Enthusiasm High in Front of Labor Report

Mid-caps, Big caps, Small Caps, heck, nearly ALL CAPS had a great day Thursday. Most sectors enjoyed gains on solid volume after Thursday's economic reports came in market-friendly.

Stocks seem to be moving on macroeconomic factors and the most recent reports are indicating that the economy is growing at a steady but slower rate. Before the market open, weekly jobless claims, Chicago PMI and July Factory Orders were reported. Each came in below consensus expectations. Since perceptions are fleeting, today's news effectively cancelled out the memory of the strong New Home Sales report of Tuesday.

Buyers repeated a pattern we have seen before: a strong day in front of Friday's bi-weekly Labor Report. This time the buying was amplified because we have other things going on - the end of the month, a three-day weekend, and the unofficial kickoff to the fall trading season. Now if we can just get a 4.1% reading on the unemployment report, things might really get cracking! Otherwise, the reaction to Friday's report may be a bit muted, as many traders will be leaving early for their vacation.

If we can point to any leadership in this rally, it's been the financials, as it has been for the past two months. The continued strength of this sector is pushing most boats higher and is including most of the old economy stocks. By that I mean anything outside of the tech sector (techs rally if the wind blows - a real rally includes all stocks). I'm encouraged to see the rally broaden to include Mid-cap stocks. During August alone, the Mid-cap SPYDR (MDY) has increased 10%. Of course, techs were no slouch either, as CNBC pointed out - it was the best August performance for the NASDAQ in 10 years.

Thursday's Data:

The NASDAQ Composite (COMPX) rallied 102 points to close at 4206. Volume was almost exciting at 1.87 billion shares traded. Could it be that traders are placing bets for more gains, or were they just taking care of business before the holiday? Either way, I'll take it! It was the best volume we've seen in a long time. Breadth was solid at 25 to 16.

Dow Industrial (INDU) stocks had a great day, lead by the financials, but other big caps joined in as well. The average put on 112 points to close at 11215. NYSE volume was heavy at 1.06 billion shares. Advancers on the exchange lead decliners 17 to 11.

S&P 500 stocks (SPX) moved their collective average to a high of 1525, before backing off to close at 1517, a 1% increase. 1525 has been a sticking point for the index several times in the past, with the all time high at 1552.

Treasuries had a strong day in response to the light economic reports. The ten-year note gained 13/32 to close at $100.06. The yield is now at 5.74%.

In specific sector news, a returning cast of favorites lead all others: Banks, Biotechs and Semiconductors. The BKX was up 3.15%, the BTK up 3.43% and the SOX up 3.10%.

It has been interesting to note during the past week that sector rotation has provided strength to the market. In contrast to mid-Summer trading, when one sector gained while another sold off, we are now seeing the strong sectors gain, then pause, while another takes on the leadership role. Wednesday's leader - the Internets, took a small break Thursday, but the Amex Internet Index (IIX) still managed to post a 1.35% increase.

Biotechs enjoyed a big day on the strength of an announcement from Millennium Pharmaceuticals (MLNM). The company has developed a new drug in partnership with Eli Lilly to treat congestive heart failure. The result of today's news: MLNM +13.12, the BTK index +25.68.

But alas, not all sectors are participating. Retail stocks lost 2.3% amid further concerns about weak sales. Interestingly, the downgrades are coming in waves, similar to the way upgrades seem to come at the same time on particular sectors. Anyhow, disparaging remarks were made about Target (TGT), The Gap, (GPS), Ross Stores (ROST), Intimate Brands (IBI) Pacific Sunwear (PSUN) and the Limited (LTD). As one analyst put it, "expect things to get worse before they get better".

Also showing some weakness today were the oil and oil service stocks, in response to a price slide in the crude oil futures contract, which fell off $1.25 per barrel to close at $31.22. That is likely to be a temporary setback though, as most analysts expect high prices for the remaining quarter of 2000. In fact, just before the close, ABN Ambro upgraded Schlumberger (SLB) and Halliburton (HAL) while Lehman Brothers spoke positively about Oceaneering International (OII).

And finally, I would be remiss if I didn't mention that the FBI believes it has caught the perpetrator in the Emulex hoax. It was a brash hoax, but a ridiculously sloppy crime. Details at eleven.

Friday's Trading:

Earnings will be light for Friday, so we turn to economic reports, which will be very important as we head into September. Before the open, the Jobs Report will be issued. Unemployment is expected at 4.0%, Hourly Earnings at a 0.3% increase, and Non-Farm payrolls at a 20k decrease. Also on the schedule are Auto Sales and Construction Spending.

Technically, resistance was broken on today's charts. Specifically, resistance on the NASDAQ 100 chart, which closed over the 4000 level. The COMPX scored a victory as well, with a close over 4200. The next challenge is the July 17th high at 4289. The oscillators are moving into the overbought area as they are known to do in a trending market. As long as the volume can back us up, this rally could continue. As for support, a floor at 4000 seems to be well established at this point, as a psychological level, but also a technical support, because the 200-dma is now at 3989 and climbing.

Over on the INDU chart, the index topped out at 11300 before sliding back to close at 11215. The immediate trading range is 11300 on the topside, 11100 for support. A break above resistance will be challenged at 11500; a break below support could move 11000.

Looking at Friday's trading, we may have some carry-through from today's action, but I wouldn't be surprised to see a rather flat market on low volume because of the holiday. Keep in mind that stocks look strong right now, but if volume doesn't come in right away after the holiday, traders may become worried and take profits.

Have a safe and happy Labor Day!
Steve Pekarek
Editor