From Briefing.com: Friday's session boiled down to Intel (INTC 27.39 +1.00) - Intel's pre-announcement on Q3 prospects and the market's reaction to Intel's pre-announcement. One was good and one was not so good.
To be exact, Intel pleasantly surprised the market with a declaration before the start of trading that Q3 was trending above expectations. The real kick, though, was the news that Intel was raising guidance for the September quarter. Specifically, the chip giant revised its Q3 revenue outlook to $7.3-$7.8 bln versus previous guidance of $6.9-$7.5 bln (Reuters Research consensus $7.26 bln). The company noted that its Intel Architecture business is generally trending higher across all geographies, and channels, while demand for communications products remains soft. Gross margin is expected to be 56%, plus or minus a couple of points, compared to a previous expectation of 54%, plus or minus a couple of points.
As to be expected, the futures market took immediate notice and rallied ahead of the open. The cash market performed on cue and got off to a decidedly bullish start. The Intel-induced rally, though, lasted for all of 30 minutes and then it was basically downhill the rest of the day with the indices finishing in negative territory and at their lows for the session. In light of the bullish bias that persisted throughout the week, it seems almost unfathomable that the market would trade down on that good news. After all, hasn't it been awaiting just this type of news to validate the rally? The answer is yes, but the ultimate realization is that it was already factored in to stock prices.
Keep in mind that Intel and the SOX Index were up 5.3% and 10.4% for the week, respectively, ahead of Friday's announcement. Of course, both are up much stronger than that from their lows, having been driven by a belief that the semiconductor cycle is on the verge of a meaningful upturn. To say the least, Intel's news played into that very belief.
While Intel and the SOX Index both managed a gain on Friday, each finished well off the highs for the session. The lack of follow through buying interest, despite the positive implications of Intel's pre-announcement, is apt to trigger concerns that bullish momentum will be waning. Briefing.com wouldn't argue with that contention as items like the inability to rally on good news, the low reading on the VIX Index, the low level of bearish sentiment, and the low volume accompanying recent gains are red flags that suggest a corrective period is in order for the tech sector and the broader market.-- Patrick J. O'Hare, Briefing.com
4:56PM Weekly Wrap :
There were probably a fair number of market participants on vacation this week. That doesn't mean, however, that the action on Wall Street came to a halt. On the contrary, the market pressed on and it did so with a bullish bias.
Once again, the driving factor was a belief that the pace of economic activity is accelerating and that earnings prospects are improving. That belief was certainly not without cause as a series of reassuring earnings reports from the retail sector, encouraging economic data, and a positive pre-announcement from Intel (INTC) on its Q3 prospects contributed to the favorable outlook.
During the course of the week, the Dow, Nasdaq, S&P 400 Midcap Index, S&P 600 Smallcap Index, Russell 2000, Dow Jones Transportation Average, and SOX Index all hit new 52-wk highs. The S&P 500 was noticeably absent in that respect as a lackluster showing from the financial stocks acted as a restraint and, in turn, prompted speculation that there are latent concerns about the situation at Freddie Mac (FRE) and the bearish bias that has infiltrated the bond market and forced interest rates higher.
The financial sector, of course, is an integral leadership group. Without its participation, confidence in the sustainability of the market's advance would eventually be undermined. This week, though, the market more than held its own thanks to the continued leadership of the technology and cyclical issues.
Overall, it is fair to say the market traded with a bullish bias throughout the week as it ultimately dismissed a disappointing earnings report from Hewlett-Packard (HPQ) as being company-specific and held its ground amid news of more than 20 people being killed at U.N. headquarters in Baghdad at the hands of a suicide bomber. On a better note, it was cheered by a report that Iraq's "Chemical Ali" - the King of Spades in the deck of cards - was captured by U.S. troops.
Semiconductor stocks were the strongest performers as a new round of buying interest was precipitated by the SOX Index breaking out to a new 52-wk high. Intel raising its Q3 revenue and gross margin guidance on Friday helped validate the rally in the sector. As to be expected, Intel's news ignited an early rally in the broader market on Friday, but strikingly, the market soon reversed course and finished lower for the session. The reversal, despite the positive implications of Intel's guidance, was intepreted to mean - and Briefing.com would concur - that the good news had already been factored in to stock prices.
There is a good likelihood that the pullback on Friday in the wake of Intel's news will also be viewed as a signal that bullish momentum is tiring and that some corrective activity is in order. Briefing.com wouldn't disagree with that view as several other items suggest a cautious near-term stance is warranted. In particular, there is a bothersome sense of complacency implied in the current standing of the VIX Index (20.27), there is a low level of bearish sentiment (18.4%), insider selling is still strong, and the bank stocks are underperforming.
