Blue Chips Amble Toward Holiday

Homebuilders and big pharma advance as energy stocks take a rare tumble.
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Stocks held modest gains on Wednesday, thanks to a big drop in the price of oil. The

Dow Jones Industrial Average

tacked on 56 points, or 0.6%, after making a 3-1/2 year high on Tuesday. With the index sitting at 10,815.89, talk has turned to the 11,000 barrier.

The

S&P 500

gained 0.3% to 1209.58 and the

Nasdaq Composite

added 0.3% to 2157.03, as the holiday lull began to descend. Reatilers, homebuilders and drug companies led the advance:

Pfizer

(PFE) - Get Report

added 4%,

Ryland

(RYL)

gained 2% and the

Gap

(GPS) - Get Report

climbed 2%.

Shares of

Fannie Mae

(FNM)

rose 2% after the company said CEO Franklin Raines would leave.

Street Insight

contributor Jeffrey Bagley, a portfolio manager at McCabe Capital, says he's among Fannie buyers because it's a "pretty decent turnaround story." The thinking is that with most of the facts out -- and the CEO out as well -- most of the bad news is already priced into the shares.

Among Dow optimists, Ralph Acampora at Prudential Equity Group is setting his sights even higher than most. The technical analyst says the next major resistance for the Dow is at its May 25, 2001, high of 11,350.

"Although professional money managers prefer to use the S&P 500 as their bogy for the stock market, the public really uses the Dow," he wrote on Wednesday. "We now believe that the public will become more interested in the stock market and their sidelined money will eventually make its way back into equities."

Oil took a tumble after the Energy Department reported that U.S. inventories of both crude and heating oil rose over last week's levels. Oil inventories added 2.1 million barrels to 295.9 million, about 8% higher than the same period last year. Gasoline stocks rose 1.8 million barrels to 211.4 million, 4% more than a year ago. And distillates, which include heating oil, rose 600,000 barrels to 119.9 million, or 7% less than a year earlier.

With colder weather hitting the Northeast, the market was expecting a decline in on-hand energy supplies. Crude futures lost more than 3% to $44.24.

At this time of year, weather is a key component in the price of oil, due to its obvious effect on demand. Lehman analyst Paul Cheng says the price of crude would be about $5 a barrel lower if not for the arctic blast that hit just as heating oil inventories were at historically low levels. In fact, a month ago, inventories of so-called distillates such as heating oil were 9% below the average for the same period in 1999 through 2003, Cheng found. After Wednesday's report, they are only 5% below the average for this time of year.

"Looking ahead, under the assumption of normal winter weather, we think crude prices will trade toward the lower end of the $40 to $45 per barrel range for most of

the first quarter of 2005," Cheng wrote after the DOE report was released.

Shares of companies in the energy patch declined as well.

Exxon Mobil

(XOM) - Get Report

,

ChevronTexaco

(CVX) - Get Report

and

Halliburton

(HAL) - Get Report

all dropped about 1% each.

One variable to keep an eye on: China. The country is growing at over 9% a year, requiring ever-greater quantities of oil, construction materials and metals. There aren't many signs of a significant slowdown yet. Last week, China said its money supply increased 14% in November from the previous year, the fastest rate of expansion since July. So there has been no apparent impact yet from the modest Chinese interest rate hike in mid-November yet.

Trading was more subdued in the forex and fixed-income markets. The dollar lost a bit of ground against both the yen and euro, while the yield on the 10-year Treasury note rose to 4.20% from 4.17% on Tuesday.

The Treasury's 10-year note remains exceptionally vulnerable to a pickup in inflation. The note's yield is only 0.7 percentage point above the trailing 12-month increase in the consumer price index, vs. an average spread of almost 3 points over the past 10 years,

Bloomberg's

Beth Stanton pointed out on Wednesday.

Bill Wilby, director of equities at Oppenheimer Funds, says the dollar may not fall as much as the consensus expects next year. Still, he likes the tech sector for playing the uncertainty in currency markets.

"If the economy stays weak and the dollar declines further, tech stocks are some of the biggest beneficiaries," Wilby says. "If, on the other hand, the dollar strengthens because of a stronger economy, tech stocks are highly cyclical and should benefit from a stronger economy."

The sector also may be appealing for contrarians, as tech has been a laggard over the past week and this year. Hardware makers' shares lost 0.3% and software makers shed 1% over the past five sessions, making those two the worst performers in Morningstar's 12 sector indices. Hardware is also the worst performer this year, down 2.3%, while software is in the middle of pack, holding to an 11% gain.

Maybe Santa ought to hand out shares of PC makers instead of putting new laptops and MP3 players under the tree.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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