I'm not convinced that a market top has been set but I am equally convinced that it may have been.
There have been numerous divergences that have been put in place technically that lend support to the theory that these high levels of bullish sentiment are indicative of a topping formation.
I'm keeping an eye on the banking sector for a potential breakdown through 850 as one of the indications that a deeper correction may soon be underway.
At the same time I am not yet a big believer in chart patterns like the proposed head and shoulders top that Amateur Investors suggests may be possibly taking place with the banks.
I do know that the banks are just as important to the S&P 500 as the SOX is to the NASDAQ and one index or the other will succeed in the battle to pull the market either up or down...
At least temporarily. One thing that is keeping the market moving higher is the continued high level of put buying. Light volume or not until we see less put I'm likely to get slaughtered for holding my AMAT short position.
From Briefing.com: Overall the performance was mixed, the ranges for the major averages were relatively tight, the trading action was choppy and the volume was once again on the lighter side. No real surprise with any of this as we traverse through this pre-holiday week which is traditionally one of the slowest volume weeks of the year. Last Friday and thus far this week has also seen its fair share of volatility. But, given the thinner trading conditions this too should not be considered an unusual development.
This the type of market is more conducive to day trading but if you are able to hop on a stock/group with some momentum, impressive gains can be had. The semi sector fits the bill in that regard as it built on Tuesday's late push bringing the move in the SOX off yesterday's low to 5.8% (+2.9% today). Some of the impetus for the upside extension was related to what normally would be considered minor calls from the Street: HNG upgraded BRCM +2.8%, IRF +4.6%, MCHP +2.2%, RFMD +1.1%, SKYW +2%, TQNT +8.2%; Lehman upgraded NSM +5.7%; Bear Stearns upgraded FCS +13.4%. Sector strength was also seen in networking, disk drive and computer-hardware in the tech community along with modest gains in defense, retail and cyclical.
While trade was choppy, the Nasdaq Comp has generally followed the technical levels that we have presented (see chart below). Early action held at a minor congestion zone near 1763 with short term resistances at 1774/1776 and 1783 of interest from an intraday perspective. While the index is still 30 points away from the intraday high for the month, it did actually established a new 52-wk closing high (1782). A posture above initial support now at 1777/1774 (previous closing high, July intraday high, intraday congestion) leaves the door open for additional upticks. A secondary floor is in the 1768/1764 area (20/50 period averages). Next resistance is at 1795/1800 with the August intraday high at 1812.
Close Dow -6.66 at 9333.79, S&P +0.06 at 996.79, Nasdaq +11.49 at 1782.14: It was trader heaven today as volatility reigned supreme and the indices spent the bulk of the day chopping around... Despite the lack of an apparent trend, the major averages did exhibit a slight positive bias and as a result, the indices set their session lows at the onset of the session and closed the day near their session highs and in positive territory in the case of the Nasdaq and the S&P 500... To that end, breadth figures were mildly positive, although volume maintained its anemic levels ahead of the long Labor Day weekend... The majority of the sectors spent the bigger part of the session in the green, with the leaders to the upside including the defense, networking, disk drive, semiconductor, and gold sectors... The strength of the latter coincided with a $7.30 uptick in the price of gold to $374.10/oz., its highest levels in more than six months... The resilience of the semiconductor group fed off of several upgrades in the sector, including that of National Semi (NSM 28.67 +1.50) to Equal Weight from Underweight at Lehman Brothers... Laggards of note included the oil services, transportation, housing, and banking sectors...
The housing and banking sectors have been particularly weak of late in the wake of the rising interest rates... To that end, the 10-year note closed the session down -11/32, with its yield at 4.52%...NYSE Adv/Dec 2013/1205, Nasdaq Adv/Dec 1926/1161
2:50PM Kaufman reits Buy on Covad Comms; target $8 (COVD) 3.69 +0.42: Kaufman reiterates their Buy rating and $8 target, as they believe the recent sell-off in COVD provides investors with an attractive entry point; firm says the co is building momentum, poised to turn EBITDA-positive in 4Q03 and free cash flow-positive in 2Q04, and its shares are trading at a discount to Internet infrastructure comps such as AKAM and EQIX on EV/sales (COVD at 1.5x vs 3-4x for the peer group); firm also raises net add estimate to 324,406 from 236,366, driven primarily by higher expectations for growth from consumer wholesale.