Setting our near-term concerns aside, though, Briefing.com continues to believe that the long-term outlook for stocks remains bright given the recent earnings news and economic data. Moreover, with the earnings yield on the S&P 500 (on a trailing twelve month basis) at 3.57% still exceeding the yield on the 5-yr note (at 3.44%), the asset allocation argument still does not support rotating back into bonds at current levels. The current ratio between the two stands at 1.04 (3.57/3.44), but the long-term average is 0.78, which suggests there is still plenty of room for bonds to back up, all else equal, before one can consider them cheap.-- Patrick J. O'Hare, Briefing.com
YTD chart of major stock indexes
Index Started Week Ended Week Change % Change YTD
DJIA 9321.69 9348.87 27.18 0.3 % 12.1 %
Nasdaq 1702.00 1765.32 63.32 3.7 % 32.2 %
S&P 500 990.67 993.06 2.39 0.2 % 13.0 %
Russell 2000 471.92 485.51 13.59 2.9 % 26.7 %
Close Dow -74.81 at 9348.87, S&P -10.22 at 993.05, Nasdaq -12.24 at 1765.31: The market got its balloon burst today and spent most of the session on a one-way street heading south as the air kept slipping out... The major averages started the session in positive territory, with gains of as much as 1.7% for the Nasdaq, incited by upward guidance by the semiconductor giant Intel (INTC 27.40 +1.01), which said it now expects revenues of $7.3-7.8 bln (Reuters Research consensus $7.26 bln)... Nevertheless, the market was unable to hold on to its gains and started slipping after the S&P 500 failed to clear the resistance in the 1010/1011 area...
As a result, the Dow, S&P 500, and Nasdaq spent the bigger part of the day in a steady decline and slipped a total of 154, 19, and 47 points, respectively, off their highs... Accordingly, the vast majority of the sectors spent the day on the defensive, with the semiconductor group being the only winner of note... Among the notable laggards were the networking, disk drive, biotech, drug, financial, oil services, transportation, healthcare, and housing sectors...
While the major averages proved unable to hold on to this morning's gains, they did manage to finish the week up 0.3%, 0.2%, 3.7% for the Dow, S&P 500, and the Nasdaq, respectively, compared to last Friday's closing levels... Elsewhere, the bond market spent the day not doing much of anything... The 10-year note closed up +5/32, with its yield at 4.45%...SOX +0.9%, NYSE Adv/Dec 1008/2250, Nasdaq Adv/Dec 1064/2109
3:14PM Semiconductor HOLDRs exhausted ? (SMH) 36.70 +1.15: -- Technical -- Sector posted big gains again today bringing the rebound off the August low to roughly 25%. While still holding on to a solid percentage gain, the sector has been drifting steadily lower since 10 am. While proof/technical confirmation is still needed, the action today raises the possibility that the recent run is exhausted. The linked chart shows gaps formed over the last several months. Breakaway gaps argue for follow through as they occur on a move out of a consolidation. Exhaustion gaps occur at the end of extended moves but may merely led to a period of consolidation. Also of interest is the potential bear divergence in the daily stochastic and the very low choppiness reading (lowest since Sep 2001). The latter, which measures the ratio of the average price range, has a tendency to form near at least short term reversal points.
2:30PM Intel Thoughts -- Moors & Cabot : Following Intel's favorable guidance this morning, Moors & Cabot notes that it is particularly surprising that the revenue forecast increase comes with the month of September still to be determined. As with many chip companies, quarters tend to be back-end loaded. This positive preannouncement implies that the months of July and August have been significantly stronger than expected. Firm believes that positive trends being seen by Intel could lead Cap Ex plans higher for 2004. In firm's coverage universe, believes there are three names that are big beneficiaries from this news: Applied Materials (AMAT), Cymer (CYMI) and Varian Semi (VSEA). Given that the markets are running up today based on the Intel news, firm would not recommend purchasing into this rally. However, believes that any pull-backs over the next few weeks in these names represents an entry point for the stocks.
12:48PM More Intel From Intel (INTC) 28.30 +1.91: The overall effect of the positive INTC announcement is being percieved well given the SOX's strong performance intraday. Briefing.com believes the comments by the company were no surprise given incremental data points recently provided on the site. For example, on August 13, we reported on In Play that Fechtor, Detwiler's was out with a call on INTC suggesting positive data points for the month of July's production numbers. In addition, the stock has been on a tear since last Friday suggesting the markets were already having "warm and fuzzies" about its sales prospects. The companies getting immediate attention from this announcement would be the "friends of Intel" list.
