Dow flexes its muscles; Nasdaq retreats

Dow climbs as Nasdaq wobbles

Tech buyers bail out late in the session

NEW YORK (CBS.MW) – The Dow Industrials ended a steady session on firm footing Wednesday thanks to smart gains in a couple of its tech components as well as a rally in oil stocks.

But the Nasdaq fell into negative territory as buyers — which supported the index throughout most of the day — bailed out in the afternoon. Investors have been unwilling to commit to the tech sector, which has been badly beaten over the past couple of weeks on fears that revenue growth going forward can’t support current valuations.

Though valuations in the tech sector have come down a lot since March, many stocks remain expensive, observed Hugh Johnson, chief investment officer at First Albany. Investors aren’t comfortable extending positions in the group in this kind of environment.

“The market needs to be convinced that the Fed is done raising interest rates and that we’ll get a soft landing for the U.S. economy. Then techs will reassert themselves,” Johnson observed. Right now, investors don’t have this conviction, he said.

The broader market saw the heaviest buying interest in oil and oil service shares on the heels of an unexpected plunge in crude inventories, which boosted crude oil prices. Brokerage stocks climbed, as did biotech, utility, retail and drug shares. On the downside were paper and airline stocks. Within technology, all sectors fell in afternoon trading, led by networking issues.

The Dow Jones Industrial Average jumped 80.58 points, or 0.8 percent, to 10,687.53.

Two of the Dow’s tech components — IBM and Hewlett-Packard – posted smart gains. Other gainers included Exxon Mobil, Boeing and McDonald’s. On the downside were shares of Intel, AT&T and General Electric.

The Nasdaq Composite fell 27.06 points, or 0.7 percent, to 3,658.46 after rising as much as 68 points in intra-day dealings. The Nasdaq 100 Index lost 30.81 points, or 0.9 percent, to 3,490.34.

“The economic data Wednesday was positive, though the test will come on Friday with the release of the employment report,” said Peter Cardillo, chief strategist at Westfalia Investments.

The economic picture is still mixed, said Alan Skrainka, chief market strategist at Edward Jones. Friday’s employment report for July will thus be a key piece of the puzzle ahead of the Aug. 22 Federal Open Market Committee meeting.

Skrainka said he remains optimistic about the tech sector going forward. “Prices have come down to more realistic levels.”

The Standard & Poor’s 500 Index ended near flat levels, inching up 0.60 point while the Russell 2000 Index of small-capitalization stocks gained 0.5 percent.

Separately, volume stood at 988 million on the NYSE and at 1.48 billion on the Nasdaq Stock Market. Market breadth was marginally positive on the NYSE, with winners beating losers by 16 to 13. But decliners outpaced advancers by 21 to 19 on the Nasdaq.

Sector movers

Chip stocks gave back earlier gains, falling for a second straight session, with the Philadelphia Semiconductor Index ($SOX) off 0.2 percent. Intel (INTC), which announced Tuesday a $300 million acquisition of privately-held Trillium Digital Systems, lost 1 5/16 to 63 5/16. But the sector also saw some big gainers, including Altera, up 4 7/16 to 97 7/16; Motorola, up 1 5/8 to 36 5/8; and Xilinx, up 4 5/16 to 75 5/16. Credit Suisse First Boston increased its fiscal year 2001 earnings estimates for Xilinx, bolstering the stock. See Silicon Stocks.

Computer hardware stocks also fell in afternoon trading and the Goldman Sachs Computer Hardware Index ($GHA) lost 0.9 percent. A slump in shares of Dell Computer (DELL), down 2, or 4.8 percent, to 39 9/16, weighed on the sector. USB Piper Jaffray downgraded the company to a “buy” from a “strong buy” saying it believes current revenue growth guidance of 30 percent is unsustainable. See Rating Revisions. Dell will report its second-quarter results on Aug. 10, with First Call estimating earnings-per-share of 21 cents in the second quarter.

But Hewlett-Packard jumped, climbing 4 5/8 to 112 1/2. The company (HWP) announced Wednesday that it’s entering an alliance with fellow Dow-component AT&T (T) to develop and co-market e-business solutions. AT&T lost 7/8 to 30 15/16. See full story.

Within the Internet arena, business-to-business stocks put on a good performance, as demonstrated by the 3.6 percent jump in Merrill Lynch’s B2B Holdrs (BHH). Commerce One tacked on 7.2 percent, or 2 15/16 to 43 5/8, and Scient rallied 10.3 percent, or 4 15/32 to 47 31/32. But the broader Net sector declined, with the Goldman Sachs Internet Index ($GIN) shaving 0.1 percent. See Net Stocks.

