Stocks Rally into the Holiday Weekend

So much for prognostications. In last week's market commentary, I mentioned (as did nearly everyone else) that the Nasdaq Composite Index (COMPX) and the Dow Jones Industrial Average (INDU) would likely be listless and range-bound for the week. My prediction was for the INDU to trade between 11,000 to 11,200 and for the COMPX to hover around 4,100.

Well, I was close (but close only counts in horseshoes and hand-grenades) for most of the week until a couple of favorable economic data sets caused my prediction to finish off 100 points on both indices. The INDU traded between 11,000 and 11,300, while the COMPX hovered around 4,200.

Many of us were caught on our heels by how bullishly traders and investors reacted to Thursday's jobless claims report, a weekly vignette on those folks who can't or who refuse to find work and want a government subsidy. Claims clocked in at 318,000, the third consecutive week they've been above the 300,000 level. Both major indices posted 100-point gains on the news.

Then on Friday, traders and investors were buying again on two major economic reports that reflected a cooling economy. U.S. businesses shed another 105,000 jobs in August after shedding 51,000 in July, raising the jobless rate from 4.0 percent to 4.1. I don't fully understand the excitement, though. Most of the increase was due to the government's lay- off of those pesky census works and the Verizon (VZ) strike. The market had to know the unemployment increase was coming.

Also on Friday, the National Association of Purchasing Management (NAPM) reported its manufacturing index fell to 49.5 in August, the first reading below 50 since January 1999 and the lowest since December 1998 when it was 46.3.

The two reports helped the COMPX to gap up 50 points at the opening bell to an intra-day high of 4,259.87. Soon after, traders took their profits and headed for the exit, which caused the index to briefly dip into the red before settling into a 15-point trading range between 4,215 and 4,230. When it was over, the COMPX was up 27.98 points, or 0.67 percent, to 4,234.33, its highest close since July 17. Contributing to the modest gain were Oracle (ORCL) and Sun Microsystems (SUNW), both of which added $1.69 to their share value.

For the week, the COMPX finished ahead 191 points, or 4.7 percent, thanks once again to Oracle, which added $8.00 for the five days to close at $92.63, and Sun Microsystems, which added $4.00 to $128.63.

The economic data gave a lift to middle-aged issues, too. The INDU bolted ahead 100 points in the first hour of trading, cresting the 11,300 mark. However, the average couldn't establish a foothold and quickly purged its gains in the next hour of trading. From there, the INDU clawed its way back to 11,300 before drifting down to close higher by 23.68 point, or 0.21 percent, to 11,238.78. Keeping the blue-chip average in the black for the day were Hewlett-Packard (HWP), which rose $5.38 to $126, and old-economy war-horse General Motors (GM), which jumped $3.13 to $73.13.

For the week, the INDU added just 46 points, or 0.4 percent, to its value. The average was held in check by a poor showing among its consumer goods components, namely Coca-Cola (KO), Philip Morris (MO) and Home Depot (HD).

The broader and smaller markets also posted modest gains on Friday. The S&P 500 Index (SPX) briefly touched record territory when it surged to 1,530 early in the session. But like the COMPX and the INDU, the SPX couldn't hold its gains and closed up 3.09 points, or 0.20 percent, to 1,520.77. Still, with this week's gain of 14.31 points, the SPX is now less than six points away from its all-time closing high.

The small-cap Russell 2000 Index (RUT) also traded higher on Friday, closing up 3.50 points, or 0.65 percent, to 541.39. With little fanfare, the RUT has closed higher every session over the past two weeks. Additional gains could be tough, though, because the index will likey hit resistance at 545, which will be a double-top formation.

For August, the COMPX, INDU, SPX and RUT all finished in the black, with the COMPX adding the most value (11.7 percent). Remarkably, these four major indices completed their fifth straight winning week -- feat they haven't accomplished in nearly 2 1/2 years.

In sector news, The S&P Retail Index (RLX) moved ahead 2.3 percent on Friday, but only because of a rebound in many of the retailers who tanked on Thursday. Target (TGT) added $1.44 to $24.63, J.C. Penney (JCP) added $0.66 to $14.69 and Gap (GPS) jumped $1.25 to $23.50.

The oil patch continued to benefit from rising crude prices. The CBOE Oil Index (OIX) moved up another another 1.3 percent on Friday. Helping the OIX to move higher were Amerada Hess (AHC), Phillips Petroleum (P) and Total Petroleum (TOT).

