Stocks look to open flat this morning, with most attention moving to the biotech sector. A large merger announcement between Biogen (BGEN) and IDEC Pharmaceuticals (IDPH) is taking the spotlight this morning. The Fed is also a major topic, with the FOMC set to provide their decision on interest rates Wednesday afternoon.
This week is the last full week of trading in the second quarter, which could provide some strength for stocks as institutions buy the winners this last quarter to window dress their portfolios. However, the stock market looks worn out after such a large advance and the CBOE Market Volatility Index ($VIX) is sitting just above the key 20 level.
Both BGEN and IDPH are higher this morning after announcing merger plans. IDPH will buy BGEN in a deal valued at $6.65 billion in stock. The terms provided for the deal are for 1.150 shares of IDEC stock for each share owned of BGEN. This news has covered up a warning by Biogen. The company now expected earnings of 32-38 cents a share, below estimates for 42 cents a share.
PeopleSoft (PSFT) is hoping that another company will step in and save it from the hostile takeover bid of Oracle (ORCL). Oracle has bid $19.50 a share, though the board of directors is advising shareholders to not support the takeover. Five companies are thought to be possible buyers of PSFT, with SAP (SAP) the most likely candidate.
With the second quarter about to end, earnings warnings are going to pick up. Last week, Eastman Kodak (EK) provided a major warning, which held the Dow ($INDU) in check. Today, Tenet Healthcare (THC) warned that earnings would be well below analysts’ expectations. Prior estimates were for THC to make $1.40 a share, but this has been dropped to 40-50 cents.
The combination of earnings warnings and the FOMC announcement this week could spell trouble for stocks. Traders have priced in a rate cut and this often results in selling once the actual event takes place. However, the bulls have been resilient, sending the S&P 500 ($SPX) up nine of the last ten weeks. This has only occurred one other time and that was right before the bull market ended in 2000. This doesn’t mean we are in for another major decline, but combined with other indicators, it should tell us to be mindful of a possible market top.
Jody Osborne Senior Staff Writer & Options Strategist Optionetics.com ~ Your Options Education Site
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