IBD General Market

Stocks Reverse Lower After Hot Start

BY JONAH KERI

INVESTOR'S BUSINESS DAILY

Posted 12/18/2006

Early gains turned sour Monday, as a reversal by the major market indexes ended with stocks lower.

The Nasdaq composite gapped up at the open, as the recent streak of Merger Mondays continued with a raft of new deals. But the tech-laden index turned tail, closing down 0.9%.

NYSE stocks took milder losses. The NYSE composite sank 0.4%. The S&P 500 shed 0.3%. The Dow industrials eased less than 0.1%.

Volume eased across the board following Friday's quadruple-witching options expiration. That prevented the session from being a distribution day.

Still, Monday marked the second straight session that the market started higher, only to reverse and close at or near intraday lows. Such downward reversals show that bulls can't sustain gains as sellers grab the upper hand.

A big buyout offer in the health care sector got the market off to a fast start. Pharmacy benefits manager Express Scripts (ESRX) said it made a $26 billion offer to buy rival Caremark Rx. (CMX) The hostile takeover bid comes after a recent $21 billion all-stock bid by drugstore chain CVS, (CVS) which Caremark had accepted. All three companies' stocks are well off historical highs.

The gaming sector, a market leader in recent months, perked up on reports that two private equity groups were close to buying Harrah's Entertainment. The casino operator jumped 3% on the news. Big-name gaming firms such as Las Vegas Sands (LVS) and MGM Mirage (MGM) have trended sharply higher lately.

A few leading stocks had a tougher time Monday, led by Google. (GOOG) The search engine giant dropped 17.50, or 3.6%, to 462.80 on brisk trade. The stock slashed through its 50-day moving average.

A trip below the 50-day line isn't necessarily a big sell signal. Google's volume was 29% above average, but not huge compared to recent levels. The stock undercut its recent three-weeks-tight pattern.

Keep an eye on Google in the coming days and weeks to see if the stock bounces back above its 50-day in healthy turnover. That would signal buying among big-money institutional investors.

After the close, resurging tech leader Oracle (ORCL) beat sales and earnings views. But new license revenue disappointed, sending shares down after hours.

Energy stocks were also among the day's biggest losers, as oil prices slid. January crude skidded $1.22 to close at $62.21 a barrel.

The IBD 100 tumbled 1.2%. That marked the second straight session that IBD's index of leading stocks lagged the market's results.

With less than two trading weeks left in 2006, asset managers will be taking stock of their portfolios. They might make some window-dressing trading decisions before year's end.

It's a good time for individual investors to scrutinize holdings too. But remember, you're not bound by the same calendar-year restrictions as are big funds. Make decisions based on the price and volume action of your stocks. Tax implications should be viewed as secondary factors at best.