Sleepy Bulls

Certainly, the most intriguing story of the day was the across- the-board rally in stocks. It certainly looked like we were going to have a traditionally languid summertime session. But then the bulls woke up and charged forward into the close. The impetus for the rally is difficult to discern. It could be a result of some early option expiration week buying, or it could just be a lack of selling.

The NASDAQ was dominated by a late surge in semiconductor stocks following some positive comments on Micron Technology (MU) from Paine Webber, which initiated new coverage with a "Buy" rating. Two of the biggest winners were Intel (INTC), which climbed $3.13 to $66.94 and Applied Materials (AMAT), which gained $5.63 to $74.81.

For the day, the NASDAQ (COMPX) increased 60.22 points to close just a hair below its high for the day at 3,849.69. Volume was very light with only 1.23 billion shares traded, which was the sixth slowest trading day of the year. Breadth was a virtual dead heat with 18 more decliners than gainers. There were 58 new highs and 103 new lows on the NASDAQ. Some of the other leading volume gainers were Rambus (RMBS), which recovered $8.06 to $76.94; and JDS Uniphase (JDSU), which gained $2.50 to $120.25.

The Dow Jones Industrial Average (INDU) enjoyed a very solid day, as it was led higher by Intel and a few retailing and financial stocks. Home Depot (HD) tacked on $2.63 to $58.31 and JP Morgan (JPM) moved up $4.06 to $147.94 on renewed expectations for favorable profits. The triple whammy enabled the INDU to climb 148.34 points to a close at 11,176.14.

Among stocks in the broader NYSE, Micron Technologies (MU) continued its winning ways by gaining $4.81 to $80.50 and Advanced Micro Devices (AMD) also led the semiconductor stocks with a gain of $6.00 to $63.00 after the Company announced they have begun shipping their 1.1 gigahertz processors, their fastest ever. One notable loser on the NYSE was Scientific- Atlanta (SFA), which dropped $10.94 to $82.44. For the day, volume was an extremely anemic 787 million, but breadth was solid with winners outpacing losers 16 to 12. There were 139 new highs and only 25 new lows.

The other major indices also had a good day. The S&P 500 (SPX) tacked on 19.72 to 1491.56, while the Russell 2000 (RUT) picked up 4.21 to 514.48.

Among the major industry sectors, the semiconductors were the big winners. The PHLX Semiconductor Index (SOX) gained a solid 73 points to climb back over resistance of 1000. The SOX closed at 1027.19. Oil and gas stocks gushed from higher prices driven by higher demand. The AMEX Oil Index (XOI) was up 6.35 to close at 509.69.

Bonds were weak early but they managed to climb higher by the end of the day. The 10-year Treasury note gained 1/32 to a yield of 5.79% and the 30-year bond outperformed by rising 5/32, which dropped its yield to 5.70%.

Some major players avoided the lure of summer weekend getaways. Rupert Murdoch's News Corp (NWS) expanded its media empire by agreeing to purchase Chris-Craft Industries (CCN) for $5.35 billion in cash and stock. News Corp will now be able to add the major market stations WWOR in New York and KCOP in Los Angeles to its stable. Murdoch's company will pay $85 a share for Chris-Craft and it will also pay CCN's subsidiaries in the amounts of $165 a share for BHC Communications (BHC) and $150 a share for United Television (UTVI). NWS gained $0.38 to $50.13, while CCN gained $16.25 to $78.75.

One rumor that was flying around the Street that offers intriguing possibilities for the technology universe is that IBM is about to buy Novell (NOVL). Novell has struggled recently, even though earlier this year it appeared that its business software suite was going to lead the Company out of multiyear doldrums. NOVL finished up $1.81 to $11.00.

The biggest Linux convention ever is about to commence in San Diego this week. Linux is fast becoming a significant threat to the Windows operating system, as more and more major computer companies, especially Compaq (CPQ) and IBM are hinting at including Linux options for some of their best selling products. The penguin stocks may waddle into some profits this week as excitement grows for some of the biggest Linux players. RedHat (RHAT) gained $1.75 to $21.81 and VA Linux (LNUX) added $2.00 to $42.00.

Agilent Technologies (A) attempted to bolster its ailing stock price by announcing 450 job cuts in its health-care division. The Company also cut 200 contract workers. The division anticipates annual cost savings of $80 million. Agilent moved higher by $2.81 to $43.44 on the announcement.

Broadcom (BRCM) is continuing to satiate its acquisition appetite by announcing the purchase of NewPort Communications, a maker of optical communications chips. NewPort shareholders will receive 5.5 million BRCM shares, which are roughly worth $1.25 billion. The market cheered the news and drove BRCM up another $15.75 to $240.81.

ImClone Systems (IMCL) was one of the strongest biotechnology firms during today's trading. The Company told analysts that its preliminary discussions with the FDA regarding its new cancer treatment drug were "successful". The comments were enough to inspire Lehman Brothers to change their rating on the company to "Outperform" from "Neutral". The researcher also raised the target price to $96.00 from $73.00. IMCL jumped up $13.44 to $83.94 on the news.

In earnings news, Home Depot competitor Lowe's Companies (LOW) reported second quarter earnings that were in line with analysts expectations of 73 cents per share. Lowe's shares rallied $2.81 to $46.81 on the news.

Some of the key earnings to watch for tomorrow include Home Depot (HD), ImClone Systems (IMCL), J.C. Penney (JCP), Target (TGT) and BEA Systems (BEAS).

Tomorrow's major economic reports include industrial production, which is expected to show an increase of 0.3% and capacity utilization, which is expected to be 82.1%.

The INDU has rallied 10 of the last 11 days and is starting to look better, mainly because it is seeing some strength in several sectors as opposed to a constant rotation in and out of each sector. Today, we saw strength in technology, retail and financial stocks. If this trend continues the INDU may be able to move out of its current range. This could easily happen if the CPI is benign on Wednesday which would probably be the final confirmation that the Fed will not raise interest rates next week and will probably wait until after the election before considering any more moves. There is a little resistance just above today's close, but a move above 11,280 could easily drive the DOW to 11,650. This seems unlikely however, because the RSI is telling us that the DOW is currently overbought and we are in the middle of August, which historically is not a good time for major moves.

You probably should not get too excited about the NASDAQ rally today because it was accomplished on very low volume. With that said, volume has actually been pretty decent when compared to the volume last August. The technical key to the NASDAQ is the 200-DMA, which is offering resistance at 3927. With the trading range narrowing, do not expect much of a rally beyond that resistance in the short term. The MACD is moving into a more neutral position which is relieving the bearish signal triggered last week. The RSI is still quite neutral. An options related rally could sluggishly move the NASDAQ another 70 points higher this week.

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

Jim Booth
Research Analyst