Option Investor
Market Wrap

The tug of war continues between buyers and sellers...

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        WE 2-5           WE 1-29          WE 1-22          WE 1-15
DOW     9304.24 - 54.59  9358.83 +238.16  9120.67 -219.88   -302.77  
Nasdaq  2373.62 -132.27  2505.89 +167.01  2338.88 -  9.27   +  3.79  
S&P-100  617.67 - 22.77   640.44 + 30.06   610.38 -  6.08   - 19.56  
S&P-500 1239.40 - 40.20  1279.64 + 54.45  1225.19 - 18.07   - 31.43  
RUT      412.72 - 14.50   427.22 +  4.78   422.44 -  4.61   -  4.18  
TRAN    3247.66 + 45.29  3202.37 +138.57  3063.80 - 84.73   -211.75  
VIX       30.47            26.53            32.85            29.75
Put/Call    .64              .47              .54              .56

The tug of war continues between buyers and sellers...

The Nasdaq sell off continued on Friday but is finally showing signs of a bottom. After dropping from a record high of 2533 on Monday to a low of 2346 on Friday, the -187 drop stalled at the 2350 level. The Nasdaq bounced off 2350 just before noon and then retested to 2346 around 12:45. The final dip at 1:15 was not able to penetrate to the 2350 level again. The Nasdaq rose to 2388, +42 points off the low by 2:PM. Fear of the coming weekend then took hold and some stocks eased off again while others broke free of the downdraft and started moving up as bargain hunters started shopping. The divergence of some stocks in the Nasdaq from the cross the board free fall shows that there are buyers available. Any time a blue chip tech stock drops -$10 to -$15 there are many investors ready to move in and add to their portfolio a stock they missed in the previous rally.

Another chart that backs up my view that the market will not sell off any further without a global currency event is the Dow intraday chart for the last two weeks. After peaking at almost 9400 on Wednesday Jan 27th we dropped on profit taking and Brazil concerns on Thursday the 28th to a range bottoming on 9240. A brief dip to 9200 rebounded sharply. We tested 9240 three times in two days before rebounding again to almost 9440. Again on Tuesday Feb-2nd we dropped sharply to 9200 and tested it three times but we were unable to penetrate again. On Wed/Thr we again rallied to 9400 three times. The most important indicator was the new bottom of 9280 which was tested several times on Thr/Fri. It appears the a new higher low was being formed. The sell off at the close on Friday was simply fear of the weekend just like the previous Friday. Even with the sell off at the close the market rallied again in the last five minutes to close above the psychologically important 9300 level. We view this as a bullish sign.

Another factor that we deem important is the huge jump in the jobs report on Friday. This was very strong news and the market should have reacted very negatively. It did not impact us at all. Yes there was some intraday volatility but look at it in perspective. The Nasdaq was in free fall with no bottom in sight. The chance of a future interest rate cut just evaporated. Japan and Brazil are still viewed as a negative. Every bear in the U.S. was appearing on CNBC and warning of approaching doomsday. BUT..the market did not go down. If ever it should have fallen, Friday was the day. Instead the Nasdaq broke it's fall and the Dow only traded in a narrow 50 point range and closed on a strong buy program. Advancers were narrowing the gap on decliners and as they say...we did not lose, we just ran out of time.

Another reason for expecting the market to rally this week is the overbought/oversold factor has reversed. It is amazing how fast an overbought condition can reverse when a stock drops $10-15. Immediately the value conscious investors start seeing value in every seriously beat up stock. Especially when those stocks are DELL, MSFT, CSCO, SUNW, etc... These are known commodities and until the tech stocks are replaced by some new generation of fast growers, they will continue to be "THE" place to invest your money. Think about it. If you had to invest some money tomorrow and could not withdraw it for ten years, would you rather have MSFT, CSCO, SUNW or Maytag (MYG), Safeway (SWY) or Sears (S). You should not even have to think about the answer. In any scenario you can imagine for the next ten years, tech stocks will continue to evolve, invent and sell new better, bigger, faster equipment to make our lives better. If you are a fund manager you are faced with this decision every day. Any drop on profit taking simply gives you another opportunity to put that cash that came in last week to work at a cheaper price. If you bought DELL last week at $110 would you not buy more this week at $96?? MSFT at $175 last week or $160 this week??

I obviously do not have a crystal ball and the market could just continue to go south on Monday in spite of all the reasons anyone could invent. This would only be temporary. The market is driven by a simple but powerful principal. Profit! Or in some cases an even more powerful cousin, GREED. Until these two factors cease to exist the long term trend will always be up. With the influx of cash that comes in the first quarter we have the added bonus of urgency. Fund managers do not win any customers by sitting on cash. 4% money market returns do not excite anybody.

Something unusual happened on Friday. Jerry Favors, a noted recent bear who is interviewed on CNBC regularly, turned bullish. His forecast of a correction for last week was right on target and he is now forecasting a rally for next week which, depending on several key technical points, could run well into April. Jerry, I hope you are right!!

The news this weekend is full of the Dell Computer auction site buzz. Evidently Dell registered the name www.dellauction.com in preparation for starting an auction site to sell their excess inventory and that of their partners. Just another great move by Michael Dell. Sure glad I bought Dell on the dip Friday!!

I vote for a rally on Monday. All in favor say aye!

Good Luck

Jim Brown

PS. Quote.com is working on their site this weekend and the live charts are not working at this time. They should be ok by Monday.

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