Technology and Financials Back in Favor

Stocks rallied today, but if you listened only to the on-air personalities and read the newswires you may have half the story. Sure, Alan Greenspan was friendly to the markets and sure, IBM led forecasts higher in their earnings report and yes, JDSU led the Fiber optics group higher. Do those events fully explain today's rally? I don't think so.

Let's put Alan Greenspan's testimony aside. His Humphrey-Hawkins report to Congress and today's Housing Starts report helped to rally the financials, but both the S&P Futures and the NASDAQ Futures closed positive before the market opened today. All market indices opened higher, which means they anticipated his remarks to be benign. He didn't begin speaking until an hour into trading, so that doesn't explain the rally.

So what about IBM? Did its positive earnings report drive today's rally? Big Blue led the Dow Industrials higher. On the other hand, how about disappointing reports from Lucent and Qualcomm? Those stocks didn't pull the tech sector down. In other words, this market wanted to rally.

The addition of JDS Uniphase (JDSU) to the S&P 500 could arguably be the strongest fundamental catalyst for today's rally. The news had a positive effect on the fiber optics group, driving the Networking index higher.

But something is missing and that something is the technical analysis of the NASDAQ Composite and NASDAQ 100. News items do move the markets. But when news confirms a technical indication on the charts, the market really responds.

There was strong support in today's rally because of just that, support. Support on the NASDAQ 100 (NDX) chart that is. The chart is still uptrending, and when the selloff hit trendline support, bulls were lined up to buy if fundamental news came in positive, which it did.

Conversely, this Tuesday's selloff was triggered by Monday's bounce down from the 62% retracement level, which is strong resistance in a trending market. Tuesday's ambiguous CPI number was the impetus to start the selling. See the chart below:

If my little rant has a theme, it's that the market often interprets news based upon current sentiment. A market that wants to rally will focus on good news and one that is in a bearish mood will focus on bad news. Often the chart can help to predict this sentiment.

Thursday's Numbers:

The NASDAQ Composite finished up 129 points to close at 4185. Volume was heavy at 1.7 billion shares and advancers beat declining issues in a 22 to 18 ratio.

The INDU closed at 10844, up 148 points. The leading components were technology and financials. On the NYSE exchange, volume was 1.06 billion shares and advancers beat decliners 17 to 11.

Broad measures were higher. The S&P 500 was up 13.5 points (0.91%) and and Russell 2000 gained 6.89 points, or 1.3%.

Equity gains were not treasury's loss. The Bond market rallied after Alan Greenspan's speech. Also helping was the June Housing Starts report, which came in at 1.554 million vs. expectations of 1.57 million, a two year low in terms of rate of growth. As a result the yield on the ten year note plummeted to 6.01%, off sharply from Wednesday's yield of 6.15%.

In individual stock and sector news, Internet stocks again led the way with a 4.89% gain. The run was probably in advance of America Online's (AOL) earnings report, which came after the close. AOL was off 0.38 on the day, but other Internet horsemen did well with Yahoo (YHOO) +5.81 and Ebay (EBAY) +4.12. AOL's beat estimates by 2 cents per share but revenues came in on the low side of estimates.

Semiconductors were lower Thursday, in spite of a rising tech market. Leading chip stock Intel (INTC) gained 4.54 points, but many other chips were weak. The index is now on trendline support so an upturn from here is key to supporting the tech rally.

The Networking index (NWX) reasserted itself after a 100 point (7%) retracement from the highs at 1400. Today's 1.95% gain was dampened by Lucent's (LU) 10.25 loss following a poor revenue forecast. Gains were lead by JDSU (not on the index), which gained 21 points after it was announced that they would enter the S&P 500. Their new partner SDL Labs (SDLI) gained 68.44 points. SDLI also announced earnings that beat estimates by 3 cents.

Hardware stocks had reason to celebrate after the close. Sun Microsystems (SUNW) reported earnings 6 cents better than estimates. Sun called it's market share growth "stunning" and estimated revenue growth at 30%. In after market trading, the stock gained another six dollars after today's $4.12 gain in regular trading.

Software stocks rallied following strong numbers from Checkpoint Software (CHKP) Wednesday evening. CHKP posted an 18.38 point gain today. The CBOE Software Index (CWX) was up 4.09% on the day.

Financial stocks performed well across the board following the Greenspan speech. The Banking index (BKX) gained 3.66%, Brokerages (XBD) were up 2.66% and Insurance (IUX) gained 2.2%.

T.G.I. Friday:

As usual, earnings will be light on Friday. No big tech names are on the docket. Second tier names include Anadigics (ANAD) and Lexmark (LXK). Retail giant Sears will also report.

Not much happening on the economic front for Friday either. The only report for Friday is the Treasury budget.

Options expiration will occur Friday, so that may add to market volatility.

Technically, the indices are mixed at this point. The NASDAQ composite is in an uptrend and did bounce up from support. However, previous resistance looms overhead. We may get some follow through buying Friday, but if the chart approaches Monday's top, we may see some trepidation unless another news event can drive us forward. MACD is neutral so the trend is intact.

The INDU is tough to call. Today's rally was focused very narrowly on the Technology and Financial components of the index. The Dow is back even with the June highs and attempting to break out of the trading range. The next significant resistance is at 11000. If the index should fail to breach current resistance, next support is back on the old trendline, now near 10500.

Going forward, much will depend upon the individual sectors. Semiconductors looked poor today. If the tech rally is to continue, they will need to pick up. I'm encouraged that the Drug sector hasn't surged again, which means that institutions aren't going on the defensive side.

Two notes of caution. The Volatility Index (VIX) is reaching precarious levels and it closed at 21.99. We've often seen selling near that level. Also, if you believe that history has a tendency to repeat itself, take a look at the weekly charts. In 1998, the summer rally ended abruptly on July 21st (at least for the technology stocks). In 1999, the selling started July 19th. Both of those dates followed options expiration. This year, July options expire tomorrow. Just something for this old bull to chew on.

Good Luck!
Steve Pekarek
Editor

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