Time for Hibernation

Winter is approaching and it may just be time for all the little bears to quietly slink off to their dens for their annual October to March hibernation. Just because this has been the pattern for the past few years does not mean it has to happen.

Many market pundits do not seem convinced that we have passed the October portfolio destruction and we are now ready for the fourth quarter rally. Two years ago when the market fell apart we were in the midst of a global economic crisis. A fall in equity prices was warranted. Greenspan bailed the markets out with a surprise rate cut and we were off to the races. This time around we are experiencing the negative effects of a European slowdown but it is hardly a crisis. A rate cut appears to be extremely unlikely this time around, but there is so much cash lying around that has to be put to work that some sort of continued rally into the end of the year appears likely.

The NASDAQ began the new options expiration period with a decided day of consolidation. The COMPX flopped around in a relatively tight range, which is perfectly acceptable considering last week's gyrations. The 90-point range culminated in a slightly down day with the Index dropping 14.44 points and closing at 3468.7. There was some good volume today with 1.67 billion shares traded. Despite the drop, gainers outpaced decliners by a ratio of 21 to 18. 44 new 52-week highs were slightly outpaced by 58 new lows.

Among individual leaders there was general strength in the beaten down semiconductor sector. Shares of Xilinx (XLNX) climbed $1.38 to $75.63, Applied Materials (AMAT) came back another $2.94 to $53.44 and the Splittrader Play of the Day, Elantec Semiconductor (ELNT), powered to a new high as it gained $4.88 to $109.50. Some other NASDAQ winners included, Micromuse (MUSE), which moved $17.19 higher to $212.44, Vertex Pharmaceuticals (VRTX) added $13.19 to $92.94 and Brocade Communications (BRCD) picked up $14.19 to $266.63.

Some of the biggest gains were found in the Biotechnology sector. Protein Design Labs (PDLI) rallied $10.06 to $131.75. Human Genome Sciences (HGSI) increased its value by $6.69 to $98.19 and Millenium Pharmaceuticals (MLNM) gained $7.31 to $77.31. You may want to keep an eye on this trio because they were some of the biggest winners during last year's November to January run.

There was some decent profit taking in some of last week's biggest winners. Juniper Networks (JNPR) gave up $7.13 to $224.88. i2 Technologies (ITWO) lost over nine points to $177.36. Veritas Software (VRTS) slipped $9.44 to $157.38. Network Appliance (NTAP) was also a notable loser by dropping $8.25 to $140.38.

The DOW Industrials was dominated by the General Electric (GE) takeover of Honeywell (HON). More on that later. Typically monster mergers spark a bit of enthusiasm but the DOW only picked up 45.13 to 10,271.72. Volume was 1.03 billion shares. Decliners slipped past gainers on the NYSE by a ratio of 5 to 4. There were 38 new highs but 66 new lows.

Profit taking in Microsoft (MSFT) hurt the DOW as the stock fell $3.06 to $62.13. Shares of Merck (MRK) helped the DOW as it rose $2.88 to $84.75 due to a rating increase to Outperform from Neutral from Salomon Smith Barney. Minnesota, Mining & Manufacturing (MMM) also helped matters as it rallied $2.69 to $89.81 after reporting profits of $1.25, a penny ahead of consensus estimates.

SBC Communications (SBC) was a sizable gainer on the NYSE as it picked up $3.38 to $54.13. The Company reported profits of $0.56 a share which was a penny above estimates. Pfizer (PFE) joined the Drug stock rally and gained $2.00 to $45.38. Major NYSE semiconductor representatives had decent days as Micron (MU) bounced $1.44 and Texas Instruments (TXN) increased $1.38 to $48.88. Genentech (DNA) had a good day, rising $10.19 to $163.06 and it was closely followed by fellow biotech, Celera Genomics (CRA) a gainer of $5.75 to $74.50. Printer maker Lexmark International (LXK) moved $5.56 higher after it beat estimates by three pennies with profits of $0.50. These estimates had been revised after an earnings warning but the stock probably rallied due the announcement that the Company will eliminate 900 jobs as part of a restructuring move.

NYSE decliners were highlighted by the fall in Corning (GLW). The stock fell $4.50 despite beating expectations by a penny with profits of $0.35. The Company did say that earnings are expected to grow by about 25% next year. Many analysts chalked up the drop to profit taking. Quest Diagnostics (DGX) missed the health care stock surge by dropping $13.38 to $99.56. Schlumberger (SLB) led oil service stocks lower with a drop of $3.63 to $80.50.

Outside of the DOW one of the major index winners was the Russell 2000 (RUT) which gained 2.51 to 489.96. The S&P 500 (SPX) barely finished negative with a drop of 1.15 to 1395.8. The S&P 100 (OEX) was a little weaker, falling 3.8 to 734.36. The 100 largest NASDAQ stocks, represented by the NDX, were weaker than the broader NASDAQ with a decline of 35 points to 342.

The highlight of the day among the major sectors was the Biotechs (BTK). This index climbed 40.76 to 767.98. Semiconductors (SOX) continued their bounce from last week with a gain of 24.4 to 777.25. The Pharmaceutical Index (DRG) is closing in on its high of 428.26 with a gain of 12.1 to 423.68. Banks (BKX) softened by 5.1 to 795.82 and Brokers (XBD) also suffered, dropping 16.78 to 604.8.