9:59AM INTC: Current risk/reward profile is not attractive -- Bernstein 27.54 -0.17:
9:56AM Bernstein reduces tech exposure : Yesterday after the close, Bernstein reduced their exposure to the Technology sector to Mkt-Weight, as their analysis suggests that Q3 bottoms-up consensus ests are aggressive on a historical basis, with the strengthening dollar reducing one of the key drivers of growth; firm concludes that current valuation levels are difficult to justify given the near-term risk to ests. Firm adds exposure to STM, ATML, and DBD, and reduces AGR.A, IBM, and HRS.
9:22AM Westell Tech selected by Cincinnati Bell as DSL modem supplier (WSTL) 7.36: Co selected by Cincinnati Bell (CBB) as the primary provider of DSL modems to its residential and small business customers in Ohio, Kentucky and Indiana.
9:17AM ATI Tech ramping orders at TSMC and UMC -- Digitimes (ATYT) 13.99: Digitimes reports ATI Technologies is expected to increase its orders to TSMC and UMC to approximately 100k wafers in Q3, which is up from 70k in Q2. The order growth is attributed to the co's emphasis on the middle range and low end markets. In addition, the co is expected to replace NVDA this quarter as TSMC's largest customer
8:27AM Fairchild Semi upgraded at Bear Stearns (FCS) 14.96: Bear Stearns upgrades to Outperform from Peer Perform, as they believe the co could begin to see shortages in power discrete components (primarily for power MOSFETs) in 2004, and that supply constraints could lead to firming prices and a period of strong earnings growth for the co. Target is $21.
3:22PM Corinthian Colleges (COCO) 54.03 -1.98: Momentum groups have the advantage of having the wind at their back, any upside preannouncement prompting a rush of buying activity. This formula has worked particularly well for the post secondary education sector as shares have charged to new 52-week highs against a backdrop of better than expected earnings announcements. The downside, of course, is that even in-line financial guidance is balked at by investors, and triggers a sharp correction in share price.
As such, we have the for-profit education providers today, rounding out the list of worst performing stocks. Corinthian Colleges (COCO) grew Q4 (June) EPS from year-ago levels by 44% to $0.39 (consensus of $0.36) on total revenues that increased 45% to $138.9 mln, but said it saw Q1 (Sept) and FY04 EPS roughly in-line with Wall Street's forecast at $0.36-0.37 (consensus of $0.37) and $1.77-1.80 (consensus of $1.78), respectively. Consequently, COCO stock has given back 4%, and paced the way lower for the entire industry.
Admittedly, much of the market's concern lies with the opinion that the group's better days might be behind it. The jobless economic recovery - which has seen firms cease their headcount reductions but not increase their hiring efforts - has landed many laid-off workers in post-secondary schools while they wait for the labor market to improve. The noticeable decline in weekly initial and continuing claims, however, has signaled that the employment picture may be strengthening, and this in turn has renewed talk that student enrollment rates may stagnate.
All fears aside, Corinthian College sought to assure the investment community that it is still experiencing solid rates of growth. Total student population rose 26% and new student starts increased 25%, and the company projected that FY04 revenues should jump 44-46%, to $744.9-755.3 mln (consensus of $714.3 mln), as a result of strong student interest. Briefing.com suspects that such a projection may be attainable in light of Corinthian's impressive breadth of degree offerings, strong track record of student placement, and positioning within niche areas. The company recently acquired Career Choices and East Coast Aero Tech, two school franchises that specialize in auto technician, aviation, and allied health, which should help preserve pricing power with little competion in those areas.
Nonetheless, we would advise investors to take some profits as COCO is up 18% since we last wrote about it on April 30. The stock is trading within 8% of its 52-week high, and that combined with underlying concerns surrounding the post-secondary colleges' growth prospects, could curb upside momentum. Still, we continue to view Corinthian Colleges favorably, and believe its strong increase in Q4 new student starts portends well for FY04. -- Heather Smith, Briefing.com 1:41PM Michaels Stores (MIK) 39.22 +0.89: Need beads? Some paint perhaps? Well, Michaels Stores (00C) has been the place of preference for thousands of students, starving artists and part-time hobbyists since its founding in 1984. But more recently, MIK has been a decisive destination for parents in better preparing their kids going back to school.
The nation's largest specialty retailer of arts and crafts materials is scheduled to report Q2 results after the close tonight. And if history can repeat itself, MIK shareholders could go into the Labor Day weekend with anything other than work on their minds. One year ago today, MIK shares closed 5.4% lower at $39.75 heading into earnings. But after the close, MIK management shocked the Street by reporting EPS of $0.30, cleverly and creatively beating the Reuters Research consensus of $0.18 despite raising guidance by two cents to $0.18 twenty days earlier. Twenty-four hours later, shares closed nearly 14% higher at a new 52-week high of $45.21.
