Mr. Softee Plays Hardball

Microsoft (MSFT) took the whole market on its back today, rallying both the Dow (INDU) and the NASDAQ (COMPX) to triple digit gains. New York City saw an early preview of how to hit a curveball, when Mr. Softee stepped up to the plate this morning and hit one out of the park. Derek Jeter couldn't have done better. After releasing earnings of $0.46 a share, beating the Street by $0.05, MSFT gapped open $6.69 and didn't look back.

Microsoft ended the day up $10.13, or 19.5% to close at $61.88 on volume of 127 million shares. Revenues increased 7% to $5.8 billion, from $5.4 billion in the year ago period. Some other notables out of this stellar report include the fact that PC demand was in line with expectations and MSFT actually beat the original estimate (before it was lowered) of $0.43 a share. The company also reiterated that it sees long term growth in the 15% area.

It was high-five time for most all of the high techs today, especially for the bellwethers. Sun Microsystems (SUNW) tacked on $7.38, to $117.69, Dell (DELL) added $2.56, to $28.81, Cisco (CSCO) rocketed $6.00, to $58.25, Intel (INTC) finished up $3.75, to $41.88 and Network Appliance (NTAP) almost made a 52-week high, closing up $11.88, to $145.38.

Even the beaten down wireless group issued a fuzzy cheer and rose from the depths, on renewed enthusiasm from Nokia's (NOK) earnings report. Nokia soothed investor's fears by beating earnings and assuring that it is headed towards "record breaking earnings" in the fourth quarter. NOK rallied $8.13, or 27% to close at $38.13.

After the bell today, eBay (EBAY) reported better than expected earnings and as of this writing, was up strongly in after hours trading. EBAY came in with earnings of $0.07 a share, handily beating consensus expectations of $0.04 a share. Not too shabby. I guess more folks are bidding for Teletubbies and those new Sega videogame consoles that every kid has on his, I-must-get-this-or- I-will-hate-you Christmas list. With EBAY saying all the right things in their earnings report, expect the internet sector to wake up and show signs of life tomorrow.

Thursday's Happenings:

Hold off on the ticker-tape parade for now, but I think it might be time to toot some horns and do a small (conservative) dance. The indicies showed that they have not rolled over and played dead yet.

The NASDAQ (COMPX) staged a much needed accumulation day on great volume. The COMPX shot up 247.04, or 7.79% to close at 3418.60. Volume was a staggering 2.3 billion shares. An accumulation day, for the uninitiated, is a day in which the index or stock closes higher on greater than average volume. It shows conviction in the move and is exactly what the Good Doctor ordered for the COMPX. To cap off a great day, the COMPX finally took some Scope to cure its bad breadth. Advancers beat decliners 2846 to 1156. This is what we want to see if this is truly a bottom that we hit yesterday.

The DOW (INDU) shed its stogy demeanor, donned its party hat, and marched higher by 167.96 points to close the day above 10,000 at 10,142.98. Whew! The 10,000 level has become like a safety blanket for many on Wall Street and they got a little cranky yesterday when it was taken away. The financials within the INDU contributed to the gains, with J.P. Morgan (JPM) up $8.00, American Express (AXP) up $1.81 and Citigroup (CI) adding $1.75. The drugs and consumer stocks within the DOW slowed it down a little, as investors fled the relative safety of these issues in favor of the newly popular tech issues. Johnson & Johnson finished down $2.50, while Coca-Cola (KO) ended down $1.06.

Surprisingly, treasuries finished the day higher, with a number of forces pushing and pulling in opposite directions. With the U.S. stock market doing so well, one would expect treasuries to have been sold in favor of newly energized equities. This didn't happen, however, due to the fact that some Israeli's got an itchy trigger finger again and fired on Palestinians in the West Bank. Bullets equal buying when it comes to the treasury market.

