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Market Snapshot

The week ahead: Get used to volatility - Focus on bond yields

By Julie Rannazzisi, CBS MarketWatch

Last Update: 7:57 PM ET Feb 4, 2000 Market Pulse Bond Report

NEW YORK (CBS.MW) -- Another wild week on Wall Street saw the biggest gyrations in bonds -- not stocks -- for a change. But equities were far from still and observers believe that, driven by uncertainty over the interest rate and inflation outlook, they'll continue to see huge price swings.

"The market's got the Fed in its face," remarked Donald Selkin, chief market strategist at Joseph Gunnar.

When uncertainty over the number of future rate hikes clears, the market will be able to break out of its trading range, he added.

"The market's swings are reflecting investors' uncertainties. They become fickle," said Peter Boockvar, equity strategist at Miller, Tabak & Co.

Solid Nasdaq

The Nasdaq had a dandy week but the same pressing question remains: how long can this buying spree continue if the Fed is tapping the brakes on the U.S. economy?

Sure, the Fed doesn't want to quash growth but achieve a so-called soft-landing, which should keep earnings growth on a solid track going forward. But can current valuations in many of the tech stocks be sustained in the face of higher interest rates?

Until people get really scared, we'll see more of the same in the market, according to Boockvar. "Techs are in la-la land."

From a technical perspective, meanwhile, the improvement in market breadth this week was a good sign.

"The market is overbought, but strong markets tend to get overbought and stay overbought -- if the market does follow through here it would be an encouraging sign," said Frank Gretz, chief market strategist at Shields & Co.

Still a narrow market

As techs rallied this week, interest-rate sensitive stocks were pressure by continued strong economic data and the Fed's suggestion that more rate hikes are in store.

"We still believe the real technical health of the market, and longevity to this rally, lies in its ability to broaden beyond just the market averages. In that regard, the cyclicals have been extremely disappointing," Gretz noted.

"Its hard to quantify much broadening in the market. If you look at the advance-decline line, theres only a glimpse of any improvement. There are only 27 percent of NYSE stocks above their 200-day moving average," Gretz continued.

The small signs of improvement in breadth, he said, are all in the Nasdaq, mostly in secondary tech stocks.

Wild bonds

Responding to technical factors such as diminished supply and massive bouts of short-covering, Treasury traded in a violent fashion this week. Friday, however, saw a return to fundamentals -- bond prices fell in response to the strong employment report -- and market participants believe higher rates are on the way.

"Yields will go higher," Boockvar said. A glance at recent data clearly shows the Fed may need to strike again and again and again to cool off the white-hot economy.

Meanwhile, the inversion of the Treasury yield curve -- with long-term rates lower than short ones due to lessened supply in the 30-year sector -- has added another element of uncertainty in the stock market.

People are watching the inverted yield curve, said Jay Suskind, director of trading at Ryan Beck & Co. In the past, an inverted curve has always been a problem for the stock market, he noted.

This time around, the inversion of the Treasury curve is due to supply factors and not because the economy is heading toward a recession. Still, Suskind said, if the inversion persists for long, it will produce uneasiness in equities. Thus, stocks will be bond-watching in the weeks ahead.

Upcoming events

Fourth-quarter productivity numbers and the retail sales report will highlight next week's economic calendar.

Monday: December consumer credit. Tuesday: Fourth-quarter productivity figures. Wednesday: December wholesale inventories. Thursday: Weekly initial claims. Friday: January retail sales, February Michigan consumer sentiment index.

In addition, Treasury will auction $32 billion in new debt next week. Tuesday will see the sale of $12 billion 5-year notes; $10 billion 10-year notes will hit the market on Thursday; and $10 billion in 30-year bonds will be sold on Thursday.

On the earnings front, the number of companies reporting diminishes considerably next week. The only report from a Dow company next week is the consolidated Disney report. On Jan. 26, Disney reported results that did not include their interest in Go.com, First Call said.