And last year's post-earnings surge was no exception. When MIK reported Q3 results of $0.46 (vs consensus of $0.40) after the close on Nov. 26th, investors showed their appreciation by bidding up shares 11% intra-day to close at $38.61 on the eve of Thanksgiving. Fast-forward four more months and, voila! On Wednesday, March 12th, MIK reported Q4 EPS of $1.07, beating consensus estimates by $0.06. The next morning, shares opened 8.3% above its previous close of $20.29, gained as much as 19.5% intra-day and finished the session at $23.95 (+18%) on 3x average volume.
Out of the 13 analysts that cover Michaels Stores, nine maintain Strong Buy ratings with the remaining four split with 2 Buys and 2 Holds. Most recently, Adams Harkness reiterated its Strong Buy rating on July 28th and adjusted its target to $51 (from $44). Six weeks ago, Wedbush Morgan reiterated its Buy rating and $48 target on the heels of Southwest Securities Strong Buy reiteration and target increase to $46 (from $41). And, USB Piper Jaffray in early May upgraded MIK to Strong Buy and raised its 12-month price target to $50 (from $36).
Sure, Michaels Stores reaffirmed EPS guidance of $0.32-0.36 vs consensus of $0.33 just three weeks ago. But since MIK has consistently beaten consensus over the last five quarters, coupled with improving same-store sales trends and ongoing margin expansion through better inventory controls, don't be surprised if the present [once again] parallels the past.
So, when it comes to beading, albeit from a financial stance to mean a drop [in share price], analysts as well as shareholders will more than likely hang their hats on anything but a plummet in MIK shares following tonight's results.
12:51PM Tomorrow's Second Quarter GDP Release: Tomorrow morning at 8:30 ET, revised second quarter GDP data will be release. On July 31, real GDP growth for the quarter was put at a 2.4% annual rate. Expectations are that this will be revised upwards to close to 3%. The data are also likely to lead to higher forecasts for third quarter real GDP growth, which Briefing.com believes will be at over a 4% rate.
For an explanation of the breakdown of the components of GDP, and how these components are reflecting stronger growth, please see the recently posted Stock Brief titled GDP Primer.
11:47AM Ratings Briefing - BSX : Drug-eluting stents have been championed as the next great frontier in medical technology. Unlike their bare metal cousins, drug-eluting stents prop open arteries and prevent restenosis, a type of scarring that results in obstruction of the artery. Analysts estimate that the new device could more that double the stent market to $4.7 bln in annual sales, a figure that has enticed a number of drug/medical device companies to jump on board. Johnson & Johnson (JNJ) was the first to win FDA approval for its Cyper stent in late April, and Boston Scientific (BSX 63.35 -2.05) is not far behind with its Taxus IV stent, slated for US approval by year-end.
Buyers have flocked to stock of Boston Scientific, in particular, as the company's equally as potent drug-eluting stent is expected to steal share from Johnson & Johnson's Cyper, which has experienced more than its fair share of problems during its launch. Demand was simply more robust than Johnson & Johnson had anticipated, resulting in inventory shortfalls and off-label use. Consequently, Boston Scientific looks well-positioned to claim a solid portion of the market, and analysts have used that reason for a steady stream of upward estimate revisions and analyst upgrades. Prior to today, an impressive 24 out of the 27 analysts that covered BSX rated it a Buy.
In an effort to stay ahead of the analyst pack, Morgan Stanley has downgraded shares of BSX to Equal-weight from Overweight, while also significantly boosting its 2004-06 EPS estimates. The firm dubs the Taxus IV data that will be presented next month a 'powerful event,' with in segment binary restenosis rates falling in the 9-12% range (Cypher yields approximately 8.6%). As a result, Morgan Stanley increased its 2004 EPS estimate to $3.28 from $2.55 (consensus of $2.82) and raised its 2005 EPS estimate to $3.75 from $2.93 (consensus of $3.58). The firm cautions, however, that 2005 should mark Boston Scientific's peak earnings cycle as new competition emerges, and recommends that investors form an appropriate multiple around those earnings. The firm sees BSX trading at the lower end of a 20-24x range (the historic multiple of med tech stocks), which yields a price target of $75.
