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Market Wrap

A different kind of triple witching Friday !

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         WE 7-2           WE 6-25          WE 6-18          WE 6-11
DOW     11139.24 +586.68 10552.56 -303.00 10855.56 +365.06  -309.34  
Nasdaq   2741.02 +188.37  2552.65 - 10.79  2563.44 +115.64  - 30.54  
S&P-100   716.28 + 44.99   671.29 - 12.18   683.47 + 28.60  - 17.55  
S&P-500  1391.22 + 75.91  1315.31 - 27.53  1342.84 + 49.20  - 34.11  
RUT       456.51 + 13.40   443.11 -  1.94   445.05 +  7.04  -  4.32  
TRAN     3515.99 199.88   3316.11 - 80.23  3396.34 + 51.87  -118.26  
VIX        18.85            22.61            22.34            27.01
Put/Call     .47              .53              .43              .64

A different kind of triple witching Friday !

No, we did not have another options expiration Friday. Instead the three major indexes all soared to new highs. It has been a steady procession of buyers after Greenspan blessed the markets on Wednesday with a minor increase and neutral bias. The Dow, Nasdaq and S&P are all in breakout mode and stretching into new territory.

Even with the light volume on Friday there was no volatility. Both the Dow and Nasdaq have cleared resistance and are in blue sky. The outlook for lower interest rates has the tech heavy Nasdaq heading for 3,000. (Please, not another CNBC special) The Dow is making a major run on the backs of techs, banks and of all stocks, Alcoa. AA has gained more than any other Dow stock this year.

This Dow chart shows the three tests of the 10,450 support and also in the first block (April) the strong run in the last earnings cycle. From it's last retest of 9700 before the April earnings run, the Dow gained +1500 points. Surely we can wish for another +1500 point run from the 10,400 low during this earnings cycle but don't hold your breath. That would put us at the 11,900 range and all but the most optimistic analysts are holding the line at 11,500 as a market top this summer.

The Nasdaq was not able to mount a run last April. The major blow here was the analyst hair cut given Dell and Intel before earnings and the trial impact on Microsoft. With analysts currently bullish on all four leading Nasdaq stocks, Dell, CSCO, INTC and MSFT, it is almost a given that we cold tack on another +150 points before earnings are announced.

Everyone expects the second quarter earnings to be better than the previous quarters in both sequential and prior year comparisons. The pre-warnings have been less than expected and the several companies that have pre-announced earnings estimates have been up beat and positive. The S&P is widely expected to post an average of a +12% increase in earnings but the tech sector is expected to post a +40% avg earnings increase. This is why the tech sector is the first to rally when times are good.

The stronger than expected jobs report on Friday only caused a momentary pause in the markets. The bullish sentiment is just too strong for anything but a disaster to crater us during the next two weeks. The +268K of new jobs was up from last months statistical anomaly of -5k and also slightly higher than the running average of 200k. Still nobody was concerned as the unemployment also rose an very small +.1% from 4.2 to 4.3%. The only sign of inflation from the technology led productivity increase was the gain of +$.05 in the hourly wage. More than reasonable given the strength of the economy.

As I mentioned, the markets rocked last week with their best week of the year. The Dow added +5.6%, S&P +5.8% and the Nasdaq +7.4%. The Nasdaq was powered by the Internet recovery. The big news for the Internets next week will be the Yahoo earnings on Wednesday. If Yahoo beats their estimates, the sector will continue to soar as other Internets take the earnings spotlight. The prospect of Yahoo beating estimates is about 100%, however because they are widely expected to beat estimates the expectation has risen to a stratospheric level. Yahoo is officially expected to post $.08 but the whisper numbers are as high as $.15, or almost double. If Yahoo only beats by one or two cents then it will be a dark day at the Nasdaq. If they beat by four or five cents then they may get off with only a minor reshuffle. If they pull off the seven or eight cent miracle then all will be joyful in Mudvile. Now most of you know that I am a high risk trader but holding Yahoo over earnings would be financial suicide in my book. Did I mention that they are a split candidate? Just another complication in your financial decision making.

The market rally this week was caused by massive inflows of cash from the sidelines after the Greenspan blessing. TrimTabs.com said that $8.8 billion came into the market in the form of cash into U.S. mutual funds. $3.5 billion went into global stock funds. If the cash continues to flow then we could see a huge liquidity driven bump. The wild card here again is the technical traders nightmare. The Dow is up almost +600 points in the last six days without a day off. Six days on the rally road and no pit stop. Eight days is the longest streak we have had this year. My target for a day off is Wednesday. I think traders will come back from the long holiday and want to open new positions before earnings get under way. Wednesday however could be restrained because of the Yahoo earnings. Uncertainty about the Internet sector could cause some cautionary profit taking.

This is a non-week as far as economic reports are concerned. The NAPM non-manufacturing index is due out Tue and Wholesale Inventories on Thursday. These along with the regular weekly BTM Schroders, LJR Redbook and API Oil stocks are routinely ignored and will be road kill on the rally road this week. The market will definitely not get any help or be hindered by economic reports. The only speck on the horizon is the closely followed Tankan Index in Japan. The quarterly index of business sentiment and the most watched portion called the diffusion index is expected to improve from -47 to -35. If the index came in significantly stronger the Bank of Japan would likely upgrade it's outlook on the economy. This would drive the Japanese bond market sharply lower and impact the world bond markets like falling dominos. Given the trouble the U.S. bond market has had lately we could see another round of instability. The stock market has been playing follow the leader to the bond market lately but I think the smell of fresh profits in the form of earnings could be enough to break the bond markets grip on our destiny. Fortunately, we will know the outcome before our markets open on Tuesday.

The earnings calendar is just getting started and the only two of note this week are Yahoo and Alcoa.

7/6 Biomet Inc. (NASDAQ:BMET) Est = 0.35
7/7 Alcoa Inc. (NYSE:AA) Est = 0.63
7/7 Great Atlantic & Pacific (NYSE:GAP) Est = 0.48
7/7 Yahoo! Corp. (NASDAQ:YHOO) Est = 0.08
7/8 AirTouch Communications (NYSE:ATI) Est = 0.37
7/8 King World Productions (NYSE:KWP) Est = 0.53
7/8 Laidlaw Inc. (NYSE:LDW) Est = 0.18
7/8 Loews Cineplex (NYSE:LCP) Est = -0.23
7/8 Marriott International (NYSE:MAR) Est = 0.42
7/8 Safeway Inc (NYSE:SWY) Est = 0.44
7/9 Abbott Laboratories (NYSE:ABT) Est = 0.42
7/9 Pioneer Hi-Bred Interna (NYSE:PHB) Est = 1.65

If you do not already have open positions, I would be a buyer on any pullback and I would look to add to any positions that are moving in the right direction. Keep your stops close on Wednesday in case of profit taking but be ready to buy back at a lower price anything on which you are stopped out.

This will probably be the largest letter we ever publish. There are so many good plays available this week that we went overboard. When the market is moving in our direction and all the factors move over to our side, we need to seize the advantage. Too often we settle for what the market gives us and fight for every trade. Hopefully any profit taking, when it comes, will be light and quick. Profit from it!

Have a great holiday, pick your entry points, sell too soon.

Jim Brown

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