With three-fourths of the companies in the S&P 500 having reported, the results are coming in 21.3 percent above the fourth quarter of 1998, First Call said. Adding in the estimates for those left to report yields an expected growth rate for the S&P 500 of 21.1 percent.

Although Dell Computer will pull down the aggregate growth rate, it will be more than offset by companies such as Royal Dutch and Cisco Systems. The next couple of weeks will see reports from the retailers, with results for the group likely to be up about 20 percent.

Monday: Mindspring, Earthlink Network, Marriott International, La-Z-Boy, Barrick Gold, Jupiter Communications, Medquist. Tuesday: Cisco Systems, Perot Systems, Hasbro, Cooper Tire & Rubber, ZDNet, CVS, Louis Dreyfus, Utilicorp, Cigna, Aetna, Chiron, Boston Scientific. Wednesday: Celestica, Sterling Software, Applebees, Goodyear Tire & Rubber, Jones Apparel, Fox Entertainment, Marketwatch.com, Cox Communications, Pepsi. Thursday: Dell Computer, Keane, Network Solutions, MCI Worldcom, May Department Stores, Polo Ralph Lauren, Office Depot, Starwood Hotels, TheStreet.com, Seagram, Royal Dutch, Shell Transport, Monsanto, Pharmacia & Upjohn, Humana. Friday: Wendys, Trigon Healthcare.

Weekly recap

Monday: Blue chips set the tone for a market rebound as the Dow Industrials climbed over 200 points with some of the more hard hit sectors, like the financials, catching a strong bid. Dow up 201 points to 10,940, Nasdaq rises 53 points to 3,940.

Tuesday: U.S. shares picked up significant steam, with investors displaying a hearty appetite for tech issues in particular, as a two-day Federal Open Market Committee meeting commenced. Dow rises 100.52 points to 11,041.05, Nasdaq puts on 111.63 points to 4,051.98.

Wednesday: Equity prices staged a mixed performance following news that the Fed raised short-term rates by an as-expected 25 basis points. Dow slips 37.85 points to 11,003.20 while Nasdaq gains 21.98 points to 4,073.96.

Thursday: The Nasdaq flexed its muscles for the fourth straight session while the Dow eked out only small gains as investors maintained a more cautious stance on blue-chip issues in the aftermath of Wednesday's Fed rate hike. Dow adds 10.24 points to 11,013.44, Nasdaq surges 137.02 points to 4,210.98.

The Dow has risen 224.93 points, or 2.1 percent this week. The blue-chip barometer jumped 533.32 points, or 4.6 percent, in January following a 25 percent rise in 1999.

On the week, the Nasdaq surged 357.07 points, or 9.2 percent. The tech gauge gained 174.83 points, or 4.3 percent, in January compared to an 85.6 percent bounce in 1999.

Friday's trading activity

Enthusiastic buyers scooped up technology shares Friday and took the Nasdaq to its first record close in two weeks. The Dow, on the other hand, succumbed to some mild profit-taking late in the session after posting feeble gains throughout the trading day.

"The leadership remains with companies with the best earnings potential," Selkin of Joseph Gunnar said. "I'm encouraged by the good performance in stocks like Microsoft and Intel. I like the leadership here," he added.

"There's still a lot of complacency in the market," said Suskind of Ryan Beck & Co. Market participants are digesting the week's events and the path of least resistance remains on the upside, he added.

In the meantime, the closely-watched employment report told investors what they already knew: that the job market remained extremely healthy in January. Investors are already bracing for more Fed rate increases and staged a largely muted reaction to the numbers.

"Bull markets are reactive animals and creatures of habit. If given the opportunity, they will react by buying the dip. In addition, habitual success -- big-cap growth and tech/telecom momentum -- is hard to forget," said Brian Belski, chief investment strategist at George K. Baum.

The Dow Jones Industrial Average fell 49.64 points, or 0.5 percent, to 10,963.80. Capping losses were gains in the barometer's tech components: Microsoft, Intel and Hewlett-Packard. Downside leaders were Wal-Mart, J.P. Morgan, Procter & Gamble, United Technologies and Minnesota Mining & Manufacturing.

