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Market Wrap

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        WE 10-8           WE 10-1          WE 9-24          WE 9-17
DOW     10649.76 +376.76 10273.00 -  6.33 10279.33 -524.30  -224.80  
Nasdaq   2886.57 +149.72  2736.85 -  3.56  2740.41 -129.23  - 17.32  
S&P-100   698.45 + 28.14   670.31 -  2.49   672.80 - 32.16  -  7.83  
S&P-500  1336.02 + 53.21  1282.81 +  5.45  1277.36 - 58.06  - 16.23  
RUT       427.71 +  4.18   423.53 +  6.44   417.09 - 17.37  -  6.73  
TRAN     3081.71 +213.37  2868.34 - 10.38  2878.72 -121.07  - 91.04  
VIX        21.20 -  5.26    26.46 -  3.08    29.54 +  5.32  +  1.87  
Put/Call     .67              .68              .74              .67

What's wrong with this picture?

The Jobs Report was benign. The Fed did not raise interest rates. The markets are humming with activity. The markets have added large gains on good volume. The Nasdaq is close to another new record high. The Dow at 10650 is trading at levels not seen since Sept 21st. Ralph Acompora has gone back into hiding. Abbey Joseph Cohen is on stage almost every day pounding the table on the undervalued S&P. Earnings warning season is officially over. Earnings are coming in at record levels around +25%. The anniversary of last October 8th's market low has now passed without incident. The transports are confirming the Dow rally on the back of lower oil prices. Internet stocks are going to have a record sales quarter with the most online buying ever. In the movies birds would be singing, with lovers walking off into the sunset hand in hand.

Does anybody else feel like things are just a little too perfect? Don't look now but there are some cracks around the edges. With the Dow up +346 for the week, up over +500 from the lows of the prior week, you would think the advances would be beating declines by a large margin. Think again. Declines beat advances on Friday when the Dow was up +113. The old big cap rally syndrome is still active. The Russell-2000 was actually down on Friday. Check out A/D line on this chart. Note the divergence between the A/D line and the rise in the Dow. We have gone from oversold to over bought in record time.

The Nasdaq, even though poised to trade in record territory on Monday, has traded here several times over the last three months only to fall back again. Somebody send Steve Ballmer some Prozac if we trade and close above the previous high of 2887 on Monday.

Other cracks in the market support besides the A/D line is the continued possibility of another rate increase. The bond yields on Friday hit 6.20% again and many analysts think the chance of a Fed rate increase at the Nov-16th meeting, or before, are now over 50%. This could continue to drag on the market and keep us from moving much higher from here. At 6.20% the bond yields are moving into territory not seen since Oct 1997. New highs continue to lag new lows by a greater than 2:1 margin. There is still more than 70% of the Nasdaq under their 200 DMA. Not what you would expect for a market setting new highs.

The benign Jobs Report was "adjusted" for hurricane Floyd and the adjustments could jump up and bite us with the next report which is right before the next Fed meeting. While the new jobs number of -8000 was ignored due to the adjustment, the average hourly wage jumped again by a higher than expected amount. The continued rises are justified by the increased production rates but still a sticking point for the Fed. The unemployment rate is still hovering at a multi-decade low of 4.2% and shows the very tight job market. All of these things are watched heavily by the Fed. Lets hope the adjusters were conservative when next month rolls around.

Don't look now but did you see the Y2K problems beginning to surface this week? Quantum was downgraded after warning that sluggish orders due to Y2K and lower orders from a major customer would impact earnings. HIFN also took a major hit when major customers Lucent/Ascend and Quantum cut back on chip orders due to slower Y2K sales. The loss in orders for HIFN caused a drop in prices for PMCS and VTSS who also "MAY" be impacted by lower orders from large customers as well. IBM was cut by Goldman Sachs due to flat hardware sales attributed to Y2K. The entire semiconductor sector was hit with concerns that the Y2K ripple may impact 4th qtr earnings as supply builds due to lack of orders and prices drop. See how the ripple of one companies drop in orders impacted dozens of others. Losses included HIFN -36.25, PMCS -10.38, VTSS -3.88, BRCM -4.75, IBM -2.88.

Add to all the above the tax loss selling by stock funds that begins in October. Every rally becomes an opportunity to unload under performing stocks for a dollar or two more than they expected to get. This is not a big event but just another piece of the picture that we have to consider in October. If funds want to take advantage of the recent drop in stock prices they have to first sell the losers. The window dressing that took place two weeks ago for the end of the quarter now turns into window dressing for the rebalanced portfolios to start the next year.

The challenges for the week will be the Retail Sales, Import and Export prices on Thursday. The big day comes on Friday with the PPI, Business Inventories, Industrial Production and Capacity Utilization reports. The CPI follows on the following Tuesday. Mon/Tue/Wed are pretty much non-events for economic reports so all eyes will be on earnings. Hopefully there will not be any more high profile events like the Xerox warning on Friday. The earnings season kicks off with a roar with PFE on Monday, MOT, INTC, MER on Tuesday, AAPL, BA on Wednesday, ALD, COF, FTU, GM, SUNW on Thursday and CAT on Friday. These are just some of the companies announcing. Check out the complete earnings list on the website and in later sections of the email newsletter.

There was another event on this week that could impact the future of the brokerage sector. Just when the brokers were starting to show new life, Morgan Stanley downgraded several brokers saying that shrinking commissions, higher costs and greater competition were going to kill profits. They also said "for pure online firms the outlook is dire." The American Express announcement earlier in the week has setup the industry for a fall. AXP announced free trading for their large accounts. (over $100,000) This was the latest salvo in the broker wars after Merrill Lynch offered free trading for large accounts but charged a flat $1,500 fee per year for maintenance. Etrade is now offering $4.95 trades and others are likely to follow suit. With over 100 new Internet brokers in just the last three years the sector is becoming very crowded. Don't expect any big up moves in this sector until the winners are sorted out. Those winners are likely to be the well known, established firms that have other sources of income other than commissions. Schwab, for instance, depends on commissions for 60% of their revenue.

Where do we go from here? If we have no high profile news events before Monday then we only have to worry about profit taking to dampen the rally. As we move farther into the week the looming economic reports could put a cap on the rally until after the CPI comes out the following Tuesday. We still have the possibility of an October surprise at any time but hopefully the low for the month has already passed. Traders will probably be careful with interest rate concerns and Y2K in the near future. A final thought. Everyone knows that the market is the best discounter of future events ever devised by man. The big earnings gains for this quarter are due to the previous third quarter being so lousy. The third quarter of 1998 was pretty bad. Beating those numbers by +20% is a snap. The fourth quarter of this year could be a struggle as business grinds to a halt in anticipation of Y2K. This means that 4th qtr earnings, announced in January, could be disappointing. If the market is going to discount the next quarters earnings then it will happen this year. As option traders this means that we should not be taking long term positions out into the late fourth quarter or even next year. When you take long term positions you feel the safety of the long time frame. This security blanket promotes a false sense of security. You have heard that a frog dropped into boiling water will jump out but a frog put into a pan of cold water will eventually be boiled alive because they ignore the temperature change until it is too late. Don't be a frog and hold on to losing positions until they are worthless, just because you have "time."

With strong gains by most stocks in the last week, DEFINITELY WAIT FOR AN ENTRY POINT, and sell too soon. The VIX spiked down to 21.20 at the close. This is the lowest it has been since August 26th when it was 20.93. Why is that day important? That was the market top at 11332. Coincidence?

Jim Brown

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