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Monday, January 31, 2005
Market Recap
As expected, the futures were up nicely this morning in response to the success of the elections in Iraq over the weekend. The buyers showed up at the bell and did not look back. The Nasdaq was, by far, the strongest index of the 3, as it managed to gain 1.3% and closed up +26 points. The Dow finished the day higher by +62 points, and the S&P close up by +9 points. I must admit, with about 40 minutes left to go in the session, it looked like the markets might sell off into the close, and give away all of its gains for the day. Fortunately, the exact opposite occurred, and the buyers closed the market and sent the Nasdaq right up near the HOD at the close. If this bounce is for real, expect to see follow through strength at the open tomorrow.
Today's overall action and, more importantly, the action into the close, is a very good sign that this bounce may be for real and not just a one-day sympathy rally from the Iraq elections. Both the Nasdaq and the S&P closed above the short-term resistance levels, that I have been talking so much about. Again, those levels are 1175 on the S&P and 2050 on the Nasdaq. The Dow was not quite able to close above the 10500 resistance level, but, it did close up near the HOD. Based on the strength we saw at the close, I expect the Dow to follow suit tomorrow.
More good news for the Nasdaq today, as it also managed to close above the 9EMA for only the second time this year. Remember, I talked about one of the indicators that a short-term reversal has occurred is a close above the 9EMA. So, on the Nasdaq, we got a close above 2050 resistance and the 9EMA. One thing we do need to keep a close eye on is the volume. Today's volume on the Nasdaq was a bit below average. However, I believe it was strong enough to sustain this bounce, at least until the FOMC meeting on Wednesday. How the markets react to Wednesday's FOMC meeting is anyone's guess. I gave up trying to predict how the markets are going to react to the FOMC's policy announcement. The important thing is that we react to the reaction.
Got Merge?
The urge to merge is hotter than ever. We were actually several months ahead of the mainstream analysts and news agencies, this time around. Usually, they get their news out only a few weeks after we have talked about it here. They must have forgotten that we are the number one news source for what is actually happening and what everyone needs to be talking about.
http://money.cnn.com/2005/01/31/news/economy/merge...
The analysts are now saying that 2005 could be the hottest year for mergers. Strong balance sheets, low interest rates, and analysts being able to scare the herd with tremendous ease are all contributing to this trend. We saw a huge merger announced today, SBC has agreed to buy AT&T for $16 billion. On top of that, MetLife is buying part of the Travelers' Insurance unit from Citigroup for $11 billion. Then, there is the measly little deal announced just last week between Proctor & Gamble and Gillette. $57 billion dollars is the price tag for that one.
I think what we have been seeing is a lot of back room deals going on between corporations intent on buying and their bankers. Those investment banks are the folks that not only make the deals for one company to purchase another, they are the same brokers who, with the stroke of a keyboard, can determine the fate of a stock trading on Wall Street. Do you want the price to come down? A simple downgrade will do the trick. Do that in advance of a buyout, and you have ensured that the company interested in buying something has just gotten a better price to do so. I have not taken the time to do any in-depth research. It would be interesting to see how many companies being bought were hit with downgrades over the last month or so.
What this means for us right now is to say that our approach has been on target. We have known this for a while. Cash is king when the markets are not sure what they want to do. We have started moving out of our short positions, as the markets are now starting to look like they really do want to commit to going higher. We are going to continue to see additional mergers announced, and it will not be a surprise to see that many of the targets for purchase have taken hits to their stock price recently. It is the perfect set up. As we move forward, these mergers should start lifting the general market. The sectors are going to start seeing some infighting. If one merger is announced, you can expect the potential for others to be announced shortly thereafter. Large companies buying smaller ones, simply to “keep up with the Jones”. They have to keep up or they will eventually be bought out themselves.
Please tell a friend about our service. As always, thank you for your support past, present, and future! We will see you Monday evening.
Do not forget to check your short-term holdings and know when those companies are reporting earnings. Holding a stock through earnings is risky, and I do not recommend it. You can always buy the stock back after the dust settles.
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