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Sideways Is Bears' Best Bet

Liz Rappaport

There wasn't much to complain about Monday, but still a lot of information (and perhaps nachos and wings) to digest.

Indeed, the markets spent Monday chewing over last week's helpings of confirmation signals. The six-month-long rally was "confirmed" by the Dow Jones Transportation Average hitting a new all-time high, as did the Russell 2000, S&P 400 Mid-Cap index, the NYSE Composite and the NYSE advance-decline line (or the ratio of stocks gaining vs. those losing ground).

Likewise, the Federal Reserve stepped out of the way of the markets, acknowledging the economy's soft landing and foreshadowing no interest rate adjustments for a good while. The bulk of earnings season is behind us, and profits so far point to yet another quarter of double-digit growth.

"If you can't make hay with these numbers, what are you going to do when you don't have earnings or a Fed meeting helping you out?" says Marc Pado, chief market analyst at Cantor Fitzgerald.

The three major averages were essentially flat on the day. The Dow Jones Industrial Average was the only index to gain, closing up a fraction at 12,661.74. The S&P 500 closed down 0.1% to 1446.99, and the Nasdaq Composite finished down 0.2% to 2470.60. The Transports closed down off of Friday's record high -- falling 0.9% to 4962.93.

The surface looked dull, but there was strength in a previously lagging group -- the semiconductors, in part due to Barron's interview with Michael Cahill, manager of Chilton Investment. Semiconductors have struggled this year as many tech companies warned about future earnings weakness in 2007.

Some, like Cahill, say that it is time for the industry to have its run. "I think semis are trying to turn and firm," says John Roque, chief technical analyst at Natexis Bleichroeder. "We think they are in a slow improvement period -- flat since October, and the sell side is not very fond of it."

Anadigics(ANAD Quote) jumped most on the heels of the Barron's article -- up 17.5% Monday -- while Atheros Communications(ATHR Quote) rallied 6%.

Other chip and related names like Lam Research(LRCX Quote), Qualcomm(QCOM Quote) and KLA-Tencor(KLAC Quote) added more than 1% apiece. The Merrill Lynch Semiconductor HOLDRs (SMH Quote) rose 0.5%.

Also generally bullish was a dose of M&A activity Monday. But once again, the dealmaking failed to boost the overall market. On the flip side, however, the price of oil rising to near $60 per barrel also failed to hurt the market.

Sideways seems the best the bears can get these days.

In M&A news, State Street(STT Quote) fell 6.5% on news it will buy Investors Financial(IFIN Quote) for $4.5 billion. Investors Financial shares jumped 27.4%. Triad Hospitals(TRI Quote) gained 14.7% on news the company will be taken private in a $4.7 billion deal.

Billionaire investor and agitator Carl Icahn entered the auto-parts game, making a $36-per-share offer to buy Lear(LEA Quote), which jumped 11.5% on the day.

From an economic data perspective, the market had nothing to drag down the mood either. The Institute for Supply Management's report on activity in the services sector rose to 59, much higher than consensus expectations for a reading of 56.7.

"The economy is still cooking along," says Margie Patel, portfolio manager at Pioneer Investments, which has $6 billion in investments. "You can think of bad things that might happen, but here and now, it is hard to name any very negative thing that could derail the economy or the markets here or around the world."

From her assessment of earnings conference calls, Patel concludes that companies are bullish about the economy, despite several much-publicized profit warnings. But for a mention of a month or weakness here or there in the fourth quarter, most executives were continuing to pass through high energy and raw materials prices from earlier in 2006 -- and that is bullish on the economy, she says.

On why companies are not as optimistic as they've been on future earnings, Patel quips: "With Sarbanes-Oxley, you'd be crazy to be optimistic. It's much better to soft-pedal without blowing up your stock."

Perhaps traders will be hungrier Tuesday, with speeches planned from Fed Chairman Ben Bernanke, Chicago Federal Reserve President Michael Moskow and San Francisco Fed President Janet Yellen. After the close, tech bellwether Cisco (CSCO Quote) reports.