Oil stocks rose nicely as crude oil prices jumped on the heels of an amazingly bullish report from the American Petroleum Institute, released late Tuesday. The API said crude stocks fell a whopping 9 million barrels in the latest week compared to expectations for an increase. See full story. On Wednesday, numbers from the energy Dept. confirmed the API report, indicating that crude stocks fell by 10.6 million barrels in the last week. September crude rose 47 cents to $28.26 while the Bridge CRB index added 1.86 to 220.53.

The Philadelphia Oil Service Index ($OSX) rose 1.3 percent, with Halliburton up 3/4 to 47 9/16 and Schlumberger up 2 1/2 to 78. The CBOE Oil Index ($OIX) rose 2.4 percent. Exxon Mobil (XOM) was one of the upside movers, rising 2 7/8 to 82 7/8.

The biotech sector was another bright spot within the market, limiting the Nasdaq’s losses. A rally in shares of Protein Design Labs propelled the sector, helping the Amex Biotechnology Index ($BTK) add 1.1 percent and the Nasdaq Biotechnology Index ($IXBT) advance 1.1 percent. Protein Design Labs (PDLI) reported a second-quarter profit of 23 cents a share Tuesday compared to a loss of 14 cents in the same quarter a year ago. The earnings exceeded the First Call estimate of a profit of 18 cents a share. See full story.

Brokerage stocks rallied Wednesday, as the Amex Securities Broker/Dealer Index ($XBD) put on 1.6 percent. But bank stocks languished, with the S&P Bank Index ($BIX) off 0.1 percent.

Lehman Brothers (LEH), up 5 3/4, or 5.1 percent, to 118 1/2, boosted the brokerage group following an upgrade to a “buy” from an “attractive” rating by Bear Stearns. Also higher was Goldman Sachs (GS), which edged up 1 1/2 to 102 1/8, erasing earlier losses. The company priced its 40-million-share secondary offering late Tuesday at $99.75 a share.

In earnings news, Revlon checked in with a second-quarter loss of 48 cents a share, much wider than the First Call estimate of a loss of 28 cents a share. The company lost 8 cents a share in the year-ago quarter. See full story. The stock (REV) ended off 1/16 to 5 7/8.

See After Hours for post-market trading activity.

Treasury focus

The 30-year Treasury issue dropped, heavily lagging the rest of the curve, as investors expressed disappointment that Treasury didn’t announce any changes in its auction or buyback schedule Wednesday.

Treasury will sell a total of $25 billion in debt next week — less than the $20 billion sold at the previous refunding in May — including $5 billion in 30-year bonds, $10 billion in 10-year notes and $10 billion on 2-year notes. Treasury said it’ll continue to buy back debt twice per month.

The 10-year Treasury note was flat to yield 5.99 and the 30-year bond dropped 17/32 to yield 5.765 percent. See Bond Report.

A couple of economic indicators were unveiled on Wednesday: June new home sales fell by a surprising 3.7 percent to 829,000, much less than the expected rate of 878,000; and June leading economic indicators came in at flat levels compared to the expected 0.1 percent decline.

The new home sales number surprised the market as it fell to its lowest level in two and half years. See full story.

Thursday will see the release of weekly initial claims and June factory orders, seen rising by 6.1 percent. View Economic Preview, economic calendar and forecasts and historical economic data

Meanwhile, the fixed-income market is processing a gargantuan offering from Fannie Mae (FNM). Fannie Mae’s record $11.5 billion agency offering was priced Wednesday morning and contained the following tranches: $2.5 billion in reopened 30-year debt; $4 billion in reopened 10-year issues; and $5 billion in the 2-year sector.

In the currency market, dollar/yen shed 0.3 percent to 108.96 while euro/dollar edged down 0.1 percent to 0.9135. See latest currency rates.

The European Central Bank will meet to decide on short-term rates Thursday — the same day the Bank of England’s two-day policy-setting meeting concludes.

Carl Weinberg, chief economist at High Frequency Economics, doesn’t expect the ECB to announce changes in monetary conditions.

“We [believe] that rates are being boosted slowly [by the ECB] by gradually snugging up money market conditions at the weekly repo operation. No big announcement-type changes in conditions are needed,” Weinberg said.

In the meantime, the dollar had little reaction to words from Bank of Japan Governor Masaru Hayami, who said keeping Japan’s zero-rate policy for too long could have a negative impact on the economy. The BOJ left short-term rates unchanged at its last policy-setting meeting in July amid widespread expectations for a tightening.