The Dow has trailed the Nasdaq significantly in recent sessions as the notion that more Fed tightenings are on the way continued to weigh on economically-sensitive areas of the market.

"The cyclicals and the financials are dragging the Dow down," Selkin said.

The Dow is lounging around with investors unwilling to make any big bets on direction, according to Suskind. With the Fed in a tightening mode, he added, investors are sticking to the blue-chip tech winners.

Belski expects newfound momentum within the big-cap growth and tech stocks.

"The only difference this time around relative to the growth/tech dominance of the 1997-1999 markets will likely be the decreased performance disparity between the momentum-filled growth stocks and other areas of the market," he added.

The Nasdaq Composite climbed 33.16 points, or 0.8 percent, to 4,244.14, breaching its last record close of 4,235.40, set on Jan. 21. The tech gauge's intra-day high of 4,294.84 was 8.31 points shy of touching the previous intra-day record high of 4,303.15, reached on Jan. 24.

Turning to the economic front, a total of 387,000 non-farm jobs were created in January compared to expectations for a 242,000 increase. The unemployment rate fell to an as-expected 4.0 percent from December's 4.1 percent while average hourly earnings rose by an as-expected 0.4 percent. See full story.

"There were some usual seasonal factors in the report [due to] the mild weather through mid-January. Yet, even excluding these [factors], job growth would still be in the 275,000 range. Critically, the gains were everywhere. The economic job machine is clearly taking its toll on available workers. No matter how you slice and dice it, this was a big, big, report," remarked Joel Naroff, chief economist at Naroff Economic Advisors.

"This is a blistering report. That said, we are suspicious about the huge 116,000 rise in construction jobs, which presumably reflects mild weather -- the survey was taken before the snowstorms -- and will reverse. But the Fed will not like the 6-cent rise in wages and the further labor pool shrinkage," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The Standard & Poor's 500 Index inched down 0.60 point while the Russell 2000 Index ($RUT) of small-capitalization stocks advanced 0.7 percent. (See 1-year charts of Nasdaq and Russell 2000.)

Within the market, networking issues led the tech sector higher, with Cisco Systems rising 3 5/16 to 121 1/8. It set a record high of 122 1/2 in intra-day dealings. Warburg Dillon Read raised its price target on the stock (CSCO: news, msgs) to $140 from $100 and reiterated its "buy" recommendation, saying it believes the company's second quarter could exceed estimates. See Tech Report. CS First Boston reiterated its "strong buy" recommendation on Cisco and pegged the chance of a stock split at "better than 50-50." See Rating Revisions.

Computer software, biotech, retail and gaming stocks also enjoyed handsome gains. Gold stocks skyrocketed as April gold jumped $23.10 to $313, boosted by active buying from commodity and hedge funds. See Futures Movers.

Ending on the downside Friday were bank, utility, pharmaceutical and oil service issues. Internet shares also took a break following Thursday's lofty increases.

Volume checked in at 1.03 billion on the Big Board while 1.75 billion shares changed hands on the Nasdaq Stock Market. Losers bested winners by 16 to 14 on the NYSE while winners outnumbered losers on the Nasdaq by 22 to 20.

Meanwhile, Treasurys took a dive after climbing ferociously on Thursday. The market gyrated immediately after the jobs numbers were released, initially gaining ground -- an unusual move considering the data's strength -- only to fall into negative territory shortly after. See Bond Report.

The 30-year Treasury bond plunged 1 27/32 point to yield 6.272 percent.

Turning to specific issues, Mattel slipped 1/4 to 10 5/8. Late Thursday, Jill Barad, the company's (MAT: news, msgs) chief executive, stepped down. Mattel also released its fourth-quarter earnings five days ahead of schedule, posting an operating loss of 4 cents a share compared to the First Call estimate of a 25-cent gain. See related story. ABN Amro reiterated its "outperform" rating but said it remains cautious given continuing losses at The Learning Company.