Bonds were down a bit today. The 30 year T-Bond Index (TYX) slipped 0.05 to an average yield of 5.679% and the 10 Year Note Index (TNX) fell 0.06 to an average yield of 5.582%.

General Electric's (GE) blockbuster takeover of Honeywell (HON) dominated the news front today. The $43 billion stock deal is the largest ever for GE and it is the first takeover involving two DOW components since 1907. When CEO Jack Welch was questioned by a reporter about why GE did not spend their cash on a technology company the popular CEO responded, "What the h- -- do you you think Honeywell is"?. He went on to further explain that GE is also a technology company and you do not have to have "dot com" in your name to qualify as a "tech". In fact, as Mr. Welch continued, perhaps the biggest beneficiaries of the technology explosion are the companies that know how to utilize innovations to increase efficiencies and apply the appropriate new technologies to their operations. Although Honeywell's recent financial performance lags behind GE's there is confidence that GE's well respected management team will make the deal work and get Honeywell's profits up to GE standards. Although the companies are in many similar industries they do not have a lot of product overlap. GE closed modestly lower by $2.50 to $49.75 and Honeywell (HON) picked up $3.94 to $49.94. The deal values HON at $54.99 a share.

Troubles continue over at Lucent Technologies (LU). The Company warned yet again that earnings will not meet estimates. The Company is now looking at a break even quarter when it ends December 31st. LU reported fourth quarter earnings today after the close. The profits of $0.18 beat revised estimates by one penny. The fallout from Lucent's string of disappointing results cost the current CEO his job. Current CEO Rich McGinn will be replaced with former CEO Henry Schact in an attempt to get Lucent moving forward again. LU lost $0.56 to $22.06, a far cry from its 52-week high of $84.19.

AT&T (T) is considering a different way to get its floundering stock going. Ma Bell is contemplating splitting the company into four separate entities. The plan calls for the business- services division to become the new AT&T. This division is the company's largest and most profitable group. The Company's current wireless, consumer and broadband groups would be spun off and/or tracking stocks would be created. AT&T reports earnings on Wednesday before the market opens. Consensus estimates are looking for profits of $0.38 per share. Shares of AT&T closed modestly higher by $0.63 to $27.63.

Earnings reports should continue to dominate the trading day so here is a partial list of some important earnings due out tomorrow.

Before the open: Ameritrade (AMTD), Bowater (BOW), Burlington Northern/Sante Fe (BNI), Cardinal Health (CAH), Chevron (CHV), Colgate-Palmolive (CL), Exxon Mobil (XOM), Goodyear Tire (GT), Hershey Foods (HSY), McKesson HBOC (MCK), Metro-Goldwyn-Meyer (MGM), Nabors Industries (NBR), Nextel Communications (NXTL), Pfizer (PFE), Schering-Plough (SGP), SPX Corp (SPW), Storage Networks (STOR), Sunoco (SUN), Tenneco (TEN), Texaco (TX), THQ Inc (THQI), Transocean Sedco Forex (RIG), Tyco International (TYC) and Xerox (XRX).

After the close: Actel (ACTL), Advanced Fibre Communications (AFCI), Affymetrix (AFFX), AFLAC (AFL), Amazon.com (AMZN), BMC Software (BMCS), C-Cube Microsystems (CUBE), CheckFree (CKFR), Compaq (CPQ), Computer Associates (CA), DSP Group (DSPG), Excite@Home (ATHM), Halliburton (HAL), Lernout & Hauspie (LHSP), Maxim Integrated Products (MXIM), Mentor Graphics (MENT), Micromuse (MUSE), Nortel Networks (NT), Oak Technology (OAKT), Peregrine Systems (PRGN), Plexus Corp (PLXS), Siebel Systems (SEBL), Vertex Pharmaceuticals (VRTX) and VerticalNet (VERT).

One can expect some more consolidation with an upside bias for the rest of the week. The NASDAQ has established some very solid double bottom support just above 3000. It would take a major news item for this support not to hold. We are emerging from the traditional October swoon. In some ways it appears almost too perfect. Some analysts are saying that since everyone knows the market bottoms in October there just has to be a surprise down the road. Fine, they can keep their money on the sidelines. Double bottoms on huge volume are one of the single best indicators that we have that a significant low has been achieved. Some are saying there was not enough bearishness but I beg to differ. There were a ton of puts out there right before expiration. We probably we will not scream higher right away. We still have a lot of earnings to get through as well as a close Presidential race.

Short term technical indicators are good, especially the MACD which issued a buy signal last week. This indicator has been very reliable in predicting market trends this year. A good rally will likely occur if we can surpass resistance at 3535. 3400 is the short term support. We could get one last little drop if this support fails. It probably is not time to really load up yet, but cautious bullish positions could be the way to go, especially in the fundamentally strongest stocks that have limited European and interest rate exposure.

You can also watch the DOW as its MACD is just about to catch up to the NASDAQ by issuing its own buy signal. One or two more up days ought to do it. Major support is still the psychologically important 10,000 level and shorter term support should be found at today's low of 10,216. If we can climb above today's high of 10,360 then a test of the 10,500 resistance should only be a hop-skip-and-jump away.

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

Jim Booth
Research Analyst

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