It wasn't quite the proverbial unheard tree falling in the forest, but another closely watched technical level tumbled Wednesday even as headline writers and TV pundits were focused on the
indictment of Martha Stewart. The Dow Jones Industrial Average eclipsed 9000 Wednesday for the first time since Aug. 22, 2002, amid far less excitement among the chattering class than its ultimately failed attempt on Monday. With media outlets focused on Martha, traders kept focusing on stocks, helping the Dow rise 1.3% to 9038.93. In addition to being a nice round number, 9000 is significant because rallies in the Dow failed around that level both last August and again in December, when the index traded above 9000 only on an intraday basis. The Dow may have made a "triple top" Wednesday, but recent proclamations of the rally's demise have all proven premature, so far. Case in point, other major averages -- which had previously eclipsed levels comparable to Dow 9000 -- continued their ascent Wednesday. The S&P 500 rose 1.5% to 986.24, its best close since July 5, 2002, and the Nasdaq Composite climbed 1.9% to 1634.70, its highest since May 28, 2002. "I think it was inevitable we'd pass through 9000," said Matt Ruane, head of U.S. equities at Credit Lyonnais. "Leadership is coming from the Nasdaq and the broader market -- smaller stocks act tremendous." Advancing stocks bested declining issues by 25 to 7 in Big Board trading, where 1.6 billion shares traded, and by 11 to 5 in over-the-counter activity, where a hefty 2.5 billion shares were exchanged. "People are discounting bad news and looking ahead," Ruane continued. "I hope not too far without a pullback or this might get out of hand. That's how we're starting to feel." Although Chartcraft.com's Investors Intelligence survey showed bullish sentiment rising to 56.5% from 53.8% and bearish sentiment falling to 20.7%, the lowest level in 12 years, few traders are wildly euphoric. Ruane talked about 1000 being a potential resistance point for the S&P 500, which is more closely watched by market participants than the Dow.
Even more important to traders than the cash indices are the futures. Reports of a big buyer of 130,000 Nasdaq 100 June calls helped spur averages higher, while the pit-traded S&P 500 futures settled up 14 at 986.20 in Chicago Mercantile Exchange trading. A settlement above 976 could prompt a "solid attempt at 1000," Brad Sullivan, founder of Group Six Trading, an index futures trading firm, said Tuesday afternoon. Sullivan said he would cover existing short bets on the S&P futures if 976 was eclipsed, as it was Wednesday. Although speculative juices are clearly flowing in some areas, the covering of short positions by previously skeptical participants is contributing as much to the latest phase of the rally. The ongoing cynicism of many participants suggests the proverbial "wall of worry" remains intact despite -- nay, because of -- the market's latest surge.
Virtuous CycleMajor averages struggled in the early going, then jumped higher after the 10 a.m. EDT release of the Institute for Supply Management's services index, which at 54.5 exceeded consensus estimates of 52.0 and posted its biggest increase since May 2002. The new orders component of the index rose to 54.7 from 50.6, indicating "that the service sector can continue to bridge the gap that the struggling manufacturing sector has left in the economy," according to Matthew Ellis, economist at Wachovia. Elsewhere, first-quarter productivity growth was revised to 1.9% from 1.6% originally and May vehicle sales were reported down 2.3% month to month, but up 2.9% on a year-over-year basis. Also, the Mortgage Bankers Association's index of loan applications was a record 1856.7, with both the refinancing and new mortgage applications hitting all-time high levels. The rise in new loan applications suggests "much stronger" new home sales in May and June, and a renewed pickup in housing construction in the third quarter, according to Peter E. Kretzmer, senior economist at Banc of America Securities. More refinancing activity, meanwhile, will free up disposable income for spending on goods and services.
"Taken together, recent releases and financial market behavior are sufficient to warrant increased optimism about the economic outlook," Kretzmer commented. It's unclear whether economic data or financial market behavior is the chicken in the classic "chicken and egg" conundrum. But clearly, strength in one is helping the other in what is either a virtuous cycle or mindless optimism, depending on your perspective. From the Treasury market's perspective, however, the economic recovery equity investors are betting on remains elusive. Despite the aforementioned data, the price of the benchmark 10-year Treasury rose another 10/32 to 102 25/32, its yield falling to 3.29%, a new 45-year low. Yield on the 5-year note fell to 2.71%, its lowest since 1954, Bloomberg reported. Fixed income investors may have focused on the prices paid index of the ISM services index, which fell for the first time in 15 months, to 47.5 from 56.7. Or maybe Treasury buyers continue to think they have a "free pass," as the Fed has hinted it will buy long-dated Treasuries to preempt deflationary pressures.
To Martha & BeyondCompany-specific developments aiding stock proxies included raised guidance from Altera ( ALTR), which raised expectations for Intel's ( INTC) midquarter update Thursday. Additionally, the merger between Handspring ( HAND) and Palm ( PALM) raised speculation about more consolidation in the technology sector. Elsewhere, Prudential Securities upped estimates on money center banks such as Citigroup ( C) and J.P. Morgan ( JPM), while J.P. Morgan upgraded American Airlines' parent AMR ( AMR), helping AMR rise 22.5% and the Dow Jones Transportation Average climb 1.8%. In fact, save for cautious guidance from DaimlerChrysler ( DCX) and General Motors ( GM), good news seemed abundant Wednesday. However, news coverage was dominated by the negative news about the indictment of Martha Stewart and her stockbroker, Peter Bacanovic. Both were charged with conspiracy, obstruction of justice and making false statements. Stewart is also accused of securities fraud and Bacanovic with perjury.
Notably, Stewart was not charged with insider trading, the original focus of the investigation, but of trying to cover up something she is not being accused of doing. The law is the law, but one source, who claimed to have met Stewart personally on several occasions, called the indictment a tragedy. Stewart took a catering business and turned it into a big corporation that employed several hundred people, he noted. Like many, he wondered why government officials haven't been more aggressive in prosecuting executives from Enron or WorldCom, much less Wall Street chieftains, whose actions caused far more economic damage than Stewart's alleged misdeeds. Meanwhile, traders also observed that the indictments against Stewart didn't stop many from buying shares Wednesday, including those of Martha Stewart Ominmedia ( MSO), which rose 5%.