A Stealth Rally

Summer is winding down and whatever players are left are filling their time with selective buying. Therefore, I am calling this a stealth rally because the move has been slow and steady and has not really attracted much attention. There is little news rocketing this market skyward; it's been a nice slow, methodical increase that is flying below the radar of casual market observers. This type of rally is very healthy because we have not seen any huge budget busting swings.

The NASDAQ Composite Index (COMPX) stumbled late in the day after enjoying a nice round of buying right from the open until lunchtime. There was some early buying in semiconductors and financials. Then late day profit taking cut the gains for the day nearly in half as the NASDAQ closed at 4070.59, which was a gain of 27.91 points. Advancers narrowly outpaced decliners 20 to 19 and volume was slow with only 1.37 billion shares traded.

There were some solid gain, however. Intel (INTC) made a new high and was trading as high as $75.81 before pulling back to close at $73.88. The best day among high profile stocks was enjoyed by Juniper Networks (JNPR), which also surged to a new high and managed to hold on to most of its gains. JNPR closed the day at $199.06, which was a gain of $8.13 with almost average daily volume. Sun Microsystems (SUNW) was another highlight among the technology leaders and it picked up $3.06 to a close at $127.81.

There were a few sizable decliners among the most active stocks. Yahoo! (YHOO) erased a huge chunk of its recent gains when it fell $12.19 to $122.06 after a research note from Lehman Brothers expressed concerns about online advertising sales. Sycamore Networks (SCMR) continued its recent troubles and dropped another $9.81 to $141.00. One of our favorite trading stocks, Sapient (SAPE), dropped $6.94, as it is fast approaching psychological support at $100.00. SAPE closed at $104.81.

The Dow Industrials (INDU) had a very strong day and even pushed into the triple digits area before day traders cashed in their profits. The INDU finished with a healthy profit of 60.22 points and closed at 11,252.84. Financial stocks continue to lead this index after suffering a little profit taking towards the end of last week. The broader NYSE only saw 727 million shares go by and losers actually snuck ahead of winners on a 14 to 13 basis.

IBM was a solid contributor to the Dow's gains, as the stock moved up $1.56 to $130.56 after an analyst from CS First Boston lifted their 12-month target on the technology leader to $150.00. Lucent Technologies (LU) lent a helpful hand and dialed up a gain of $1.38 to $42.38. Citigroup (C) pushed a point higher to $58.00. Another Dow financial component, American Express (AXP), did its part by tacking on $3.31 to $59.88.

There were a few big names that could not keep up with the broader rally as Forest Labs (FRX) was burned $3.81 and closed down to $95.38. Best Buy (BBY) began its Labor Day sale a bit early and dropped $2.81 to $71.81. Genentech (DNA) led a soft biotech sector lower as it slipped $7.50 to $182.75.

The other closely watched market indices edged higher. The S&P 500 (SPX) closed up 7.65 to 1514.10. The NASDAQ 100 (NDX) enjoyed a decent day as it moved up 23 points to 3954 after falling 12 points short of the 4000 level intraday. The Russell 2000 (RUT) only managed to pick up 1.37 to its close at 526.48.

The Treasuries were in fine summer form with limited activity. The 30-year T-Bond Index gained 0.04 to close at an average yield of 5.715 and the 10-year T-Note Index also increased 0.04 and stands at 5.766.

The Semiconductor Index (SOX) took a break from its winning ways as it fell a modest 9.25 points to 1134.45. The high flying Biotech Index (BTK) also slipped a bit with a drop of 12.76 and this index now stands at 737.92. Pharmaceuticals (DRG) were slightly weak, falling 4.08 to 394.86. Banks (BKX) were solid winners with a gain of 5.74 to a close just below 875.

Summer may be winding down but enough people stayed in town to hammer out some decent sized acquisitions including the second largest takeover in the history of the semiconductor industry. MMC Networks (MMCN) agreed to be acquired by Applied Micro (AMCC) in a stock deal whereby AMCC will issue 0.619 of its shares for each MMCN share. Based upon AMCC's closing price on Friday, the deal is worth $4.5 billion. AMCC claims that the deal will have a neutral to slightly positive influence on the earnings of AMCC once the deal closes. AMCC closed down $4.75 to $183.81 and MMCN gained a very healthy $31.75 to $110.00.

Consolidation in the wireless communications industry took a complicated turn today when VoiceStream Wireless (VSTR) said it will buy Powertel (PTEL) in a deal that may not even present a premium over Powertel's current stock price. The deal is dependant upon whether Deutsche Telekom (DT) completes its planned acquisition of VoiceStream.

Confused yet?

If the DT/VSTR deal goes through then Powertel shareholders will receive Deutsche Telecom shares worth roughly $105.36 for each Powertel share. If the planned takeover of VoiceStream falls through then VoiceStream will offer its own shares for the acquisition of Powertel at a value of roughly $85.00 for each Powertel share. For you arbitrageurs out there; Have Fun! DT closed down $0.19 to $40.13, PTEL closed down $5.56 to $81.06 and VSTR finished the day off by $1.13 to $117.06.

If eBooks become the next technology craze Amazon (AMZN) took a big step in securing its future in this new medium by picking Microsoft (MSFT) to provide the format for Amazon's future eBook store. AMZN finished the day with a slight loss and closed at $39.13 and MSFT gained slightly to $71.31.

The weekend produced the long expected and painfully negotiated agreement between United Airlines (UAL) and their pilots. Initially it appears that the pilots have negotiated a favorable settlement. The deal includes immediate pay raises for the pilots but most of the details have not been released. The pilots still need to ratify the agreement and investors were cautiously optimistic about the deal as the stock of UAL rose $1.38 to close at $51.50.

The NASDAQ rally has taken the Index comfortably above the resistance that was provided at 4000. The next resistance is most likely 4134, a small spike up in July followed by that month's high print of 4237. There is a chance that we saw the high for the week today, especially in light of the decent selloff into the close. Traders are unlikely to make a serious rally attempt unless we can climb over today's high of 4097. Selling is likely to be light, if there is any at all. Be warned, however, because many of the NASDAQ's leaders are approaching overbought levels on an RSI basis, although the broader Index itself still has some room before its RSI indicates an overbought condition.

The Dow is looking very strong as the major technology components are rallying along with the financial components and there is even a little bottom fishing in the classic industrial stocks themselves. 11,264 was an important resistance level that was briefly taken out. Even though the Dow dropped back below this price it is still in a decided uptrend that could move up to the next resistance at 11,459, which was April's high right before the correction. The most important thing to watch is to make sure the Dow does not drop below any previous day's low, today's was 11,188, because that could result in a little profit taking before the holiday.

We may have seen the highs for the week despite the fact that there is historically a bit of a bullish bias in the week before a holiday. Look for volume to continue to decline into Friday. Major bets should probably be avoided, but there could be some scalping opportunities. The trend is your friend and until it changes, being generally bullish with a little caution should be a good way to go for the rest of the week.

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

Jim Booth
Research Analyst