Nasdaq Rally Ready to Take a Breather, Some Market Watchers Say

SAN FRANCISCO -- I'm not trying to kick the market when it's up or suggesting you look a rally horse in the mouth. But some market watchers say the advance is looking ready to take a powder.

"The big rally has pretty much peaked out," Scott Bleier, chief investment strategist at Prime Charter said Thursday. "Trading accounts should take a little off the table here."

Bleier maintains a long-held view that 4200 represents the upper limit for the Nasdaq Composite Index (short-term) and believes the index must spend more time "working through resistance" in the high-3000, low-4000 range.

Stanley Nabi, vice chairman at DLJ Asset Management, offered a similar, even more cautious, view Thursday.

"I think the recovery in the Nasdaq has been too steep, exposing the major stocks in that index to risk once again," he said. "I'm concerned some market players" (Editor's note: Not to mention TV pundits) "are saying 'the correction is over and now we're going to rebound to new highs.' I think that's a dangerous assumption."

The veteran market watcher sees three main stumbling blocks to a continued Nasdaq rally. One, bellwether names such as Sun Microsystems (SUNW Quote - Cramer on SUNW - Stock Picks) are again approaching triple-digit price-to-earnings ratios. "How far are they going to go?" Nabi wondered.

Second, the spate of profit warnings from "major companies" such as Computer Associates (CA Quote - Cramer on CA - Stock Picks), Honeywell (HON Quote - Cramer on HON - Stock Picks) and Unisys (UIS Quote - Cramer on UIS - Stock Picks) have him convinced more disappointments are forthcoming, especially if the economy continues to slow. The perception that second-quarter earnings are solid is "hiding a lot of risk," Nabi said.

Third, "once profit season is out, there's no other factor that would push the market up," he predicted, suggesting the focus will shift to the political conventions and the Fed .

Nabi maintains the bullish outlook on energy stocks expressed here in early February, believing industry analysts are basing earnings expectations on oil being in the $18 to $19 range. He sees crude stabilizing in the mid-to-high $20s because of (still) favorable supply/demand considerations, leading to upward earnings revisions in the coming months.

The market watcher continues to recommend integrated oil companies such as Chevron (CHV Quote - Cramer on CHV - Stock Picks), Exxon Mobil (XOM Quote - Cramer on XOM - Stock Picks) and Texaco (TX Quote - Cramer on TX - Stock Picks), as well as Conoco (COC Quote - Cramer on COC - Stock Picks), Anadarko Petroleum (APC Quote - Cramer on APC - Stock Picks) and Burlington Resources (BR Quote - Cramer on BR - Stock Picks).

Thursday Afternoon QB

Another reason some are concerned is the dark side of momentum's resurgence. Just ask Arthur Bonnel, manager of the (ACBGX Quote - Cramer on ACBGX - Stock Picks)U.S. Global Investors Bonnel Growth fund.

Several of the names Bonnel mentioned with favor (vs. flavor) Wednesday night experienced nasty declines Thursday.

As presaged by after-hours trading Wednesday, Three-Five Systems (TFS Quote - Cramer on TFS - Stock Picks) plummeted 46.4% Thursday after the company issued some cautious comments about its second-half revenue.

As he recommended Wednesday, Bonnel bought more of the stock at the open Thursday at 32 1/16; the stock closed at 34 1/4.

Another of Bonnel's picks, Black Box (BBOX Quote - Cramer on BBOX - Stock Picks), dumped 36% Thursday. The provider of network services produced first-quarter revenue growth of 73% and earnings of 72 cents a share, a 21% rise from the prior year. The company also announced plans to buy back 500,000 shares.

"I thought Black Box's numbers were very good," Bonnel said, saying he could see no difference in the quality of its earnings vs. those of Tollgrade Communications (TLGD Quote - Cramer on TLGD - Stock Picks), another of his picks which rose 18.2% Thursday.

Bonnel chalked up the disparity in performance to the short-term vagaries of earnings season. A more obvious answer is that Black Box's earnings merely met expectations, while Tollgrade's profit of 54 cents a share whipped them by a stunning 24 cents.

Less clear is what transpired with two of Bonnel's other recommendations, Jones Pharmaceutical (JMED Quote - Cramer on JMED - Stock Picks) and King Pharmaceuticals (KG Quote - Cramer on KG - Stock Picks).

We know (of course) that King offered $3.4 billion in stock to acquire Jones Medical, a 38% premium based on King's closing price on July 12.

King shares fell 19.5% Thursday, even though the company said the acquisition would be accretive to earnings "immediately" upon its close. King's decline is somewhat understandable, given the company is the acquirer, but Jones Medical also tumbled, sliding 11.4% Thursday.

On Thursday, Bonnel said the declines could have been caused by arbitragers gaming the stocks; indeed, the decline in King's shares reduced the value of its all-stock offer to $2.7 billion by day's end, explaining why Jones shares also fell. Another trader recalled a similar pattern emerged, both buyer and seller falling, when Trizetto Group (TZIX Quote - Cramer on TZIX - Stock Picks) attempted a buyout of IMS Health (RX Quote - Cramer on RX - Stock Picks) in April. Perhaps the King-Jones Medical deal was victimized by guilt by association, however tenuous. Trizetto later called off the deal, settling for the acquisition of an IMS subsidiary. (King shares fell another 12% Friday, while Jones Medical slid 9.4%.)

"I don't think it's a bad deal, but I'm sorry [Jones and King] are doing it because they're pounding my stocks," Bonnel said.

The fund manager's advice is to "just sit with it" if you believe a stock with good long-term fundamentals is being unduly trashed. "Take the long view and you'll make money," he said, adding that's his plan for all of Thursday's flatulent four.

Speaking of running out of gas, so is this version of The TaskMaster, meaning I'm again forced to postpone more from my interview with Marc Klee, co-manager of the (NTTFX Quote - Cramer on NTTFX - Stock Picks)John Hancock Technology fund. It is coming soon -- promise.