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CBS MarketWatch
U.S. shares in rally mode as financials, techs sprint
Monday July 14, 10:48 am ET
By Julie Rannazzisi


NEW YORK (CBS.MW) -- Analyst upgrades of Dow components Intel, Johnson & Johnson and Merck combined with upbeat earnings news from Citigroup and Bank of America to light a fire under U.S. stocks on Monday.
Merger news from Yahoo underpinned the Internet sector while upbeat sales news from Wal-Mart boosted the retailers. Gains were widespread, with red ink surfacing only among oil service and natural gas stocks.

The Dow Jones Industrial Average (CBOT^DJINews) piled on 137 points, or 1.5 percent, to 9,258.

Six Dow components breached 52-week highs on Monday, including Intel, Citi, American Express and J.P. Morgan Chase.

The Nasdaq Composite (NasdaqSC^IXICNews) rallied 38 points, or 2.2 percent, to 1,772 and the Nasdaq 100 Index (NasdaqSC^NDXNews) sprinted 31 points, or 2.5 percent, to 1,312.

The Standard & Poor's 500 Index (CBOE^SPXNews) bulked up 1.5 percent while the Russell 2000 Index (CBOE^RUTNews) of small-capitalization stocks firmed 1.5 percent.

Volume totaled 376 million on the NYSE and 632 million on the Nasdaq Stock Market. Advancers pounded decliners by 23 to 7 on the NYSE and by 21 to 8 on the Nasdaq.

Investors too optimistic?
Richard Bernstein, Merrill Lynch's chief quantitative strategist, said only four of its 10 profit indicators suggest the profit cycle will be stronger than current expectations.

He notes that indicators showing improvement are technical ones while fundamental readings remain "quite weak," which suggests that earnings expectations for the second half of the year may be "much too optimistic."

To wade through current market conditions, Bernstein advises investors to overweight "higher-quality" assets: companies that pay dividends and have better-than-average balance sheets.

Taking a different stand, Sherry Cooper, global economic strategist at BMO Financial Group, believes that expectations for a second-half rebound will be justified this year.

"Stocks have risen sharply since their lows in early October, and, for the first time since early 2002, stocks are up year-over-year. Also, for the first time since 1999, stocks have outperformed bonds," she noted.

Cooper said there's a "very good chance" the U.S. will have the strongest economy among the Group of Seven most industrialized nations for the remainder of this year and next. "U.S. corporate balance sheets have improved and so has American competitiveness."

While Cooper acknowledges that U.S. stocks are not cheap by historical standards, she believes equities "look cheap" in comparison to bonds. She expects some sideways action in stocks during the second-half of the year as they work off overbought levels and as a precursor to a "sustained rally next year."

Upgrades lift Intel, Merck and J&J; Financials rally
Merrill Lynch took Intel to a "buy" rating from a "neutral" on expectations the chip titan (NasdaqNMINTCNews) will improve its gross margins, sending shares 4.5 percent higher. Intel, which will open the books on its second quarter on Tuesday, is expected to have earned 13 cents a share. Read related story.

And Bear Stearns hoisted Johnson & Johnson (NYSEJNJNews) to an "outperform" rating from a "peer perform" on belief the drugmaker's valuation is attractive and that investor concerns about the company are already reflected in current prices. J&J is expected to have made 69 cents a share when it unfurls second-quarter earnings on Tuesday and saw its shares climb 2.3 percent in recent trades.

Finally, CIBC World Markets upped Dow component Merck (NYSEMRKNews) to a "sector performer" from a "sector underperformer," citing attractive valuation and belief that the drug behemoth is likely to meet its 2003 and 2004 financial targets. The stock sprinted 1.5 percent.

In the financial sector, both Citigroup and Bank of America chimed in with better-than-expected second-quarter results.

Dow component Citi (NYSECNews) topped Wall Street's expectations thanks to its credit card and mortgage lending businesses and watched shares swell 3.4 percent.

Bank of America (NYSEBACNews) handily surpassed second-quarter profit targets as credit losses came in at their lowest level since the first quarter 2001. Investors took shares 1.2 percent higher.

Smith Barney institutional equity strategist Tobias Levkovich reiterated his positive stance on the financial sector, telling investors that the group is "well positioned" for relative performance gains and estimating a 15 percent to 20 percent upside from current levels.

"Improving capital markets should boost many financial companies' investment banking, brokerage and asset management results, which are coming off depressed levels," the strategist concluded.

Merger news for Yahoo; Wal-Mart; Mickey D's climb
The Net sector (CBOE^GINNews) got a boost from merger news in the sector as leader Yahoo (NasdaqNMYHOONews) announced it was nabbing Overture Services (TICKER: OVER ) for about $1.63 billion in a deal that's expected to close in the fourth quarter. Overture rallied 10.4 percent.

Dow component Wal-Mart (NYSEWMTNews) put on 1 percent after telling investors on its weekly phone update that July U.S. comparable store sales were tracking at the "high end" of its 2 percent to 4 percent range.

Fellow blue chipper McDonald's (NYSEMCDNews) added 0.6 percent after announcing that second-quarter earnings would fall in line with current analyst expectations as comparable store sales rose 4.9 percent during the quarter.

Chip equipment stocks (Philadelphia^SOXXNews) checked in with hefty gains as the Semicon trade show kicked off in San Francisco and San Jose on Monday. SG Cowen said it expects "cautious" optimism at the gathering, with a modest order improvement anticipated among the equipment makers in the second half of 2003, which it feels will lead to a strong recovery in 2004. Novellus Systems climbed 5 percent and group leader Applied Materials also charged higher, with a gain of 4 percent. See related story.

Read Movers & Shakers for the latest individual stock action.

Treasurys sag
Government bonds slipped, with the 10-year Treasury note down 5/32 to yield (CBOE^TNXNews) 3.645 percent while the 30-year government bond eased 1/8 to yield (CBOE^TYXNews) 4.69 percent.

No economic news is set for release on Monday in a week that will be jam-packed with key reports. Among them: June retail sales, June consumer price index and June industrial production.

But Fed Chief Alan Greenspan's testimony on the U.S. economy before Congress on Tuesday and Wednesday will take center stage and will likely be the week's most market-moving event.

In the currency sector, the U.S. dollar slipped against its major trading partners, falling 0.3 percent to 117.49 yen while the euro advanced 0.1 percent to $1.1296.