The coming week
Back to work
By Kevin N. Marder, CBS MarketWatch
Last Update: 9:05 PM ET Sep 5, 1999 Bond Report
NEW YORK (CBS.MW) -- After weeks of lukewarm volume spawned by a heap of vacationing Wall Streeters, the coming week should allow the U.S. stock market to prove its mettle.
Was Friday's stock market eruption genuine?
Or was it the result of thin trading conditions that saw New York Stock Exchange volume undercut its recent average by 7 percent?
This week's reemergence of the fully-staffed trading desk should settle the score.
Otherwise, there won't be much on the week's economic calendar to guide share prices.
Ditto for the earnings docket.
In fact most of the week's excitement will be provided by (yawn) a few speeches on the part of senior Federal Reserve officials. See related story.
In that case, investors had better make sure there's plenty of java (no, not the programming language) on hand.
Whoa. Not so fast. Maybe, just maybe, Friday's 3.4-to-1 advance-decline ratio on the NYSE is heralding the start of something big.
After all, breadth like this doesn't come along that often. And among plenty of market observers, the chief market bugaboo has been the painfully thin advance.
"Rarely has a market been as narrow as this one," said Frank D. Gretz, market analyst at Shields & Co., in a research note.
"The continued narrowness of recent upside moves is of paramount concern to us," echoed Brian G. Belski, chief investment strategist at George K. Baum & Co.
Other analysts like the behavior of benchmark technology names as well as that of the semiconductor group. They've been the leaders.
"In general, the leaders are yet to give it up," said Gretz. "The problem is, they're about the only thing left standing."
Upcoming events
The economic calendar doesn't get any lighter than this. Thursday: Weekly jobless claims. Friday: August producer price index.
The coming week's earnings calendar thins considerably. Wednesday: HJ Heinz. Thursday: CKE Restaurants, Dave & Buster's, National Semiconductor.
According to earnings compiler First Call Corp., the consensus analyst outlook for third-quarter earnings growth is 20.9 percent. The S&P 500's long-term earnings growth rate is 7 percent.
Friday's action -- Whole lotta gains
A stock market searching for something that might defer a Federal Reserve rate hike got exactly what it asked for Friday, as a friendly August jobs report unleashed lush gains across the board.
"Many people now believe there's less likelihood the Fed will raise rates when they meet Oct. 5 as a result of the August employment data," said Alan Ackerman, executive vice president at Fahnestock & Co.
The Dow Jones Industrial Average shot up 235.24 points, or 2.0 percent, to 11,078.45 for its best percentage outing in four months.
The Nasdaq Composite surged 108.87 points, or 4.0 percent, to 2,843.11. It was the biggest point gain ever for the tech-drenched gauge and the heaviest percentage win since June 16.
The Standard & Poor's 500 Index leaped 2.9 percent, its largest jump since Oct. 15. The Russell 2000 Index of small-capitalization stocks gained 2.0 percent.
The U.S. economy generated 124,000 nonfarm jobs in August, a big drop from July's revised gain of 338,000. Most economists had expected 214,000. Critically, average hourly earnings rose 0.2 percent vs. most estimates of 0.3 percent. The unemployment rate, meanwhile, dipped to 4.2 percent, matching most projections. See full story.
"Today's numbers are great numbers," said Roy M. Blumberg, portfolio manager at Sheer Asset Management. "Because the market's pretty thin and illiquid these days, you get exaggerated moves like this."
"This was a surprising number and it reveals what might be a surprising economic slowdown," said Ackerman. "Nonetheless, one fly in the ointment might be the weakness of the dollar against the yen, which needs to be watched carefully."
Bond traders liked the less-than-expected gains in jobs and wages, which some feel lessen the immediacy of a Federal Reserve hike of short-term rates. Though there are plenty of other data hurdles that must be overcome before the Federal Reserve meets Oct. 5 to discuss rates, the jobs report provided at least temporary relief to a weary bond market.
"It must be that the bears are on holiday and only the bulls are still left in their offices," sniffed Irwin Kellner, chief economist at CBS MarketWatch and Weller professor of economics at Hofstra University.
