On the Eighth Day The Dow Rested

Yesterday's news set the stage for today's trading. First, a report by the government revealed fantastic productivity gains by U.S. businesses. Market sentiment quickly mushroomed that the Federal Reserve would stay pat on interest rates. Then, after the market closed, Cisco Systems (CSCO) reported record second-quarter earnings and soaring revenue growth.

After the bell yesterday, Cisco reported earnings of $0.16 per share, a penny better than Street estimates. More importantly, the company reported that its revenue for the quarter rose an incredible 61 percent to $5.72 billion compared to $3.56 billion for the same period last year. Investors eagerly awaited the market's open. Cisco closed up $2.32 to $67.82 on 94 million shares.

Still, despite, Cisco's good fortune, the Nasdaq Composite Index (COMPX) managed only a modest gain of 4.95 points, or 0.12 percent, to 3,853.50.

However, technology companies that do business with Cisco posted solid gains. Shares of Jabil Circuit (JBL) climbed $4.82 to $56.07, an increase of 7.29 percent, while Sanmina Corporation (SANM) added $4.19 to $107.75.

As for the old-economy, the Dow Jones Industrial Average (INDU) finally decided to take a day off. After closing up seven straight sessions, the venerable old barometer attempted to make its eighth consecutive advance, confirming a breakout of its triangle, but failed to do so. The pattern, which has been forming since mid-April, saw the INDU break through resistance near 10,860. For the day, the INDU closed down 71.06 points, or 0.64 percent, to 10,905.83.

Easing the doom and gloom on the INDU, General Electric Corporation (GE) took off when it broke through resistance at the $55 level. The company's shares gained $1.88 to $55.63. Also, softening the fall was Intel INTC), taking advantage of the rally in the Tech sector, its shares closed up $1.94 to $63.56, a gain of 3.14 percent.

As for the broader and smaller markets, the S&P 500 Index (RUT) lost 9.94 points to close at 1,472.87, while the Russell 2000 (RUT) lost 1.22 points to close at 507.50.

On the NYSE, declining issues held a slight advantage over gaining issues, 1240 to 1167, on volume of 1.25 billion shares. 62 issues hit new 52-week highs versus 36 new lows. On the Nasdaq, 1.43 billion shares were traded with advancing issues trailing decliners 1788 to 2066. 123 issues traded at their 52-week low, while only 63 traded at new highs.

In earnings news, Aspen Technologies (AZPN), a leader in manufacturing design and analysis software, reported second quarter earnings of $5.7 million, or $0.18 per share, beating consensus street estimates by a nickel. In response to the positive earnings news, Banc of America analyst Bob Austrian stated that Aspen's company's 24-month turnaround was complete. In response, the company's shares closed up $10.00 to $46.25, a one-day gain of 27.58 percent.

Wal-Mart Stores (WMT), the world's largest retailer, received a cool response from investors today when it announced earnings. Earnings per share rose 29 percent to $0.36 per share. Retail analysts stated that Wal-Mart had been able to post gains in an environment of sluggish consumer spending because of its ability to adjust inventories and expense levels favorably. Nevertheless, the company's stock suffered, closing down $4.63 to $53, and 8.02 percent loss. Investors seemed to be focused on the management's caveat that analysts' estimates for next quarter's earnings would need to be revised downward. Walmart's loss contributed to the S&P Retail Index (RLXX) losing 31.40 points, or 3.4 percent, to 871.45.

Also contributing to the INDU's decline were Merck and Company Incorporated (MRK) and Johnson and Johnson (JNJ). J&J closed down $1.85 to $94.82 and Merck lost $1.82 closing at $70.53.

Looking to Thursday, shares of Eli Lilly and Company (LLY), which were suspended from trading midway in the session are down sharply in extended trading. It was reported at a midday news conference that an appeals court ruling will speed up the patent expiration for Prozac. The decision, which could have serious side effects for Lilly's profitability, has the company officials reaching for their own product. Prozac is a $2 billion producer for Lilly and accounts for approximately 20 percent of sales. The stock opened the session at $107.00 only to be hit with a 29 percent loss as shares closed down to $76.88 in late trading. Meanwhile, shares of Barr Labs Incorporated (BRL), a benefactor of the decision, are up $30.25 up 66 percent to 76.00.

Elsewhere, earnings were reported after the close for Applied Materials Incorporated (AMAT). The company reported second quarter net income of $604 million, which translates to 70 cents per share. Analysts expected 68 cents. Shares gained 2 percent in late trading.

Looking ahead, investors will now be wondering if the market can sustain its late summer gains, or if continued summer doldrums will define the remainder of August.

Good Luck!

Michael Fairbourn
Research Analyst

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