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Market Wrap

A triple witching Friday and a triple whoopee week!

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         WE 6-18          WE 6-11           WE 6-4          WE 5-28
DOW     10855.56 +365.06 10490.50 -309.34 10799.84 +240.10  -269.54 
Nasdaq   2563.44 +115.64  2447.80 - 30.54  2478.34 +  7.82  - 49.62 
S&P-100   683.47 + 28.60   654.87 - 17.55   672.42 + 13.76  - 13.10 
S&P-500  1342.84 + 49.20  1293.64 - 34.11  1327.75 + 25.91  - 28.45 
RUT       445.05 +  7.04   438.01 -  4.32   442.33 +  3.65  - 10.46 
TRAN     3396.34 + 51.87  3344.47 -118.26  3462.73 + 47.03  -135.56 
VIX        22.34            27.01            23.45            26.38
Put/Call     .43              .64              .56              .54

A triple witching Friday and a triple whoopee week!

You just cannot ask for better than we got this week. A +365 point gain for the Dow and a +115 point gain for the Nasdaq. (Equivalent to +500 Dow points) All this on a week where the CPI was lurking like a Titanic size iceberg and Alan Greenspan said the Fed would raise rates. Can you believe it? Where is the beef? Apparently it is all on the hoof and stampeding into earnings season. Even the new downgrade of Intel by Morgan Stanley on Friday and the highest first hour volume on the NYSE in history did not break the market stride. The volume was related to the triple witching but did not move the market as an equal number of positions on both sides just closed each other out.

In reality today could have been a good day for profit taking and after the morning spike we did retreat into negative territory several times before breaking the end of day tape with a last minute surge. Every dip was met with buyers but -30 was the most damage the sellers could do and it only lasted a moment. Almost all sectors took part with the exception of drugs and semiconductors. Drugs were only fractionally weak with PFE -.88, MRK -.50, SGP -.34, BMY -.66 and WLA bucking the trend with a +1.38.

Intel was downgraded by Morgan Stanley, making the second downgrade in two days. Citing a manufacturing problem with .18 micron Pentium III processors, the analyst thought the delay would change the product mix to a lower margin ratio and impact profits. Intel at first declined to comment but later in the day announced that they indeed were having some challenges in yields but "it would have no impact on their results". The damage had already been done and the semi sector had already suffered some profit taking from their great run the last two weeks. KLAC -1.56, LSI -.38, AMAT -2.56, NVLS -1.94, XLNX -1.44. Minor damage only and about one days gains from last week. We took the precaution of dropping all the semiconductor stocks tonight just in case the pause here is not temporary. We will pick up the leaders again once the pack turns back around.

Gillette, however took heavy fire, as traders nailed it for -5.13 after their profit warning Thursday. Gillette cited weaker global sales but in reality analysts said things are not good under the shave cream and razors. Several units are losing money and repeated efforts to jump start them are failing. Look for Gillette to continue bleeding as analysts knick them with downgrades next week.

Things are looking up. Actually, things are looking too good. The VIX at 22.34 has not been this low since December and indicates that volatility is non-existent. The put/call ratio at .43 is very low and indicates everybody is looking for a move in the same direction. This is fine as long as nobody blinks but the calmness will start making many old time traders skittish. The old saying "when the VIX is low its time to go" is bound to start echoing in the subconscious's of serious market timers. In the meantime we are in limbo. We have a week with no serious economic reports. Yes, the Fed meets the following week but everyone knows what the outcome is there. The earnings feast will be served starting in two weeks and traders are already salivating with anticipation. I can find no reason not to start new positions and it scares even a bull like me. The only excuse I could even barely see using is possible profit taking from this week but I would view any pullback here as a gift.

The sector to watch would be the Internets. After pulling themselves out of the depths last week they stalled on Thursday afternoon. Several followed Yahoo's lead and peaked Thursday morning and then pulled back in the afternoon and did nothing Friday. This could just be natural. Some are up +$15-$20 from their lows last week and normal end of week profit taking could have caused the stall. Yahoo will announce earnings the second week of July and should continue their pre-earnings run next week. If Yahoo falters then they will all falter. Watch them for guidance. Others may move faster once Yahoo signals the coast is clear. Doubleclick, which has a new product coming out, Realnetworks, Amazon and of course AOL, which we made a pick tonight.

We added several new leverage plays tonight. ASND which is being bought by Lucent and Honeywell which is being bought by Allied Signal. Both are being acquired for more than one share of the purchaser which provides a bigger bump for the acquired company. For instance a 2 for 1 purchase would result in the company being bought jumping $2 for every $1 the purchaser gained. Check the plays for details.

Without a global meltdown over the weekend, none is expected, and assuming there is no catastrophic earnings warning on Monday before the bell, then we could see 2600 on the Nasdaq again and 11,000 on the Dow. Simply incredible. The last four weeks were rocky with sector rotation and selloffs occurring daily. Now that reports prove that Goldilocks is alive and well and not gaining weight, the buyers are out in force again. All is forgotten. NOT! Those who lived through February were hopefully better traders in the recent correction. If not then surely you will be better in the next one. Next one? You bet! It is only a matter of time and you can bet on it. When the earnings bloom starts to wither in late July you need to be ready to pull in those bullish horns again. Remember it is not going to be written in three inch headlines on the Wall Street Journal and Investors Business Daily that the rally is over. It is up to all traders to recognize the warning signs and withdraw safely. Many of our readers only think markets go up and when markets correct they wrongly interpret is as just bad picks on our part. Sorry folks but we all know the market determines stock direction. The best call plays in the world will go down when the market drops -700 points. You would be surprised how many people who email us do not understand this simple point. We will try to warn you again that things are not right in the markets.

Go back to the May 18th commentary:

I would have to see a real nice uptrend in ANY stock after today before I would start any new plays this week. The market looks strong but it could be the calm before the storm. Remember we are up +1200 points without any significant profit taking. With earnings now over we have no news to drive the market.

Advances are declining again at a rapid rate. Buyer beware!

Do you see the new downward tilt on this chart? Definitely, pick your entry points carefully and sell too soon until a new direction is established.

Just superimpose July 1st (earnings month) over April 1st (earnings month)on the chart above and you will see what could happen starting in July. Yes, summer rally! But as on the chart above, when the earnings are over the profit taking begins. Lest you doubt me look at the last month on this chart again. Earnings run from April 8th to May 15th for most. (July 8th to August 15th this time)

Sounds simple dosen't it? It is if you follow the rules. Remember to trade according to our trading plan. "Only trade when the odds are in your favor". Or as you have heard me say many times, "only trade when profitable". Many of our readers have a different plan, "trade whenever the market is open". There is a difference.

Have a great week, pick your entry points, sell too soon!

Jim Brown
Editor

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