U.S. stocks face key test if Nasdaq can't hold 2,000
Saturday February 21, 4:13 am ET
By Mark Cotton
biz.yahoo.com
NEW YORK (CBS.MW) -- U.S. stocks are headed for another week where technology companies could underperform the broader market, as investors continue to lock in gains in the sector after a solid run-up over the last 12 months.
A raft of retailers, including Home Depot and The Gap, report earnings, while investors will have a slew of economic data to pore over, notably January durable goods orders and consumer confidence data for February.
"The trend is now in place where the Nasdaq will continue to underperform the S&P 500 and the Dow going forward," said Paul Nolte, director of investments at Hinsdale Associates.
Nolte said the tech-rich index has performed better than the other two indexes for much of the last 12 months, and it is only normal to expect a pullback, as over the long term, the three indexes tend to move together.
"And for those doing the technical analysis of the market, if the Nasdaq falls much below 2,000 it could spark some heavy selling," as it breaks through support levels.
In a note to clients, Smith Barney's chief U.S. equity strategist Tobias Levkovich said any wavering in the positive economic, earnings and political outlook has the potential "to rattle the markets."
Levkovich recommends reducing technology weightings and shifting toward lower-risk areas such as household products, insurance an select health-care names."
On Friday, the Dow Jones Industrial Average (^DJI - News) ended down 45.70 points, or 0.4 percent at 10,619.03. The benchmark index ended virtually unchanged on the week.
The Nasdaq Composite (NasdaqSC:^IXIC - News) fell 8.03 points, or 0.4 percent, at 2,037.93. The tech-rich index ended lower for the fifth consecutive week, down 16 points, or 0.8 percent.
The S&P 500 (CBOE:^SPX - News) was down 2.95 points, or 0.3 percent, at 1,144.11. The index was flat on the week.
Earnings calendar
On the earnings front, investors will be paying close attention to fourth-quarter results from Home Depot (NYSE:HD - News) .
"There have been a lot of questions about Home Depot in the last year especially in relation to its rival Lowe's (NYSE:LOW - News) . People want to see that they are turning the corner," said Nolte.
Lowe's reports Monday, with 11 analysts polled by Thomson First Call expecting 50 cents a share and revenue of $7.3 billion, on average.
On Tuesday, Home Depot is expected to report fourth-quarter net income of 39 cents a share on revenue of $15.1 billion, compared with 30 cents a share in the same quarter of 2002, according to the mean estimate of 26 analysts polled by Thomson First Call.
Analysts will also expect an update on the 2004 outlook it gave in January. The Atlanta-based retailer said then that it is forecasting fiscal year 2004 sales growth of between 9 to 12 percent and earnings growth of 10 to 14 percent. Comparable store sales for the year are estimated to rise 3 to 6 percent.
On Thursday, JC Penney (NYSE:JCP - News) reports fourth-quarter earnings before the bell. The department store chain is expected to post net income of 80 cents a share compared with 68 cents in the same quarter in 2002, according to Thomson First Call.
Kohl's (NYSE:KSS - News) is forecast to earn 69 cents a share on sales of $3.6 billion in the fourth quarter against 81 cents a share on sales of $3.2 billion in the same quarter in 2002, when it reports on Thursday ahead of the market open.
The Gap (NYSE:GPS - News) is expected to report net income of 37 cents a share on revenue of $4.8 billion compared with 27 cents a share on sales of $4.7 billion in the year earlier period. At the beginning of February, the company said it would take a penny charge in the quarter as a result of its decision to close its 10 stores in Germany.
Economic data
In a heavy week for economic reports, investors are likely to focus on Tuesday's consumer confidence reading for February and Thursday's durable goods orders for January.
The Conference Board's consumer confidence reading is expected to come in at 94.6 compared with 96.8 in January, according to analysts polled by
Orders for durable goods are forecast to rise 1.0 percent in January compared with a 0.3 percent rise in December. Orders have come in weaker-than-expected for the last two months.
Other reports due next week include delayed January producer price index figures, existing home sales for January and revised fourth quarter GDP numbers.
Friday's trading
U.S. stocks finished down Friday, ending a holiday-shortened trading week with a volatile session that featured inflation worries and the prospect of global unrest.
