Stealth Rally Moves NASDAQ and Dow Higher

Never short a dull market they say. It was supposed to be another dull, range bound trading day. Supposed to be. Mixed indications before the market opening failed to forecast Thursday's broad rally. Early strength was narrowly focused, but buying spread across most sectors by mid-morning.

Strength in the financial stocks and technology might indicate that the broad market is poised for further gains leading up to the FOMC meeting on Tuesday, but beyond that, further range bound trading is likely.

Many indices are now sitting at or just above resistance areas. Price momentum is building, but there are reasons to doubt the validity of this rally. Volume remains light and the earnings reporting season is coming to a close. In fact, the upcoming FOMC meeting may signal a sell on the news event rather than an extended rally. We'll examine that possibility further after looking at Thursday's action.

Thursday's Markets:

It was a day that combined technical factors with positive news to send the markets higher. Financial and oil stocks lead the way, by charging out of the gate with a strong surge.

A Wednesday evening earnings report from Hewlett Packard was the obvious driver for the tech sector. HWP reported a 99-cent/share profit vs. expectations of 85 cents. Initial reaction was highly positive until questions were raised about revenue growth and one-time gains posted to the bottom line. The overall tone of the report was still positive however and in turn, helped to move the broad market averages higher. The news hurt HWP stock though, which lost 3.62 points by the close.

Dow and NASDAQ futures, which both closed below fair value before the market open, reflected mixed reaction to HWP's report.

Solid earnings news from Ciena (CIEN) and Brocade Communications (BRCD) had a delayed reaction, but after watching the DOW industrials hold support at 11000, NASDAQ traders began to charge forward with large gains in semiconductors and the fiber stocks.

The NASDAQ Composite (COMPX) gained 79 points to close at 3941. Volume was light at 1.35 billion shares traded. Breadth was positive at 21 to 19.

Dow 30 stocks had a 47-point day after two days of profit taking. The close at 11055 came on volume of only 860 million shares but advancing issues did beat declining stocks by 15 to 12.

The S&P 500 stopped just short of resistance at the 1500 level with a close at 1496, which was a 1.09% advance.

Treasuries moved slightly higher, more in reaction to government buybacks of debt rather than economic news. Initial jobless claims were weak, at 313k vs. 288k expected, but the Philadelphia Federal Reserve manufacturing index was strong at 14.1% compared to 0.7% expected. Neither is a widely followed report so the impact was minimal. The ten-year note gained 6/32 to yield 5.81%.

Stock and Sector News:

Fiber Optics continue to be the monster group. There is no index to track them, save for the Broadband HOLDR (BDH), which was up 2.3% today. Leading the way was Ciena (CIEN) which reported earnings AND revenues that exceeded estimates. CIEN moved 16 points higher. Corning (GLW) jumped in with a 3:1 split announcement but finished unchanged - it is held up at the $300 level. Finally, Brocade Communications (BRCD) beat earnings estimates by 2 cents. Earnings weren't blowout, but traders love Brocade and rewarded the stock with a 15.18 point gain.

Semiconductors (SOX) closed higher for a fifth sequential day. Today's finish at 1111 is just above resistance, but it could be a 'headfake'. Traders will watch this index closely Friday to see if chips can continue moving higher because they are likely to indicate the direction for the technology sector as a whole.

Biotechs surged following news that Incyte Genomics (INCY - formerly Incyte Pharmaceuticals) is partnering with Motorola (MOT). INCY will provide its "gene sequence databases and gene patent portfolio for the commercialization of bioarrays" to Motorola. That doesn't make a lot of sense, but no, I'm not confused, MOT is still in the wireless and chip biz, but it seems they are entrenched in the biotech area as well. The news helped INCY to move up 19.88 points, MOT was up 0.54 points and the biotech index (BTK) ended 3.14% higher.

The early leader in today's rally was financials, spurred by analyst comments about several stocks in the brokerage sector. Continued strength in this group is seen as the key to a good fall rally for the old economy stocks, as the thinking is that financials will reflect the good or bad credit of the market on the whole. Banks (BKX) gained 1.07%, Insurance (IUX) was up 1.07% and Brokerages (XBD) gained 3.89%.

United Airlines stock is flying unfriendly skies and currently in a nosedive. The Company announced that earnings would fall short of projections announced on July 19th when they originally misguided analysts to a range of $2.60 to $3.20 per share. The problems stem from ongoing management. The stock fell 1.00 point to close at 48.50. For the year, the stock is off 37 percent. The Dow Transports average suffered as a result, falling 0.95% and the Airline stocks (XAL) were off 1.43%.

In after market news, Agilent (A) reported earning of 33 cents per share, beating estimates by 13 cents. Another broadband company, ADC Telecommunications (ADCT), reported with a 17-cent profit, besting the analyst guess by 2 cents.

Friday's Market and Beyond:

Earnings news for Friday will be almost non-existent, so we turn to economic news, which is only slightly more impactful. The Trade Balance report, which at one time was closely scrutinized, is now usually just shrugged off. Anyway, the June Trade Balance is expected at a $31.5 billion deficit. Of course, the market is looking forward to the Tuesday FOMC meeting at this point.

As a chart-oholic, I'm fascinated with the current setup in the NASDAQ 100 index, which I think is where most of the support and resistance signals are generated for the NASDAQ Composite. The chart has moved just short of trendline resistance, which means that if we are in a range bound market and I think that we still are, then a chance to go short may be nearby. On the other hand, if the NDX can CLOSE above 3900, then 4000 would be next.

The INDU scored a nice move up from trendline support and from 11000. Weakness on Tuesday and Wednesday appears to be a pause in the uptrend, but significant resistance lies just above at 11250. What I like about the overall market is the S&P 500 index on a weekly chart. It is trending nicely for a longer-term move, but in the short term we may see some retracement soon.

The Volatility Index (VIX), which measures implied volatility of S&P 100 index options (OEX) closed at 20.04, the lowest level since November 1999. Oftentimes the VIX is used as a contrarian indicator that the market is due a correction if it falls below 22. I think that it's more valid for a trending or wide swinging market though. The VIX appears to have fallen so low primarily because of the range bound market in which we have settled. Right now the market is a crapshoot in terms of day to day direction.

As for Friday, we may expect some follow through from Thursday's nice move on both markets. It will be interesting to see the action on the charts surrounding the resistance levels that we have now approached. If you're not already in, it may be wise to wait for a move back to support or for a solid close above resistance to signal an entry point. Be sure to use trailing stops to protect gains.

Good Luck!

Steve Pekarek
Editor