Don't Take Off Those Rally Caps Just Yet

Major averages rallied sharply Tuesday, and news after the close of trading has raised expectations that a follow-through tomorrow is possible. Such a development would be noteworthy because Tuesday's advance marked the ninth-consecutive session in which stock proxies reversed the prior day's trend.

But a back-to-back rally could occur, judging by the early reaction to Intel's (INTC) quarterly results. The chip giant posted first-quarter earnings of 15 cents a share, before charges, in line with analyst expectations and down a penny from year-ago results. Intel's revenue totaled $6.8 billion, slightly ahead of expectations and up from $6.68 billion in 2001's first quarter.

"We still haven't seen any signs of recovery" in the broader economy, CFO Andy Bryant said in the firm's conference call. But he did forecast "some uplift" in the second half of the year, citing seasonal factors that traditionally buoy PC sales.

Looking ahead, Intel forecast second-quarter revenues of $6.4 billion to $7 billion vs. the consensus of $6.7 billion, and said it expects gross margins to rise to near 53% vs. 51.3% in the first quarter. For all of 2002, the company said it expects capital spending of about $5.5 billion, which is in line with analysts' forecasts.

In after-hours activity, Intel was recently trading around $31.03, up from its regular-session close of $29.51.

Piggy-backing on Intel's gains, S&P futures were recently trading at 1133 in Globex trading vs. settlement of 1130 in regular-hours trading. Similarly, Nasdaq 100 futures were at 1427.50 in Globex activity vs. 1420 earlier.

Among other postclose earnings news, the majority of firms posted in-line or better-than-expected results. Among those in the latter category were Boston Scientific (BSX), Harley Davidson (HDI), Motorola (MOT), Capital One Financial (COF) and Kraft Foods (KFT).

Of course, the analysis of those reports and deciphering of conference call comments -- Veritas Software(VRTS), despite beating estimates, had cautious guidance -- will continue through tomorrow and have a great bearing on whether early indications of further gains prove prescient. Then, of course, some guy named Greenspan is speaking and somehow the market always seems to react when he talks.

In the Charts

As noted earlier , there were plenty of fundamental reasons for the market's advance Tuesday but plenty of technical fodder as well.

Among those were "very oversold telltale indicators," like the 10-day Arms Index, positive McClellan oscillators, and a "modestly improved" Chicago Board Options Exchange Volatility Index, according to Michael Paulenoff, founder of 2MStrategies.Com. Heading into today, the VIX had risen nearly 11% since April 10.

Those signals, plus a "trigger mechanism" from Novellus Systems (NVLS) combined to "light the match for a sharp recovery rally," the technician said.

Referring to the near capitulation of his short-term bullishness last week, Paulenoff said: "The moral of the story is: It ain't over until the fat lady sings ... although she was tuning up."

As to why Novellus' positive comments were more important than those from Texas Instruments (TXN), General Motors (GM), Johnson & Johnson (JNJ), etc., he replied: "I am not saying one was more important than the other, but certainly the combined 'visibility improvement,' however slight, inspired managers to put money to work in tech."

Indeed they did; The Nasdaq 100 rose 4.3% today while the SOX jumped 5.6%.

Still, Novellus may have had a disproportionate impact because semiconductors are considered the linchpin to any broader tech recovery. Positive comments about improving second-quarter order growth from the equipment maker were viewed as a harbinger of that long-awaited event. (Semiconductors also are the favorite trading vehicle for momentum investors, as fans of Bill Fleckenstein's RealMoney.com column are well aware.)

Because they are so intently watched, quickly traded and require a degree of attention that outstrips their representation in most investors' portfolios, John Roque, senior analyst at Arnhold & S. Bleichroeder, prefers to focus his attention away from chips.

In a report yesterday, he recommended names such as Liz Claiborne (LIZ), Radio Shack (RSH), Western Digital (WDC) and Torchmark (TMK). Each rallied today, although certainly not as much as the SOX.

As to the influence of technical factors on the market, Roque noted the following positives, which helped pave the way for today's advance:

The NYSE Composite being at the confluence of its 50- and 200-day moving averages, with an upward sloping trend line connecting the Sept. 21 low with the February 2002 low;

Favorable market internals, featuring a "goodly number" of stocks at 52-week highs. (Today, gainers led advancers 22 to 9 in Big Board trading while 214 stocks hit new highs vs. just eight new lows.)

Additionally, Roque was "intrigued" by the market's ability to weather fairly well the probe by New York Attorney General Eliot Spitzer, as well as recent weakness in market cap giants such as IBM (IBM).

That said, we couldn't help but notice how quickly the presumed "negative sentiment" turned around today at the first signs the market was gettin' jiggy. The VIX fell 9.3% to 20.3 today, pretty much wiping out the recent gains mentioned above. Similarly, the CBOE Nasdaq Volatility Index fell 5.8% to 39.43 today, all but eradicating its more than 11% rise from March 25 through yesterday's close. The equity put/call ratio fell to 0.57 today vs. 0.73 yesterday.

Market participants' eagerness to accept the notion that last Thursday marked a capitulation bottom, that Middle East tensions are going to quickly fade, and that first-quarter earnings will provide salvation has some observers convinced any near-term rally will prove very fleeting.

But to discuss those views now would be to rain on the parade that was Tuesday's session, and I'd never want to be accused of doing that.

Plus, there's always tomorrow.

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