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Wednesday's Market: Late Rally Spurs Dow, Nasdaq Higher as Earnings Season Kicks Off

The major indices ran a back-and-forth race today with the bulls winning by a nose.

After an erratic day on Wall Street, stocks revved up into the close.

The market continues to duke out an existential battle over earnings woes versus interest-rate optimism. It seems the latter won out today. What is sure to be a bitter, ugly fourth-quarter earnings season began this week, but the Fed's 50-basis point interest-rate cut has some betting better times are ahead.

The blue-chip

Dow and the tech-heavy

Nasdaq dropped at the open, rallied, fell back, and then rallied again into the close. The Dow closed mildly higher, while the Nasdaq ended the day well into the green and just above the key 2500 threshold.

While the effects of last week's

Fed rate-cuts won't show up in the economy for months, investors are divided about whether to stick with defensive stocks or anticipate a longer-lasting shift in the economy by moving back into cyclical stocks. Cyclicals, like PC-makers and semiconductors, tend to grow and slow in synch with economic expansion and contraction. Defensive stocks -- like consumer staples -- on the other hand, are not as closely wedded to the economy.

Tech stocks and financials were the flavor today while defensives, like consumer staples, were a total drag.

Meanwhile, Wall Street is anxiously waiting for earnings from Internet heavy hitter

Yahoo!

(YHOO)

, which reports earnings this afternoon. Analysts are betting the company to report 13 cents share -- in line with consensus forecasts, but are worried that slowing online advertising spending will force it to lower its guidance for 2001. Ad spend accounts for 80% of Yahoo!'s revenues.

Mobile phone company

Motorola

(MOT)

also reports after today's close. Analysts are concerned about Motorola's earnings after

Nokia

(NOK) - Get Nokia Oyj Sponsored ADR Report

disappointed analysts and investors with lower-than-expected handset sales numbers yesterday. But the stock rose yesterday and was tickling higher again today. Amid worries over slowing global handset demand, many analysts fear that mobile phone companies are propping up sales by slashing prices. That's no good for earnings, or for stock price valuations.

Motorola warned in December it wouldn't meet its already-lowered fourth-quarter earnings estimates.

The Nasdaq got an extra boost today as investors cheered the ability of some key tech stocks to weather analyst downgrades this morning. Networking systems providers

Cisco

(CSCO) - Get Cisco Systems, Inc. Report

,

Redback Networks

(RBAK)

and

Juniper Networks

(JNPR) - Get Juniper Networks, Inc. (JNPR) Report

were all lowered by

CIBC World Markets

this morning, but both Redback and Juniper managed to rise, closing up 15.3% to $40.88 and 1.8% to $119.31, respectively. Cisco didn't join the party, however, putting a tiny little cramp in the Nasdaq's style.

Cisco fell in anticipation of negative comments about earnings from its CEO at a conference today. They continued to fall when the CEO said that the quarter was more challenging than expected. Cisco has been dogged by rumors that it would miss estimates for the quarter, which ends later this month. The stock closed down 88 cents, or 2.4%, to $36.25, raking in the second-highest volume of trading in one day for any specific stock ever. That's big!

Other tech stocks also rallied despite some negative analyst comments, including semiconductor maker

Applied Materials

(AMAT) - Get Applied Materials, Inc. Report

.

But there were a few exceptions.

Qualcomm

(QCOM) - Get QUALCOMM Incorporated Report

closed lower after research firm

Wit Soundview

lowered the stock's rating to hold from buy and cut its 2001 and 2002 earnings estimates. Mobile phone company Nokia -- which sells handsets with Qualcomm's proprietary CDMA technology -- yesterday disappointed analysts with lower-than-expected handset sales. Qualcomm closed 81 cents lower, or 1.1%, to $72.44.

The Dow's amazing comeback can be attributed mostly to strength in financial Goliaths

J.P. Morgan

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

and

Citibank

(C) - Get Citigroup Inc. Report

, which, together, added 27 points of upside to the Dow's late-day rally. Defensive stocks nipped it in the bud, however. Consumer products giant

Procter & Gamble

(PG) - Get Procter & Gamble Company Report

,

3M

(MMM) - Get 3M Company Report

and pharmaceutical

Johnson & Johnson

(JNJ) - Get Johnson & Johnson (JNJ) Report

were the biggest drags on the blue-chip index, weighing in with 28 points to the downside.