For the week, though, the best performing sector by far was the brokerage sector. The AMEX Securities Broker/Dealer Index (XBD) soared nearly 12 percent thanks to Credit Suisse's offer to purchase Donald, Lufkin & Jenrette (DLJ) for $11.5 billion, or $90 a share. Of course, the deal had traders speculating on who would be the next target. Lehman Brothers (LEH) added $15.00 to $148.63, Bear Stearns (BS) surged $10.63 to $69.38 and J.P. Morgan (JPM) rocketed $16.00 to $160.00.

In other stock news, Global Crossing (GBLX) advanced $5.06 to $35.12 on Friday after the company announced its sales and earnings for the remainder of the year will be stronger than previously anticipated. On Thursday night, the company released a statement on Business Wire that said it expected approximately $5.37 billion in revenue for the year, a projected increase of 38 percent over 1999.

Another strong performer was Symphonix Devices (SMPX), which soared $4.34 to $9.50 after saying the U.S. Food and Drug Administration (FDA) approved its ear implant used to treat patients with hearing loss. This first-of-a-kind device, dubbed the Vibrant Soundbridge, is a new approach for treating patients with moderate to severe nerve hearing loss.

On the downside, Yahoo! (YHOO) dumped $8.34 to $113.16 following a report that the Internet portal is having a tougher time getting advertisers for its Web site. Hard to believe this king of all portals was trading over $240 back in January. I think it's safe to say that we are not going to see $240 anytime soon.

If you're feeling a little down because you owned Yahoo going into Friday's session, be thankful you didn't own Viant (VIAN). This disaster du jour got creamed for $5.69 to close at $8.19. The Internet consulting firm stated that it expects to post a third-quarter loss versus a profit in the same year-ago period. It seems the company's clients no longer fear Internet competition like they once did. In response to Viant's statement, Mark Wolfenberger of Credit Suisse First Boston dropped his rating on the company to a "Buy" from "Strong Buy" and slashed his price target to $25 from $60 ($25? I'm thinking more like $5).

Viant's problems weighed heavily on the Internet services sector. Sapient (SAPE) fell $7.75 to $44.75, Scient (SCNT) lost $5.06 to $22.00, Netopia (NTPA) tanked $9.75 to $26.88 and IXL Enterprises (IIXL) sank $1.19 to $8.38.

In the bond arena, Friday's unemployment report bolstered an already bullish Treasury market. The 10-year Treasury note added 7/32 to yield 5.68 percent and the 30-year bond added 2/32 to yield 5.66 percent, which is the lowest its yield has been in nearly a year.

Looking ahead, the week's most significant economic data is slated for release on Wednesday the 6th. Traders will be eyeing the second quarter productivity report scheduled for release at 8:30 AM ET to see if beats the first quarter's impressive 5.3 percent increase.

Also on Wednesday, a report on oil inventories will be released. The high price of oil is near the top of the list of variables that could dramatically slow the economy.

As for this weeks earnings releases, there's not much to get excited about. On Tuesday, Goldman Sachs (GS) is expected to report fourth-quarter earnings of $1.47 per share. On Thursday, H.J. Heinz (HNZ) is expected to post earnings of $0.67. Then on Friday, National Semiconductor (NSM) is expected to post earnings of $0.66.

As for stock market, there's a lot to like, particularly on a macro level. Federal Reserve rate hikes will likely not be a factor through the next few months. What's more, the economy is still growing, and it's growing at a more sustainable rate.

Despite the overall bullish macro outlook and the likely increase in liquidity next week, I'm not so sure it's going to be an easy market to trade, particulary in the tech issues. The COMPX had a terrific showing last week. The index added nearly 200 points on a significant increase in volume coupled with a bullish display of on-balance volume (OBV). More importantly, though, it breeched its 50 percent retracement from its March high of 5,132.

However, if you look at the chart, you'll notice that the COMPX is close to forming a double-top at 4,300. Also, the 4,300 is close to the 38 percent retracement of 4,334, which could also provide additional resistance.

I don't have much enthusiasm for the older economy, either. I still believe that the INDU is range-bound (okay, so the range is 11,000 to 11,300 instead of 11,000 11,200). The average just doesn't seem to have the chutzpah to break through 11,300 with any conviction. Adding to my concerns are a weakening MACD and a flat RSI.

Finally, I think the market is getting too complacent. The economic data and the overall sentiment is just too bullish. Productivity is up, economic growth is at a less inflationary level, interest rates are falling and earnings have stabilized. No one is worried.

Another factor that has me thinking the market is complacent is the fact many of our plays made strong upside moves last week -- too strong for my liking. When making money is easy, that means few people are worried. And this has me worried. If no one has any immediate concerns, who is left to drive the market higher? After all, worriers supply the demand. If there are no worriers, there is no demand.

But enough of my fretting. We'll sort this all out this week. Have a good weekend (don't worry) and enjoy the Labor Day holiday.

S.P. Brown
Editor