The major equity indexes bounced off session lows late in the day as Fed officials worked to calm investor concerns about a sharp rise in consumer prices, while reactionary selling at midday in response to news of a heightened terror alert in Japan ran its course.
But, despite brief forays into positive territory, the Dow and Nasdaq were unable to close out the week with a gain, a performance that underlined recent Wall Street sentiment that stocks are starting to run out the steam. The late reversal echoed Thursday's action when the Dow hit a 32-month high but sold off in the final hour to close down.
The Dow Jones Industrial Average (^DJI - News) fell 45.70 points, or 0.4 percent, to close at 10,619,03, while the Nasdaq Composite (NasdaqSC:^IXIC - News) dropped 8.03 points, or 0.4 percent, to finish at 2,037.93.
The indexes' respective nadirs for the session were 10,580.66 and 2,022.79. It was the Nasdaq's fifth consecutive negative week.
The S&P 500 (CBOE:^SPX - News) index tumbled 0.3 percent to 1,144.11 and the small-cap Russell 2000 (CBOE:^RUT - News) slipped 0.5 percent to 579.89.
"The market sold off early in response to CPI number, and then the immediate fears that followed the news out of Japan," said David Hegarty, head of equity trading at Commerzbank Securities. "But the Fed's sticking to its positive view of the job situation, and the subsequent strength of the dollar has helped settle things."
He also noted the thin volume on Wall Street when assessing the impetus for the turnaround as light trading can be especially volatile. Looking ahead, Hegarty thinks the market looks "tired" at these levels following the strong run-up in January, and that it's likely to trade sideways to down next week.
"The good news (on earnings and the economy) seems priced in," he said. "To go higher from here is going to be a tough hurdle to clear."
The highest profile comments came from Fed Chairman Alan Greenspan, who told an audience in Nebraska that he was confident "employment will begin to increase more quickly before long as output continues to expand." The sentiment echoed that of his testimony before Congress last week.
Federal Reserve Governor Ben Bernanke also helped out, saying the January CPI data was no cause for alarm. He told reporters the numbers were "consistent" with continuing low inflation, and that he expects hiring to "strengthen significantly" this year. And finally, William Poole, president of the Federal Reserve Bank in St. Louis, chimed in, saying inflation will likely remain at its current low levels in the U.S. for the rest of the year.
The U.S. dollar rallied in response to Japan's decision to boost its terror alert to the highest level for the first time since the U.S.-led invasion of Iraq nearly a year ago.
Dow, broad market internals
Breadth within the Dow remained negative with losers ahead of winners by 20 to 10. H-P was the biggest decliner, losing more than 3 percent following its in-line quarterly report. Shares of Alcoa were also weak, dropping 2.4 percent, after the aluminum giant sold its automotive fastener business as part of a previously disclosed plan to divest non-core assets and pay down debt.
Caterpillar (NYSE:CAT - News) , General Motors (NYSE:GM - News) , Merck (NYSE:MRK - News) , SBC Communications (NYSE:SBC - News) and Walt Disney (NYSE:DIS - News) were all off more than 1 percent.
Disney, the target of a takeover bid by Comcast, was the subject of late comments from ex-board member Roy Disney, who said Chief Executive Michael Eisner has valued to deliver value for shareholders but that Comcast's offer is too low.
Only Wal-Mart (NYSE:WMT - News) , which rallied Thursday on its strong first-quarter report, made a convincing move higher, adding nearly 2 percent to $59.43.
SBC, down 1.3 percent, has fallen in every session since announcing plans Tuesday to acquire AT&T Wireless with BellSouth for $41 billion through their Cingular joint venture.
Broad market internals were poor with decliners trouncing advancers on both exchanges, by 21 to 12 on the Big Board and by 20 to 12 on the Nasdaq. Volume totaled 1.46 billion on the NYSE, and 1.9 billion on the Nasdaq.
Volume of stocks losing ground was 1.04 billion shares on the Big Board and 1.19 billion shares on the Nasdaq, as compared to up volume of 387 million and 684 million shares, respectively.
The main drag in early action was the sharp 0.5 percent in January for consumer prices that the Labor Department reported before the bell. It was the largest gain in the CPI since February 2003, with energy costs accounting for much of the increase.
Excluding food and energy costs, the core CPI rose 0.2 percent in January. Economists had been expecting the core rate to rise 0.1 percent.