Other defensives were also weak after moving up impressively over the last week. Tobacco stocks were hanging on, but the

Morgan Stanley Consumer Index

finished down 0.8% and the

Philadelphia Stock Exchange Forest & Paper Products Index

ended off 0.2%.

Technology will probably continue to bounce around as expectations shift concerning chip and storage demand this earnings season. Reporting tech companies and the analysts that follow them will surely have plenty to say about these issues, which have been the bane of the PC and chip stocks in recent months.

Intel

(INTC) - Get Intel Corporation (INTC) Report

, which originally succumbed to the pressure after

Credit Suisse First Boston

issued a pessimistic note on the company without actually downgrading the name -- finished up 2.3% to $33. The

Philadelphia Stock Exchange Semiconductor Index lately

which was down at midday, closed up 3.2%; the

Philadelphia Stock Exchange Computer Box Maker Index

finished up 2%. The

Nasdaq Telecommunications Index

ended up 5.5%.

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Media stocks were strong today. Dow component

Disney

(DIS) - Get Walt Disney Company Report

rose 0.8% to $30.38, while

Time-Warner

(TWX)

rose 4% to $67. The

Wall Street Journal

reported today that its proposed merger with

America Online

(AOL)

may be approved by the

Federal Communications Commission

by today.

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Market Internals

Breadth was positive today on rather heavy volume.

New York Stock Exchange: 1,868 advancers, 1,052 decliners, 1.289 billion shares. 156 new 52-week highs, 18 new lows.

Nasdaq Stock Market: 2,558 advancers, 1,256 decliners, 2.424 billion shares. 61 new highs, 56 new lows.

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Most Active Stocks

NYSE Most Actives

Nasdaq Most Actives

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Sector Watch

Commodity-related stocks continue to sink. Following several downgrades yesterday, chemical stocks had another bad day. The

S&P Chemical Index

ended down 0.1%, led into the muck by

Dow Chemical

(DOW) - Get Dow, Inc. Report

and

DuPont

(DD) - Get DuPont de Nemours, Inc. Report

. The

Philadelphia Stock Exchange Gold and Silver Index

fell 0.4%.

Meanwhile, transportation stocks ended higher. The

Dow Jones Transportation Average

was 0.1% higher, and the

Amex Airline Index

was also up 0.1%.

AMR

(AMR)

, the parent of American Airlines, which plans to consolidate with now bankrupt

TWA

.

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Bonds/Economy

Treasuries are trading lower in quiet trading as the market continues to consolidate until more relevant economic reports come out tomorrow and on Friday. Yields are near the same level as at yesterday's close, with only the long bond showing some upward movement. A considerable amount of corporate and federal agency debt, about $29 billion by the week's end, is entering the market and will exert selling pressure on U.S. notes and bonds.

Yet another

Federal Reserve official, the president of the Boston reserve bank, commented on the economy this morning, predicting a moderate 2%-3% growth during the year. She noted that a stable housing market, continuing business investment in computers and good productivity would offset poor corporate profits, tighter credit conditions and slower consumer spending and business investment. However, the market took the statement in its stride, having already priced in such circumstances.

The benchmark 10-year

Treasury note was down 3/32 to 104 28/32, raising its yield to 5.102%.

In economic news, the

Mortgage Applications Survey

(

definition |

chart |

source

) detected increases in both refinancing and new mortgage activity. The Refinancing Index rose sharply to 1257, its highest level since mid March 1999. Lower interest rates are encouraging a greater number of homeowners to seek better terms on their present mortgages. The Purchase index rose to 235 from its 10-month low of 219.9. Although out of the trough, the index has not moved high enough to reflect any distinct improvement in private real estate, which remains critically dependant on consumer confidence and income growth.

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International

Nokia's

(NOK) - Get Nokia Oyj Sponsored ADR Report

crummy sales report yesterday put pressure on the major markets and spreading to telco-suppliers and chipmakers in Europe. However, the strength of the U.S. market helped put the continent's stock markets on better footing at the end of the day.

At the close, London's

FTSE

ended 27.5 lower to 6060.6. Across the channel, Paris'

CAC-40

trimmed losses to close off by just 9.84 to 5635.35. Germany's

Xetra Dax

ended down 84.45 to 6320.07.

The euro was trading lately at $0.9366. It has been gaining slowly in the past few weeks against the U.S. dollar as the U.S. economy slows.

Asian markets were lower overnight, with Tokyo's

Nikkei 225

dropping 178 to 13,433 and Hong Kong's

Hang Seng

index sliding 65 to 15,436. The greenback was lately rising against the yen, trading at 116.47 yen.

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