Minor gains for major averages

Minor gains for major averages

Profit-taking in chips; retailers under pressure

NEW YORK (CBS.MW) — Early market steadiness gave way to choppy trading late in the session Monday as investors turned cautious and lightened up on positions in the chip arena. But the major averages still managed to eke out a gain a day ahead of the Fed’s policy-setting meeting — though the buying came on extremely light volume.

Profit-taking in the semiconductor arena in afternoon action briefly pushed the Nasdaq into the minus column while the sagging retail sector was the broad market’s sore spot, impeding further advances.

Investors failed to show lots of conviction ahead of Tuesday’s Federal Open Market Committee meeting. Marketeers aren’t anticipating a change in the fed funds rate target of 6 1/2 percent but their attention will be fixated on the statement following the conclusion of the gathering, which they hope will shed light on the Fed’s future course of action. View Economic Preview, economic calendar and forecasts and historical economic data.

“It’s not clear what the market has priced in on the Fed-statement front,” said Clark Yingst, market strategist at Prudential Securities.

It would be bullish for shares, of course, if the Fed said risks to the U.S. economy were evenly weighted. “That would help housing-related issues and financial stocks,” Yingst said.

But Yingst said a Fed statement indicating that economic risks are still tilted toward inflationary pressures wouldn’t catch the market off guard. In fact, demand remains strong and, despite recent signs of a cooler economy, growth stands at very robust levels.

Within technology, Internet stocks maintained respectable gains thanks to interest in Net security software companies. The broad market saw buyers in the bank, brokerage, biotech, drug and oil sectors while retail and paper issues remained deep in the red throughout the session.

The Dow Jones Industrials Average ($DJ) added 33.33 points, or 0.3 percent, to 11,079.81.

Leading the Dow higher were shares of Honeywell, Boeing, United Technologies, Intel and Citigroup. On the downside were shares of Wal-Mart, International Paper, Alcoa and General Motors.

The Nasdaq Composite ($COMPQ) edged up 22.81 points, or 0.6 percent, to 3,953.15 while the Nasdaq 100 Index ($NDX) advanced 20.11 points, or 0.5 percent, to 3,827.62.

Lehman Brothers’ Jeffrey Applegate believes that very rich valuations for the best tech stocks will continue — perhaps for years. Fundamentals are in place for the long business cycle to get longer, the Lehman strategist said in a note to clients.

Applegate notes that demand for technological product is largely interest-rate insensitive.

Spending on technology currently accounts for 60 percent of all capital spending, he said. The tech growth rate first accelerated hugely in 1994 and it again picked up significant steam in the latest year — from about 43 percent to 62 percent, Applegate notes. And the Fed was raising interest rates to slow GDP growth during both those time periods.

The Standard & Poor’s 500 Index ($SPX) added 0.5 percent while the Russell 2000 Index ($RUT) of small-capitalization stocks inched up 0.2 percent.

Volume was very light, checking in at 730 million on the NYSE and at 1.27 billion on the Nasdaq Stock Market. Breadth was mixed, with decliners outnumbering advancers by 14 to 13 on the NYSE while winners matched losers on the Nasdaq.

Overly confident?

John Waterman, managing director of investments at Rittenhouse Financial, believes the market has become overly confident that there will be no action on rates Tuesday.

While the odds definitely favor no move on the borrowing target, he believes there will be serious discussions at the Fed table on Tuesday.

“The economic data released has still been pretty mixed,” Waterman commented.

On balance, Yingst said the economic evidence so far still points to a soft landing for the U.S. economy — the best-case scenario for stocks. But he noted that the recent performance of retail stocks is unsettling as it suggests a hard landing may be in store. An index that tracks the retailers has fallen 20 percent this year.

Joe Liro, equity strategist at Stone & McCarthy Research Associates, observed that the market has a tendency to run up heading into — and the day of — the Fed meeting while it sells off later in the week.

In the meantime, there will be a vacuum of news this week with slim pickings on the earnings front. First Call said only 13 Standard & Poor’s 500 companies have yet to reveal their results. Second-quarter earnings growth currently stands at 21.6 percent. Only 9 percent of companies missed estimates, First Call said.

While the outlook for the third-quarter remains positive, results aren’t expected to be as good as in the second quarter. First Call estimates third-quarter profit growth at 17.6 percent.

Separately, Trim Tabs said stock market liquidity was modestly bullish last week at $2.6 billion and noted that initial public offerings will dry up over the next weeks with equity fund inflows also likely to slow significantly for seasonal reasons.

Trim Tabs estimates that U.S, equity funds lost $1.3 billion over the three trading sessions ended Aug. 17 for a monthly rate of negative $10 billion. Aggressive growth funds took in $864 million while technology funds lost $125 million.

Sector movers

The chip sector came under some profit-taking in afternoon trading Monday after rallying for six straight sessions as the Philadelphia Semiconductor Index ($SOX) shed 2.1 percent.

Yingst said the recent rally in the chip arena appears to be more an “oversold bounce” than the beginning of another upward leg.

