What a Week: Role Reversal
Liz Rappaport
01/19/07 - 05:28 PM EST
If last week was about selling energy and materials to buy tech, this week was the mirror image.
In a seemingly illogical turn of events, the tech sector stumbled despite strong earnings from several bellwether companies, while energy was the best-performing sector amid plunging oil prices. The sum of the parts was a lot of volatility, investors getting the usual jitters about earnings, and blue-chip indices and bond yields that were flat on the week. The
Nasdaq Composite, conversely, did not emerge unscathed.
Apple(AAPL Quote) led the Nasdaq to a new six-year high last week, and just as swiftly led the index's 2.1% plunge in this round. Enthusiasm for the iPhone faded as investors gathered anxiety about CEO Steve Jobs and the government's investigation into options backdating. Shares of Apple fell 7.6% on the week. Investors also debated the strength of Apple's midweek earnings report. The company beat estimates but provided its usual dose of conservative guidance.
The same was true for
Intel(INTC Quote), which also beat earnings estimates earlier this week, yet warned that its profit margins would be stunted throughout 2007 due to its price war with competitor
Advanced Micro Devices(AMD Quote). Shares of Intel and AMD fell 5% and 12.1%, respectively.
IBM couldn't catch a break, despite an impressive quarter as well. Big Blue's shares slid 2.5% on the week, and
Cisco's(CSCO Quote) fell 6.7%.
"Tech makes a seasonal peak between the 15th and the end of January, after Intel reports its news," says Jeffrey DeGraaf, chief technical analyst at Lehman Brothers. But DeGraaf believes these stocks are still good long-term investments, and adds that better entry points might come later in the first quarter. His research shows that most investors are still underweight technology, and that the seasonal weakness will lead to a more deeply oversold situation.
DeGraaf says stocks like Cisco, IBM
Microsoft(MSFT Quote),
Oracle(ORCL Quote) and
Novellus(NVL Quote) show "great long term charts"; in other words, they are trading in a range that provides a solid base for future returns. "These bases are very symptomatic of what happens after a bubble," he says. "There is a five- to eight-year window where stocks go dormant and start to revive in the seventh year."
The earnings agita will pass, says James Paulsen, chief investment strategist at Wells Capital Management. "Tech companies have been doing this for the entire decade," says Paulsen. "They report earnings numbers that are pretty good, but give cautionary comments. Then the next quarter turns out to be pretty good anyway." It's the flip side of what the tech CEOs were doing in 1999, says Paulsen, "when they'd say 'earnings are a bit light, but the future looks fantastic.'"
Indeed, the future for tech may be better than the guidance suggests. The technology sector is expected to provide the strongest earnings growth of 2007, says John Butters, an analyst at Thomson First Call.
Meanwhile, the energy sector, which is expected to show the least profit growth this year, had a strong week.
Traders spent their days trying to time the bottom in the price of oil, and many felt that Thursday's brief slide below $50 per barrel was the jackpot. Oil futures rallied Friday to end the week up 11 cents at $51.99.
Fueled by stronger-than-expected earnings from oil services company
Schlumberger, shares of the
Oil Services HOLDRs Trust(OIH Quote) gained 4.9%. Shares of Schlumberger gained 5.4% Friday on the heels of its earnings report. The
Energy Select Sector SPDR(XLE Quote) exchange-traded fund also jumped 4.6% this week.
Exxon Mobil's (XOM Quote) shares gained 3.7% this week to help stabilize the
Dow Jones Industrial Average, which was pressured by earnings-related drops.
Economic bellwether
General Electric(GE Quote) couldn't wow investors with its earnings Friday, despite doubling its profits. Investors honed in on the company's restatement of earnings going back to 2001, as well as concerns about its acquisition strategy. Shares of GE were the worst-performing in the Dow on Friday, falling 2.7%.
The Dow slipped a fraction Friday and ended the week up only 9 points to close at 12,565.53. The S&P 500 finished the week down less than a point on the week, to close at 1430.50.
The week's economic data were strong all around, with a higher-than-expected industrial production and capacity utilization report, rising housing starts and building permits, and another week of declining jobless claims. Headline inflation reflected higher energy prices a few months ago, but the core readings were benign. Federal Reserve Chairman Ben Bernanke testified in front of the Senate Budget Committee, but said only one thing about the current economy: that the industrial production numbers this week show strength in the manufacturing sector. An upturn in the Philadelphia Fed Manufacturing Index helped prove his point.
On all the good news, the fed funds futures market continued to push out the likelihood of a rate cut well into the second half of the year. With all this acceleration, odds of a rate hike even crept into the conversation.
Stock investors have accepted the rate outlook at this point, but bonds were still adjusting. The sum of the parts was an unchanged 4.77% yield on the 10-year on the week. Foreign buyers and large institutions stepped in to buy longer-dated Treasury bonds when yields neared 4.8%.
Within the walls of a single week, the markets got rather volatile. A trader might have made a nice bundle shorting oil to $50 and buying it again. And tech may have been ugly this week, but the Nasdaq is still up 1.5% for the year -- which is only three weeks long at this point. Likewise, the S&P 500 and the Dow are up 0.9% and 0.8% for the year.
Annualize that!
