Option Investor
Market Wrap

We don't want to see October again for at least eleven months!

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        WE 10-30         WE 10-23         WE 10-16         WE 10-9
DOW     8592.10 +139.81  8452.29 + 35.53  8416.76 +517.24  +114.83  
Nasdaq  1771.39 + 77.53  1693.86 + 72.91  1620.95 +128.45  -122.47  
S&P-100  536.97 +  9.19   527.78 +  6.83   520.95 + 37.31  -  2.77  
S&P-500 1098.67 + 28.00  1070.67 + 14.25  1056.42 + 72.18  - 18.25  
RUT      378.16 + 11.11   367.05 + 24.18   342.87 + 24.47  - 31.31  
TRAN    2891.92 +114.91  2777.01 -  3.86  2780.87 +351.35  
VIX       26.56            30.67            35.84            45.69
Put/Call    .69              .64              .61              .81

We don't want to see October again for at least eleven months!

Twists, turns, spine tingling excitement, edge of your seat panic, 
plot changes, fear, sudden changes of direction, shortness of breath,
chest pains. You would think I was referring to the run away mine car
in the Indiana Jones movie "Temple of Doom".  Instead I am remembering
trading in the month of October!

Sure the finish was spectacular but the journey was gut wrenching.
The Dow was up +9.6%, Transports +9.3%, S&P +8%, Nasdaq +4.6%.
Just some of the "bests" we compiled, the best single month point
gain since 1950. The best monthly percentage gain since Jan-1987
(+13.8%). The best October since 1982 (+10.6%). 

While those numbers are outstanding we have to remember that they
are measured from the close on Sept-30th - NOT THE INTRADAY LOW
on Oct-8th. The Dow is up +15.6% from there. The Nasdaq almost
30%. The Nasdaq +400 point gain in Dow points would be over 2000!

Just for the October counters, in the last 50 years we have had
27 up months and 23 down months. The October superstitions are
based on only seven really bad Octobers out of the 23 down months.
This October goes into the "bear killer" category of which October
is also famous.

So what turned the rout into the rally? One word - "Greenspan".
Say what you want about the past but he is the hero this time.
The back to back rate cuts two weeks apart set the tone for the
markets. The Fed head said in action what he did not say in words.
"The Fed will make sure the economy (and market) does not self
destruct and we will do everything in out power to prevent the
global economy from destructing." 

Once that foundation was set in place everything else just seemed
to line up in our favor. Other countries cut rates even after
saying they would not. Japan finally did something about their
bank problem. Brazil toughed it out until they got their loan
guarantees. Clinton, yes Clinton, orchestrated a $90 billion
refunding of IMF for "special circumstances" to broken countries.
Earnings were not as bad as some feared. Sure we have a poor
quarter but analysts are seeing dollar signs in the future.

The last plug in the dike of leaking investor confidence was the
surprising +3.3% growth in GDP last qtr when everyone was expecting
1.7-2.3%. Wow, it was way down from the first half of the year but 
much better than expected. Maybe things are not as bad as we 
expected. But, hold that thought. Business investments last 
quarter were the worst since 1991. You can't grow the economy
without investment. Why was it down? Tight credit markets. Lack
of liquidity in the system. Now we have gone full circle. 

The jump in GDP over estimates has some thinking the Fed will not
cut in November. Wrong! The problem as Greenspan sees it is the 
credit/liquidity crunch as evidenced by the lack of business
investments. They are looking farther out than just one quarter. 
Without money flowing into business there will not be products 
flowing out several quarters later. We believe they will cut, 
not only in November, but also in December. Small .25% cuts but 
just enough to say - we are still watching!

Their problem is this. If they don't cut again in November the
blow to market confidence would be enormous and could destroy the
benefits of the first two cuts.  If they keep cutting they risk
over stimulating the economy and fear the "inflation" word would
come back into use again. At this point the continued global
slowdown is enough to hold our economy in check so it is Mr G's
job to keep us sitting at the stop light with our engine reved
just fast enough to let us jump out in front as soon as the other
world economies turn green.

Consumers have not quit spending. The recent quarter was up +3.8%.
This was down from 6.1% the first two quarters but still stronger
than expected. The expected pullback had analysts downgrading
retailers left and right for the last two months. The strong
report last week put a bounce in stocks like Walmart and Sears as
their strong holiday quarter looks stronger than analysts expected.

We picked up another surprising forecast on Thursday from Jerry
Favors. A noted bear, Jerry said that he can see the rally extending
into late November and over 9000. Of course he then expects a
retest of the 7400 lows but we choose to ignore that forecast. My
point is that even a strong bear technician like Jerry can see
the handwriting on the wall for the next few weeks.

Clark Yingst, the new spokesperson for Prudential since Ralph
Acomporaspan stepped on his tongue, went on record Friday as saying
he felt we were in a strongly bullish market now that the three
leading averages had strongly pierced their 200 dma to the upside.
He said they "clearly broke resistance" and looked very strong.
He also felt the Fed would ease and his three strongest picks by
the way were DELL, CPQ and INTC. The PC sector stands to benefit
the most from the current economic revival. (he said it, we agree)

Trim Tabs, a leading mutual fund tracker, said in the last three
weeks $16.4 billion came back into stock mutual funds. Investors
who had been hoarding cash are seeing the light and don't want to
miss out on the next bull market ride.

Now you know I have to temper this clearly bullish commentary with
some negative sentiment just to keep us clear headed. Friday was
the end of the quarter and end of the year for most mutual funds.
The normal "window dressing buying" was in full swing. For those
of you who don't know, window dressing means they put all available
cash into big name blue chips so that when they send their statements
and prospectus to investors you will get that warm and comfortable
feeling to see MSFT, GE, IBM, etc in your portfolio. In real life
they can and sometimes do sell them again the following week to 
raise cash for other purchases and normal holiday season redemption's.

This along with any pre-election caution and normal profit taking
could put us back in the rest and test mode Mon/Tue before we make
another big push forward. It does not have to backup but the odds 
are good unless Asia and Europe move upward Sunday night. That 
could tip the scales in our favor.

There is a strong block of resistance forming at 550-560 on the OEX
which could be our next obstacle. The Dow broke the recent intraday
high at 8652 on Friday with 8659 and closed well above the recent
resistance at 8500 with the close at 8592. A fall back under 8500
would be very negative at this point.

Wait, watch, plan. Continue to be selective about any trades until 
we see which way the market is going this week. Plan your trades and 
when the time is right, execute your plan !

Good Luck


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