Thursday's Market: NYSE Volume Tops 2 Billion, but Yesterday's Rally Fizzles

One day after the Fed's move sent stocks skyrocketing, the major indices were little changed.
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Stop the music. Find a seat.

After one of the wildest days in stock market history, markets played a high-stakes game of musical chairs today. The major market indices, the

Dow Jones Industrial Average and

Nasdaq Composite Index, were slightly lower, giving up some of yesterday's gains. The mood overall was rather calm, despite the fact that the

New York Stock Exchange

traded 2.1 billion shares, shattering yesterday's volume record and trading past 2 billion shares for the first time ever.

Both the Dow and the Comp ended the day with mild losses, closer to session lows than highs. The Dow was off 33 to 10,912, while the Comp was off 50 to 2567.

Now, just because the major market indices were trading lightly didn't mean that major moves weren't being made. Quite the contrary. Markets weren't dropping -- they were rotating and not everybody found a seat. Many industries were jumping, taking their newfound gains from the coffers of yesterday's favorites.

Look no further than the Dow. Today's biggest busts were last year's big winners. Two health care companies,

Merck

(MRK) - Get Report

and

Johnson & Johnson

(JNJ) - Get Report

, were huge losers.

Philip Morris

(MO) - Get Report

and

Procter & Gamble

(PG) - Get Report

, two consumer stocks, were much lower, too.

Winners and Losers

All over the market, indices seemed to be pitted against each other. Nowhere was this more obvious than the different directions the

Dow Jones Transportation Average

and

Dow Jones Utility Average

were taking.

Utilities were getting killed, taking a big hit as fears abounded that the California energy crisis will not be isolated to the West coast.

Merrill Lynch

utility analyst Steve Fleishman lowered his long-term ratings on both

PG&E

(PCG) - Get Report

and

Edison International

(EIX) - Get Report

. Edison, after stumbling to under $13 yesterday, fell to $6.25 today before ending off $1.50, or 12.2%, to $10.75.

Fleishman said both companies face a severe bankruptcy risk, since an early draft decision from the California regulatory commission indicates that the state will not allow the companies hike rates too much and hurt consumers.

"There was none of the good language we were expecting on assurances of future recovery of power costs of existing balances," he wrote. "In our view, it was disappointing."

Now, since this decision is a draft and not a final decision, there is still wiggle room for the two major utilities to get more relief from the state. But, Fleishman said that if the draft stands, then he thinks the likelihood of bankruptcy is between 25% and 40%.

The news wasn't good for California's power companies or the industry wide concern about whether deregulating the cost of energy was a good idea. The Dow utilities fell 5.9%.

But the transportation average didn't. The Dow transports rose 4.3%, thanks in large part to a pair of upgrades on

UPS

(UPS) - Get Report

and

US Freightways

(USFC)

. Merrill Lynch upgraded both to buy from accumulate, citing the Fed's acknowledgement of the economic slowdown as a sign these guys won't be left high and dry, as they would have been in a full-blown recession.

Technology went sour, coughing up earlier positive sentiment. The

Morgan Stanley High-Technology 35 Index

, which includes names like

Cisco Systems

(CSCO) - Get Report

and the four blue-chip tech horsemen --

Hewlett-Packard

(HWP)

,

IBM

(IBM) - Get Report

,

Intel

(INTC) - Get Report

and

Microsoft

(MSFT) - Get Report

dropped 1%.

The index could not eke out a gain today as discriminating investors elevated Cisco, but left other big names like

Sun Microsystems

(SUNW) - Get Report

,

Amazon.com

(AMZN) - Get Report

and

Dell

(DELL) - Get Report

on the table.

Consumer goods, soap and soda and stuff people can buy in a supermarket, were fared poorly, with the

Morgan Stanley Consumer Index

falling 2.9%. On the other hand, cyclicals, goods that tend to cycle seasonally -- like automakers and other high-ticket item sellers, for example -- were doing well. The

Morgan Stanley Cyclical Index

rose 3.1%, the second day of huge gains for these guys.

And those 3% moves in indices were not isolated to consumers and cyclicals. Money came out of health care and drugs, too.

One of These Things is Not Like the Other

With the Fed having made a historical move, one that shatters precedent, you might be quite concerned with where to put your money. Opinions and advice are everywhere, but agreement on what to do might be hard to find -- even at Merrill Lynch.