Adding to the buying pressure in Treasuries was the fact that oil dipped below $33 a barrel today on hopes that OPEC will boost oil output before its November meeting. Lower oil prices mean lower inflationary pressures and lower inflationary pressures are always good for treasuries. The benchmark 10-year note finished up 7/32, to yield 5.67%. The 30-year rose 4/32, to yield 5.75%. Treasuries were also lifted by a buyback program instated by the Treasury Department to remove $2.075 billion in older debt from circulation.

Sectors and Stocks On the Move:

The semiconductor sector had a complete turnaround today, with the chip index (SOX.X) finishing up 111.44. It is funny what a difference a day makes. The index was lifted out of the mud by the likes of Texas Instruments (TXN) up $8.88 to $45.75 (boy, did I miss that one), Xilinx (XLNX) up $7.81 to $74.44 and Advanced Micro Devices (AMD) up $3.69, to $21.81.

I bet a lot of people are scratching their heads, wondering how a sector can be so out of favor one day, while shining the next. An example, you ask. Well, Texas Instruments (the one that got away) reported third quarter earnings last night that were in line with estimates of $0.33 a share. Then it warned (like its peers) that the fourth quarter revenues would be almost flat when compared to third quarter revenues. In addition it was going to reduce its sales estimates. On top of all this AG Edwards downgraded the stock. You know the rest of the story. TXN skyrocketed on the day, pulling the sector with it. Once again sentiment plays a huge roll in the perception of a report. Couple this with ridiculously low prices for companies that will definitely be around and doing well in 3 years, and you have the ingredients for a bargain hunter ho-down.

As mentioned above, the drug (DRG.X) and healthcare (HCX.X) sectors took a breather today as money flowed out of the "safe plays" and back into some of tech stocks that are now at bargain basement prices. The telecomm sector (IXTCX.X), finally took investors off hold and shot up 49.83 to close at 1244.18. Although this sector has quite a bit more healing to do, today might have been the start of turnaround for some of the telecomms (LVLT, T, NXTL, WCOM) that are bumping up against their 52-week lows.

Looking Forward, Always Forward:

Today was a victory for the Bulls, of that there can be no doubt. What we need to remember, though, is that we have seen this type of action before and have been let down hard. Lets weigh the pros and the cons before we dive in to find the water is only 2 feet deep.

So the pros stack up like this: We have put in a bullish double bottom in the COMPX if this thing holds where it is. The recent rallies have come on increased volume and the breadth has turned positive. The big tech stocks that led us out of the last bear market are rebounding like champs. The put/call ratio is at .95, just below the critical level of 1.0, which marks most market bottoms.

The cons, though fewer in number, should be heeded. The cons include: The number of bulls out there still out number the number of bears. The gaps, such as the one created by the sharp price rise this morning, usually are filled by prices falling back into the gaps in subsequent trading sessions. With this rebound, we are on our way to creating a "v" bottom. These "v" bottoms seldom hold, as many would be buyers think they missed the rally and wait for prices to settle back down before committing capital.

So, my friends, we are faced with the age-old question of did we put in a bottom with the recent price action. My answer to this is the same answer I give to almost any trading question; let the market tell you. All we can do is watch for follow through days on the indicies and positive buying action in the hallmark stocks that can take this market higher (MSFT, GLW, INTC, SUNW, NOK, and the stronger biotechs). No market has ever come out of a pronounced downtrend on the heels of a rally in consumer, retail or bank stocks. Look for the market to have more strong up days on strong volume. I can't stress the need for strong volume enough. We need everyone to jump on board for this rally to get legs. These tell tail signs may be interspersed between down days (ideally on lighter volume), but will take place within the next week or two if this thing is for real. As always keep your stops tight if you are wading into the waters. A trading lesson can be taken away from the behind the scenes strategies going on at the World Series this weekend in New York. More often than not, games are won by laying down singles or a bunt, than swinging for the fences.

Trade Smart!

Craig Seidler
Assistant Editor

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