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Market Wrap

Breakout !! Is this for real or is it just another spike out of the trading range?

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        WE 3-5           WE 2-26          WE 2-19          WE 2-12
DOW     9736.08 +429.50  9306.58 - 33.37  9339.95 + 65.06  - 29.35  
Nasdaq  2337.11 + 49.08  2288.03 +  4.43  2283.60 - 38.29  - 51.73  
S&P-100  638.99 + 20.57   618.42 -  1.85   620.27 +  4.13  -  1.53  
S&P-500 1275.47 + 37.14  1238.33 -   .86  1239.19 +  9.06  -  9.27  
RUT      398.01 +  5.75   392.26 -   .04   392.30 -  6.14  - 14.28  
TRAN    3312.79 +105.36  3207.43 + 72.92  3134.51 + 37.62  -150.77  
VIX       25.12            29.52            30.23            31.35
Put/Call    .61              .67              .70              .85

Breakout !! Is this for real or is it just another spike out of the trading range?

Again, only time will tell but this one looks like it might have some staying power. Strong volume, strong advance declines, good press, maybe it is too good to be true. The bullish/bearish indicator from Investors Intelligence was just breaking back down into a comfortable range with bears gaining ground on the bulls. If the bullishness returns too fast then we could see ourselves back in the trading range very quickly.

It was hard to find a bear on Friday after the tame jobs report gave the green light to fund managers to jump back into the market. The Dow had its biggest two-day point gain ever this past week and the best weekly total since 1987. After breaking the previous high on Friday the focus is clearly on 10,000 and we are only a mere 264 points away. This should be easily attainable this week if we can just hold the high ground on Monday. We will eventually be faced with the law of gravity reasserting itself. Every big move (460 points) will always be followed by a corresponding opposite move. The three steps forward, two steps backward theory. The market will cycle. Nothing goes up in a straight line. With all the positive momentum the next likely cycle point could be 10,000. Once broken there could be a pause to regroup and the necessary consolidation period. Remember the -1500 point drop after we broke 9,000, the -1000 point drop after we broke 8,000, -600 after 7,000. Should 10,000 be any different? Just four years ago last month we were trading in the upper 3,000 range. Scary isn't it!

Many still suggest that the igniting spark for the rally was the Dell/IBM deal and then the Intel/Level One transaction fanned the flame. The sign that techs were not dead as many were claiming was a welcome relief to investors. The economic catalyst of course was the tame jobs report showing unemployment actually climbed in February. More people out of work is good for the market since it means inflation in employee earnings is under control. Alan Greenspan must be breathing a sigh of relief that there is no reason to raise rates immediately. With Brazil heating up again there is always the worry that a Fed action to slow the economy could be followed by Brazil failure. That could be a combination knockout punch to the U.S. markets.

The dynamics of the rally were good with multiple leadership sectors. Banks, brokerages, techs, consumer goods, retail, all were solidly higher. The bond market which had been under pressure recently closed Friday with interest rates at 5.6%. The threat of higher rates seems to be easing. The bull rally has been built on low interest rates and recent bond depression had been threatening that building block.

The Dow is now up +6% for the year but almost 5% of that came in the last week. Other indexes are far from their highs. The Russell 2000 at 398 is almost -8.5% off its high for the year of 435. The Nasdaq at 2337 is -7.7% off its high of 2533. In spite of the euphoria of last week we still have a case of blue chips leading and the broader market trailing reluctantly. Until we see a new trend of advancers constantly beating decliners we will be skeptical of the recent gains. We did not say we are not enjoying them, just that we continue to be cautious here.

The rash of analysts recommending investors put more money into stocks because of the improved economic outlook was lead by Peter Canelo at Morgan Stanley. He upped is recommendations to %70 stocks from 65%. The U.S. continues to be the oasis of prosperity and has been known recently as the "Goldilocks economy". This phrase refers the popular children's story in which Goldilocks prefers the Baby Bear's porridge because it is not too hot or too cold. We are continuing to tread that thin line and until we deviate from this pattern the wheels should not come off the Wild Bull Express.

In stock news Dell Computer pulled another rabbit out of the hat last week with the announcement of Gigabuys.com. The new site expands Dell's marketing capability to everything computer related, not just computers any more. The 25 million weekly website visitors to Dells site now can purchase anything they need to complete their system. Printers, software, modems, networking cards and add-ons galore can be added to one shopping cart. Just another Michael Dell marketing win. Now it won't be average selling price and the number of units analysts focus on but an entirely new retail focus. What PE do Internet retailers command these days? You got it! Astronomical. We did not pick Dell as a play this weekend due to the split but as soon as we feel the possible post split depression has ceased we will be back on them strong. Since Dell has not had a normal split run we would not be surprised to see it take off when the gate opens on Monday morning. Using our normal cautious stance we would like to see the market dip from the +450 points last week to provide us a cheaper entry point for this play.

The web stocks seem to be diverging from the sector wide upward move of late. CMGI, XCIT and EBAY continue to tack on big numbers but noteable exceptions are LCOS, SEEK, AOL, EGRP, AMZN, EGGS, MSPG and company. They either lost ground last week or barely broke even. Analysts say there is some strong insider selling as the lockout periods are starting to expire. YHOO would have finished the week negative except for the upgrade received Friday. Could we also be seeing an end to sky high valuations just because there is a .com on their names? I personally think it is just a consolidation period as each stock tries to find its own level in an industry that changes weekly. If you play Internets we suggest caution until a real trend develops in the stock you pick.

Should you jump in with both feet on Monday? I would suggest not. I, for one, would wait for the next obligatory pullback in the market. This can occur intraday as well. If we blast off at the open Monday then Tuesday would be my bet for a rest. The economic calendar is full next week and investors will be focusing on the next market hurdle. Lately the minor reports have been ignored but they will continue wanting confirmation as the market progresses.

Wait for an entry point! Sell too soon!

Jim Brown
Head Huckster

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