modest rally due to a lower than expected NAPM report. The 10-Year Treasury note tacked on 7/32 and is now yielding 5.99 percent and the 30-year bond added a quarter point to a yield of 5.88 percent.

As for economic news, the National Association of Purchasing Managers (NAPM) report was relatively benign; the number came in at its lowest level in a year and half. This report gives indication that the Fed's actions appear to be working. The June number was 51.8, which was below May's stronger 53.2 posting. It is probably too soon to get totally excited by this number but it is an excellent start to what could be a slowdown in inflation.

As for trading ranges, June has seen the formation of a pretty impressive base for the NASDAQ. The top of the base is 4075, and it seems unlikely that the market will take out that level anytime soon. The only way a major July rally will occur is if we see some more benign economic reports coupled with some upside earnings surprises from major players. Otherwise, look for the continuation of a stock pickers market and do not rely on a rising tide lifting all boats. Support at the bottom of the base is 3700. This is a tradable range. The rest of this week should be mildly bullish as thoughts of a continued summer rally dance in traders heads. If we do break out above top side resistance, a rally to 4300 or even 4500 is possible. But a move of that size does appear unlikely at this time.

The Dow is also range bound. The 1000-point range between 10,100 and 11,100 will probably stay intact for the rest of the summer. Sector rotation within the Dow will probably keep the Index from making any major moves until the fall. The DOW is a bit weaker than the NASDAQ because there is a noticeable contracting wedge developing. Nevertheless, support should probably hold as interest rate concerns are subsiding. The MACD and RSI are decidedly neutral. Now is probably not the time to be placing large margined bets. Hedging and selling option time value premium are probably the best strategies for the next two months.

Looking ahead, this will be a pretty important week, even though volume is likely to be light. The first week of a new quarter typically offers us clues as to what the following three months could be like.

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

Jim Booth
Research