Volume Returns to Market in the Form of Profit Taking

Today's market didn't do much to validate the atypical August surge in stock prices. The much-anticipated return of vacationing investors no doubt disappointed the broader market, as the buyers must have stayed home at least another day. Sellers prevailed at the Nasdaq (COMPX) as the index moved 91.12 points lower to close at 4143.21 on significantly higher volume. The 1.66 billion shares that traded on the index eclipsed previous activity levels and reversed last week's upward trend.

Meanwhile, the Dow (INDU) managed to post a small gain of 21.83 points to close at 11,260.61. Volume on the NYSE remained in familiar territory with just under 841 million shares changing hands.

Selling pressure infiltrated the broader markets as well. The S&P 500(SPX) traded 13.69 points lower to close at 1507.08. The Russell 2000 (RUT) traded off 2.89 points to close at 539.02.

Whether sellers returned to the Nasdaq in response to broad- based valuation concerns or news specific events released today is unclear. The market did have some rather bearish news to digest today, especially in the technology arena.

U.S. Bancorp Piper Jaffray analyst Ashok Kumar downgraded Intel Corp. (INTC) based on an expected decrease in chip shipments as well as revenue concerns stemming from the recall of the new 1.13-gigahertz Pentium III chips. Despite other analysts coming to Intel's aid, the stock closed $4.69 lower to $69.25. The news brought down the broader semiconductor sector as well. The Philadelphia Semiconductor Index (SOX) lost 1.82% of its value to close at 1121.75.

An announcement from Ciena Corp. (CIEN) also stirred up some selling in the networking sector today. The company reported that it would take a fourth quarter charge to write off a receivable for a European customer that declared bankruptcy. The write-off will encompass a possible $28.2 million in accounts receivable. The company reiterated that this event does not change its outlook for future growth. The company sold off 6% today to close at $216.31. Keep in mind however, that with 142 million shares outstanding, a mere $28 million one-time event should barely dent Ciena's price. But we must remember that the market doesn't like surprises, no matter how trivial.

The B2B sector experienced some nice gains on the heels of Worldcom's (WCOM) announcement that it will buy Intermedia communications (ICIX) for $39 per share, an 88% increase over Fridays' closing price. WCOM's motivation behind the purchase is to gain control of Digex, a web-hosting services company, and thus further diversify its business lines out of the no- growth long-distance business. On the news, Digex competitor Exodus (EXDS) traded off 5% to close at $62.81. WCOM shares suffered the same fate, selling off over 8% to close at $33.75. The deal is expected to be dilutive to upcoming earnings and thus investors bailed out of the already ailing stock.

In an interesting side note, Intermedia's 54% stake in Digex was valued at roughly $2.9 billion yet the company's equity was trading at only $1.2 billion based on Friday's closing price. Intermedia had even announced in July that it was seeking a buyer for its majority interest in Digex. Even after discounting the Digex valuation for a lack of liquidity, it's hard to completely ignore a 54% stake in a $5.4 billion company.

Ironically, Digex investors fared the worst today. Having been bid up in anticipation of a $120 buyout from Exodus, the shares had no reason to move higher on the WCOM acquisition announcement, as the company will most certainly be taken off the auction block. Digex shares fell $16.63 to close at $67.88.

In other merger and acquisition news today, UK power-company National Grid (NGG) said it agreed to buy New York utility Niagara Mohawk (NMK) shares for $19 per share. This price represents a 37% premium over Friday's closing price. Interestingly, NMK shares rallied over 7% on Friday after trading flat most of the week. It seems the rumor mill was already in action on Friday as a few "sooners" got into NMK ahead of the takeover news.

In other market activity today, both biotech and pharmaceutical issues traded lower on a combination of events. Leonard Yaffe of Banc of America lowered his rating on Merck & Co., citing Merck's increased vulnerability to generic drugs in light of upcoming patent expirations and a lack of new blockbuster drugs in the pipeline. Other drug companies sold off in sympathy on the announcement.

Drug stocks also traded lower in the wake of presidential nominee George W. Bush's proposal to add prescription drug benefits to Medicare recipients. The Bush plan is less extensive than Gore's plan and utilizes private health insurers to provide drug benefits, resulting in a more benevolent pricing environment for drug companies. Nevertheless, the market, as we mentioned before, doesn't like change. Apparently just discussing changes to Medicare is enough to drive prices lower.

Genomics stocks also traded lower today in the expectation that many companies will be attempting to cash in on recent publicity and file for IPO's over the coming months. More than half a dozen genetic research companies are planning public offerings over the next few months. A new group of genomics companies will absorb some investment dollars otherwise headed for established issues.

Oil and oil service stocks traded modestly higher today amid uncertainty over OPEC production increases. Crude oil futures advanced $0.42 to close at $33.80/bbl. Production capacity remains tight as inventories are dwindling. The Philadelphia Oil Services Index (OSX) and the CBOE Oil Index (OIX) both traded up about 0.5% to close at 136.08 and 312.27, respectively.

Treasury issues were largely unchanged in light of the lack of economic data today. The bond market has pretty much written off any interest rate concerns until after the election. The Fed Funds futures are trading in a 0% chance of an interest rate increase next month at the October 3 Fed policy meeting. Tomorrow, traders will be watching the Productivity report due out tomorrow before the markets open. Any serious deviations from the anticipated 5.5% annualized increase in second quarter productivity could sway the markets one way or another.

Good luck and trade wisely.

Chris Pikul, CFA
Assistant Editor