Chip bellwether Intel (INTC) added 1 1/2, or 2.1 percent, to 72 1/16 and was a major factor behind gains in the major averages Monday.

The chip kingpin hit a fresh 52-week high of 74 1/16 in intra-day dealings before erasing the lion’s share of the gains late in the day. Lehman Brothers’ Dan Niles raised his fiscal year 2000 earnings-per-share estimates on Intel to $1.74 from $1.70 and 2001 estimates to $1.90 from $1.85. He maintains an $88 price target on the stock. In the meantime, Intel plans to exhibit its speedy Pentium 4 microprocessors this week.

Among other components of the $SOX, Motorola (MOT) lost 7/16 to 35 13/16. The company revealed that China has approved a $1.9 billion investment by Motorola in semiconductor manufacturing and telecoms facilities in the northern city of Tianjin.

Shares of antivirus software companies climbed on Monday following a positive writeup in this week’s issue of Barron’s, which points to the growing market for that specific kind of software. For example, Network Associates (NETA) tacked on 43/64, or 3.4 percent, to 20 7/16 with Barron’s suggesting the company trades at modest valuations. Also mentioned in the article were shares of Japan’s Trend Micro (TMIC) and Symantec Corp. (SYMC). The latter added 1.2 percent.

Network Associates is also a component of Merrill Lynch’s Internet Holdrs (HHH), which added 2.0 percent. Other upside movers within the group were America Online, which gained 3.8 percent to 56 15/16, Yahoo, up 4.2 percent to 130 7/16, and Exodus Communications, up 2.4 percent to 61 7/8.

Oil stocks climbed as crude oil prices gained ground for a fourth consecutive session while the oil service sector slipped as it digested merger news. The CBOE Oil Index ($OIX) added 0.8 percent while Philadelphia Oil Service Index ($OSX), of which Transocean Sedco Forex and R&B Falcon are components, fell 0.6 percent.

Transocean Sedco Forex (RIG) revealed that it’s purchasing R&B Falcon (FLC) for $5.8 billion plus $3 billion in debt, which would create the third largest oil service company in the world. Transocean shed 4 3/16 to 53 1/2 while R&B ended flat at 25 3/16.

Financial shares captured some buying interest a day ahead of the Fed meeting, as the S&P Bank Index ($BIX) rose 0.7 percent and the Amex Securities Broker/Dealer Index ($XBD) gained 0.7 percent. Dow-component Citigroup, up 2 25/256 to 76 7/8, reached a new 52-week high of 76 7/8 on Monday, helping the blue-chip barometer maintain gains.

A number of online brokerages flexed their muscles Monday. Putnam Lovell Securities initiated coverage on a string of stocks within the group and said it believes that in the near-term the sector is due for a rebound as the slower summer trading volumes have weighed heavily on the short-term performance of these stocks. E-Trade (EGRP), up 4.6 percent, or 3/4 to 17 1/8, was initiated by Putman Lovell with a “buy” rating and a 12-month price target of $21 a share. And Ameritrade (AMTD), up 7 percent, or 1 1/16 to 15 15/16, was initiated with a “hold” rating.

In a research note, Prudential Securities said the listlessness that the bank sector has been seeing lately is due to “restructuring fatigue.” Prudential reiterated its “strong buy” rating on FleetBoston Financial (FBF) on belief the stock is undervalued and a “strong buy” on Bank One (ONE), indicating that the firm’s new management is already making a difference. And PNC Bank’s (PNC) price target was raised to $70 from $57 on belief that the outfit is undervalued versus other trust companies.

In merger news, Washington Mutual (WM) announced Monday it will pony up $1.5 billion to purchase Houston-based Bank United in a bid to boost its presence in Texas. Bank United (BNKU) lost 1 7/8 to 40 1/2 while Washington Mutual shed 15/16 to 31 7/8.

In the insurance arena, indexes that track the sector headed north with the S&P Insurance Index ($IUX) up 1.2 percent. The largest gains were seen in shares of Allstate Corp. (ALL), up 7/8 to 29 5/8, and Aflac (AFL), up 7/16 to 55 1/8. Lehman Brothers lowered its rating on the stock to a “neutral” from “outperform” as the company hit the brokerage’s $55 price target. Lehman labeled Aflac’s performance as “superb” but called the stock “overheated.”

See for post-market trading activity.

Bond focus

Treasurys retreated, with buyers sticking to the sidelines awaiting the conclusion of the FOMC meeting on Tuesday.

The 10-year Treasury note dipped 2/32 to yield ($TNX) 5.785 percent and the 30-year bond erased 12/32 to yield ($TYX) 5.715 percent.

There is no data set for release on Monday or Tuesday. The economic highlights of the week include the durable goods report for July, existing home sales for July and the minutes of the Fed’s July 27-28 policy —setting meeting.

In the currency market, dollar/yen (C_JPY) recovered, rising 0.4 percent to 108.64 while euro/dollar (C_EUR) slid 0.6 percent to 0.9015. See latest currency rates.

In the commodity market, September crude added 48 cents to $32.47 while the Bridge/CRB index tacked on 1.38 to 221.94.