Just look at a pair of investment notes from Merrill Lynch's chief people -- Richard Bernstein and Christine Callies.

Richard Bernstein is chief quantitative strategist, which means he uses models and economic data to gauge where money should head in the market.

This morning, he wrote some comments about where his investment strategy would be headed in the wake of the Fed move. Bernstein told investors to stick to higher quality stocks, avoiding the nasty picture in technology altogether. His views directly contradicted today's market movement, with Bernstein advocating consumer staples, health care, utilities, energy, defense and financials. On his "no-no" list: tech, telecom and cyclicals.

Bernstein was aware that the markets were not in agreement with his calls in the bulletin, acknowledging that the industries he suggested investing in were getting hurt today. But, he stuck to his guns, telling clients that until profitability returns, his advice stands.

"If our indicators begin to signal that profitability will pick up as a result of the Fed's action (and given 1995 to 1997, one should not assume that they will)," he wrote, "then we will certainly change our stance."

Not everyone over at Merrill agreed. Christine Callies, chief equities analyst, who does something similar to Bernstein with perhaps less emphasis on models, made opposite picks. She was more in tune with the market's immediate mood, advocating individual stocks in consumer cyclicals and technology.

She recommended a wide array of department stores and clothiers, like

Abercrombie & Fitch

(ANF) - Get Report

,

Talbot's

(TLB)

,

Kohl's

(KSS) - Get Report

and

Radio Shack

(RSH)

. All of these companies made huge upside swings, but that's not to say that Callies was perfect.

Certain financials, like

Golden West Financial

(GDW)

,

The Hartford

(HIG) - Get Report

and

Fannie Mae

(FNM)

, also made her list, but had heavy losses today.

Simply put, use caution when investing. There are no sure things. Not even when two people work high profile jobs in the same company.

Market Internals

This marks the first time that volume passed 2 billion on the Big Board. Internals on both were great.

New York Stock Exchange: 1,600 advancers, 1,363 decliners, 2.103 billion shares. 250 new 52-week highs, 7 new lows.

Nasdaq Stock Market: 2,193 advancers, 1,797 decliners, 2.574 billion shares. 95 new highs, 47 new lows.

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Most Active Stocks

NYSE Most Actives

  • Lucent (LU) : 36.3 million shares.
  • Pfizer (PFE) - Get Report: 32.8 million shares.
  • Global Crossing (GX) : 29.3 million shares.

Nasdaq Most Actives

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Sector Watch

Financial stocks were continuing to draw a lot of attention in the wake of the Federal Reserve's surprise interest-rate cut yesterday. Lower rates boost these industries in particular, because lower rates make it cheaper for both companies and consumers to borrow more money.

Brokers, banks and insurers are close to ground zero, so that's where investors like to place bets on when rates change. Yesterday, the

American Stock Exchange Securities Broker/Dealer Index

, which as the name suggests covers the brokerages, rose more than 10%.

Now, with that huge pop already on the books, some investors are still hungry for more.

Image placeholder title

Brokers had another great day, with the broker index pasting a 1.6% gain on top of yesterday's upside explosion. The

Philadelphia Stock Exchange/KBW Bank Index

, which rose 6.2% yesterday, up another 1% today. The index tracks many national and regional lenders.

Helping bolster sentiment,

Merrill Lynch

earlier today upgraded brokerage

Morgan Stanley Dean Witter

(MWD)

and made some broad comments about the entire financial area. It guided investors toward national banks and brokerages, but steered confidence away from regional banks.

"We continue to be most cautious on the regional bank segment, where powerful...pressures are slowing earnings growth rates -- regionals are also on the front line of dealing with rapidly eroding credit quality," Merrill wrote in its research note.

Merrill's "emphasis list," which highlights its favorite names in the sector, is peppered with biggies, including

Bank of New York

(BK) - Get Report

,

Citigroup

(C) - Get Report

,

J.P. Morgan Chase

(JPM) - Get Report

,

Mellon Financial

(MEL)

, Morgan Stanley Dean Witter and

Wells Fargo

(WFC) - Get Report

.

