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Market Wrap

Do you remember the last time the Dow ended with upside curbs?

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         WE 9-3           WE 8-27          WE 8-20          WE 8-13
DOW     11078.45 - 11.72 11090.17 - 10.44 11100.61 +126.96  +259.62
Nasdaq   2843.11 + 84.21  2758.90 +110.57  2648.33 + 10.52  + 89.84
S&P-100   713.89 +  5.92   707.97 + 11.38   696.59 +  7.77  + 14.69
S&P-500  1357.24 +  8.97  1348.27 + 11.66  1336.61 +  8.93  + 27.39
RUT       435.97 +  3.52   432.45 -  1.93   434.38 +  0.33  +  6.01
TRAN     3156.90 - 14.45  3171.35 + 20.62  3150.73 - 28.34  - 40.96
VIX        21.39 -  1.82    23.21 -  0.85    24.06 +  1.68  -  4.98
Put/Call     .57              .73              .69              .72

Do you remember the last time the Dow ended with upside curbs?

The Dow turned in a stunning performance on Friday with a +235 point move but the hero of the day was the Nasdaq. The Nasdaq posted a the largest one day point gain ever with +108.87. This is equivalent to a +525 point Dow move. YeeHaw, get out your ropes and spurs, this bull is in stampede mode.

The Dow is now just a little over 200 points away from its recent high but the Nasdaq is only 20 points away. The fourth quarter has historically been good for the Nasdaq leaders like INTC, MSFT, DELL, CSCO. Odds are very good we will break out to a new high on the Nasdaq this week. Actually, it would probably take another case of Fed speak to prevent it. More later on those possibilities.

"Curbs in on the upside", maybe I can get Bill Griffith on CNCB to send us a voice clip that we can load on our computers in place of "you have mail".

Seriously, the rally was broad based with strength across all sectors. It was more like an explosion than a rally. After the very benign numbers in the non-farm payrolls report were made public, the euphoria was rampant. New jobs clocked in at only +124,000, only about half of the expected 215,000. Unemployment was 4.2% and the average hourly wage rose only a very anemic +$.02. Inflation, what inflation. The bond market posted the biggest one day rally in almost a year with bonds up +1.5 points and the yield dropping to 6.02%. It is amazing how fast things reverse course. The bonds, which had been dropping into a black hole since the attack of Kelleyspan, stopped on a dime and gave nine cents change.

Financials, which had been avoided like the plague, rocketed as investors rushed back into the beat up stocks like gnats to a picnic. DOW component American Express, which had dropped -16 in the last two weeks gained back +6 and JP Morgan recaptured almost +8 of the recent -15 point drop. Airlines, retail and telecoms also came off the shelf and back into investors portfolios.

Internets soared on the feeling that there would be no more rate hikes this year. EBAY gained +12, YHOO +13, RNWK +8. While all Nasdaq stocks were not created equal, most profited from the rush of money back into the market. One of our favorites however did not take part. QCOM, who had been thrashed severely last week after an analyst had some negative things to say, failed to rally back in the shopping spree on Friday. On a day that QCOM was voted most likely to soar, it didn't. While we still like it, we NEVER advise going against a trend. We dropped it this weekend which of course is a sure signal for it to bounce on Tuesday. Once momentum leaves these high PE stocks the future is bleak. Wait for the bounce.

Why tech stocks? Tech stocks are the first to fall and the first to rise. Tech stocks are the field of dreams for most investors and the economy in general. Without literally hundreds of tech companies you would not be reading this newsletter today. According to some the Internet is just now leaving the stone age in terms of its future potential. Techs are the wave of the future and after today we are surfing! Because of the high PE of tech stocks they are very sensitive to interest rates. The recent leaders of the Internet revolution are solid tech winners. Investors flock to tech stocks in good times to try and catch the next record move. In the last twelve months tech leader Intel has soared over +150%, MU +250%, TXN +258%. These incredible returns have made millionaires of thousands of investors but the same big gains are not gains until they are sold. Thus the flight out of techs on profit taking on any market downturn makes investors fair weather friends indeed. Right now the trading light on tech is green and the fourth quarter has been good to most tech leaders in the past.

Not all stocks took part in the rally on Friday. KO took part in the warnings cycle by posting one of their own. Coke said the European contamination scare would knock down profits by -.02 cents but analysts also say they are losing market share in many foreign countries. Russia, Turkey, China, to name a few. Not all things go better with Coke it appears.

Markets up, interest rates are down, no Fed rate increase in sight so break out the party hats and lets rock and roll, right?

Not so fast boys and girls. If you thought the Kelleyspan sell off last week was not fun then you had better take a look at the calendar for this week. We have four (4) Fed appearances this week topped off by the PPI report on Friday.

Wed - Meyer - Philadelphia
Wed - Greenspan - Grand Rapids
Thr - Gramlich - Boise
Thr - Ferguson - Washington
Fri - PPI

It is enough to make Freddy Kruger cry. While we do not expect the Fed heads to individually make as much impact on the market as Ed Kelley did last week, the sheer numbers are sure to cause some concern. Also, for those of you with a memory longer than a market day, you will remember that of the last seven inflation reports only one, non-farm payrolls, was in our favor. Other recent reports have suggested that inflation is alive and well but currently only creeping in around the edges of the economy. The jobs report did put a nail in the rate hike coffin but did NOT drive a stake in the heart of inflation.

Don't get me wrong. I still think the markets will go up over the next several weeks, contrary to all the "don't you know September is a down month" emails I have been getting. This third quarter is looking like the best 3Q in years and this will not be lost on investors. It is just the fourth quarter I don't like, but that is another story. I just want readers to be aware of market moving events and be prepared for more Fed bombs and economic potholes. So spend that cash but protect yourself with stops.

Good luck, happy holiday, sell too soon.

Jim Brown

Be sure to check out the "Traders Corner" on Sunday, Tuesday and Thursday. Janar Wasito has been doing an excellent job of explaining the pschology of trading and explaining his own trades on a play by play basis. We have had many great emails about Janar and we welcome him to the team. PS. If you would like to join the OIN team in some way, please email kimo@OptionInvestor.com.

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