As expressed in a previous story stock on Dell, the technology universe associated with PC's will be in play today in light of this announcement. Here is just a list of the names that participate in the PC cycle and are friends of Intel. The biggest beneficiary would be Dell (DELL) given its long and prosperous relationship with the chip juggernaut. If units of its microprocessors are up, then ATI Technologies (ATYT) and Nvidia (NVDA) must be witnessing interest in its graphics chips. PCs also require a hard disk drive to store data, which is primarily made up of co's such as Western Digital (WDC), Seagate (STX) and Maxtor (MXO). PC's also need dynamic random access memory or DRAM from memory makers such as Infineon (IFX) and Micron (MU). Clock chip makers Integrated Circuit Systems (ICST) and Cypress Semiconductor (CY) participate in the cycle as well. This news also bodes well for the EMS sector, which consists of co's such asJabil Circuit (JBL) and Flextronics (FLEX). While Advanced Micro Devices (AMD)is probably not on Intel's Christmas card list, an increase in units might not augur well on its perennial fight for microprocessing market share. However, given AMD's upwards trajectory in this morning's trading, the markets are either bidding it up in sympathy or believe this might be a sign of PC recovery.
Further implications for the semiconductor industry from this announcement also warrant attention. The semiconductor capital equipment sector provides the equipment to make the chips. The need to expand chip making capacity is what moves this sector, which includes Applied Materials (AMAT), KLA-Tencor (KLAC), Novellus (NVLS) and testing & equipment names such as LTX Corp (LTXX), Amkor Technology (AMKR) and Teradyne (TER). If capacity utilization keeps increasing and SEMI Book-to-Bill continues its linearity, this sector will continue to witness the stock price of its marquee names go up. Briefing.com has expressed caution in previous story stocks on this sector given the market trading it ahead of its fundamentals, no clear path of visibility on ordering and nosebleed valuations. While the market believes the recovery is imminent, its expediency continues to be a concern for analysts. The moose is loose right now in these markets.
For any questions, comments or concerns, please send your inquiries to -- John Meza, Briefing.com
11:00AM Marvell upped at Fahnestock (MRVL) 41.89 +3.53: -- Update -- Fahnestock is upgrading MRVL to Buy from Sell. With it superior growth and visibility, firm says MRVL should trade at least in-line with its diversified communication IC peer group, which trades on average at 35x-37x consensus 2004 pro forma EPS. Using a multiple of 35x, firm calculates a $46 target. Firm says nearly every growth driver is on plan, if not stronger than expected. Also, balance sheet is strong with almost no debt and $300 mln in cash.
10:13AM FBR maintains Underperform on Cree; target $15 (CREE) 16.46 +0.46: Friedman Billings Ramsey says that despite yesterday's 13.5% move on no news, their Underperform rating remains intact due to increasing competitor capacity as well as growing pricing pressure; also, firm notes that the co's lawsuit issues (alleged improper and misleading business practices) remain, as well as the informal SEC investigation and the 15 shareholder lawsuits, which are all having an impact on margins due to rising legal fees. Target is $15.
10:02AM Ciena upped to Buy from Hold at Needham (CIEN) 6.15 +0.11: While co's Q3 operating results and Q4 guidance were relatively weak, firm believes that datapoints emerged from the qtr that support view that CIEN will be able to drive significant rev growth starting in the 1st-half of fiscal 2004. Firm establishing a $7-8 price target.
9:47AM Motorola tests resistance at July high of 10.43 (MOT) 10.36 +0.11: -- Technical -- Highlighted MOT last week as it tested its month long trading range top near with the issue surging more than 10% since staging a breakout. In early action today MOT has tested resistance at its eight month high from July at 10.43.
9:11AM NVIDIA announces dismissal of class action suit (NVDA) 18.13:
8:31AM Intel guiding revs above consensus (INTC) 26.39: Co announces that Q3 business is trending above expectations. Consequently, co raising Q3 revenue outlook to $7.3-$7.8 bln vs previous guidance of $6.9-$7.5 bln -- Reuters Research consensus $7.26 bln. Co's Intel Architecture business is generally trending higher across all geographies and channels while demand for communications products remains soft. Gross margin is expected to be 56%, plus or minus a couple of points, compared to previous expectation of 54%, plus or minus a couple of points. All other expectations are unchanged. Co will hold a call this morning at 10 ET.
8:11AM Smith Barney initiates coverage of disk drive stocks : Smith Barney initiates coverage of STX with an Outperform rating and $27 target, citing mkt share leadership, areal density and cost leadership, the most diverse product portfolio of any vendor worldwide, and significant investments in basic research. Firm also initiates coverage of MXO with an In-Line rating and $10 target, saying the co's revival in the desktop segment seems to be already reflected in the shares, and initiates coverage of WDC with an Underperform rating and $8 target, citing valuation as well as margin pressures in FY06.
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