Yesterday's cut was surprising because it happened yesterday, between Fed meetings and even before tomorrow's unemployment report was out, but it wasn't surprising that it happened. Spurred by a slowing economy, the Fed was expected to cut rates sooner rather than later, so some believe the markets may have already priced in lower rates. To be sure, the major stock market indices were zigging and zagging today, lately on the losing side. The Fed's next meeting starts Jan. 30.

"Given the well-telegraphed intentions of the Fed," wrote the Merrill Lynch analysts in their briefing on the financial industry this morning, "investors may have already largely discounted the initial benefits of a decline in interest rates -- for this reason, most financial stocks seem unusually close to fair value relative to the tough credit/capital markets environment currently."

One thing is certain -- banks have

problems that won't be erased by the Fed cut. Profits have been squeezed by a series of six rate hikes that started in mid-1999 as the Fed tried to rein in the red-hot economy. But bank stocks have a handful of other issues weighing on them right now -- most noticeably the specter of bad loans.

While the bank and brokerage sectors were rising about 1% today, insurance names were struggling. The

S&P Insurance Index

fell 6.4% as investors pulled their money out of the defensive shelter they used the past seven months while technology stocks plummeted. Another thing hurting the index was that, unlike the financial sector, insurers might not gain from a Fed cut.

"For companies that write traditional life insurance as well as the related products of supplemental health insurance, a decline in interest rates would be negative," wrote Eric Berg,

Lehman Brothers'

insurance analyst. Some insurance companies would benefit from a rate hike, Berg wrote, but many would not -- specifically industry heavies

Aflac

(AFL) - Get Report

,

Protective Life

(PL)

and

Jefferson-Pilot

(JP) - Get Report

.

"The yield they earn on their investment portfolios, funded by premiums taken in on the policies, starts falling almost immediately, whereas their liabilities continue to grow at the same rate," he wrote. "The net result is a squeeze on net interest margins."

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Bonds/Economy

Treasuries were trading higher after yesterday's heavy sale in notes and bonds, which was caused by the frenzied move into equities. As the market digested the rate cut, there were some murmurs of an overreaction among stocks. There remains considerable expectation of another interest rate deduction of 25 basis points at the end of the month -- in fact, 22 of the 24 primary money market traders polled by

Reuters

expect it.

The benchmark 10-year

Treasury notelately was up 31/32 to 105 14/32, lowering its yield to 5.029%.

In economic news, the

initial jobless claims

(

definition |

chart |

source

) rose to 375,000 in the week ending Dec. 30 from 359,000 the previous week. The number has risen for the third consecutive week and is at its highest level in two and a half years. Last week's result was substantially revised from the 333,000 as initially reported, understandable since only 18 states had provided hard data at that time. The four-week average rose to 352,250, its highest number since mid-July 1998.

Factory orders

(

definition |

chart |

source

) rose 1.7% in November, more than expected. Economists polled by Reuters had forecast a 1.3% rise, on average. The annual growth rate of factory orders rose to 2.1% from 1.8% in August.

Finally, the

Purchasing Managers Non-Manufacturing Index

(

definition |

source

) dropped to 53 in December from 58.5 in November.

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International

Europe did well, with London and Paris getting a belated boost on the Fed news. Germany, which already made Fed-related headway late yesterday, since it's open later than its friends, retreated.

London's

FTSE

was 146 higher to 6186. Across the channel, Paris'

CAC-40

gained 132 to 5816. Germany's

Xetra Dax

fell 58 to 6377.

The euro was trading up to $0.948 this morning. The dollar had gained yesterday after the rate-cut news, but generally, the euro had been moving higher in the past few weeks as the U.S. dollar was weakening in the face of a slowing domestic economy.

Asian markets were also mixed overnight amid opposing views of the longer-term effects of the U.S. Fed's 50-basis point interest-rate cut. Hong Kong stocks got an extra boost after the

Hong Kong Monetary Authority

also cut its base rate by 50 basis points overnight to 7.5%.

Following several sessions of heavy losses, Hong Kong's key

Hang Seng

index closed 4.42% higher, or 645.45, to 15,235.03.

Japanese stocks slipped into the close overnight, erasing earlier gains amid skepticism over yesterday's rally in the U.S. The

Nikkei 225

closed down 94.2, or 0.68%, to 13,691.49.

The greenback was lately falling against the yen, trading at 115.67 yen.

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