Amazon shares (AMZN: news, msgs) slipped 5 5/8 to 78 9/16, erasing some of Thursday's nifty gains, which came on the heels of the release of the company's quarterly results.

CNet shares lost 1 to 51. The company (CNET: news, msgs) registered an operating loss of 40 cents per share late Thursday, 4 cents less than the First Call estimate.

Viant shares climbed 5 5/8, or 5.6 percent, to 105 5/8. The company (VIAN: news, msgs) reported after the close Thursday that it earned 14 cents a share in the fourth quarter, beating the First Call estimate by 7 cents a share. See full story.

Netcentives (NCNT: news, msgs) lost 2 1/2 to 61 7/8. The company reported a narrower-than-expected fourth-quarter operating loss of 32 cents a share late Thursday. That compared to the First Call estimate of a 54-cent loss.

Shares of Cor Therapeutics (CORR: news, msgs) surged 14 15/16, or 58.4 percent, to 40 1/2 after the company said it halted a trial of its heart drug Integrilin ahead of schedule due to positive results. See Biotech Report.

Regional market coverage North America Europe Asia ADR Report Currency rates Intl' Indexes Affymetrix shares (AFFX: news, msgs) rose 8 3/4 to 272 1/8. Late Thursday, the company posted a loss of 19 cents a share in its fourth quarter, a penny narrower than First Call expected.

Shares of the Knot (KNOT: news, msgs) shed 7/16 to 7 7/8. The wedding site lost 48 cents per share in the fourth quarter, 5 cents less than the First Call estimate. CS First Boston reiterated its "strong buy" rating on the company and called the stock an overlooked, very undervalued security.

Shares of PairGain Technologies (PAIR: news, msgs) rose 7/16 to 13 15/16. The company registered an operating loss of 5 cents a share in the fourth quarter, matching the First Call estimate, late Thursday.

Over in the IPO arena, Avanex (AVNX: news, msgs) surged nearly 378 percent to 172 in its first day of trading. The maker of optical-networking equipment priced its 6 million shares at $36. See IPO Report.

Intel shares climbed to a new high of 108 1/4 and ended the session at 104 3/4, up 9/16. The company (INTC: news, msgs) announced two acquisitions: it purchased integrated circuit maker Ambient Technologies for $150 million and Thinkit Technologies, which creates designs for chips used in networking and communications. See Market Pulse.

In other economic news, December housing completions rose 2.0 percent to a 1.661 million annual rate. Monday will see the release of December consumer credit. See economic calendar and forecasts and historical economic data.

In currency markets, the dollar/yen slipped 0.4 percent from the previous close to 107.11 while euro/dollar erased a good portion of Thursday's smart gains, shedding 0.7 percent to 0.9835.

In the commodity arena, March crude added 79 cents to $28.82 while the Bridge CRB Index gained 3.01 to 213.24. See latest commodity prices.

-- snooze button (alarmclock_2000@yahoo.com), February 06, 2000

Answers

Oh and by the way, GOLD moved a whopping 8% in just six hours, but that's not important.

Yeah, and the almost TOTAL news blackout is not important either.

Or is it? Hmmmm...

-- Q (Q@Q.com), February 06, 2000.

You have a fed trying to engineer a slowdown and controlled market correction to obtain the near mythical soft landing. You have the big baby Summers at Treasury trying to maintain bubble.com at all costs until after his royal lyness is out of office and can then let the house of cards fall "on somebody else's watch."

At some point this game will settle this high stakes game of chicken but I see Summers and Treasuries moves as not only questionable but probably the catalyst that will make this Spring one for the record books. Al should tell the Rubin that isn't to stop meddling or he raises the margin requirement to 80%, that would be enough to get all the children in the hourly rate 1600 hotel to back off and allow the serious people to attempt the impossible.

Either way, got gold?

-- Squid (ItsDark@down.here), February 06, 2000.