Dollar, bonds, gold and oil
The U.S. dollar reached a two-month high against the Japanese yen following the news of the terror alert. It also rose against the euro. Treasury prices took a hit in the wake of the CPI number and the strength in the greenback.
April gold closed at $398 an ounce on the New York Mercantile Exchange, down $12.30 for the session and down $12.80 for the week. The precious metal lost the bulk of its gains in the week's final session amid the dollar rally.
March crude closed at $35.60 per barrel on the New York Mercantile Exchange, down 40 cents for the session and up $1.04 for the week. April crude, which became the lead-month contract at the session's close, fell 38 cents for the session to end at $34.26 per barrel. March natural gas also lost ground to close at $5.193 per million British thermal units, down 4.2 cents for the session and down 6 percent for the week.
H-P and Coke in Dow spotlight
Hewlett-Packard posted first first-quarter earnings that matched Wall Street expectations and projected an in-line performance in the second quarter.
Selling in H-P's shares came even as analysts applauded the PC and printer maker's 30 percent rise in net income, which reflected a 20 percent rise in personal systems revenue that made the business H-P's biggest source of revenue.
"We would be comfortable adding to positions at current levels," said Goldman Sachs analyst Laura Conigliaro, in a note on H-P to clients. She added that the stock has "the potential to move back to a 10 to 15 percent discount to IBM (from its current 22 percent discount), which would imply that current fair value is in the $26 to $28 range." H-P fell 73 cents to close $23.13.
Meanwhile, Coca-Cola (NYSE:KO - News) dipped incrementally after Bear Stearns cut the stock to "peer perform" vs. "outperform" on concerns about Thursday's news that CEO Douglas Daft is retiring at year's end.
The Atlanta-based soft-drink giant plans to consider successor candidates from outside the company as well as Steve Heyer, its president and chief operating officer. At the stock's current valuation, "this does not leave a lot of room for error and uncertainty with respect to business model continuity and succession issues," said analyst Carlos Laboy.
Other analyst calls of note included Prudential's upgrade of Gillette in the wake of upbeat comments on the company's outlook from CEO James Kilts. Prudential analyst Connie Maneaty upped the company to "overweight" from "neutral weight," saying Gillette will benefit from "a full pipeline of new shaving products."
At an industry conference in Arizona, Kilts reiterated long-term goals of 3 to 5 percent organic sales growth. The stock (NYSE:G - News) added almost 1 percent to finish at $38.08, pulling back from a 52-week low of $38.55 earlier in the session. For further information on the move, check out The Ratings Game.
In the kingdom of the small-caps, shares of Blue Coat Systems (NasdaqNM:BCSI - News) reached a 33-month high of $38.92 in intraday trading after the provider of Internet communications management services reported its first profitable quarter on a strong 63 percent jump in revenue to $19.1 million late Thursday.
Net income in its fiscal third quarter was $2 million, or 16 cents a share, reversing a year-earlier loss. Excluding one-time items, earnings were 22 cents a share. The stock surged about 21 percent to close at $38.27. Check out other individual stock stories in Movers and Shakers.
Chip book-to-bill ratio; U.S. stock fund inflows for past week
Tech investors also pondered late Thursday's news from an industry group that orders for chip equipment placed with North American manufacturers rose for a sixth straight month in January. Intel (NasdaqNM:INTC - News) shares slipped 0.5 percent, and the Philadelphia Semiconductor Index (Philadelphia:^SOXX - News) dropped 1.3 percent to 507.85.
Preliminary data released by Semiconductor Materials & Equipment International showed a book-to-bill ratio of 1.18-to-1 in January, compared with December's final ratio of 1.23-to-1. The group also said that shipments passed the $1 billion level for the first time in 17 months.
The ratio measures the value of orders received against the value of products shipped. Based on a three-month moving average, a ratio of more than 1.0 represents more orders coming in than products being shipped.
Also, funds investing primarily in U.S. stocks took in $3.6 billion in new money during the week ended Feb. 18, according to Trim Tabs director of research Carl Wittnebert's estimate. This was down from inflows of $4 billion the week before. International stock funds had inflows of $700 million, down from inflows of $1.3 billion the prior week. Bond funds had inflows of $1 billion, reversing the prior week's outflows of $1.1 billion. |