The competition Morgan Stanley speaks of are impending drug-eluting stents from Medtronic (MDT) and Guidant (GDT) in late 2005/early 2006. The latter is breathing down both Johnson & Johnson and Boston Scientific's necks with an upbeat mid-quarter conference call yesterday that outlined its progress in bringing its Champion drug-eluting stent to market. Guidant expects to file the first module with the appropriate European regulatory body within the next week, and Prudential was so impressed with the company's increasing visibility that it named GDT a stock to own yesterday. The firm believes that shares are likely to incorporate some option value for the program by Guidant's November 20 analyst meeting, and notes that (in its estimation) BSX shares incorporate about $40 of option value right now.
As a result, Briefing.com would recommend investors keep an eye on GDT as it could - just as BSX did - enjoy even more upside leading into its drug-eluting stent's FDA approval. As for Boston Scientific itself, we would recommend investors exercise some caution at these levels (BSX is up 58% since the beginning of April), although we continue to believe that the name represents a formidable play on the medical device industry. Morgan Stanley's analyst, Glenn Reicin, has been on Institutional Investor's First or Second Team for six years running, and that fact alone probably explains why BSX is down 3% today.-- Heather Smith, Briefing.com
11:39AM Gold is Back on the Radar Screen: Stocks have been flat the past couple of months. Gold hasn't been.
Today, gold is up about $7. It is now back near its peak in February caused by the Iraqi war. Here is the chart of gold futures for the past few months:
The increase in gold price reflects a broad rise in commodity prices. Commodity indices are up sharply over the past few months. For example, the Journal of Commerce commodity index is up 13.4% since May 9, and oil prices are up 23% since April 30. Even grain prices have risen this past month.
This increase in commodity prices has raised moderate concerns about future inflationary pressures. That certainly has helped push gold prices higher. Briefing.com is skeptical that the general rise in commodity prices indicates that inflation will pick up significantly, but the move is noteworthy.
The rise in gold prices has also pushed gold stocks sharply higher. The XAU gold stock index is up a whopping 38% the past three months. Briefing.com has followed some of the gold stocks on our In Play page as trading opportunities. The long-term investment outlook is less clear and frankly, we don't follow this sector as in depth as other sectors. However, back on March 19, Briefing.com did upgrade the precious metals sector to a four star rating.
Gold is more on our radar screen for what it implies about the overall economic and stock market outlook. The rise in commodity prices is a double edge sword. Some see rises in commodity prices as beneficial to stocks, due to the increased pricing power for commodity-oriented companies. Others will see it as a negative, as it could signal higher inflation and higher interest rates.
Briefing.com falls in the latter camp. Rising commodity prices will only be one factor impacting stocks in the months ahead, and not an overwhelming factor. But if they continue to rise, the bond market is likely to take notice, and higher interest rates won't be good for stocks. - Dick Green, Briefing.com
9:18AM The Technical Take : As we noted before the open yesterday the recent downward reversal, which did trigger some negative technical developments (key reversal Dow, continued non-confirmation S&P 500, potential exhaustion action in semi sector), was not accompanied by a meaningful increase in selling pressure. This of course does not prevent further losses from developing amid thin and thus potentially more volatile trade conditions as we saw in the early going on Tuesday. However, without a sizeable pickup in volume, which is not expected until traders return from vacation next week, it is important not to place too much weight on the day to day price swings.
For today, we have the pre-market readings pointing to a slightly weaker start to the session. There is no data of interest today and limited commentary from the Street arguing for another thinly traded session. From a straight technical perspective we saw short term follow through develop in the wake of the bearish action/close on Friday. Given the solid reversal/close yesterday (outside day higher close) it suggests potential for some type of follow through rally attempt later in the day/tomorrow. Overall what we will need to see is sustained action above the recent ranges for the Dow and Nasdaq Comp with the S&P 500 and volume confirming the move. Until then, as long as the averages maintain a posture above their 20/50 day averages, the market will be considered in a neutral/corrective mode within the context of the intermediate term bull trend.
Nasdaq Comp: As for near term technical levels of interest, the Nasdaq Comp made its stand yesterday at congestive support from July in the 1740/1737 area. Standing in the way initially on the upside are resistances at 1774/1776 (50% retrace of recent slide/July high) and 1783 (62%, Aug 21 high). Support of interest is at 1763 and 1758/1756 with the latter marking previous congestion, the 20 period exp mov avg on an hourly chart --provided key directional clues over the last three days-- as well as the 50 period mov avg.
To view the remainder of the Technical Take see the Stock Brief. Send suggestions, comments or questions to -- Jim Schroeder, Briefing.com
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