Kellner is concerned with the tight labor market, given the fact that labor costs are the biggest expense at most companies. In particular, he's focusing on the quit rate, or the percentage of workers who quit their job as opposed to those who were laid off or those first-time entrants unable to find a job.
"The quit rate is a very good indicator of labor's confidence in its ability to find new jobs," he said. "The higher it goes, the more likely it is that labor is confident enough to ask for big pay increases." See related story. In August, the quit rate rose to 13.6 percent, one of the highest readings of the decade.
The breadth of the stock advance was exceptional. New York Stock Exchange winners annihilated losers by 3.4 to 1, the best showing since the 3.62 figure of Oct. 15, 1998. Advancing issues stomped on decliners by nearly 2 to 1 in the Nasdaq Stock Market.
Technology walked away with the juiciest gains, sparked by the most impressive showing in the Internet group in 11 weeks. Meanwhile, the semiconductors (SOX) broke out of a seven-week basing area amid news of more price rises in memory chips. It was the best day for the semis in nearly six weeks.
Elsewhere, the financial sector played a strong supporting role, underpinned by the best performance in the bank group since December.
There were a few things that market bulls could be thankful for in Friday's action, namely the extensive breadth and the potent leadership of the techs and financials. But, unfortunately, volume wasn't one of them. On the Big Board floor, turnover slowed 4 percent to 663 million shares, well below the 30-day average of 704 million.
And given the meek pace to the day's dealings, some seasoned market seers were reluctant to flash the all-clear sign.
"It's important to see whether this rally is sustainable into next week, which is the first time we really trade under normal circumstances since pre-summer," said Ackerman.
One long-time bull remains positive, though he holds out the possibility for some near-term turbulence.
"When August is a nebulous month, September can sometimes be a little bit treacherous," said Arnie Owen, managing director of equities at Cruttenden Roth. "But the overall trend is up and I'm hanging onto my long positions."
Another player spoke well of the rise in negative sentiment that he saw earlier in the week.
"The amount of pessimism that was present in the market prior to Friday indicates that the move that kicked off today has more staying power," said Gregory Kuhn, portfolio manager at Kuhn Asset Management Co. "If you're nimble enough and in the right stocks you can make some money here."
Kuhn noted that the ratio of put options to call options on the Chicago Board Options Exchange was higher two days ago than at the Aug. 10 market low. "There was a big anticipation on the part of options players that the market was going to break down."
Blumberg doesn't think the market will make much progress either way for a while.
"Everyone's kind of confused as to what the Fed will do, and it's causing the market to trade back and forth in this big trading range. The group rotation story is more important than the overall market story right now. Where you are will be more important than where the market is."
Blumberg, like many, wants to see better breadth and volume numbers before turning outright bullish.
Play-By-Play Toys & Novelties ran up another 1 13/16, or 41 percent, to 6 1/4 following Thursday's 2 15/16-point moonshot, or 196 percent. Thursday, the toy maker was awarded licensing rights to produce Nintendo's Pokemon toys for the U.S. amusement center toy market. See full story.
Micron Technology (MU: news, msgs) drove ahead 4 7/8 to 80 1/8. According to Donaldson, Lufkin & Jenrette, the price of Micron dynamic random access memory rose 75 cents to $9.90 in the Taiwan spot market, the biggest one-day jump this year. "Dealers in Taiwan are down to inventories of only a few days and are not sure where next week's supply will come from," DLJ's Kevin McCarthy said in a report. McCarthy attributed the tight supply situation to strengthening demand in the U.S. market.
Elsewhere in the chip group, Altera (ALTR: news, msgs) put in one of the best percentage moves, up 4 7/16 to 50 1/2. Credit Suisse First Boston Analyst Tim Mahon repeated a "buy" rating after meeting with management at the logic chip maker. "Resales in August are running ahead of the company's expectations," Mahon said in a report.
Log On America (LOAX: news, msgs) climbed 2 to 23 1/8. The Internet service provider put out a statement saying that it's in ongoing talks with an unnamed telecom company regarding financing. See full story.
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