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Market Wrap

Ding Dong, Trick or treat!

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        WE 10-15          WE 10-8          WE 10-1          WE 9-24
DOW     10019.71 -630.05 10649.76 +376.76 10273.00 -  6.33  -524.30
Nasdaq   2731.83 -154.74  2886.57 +149.72  2736.85 -  3.56  -129.23
S&P-100   651.75 - 46.70   698.45 + 28.14   670.31 -  2.49  - 32.16
S&P-500  1247.41 - 88.61  1336.02 + 53.21  1282.81 +  5.45  - 58.06
RUT       414.70 - 13.01   427.71 +  4.18   423.53 +  6.44  - 17.37
TRAN     2855.58 -226.13  3081.71 +213.37  2868.34 - 10.38  -121.07
VIX        31.48 + 10.28    21.20 -  5.26    26.46 -  3.08  +  5.32
Put/Call    1.05              .67              .68              .74

Ding Dong, Trick or treat!

Oh, Hi Mr. Greenspan. Great bear costume! I am sorry, but you are two weeks early and we have not bought any candy for all the Halloween trick or treaters yet. What? You say you will just huff and puff and blow my market down? Sure Alan, sure, now run on back to the Fed den and play.

It is not nice to fool Mother Nature or the Father of Finance it appears. Unless you live in a cave you know the rest of the story. Alan Greenspan's bubble speech burst the bubble of the Thursday relief rally and slammed the market back to depths not seen since April 7th. That was the last time the Dow traded under 10,000.

There is no bright way to paint the market today. Every technical indicator is painfully negative. That may be the good news for later. First, check out the advance/decline line on the chart above. It has been negative for some time but Friday it went into free fall. At one time the ratio was decliners leading 7:1. 7:1!! The closing ratios were still bad at 5:2 but some bargain hunters bought the mid-afternoon dip. It made no difference as both the Dow and Nasdaq closed near their lows of the day.

Making matters worse was the blowout PPI number just before the open. The +1.1% increase was more than twice the estimates and S&P futures fell through the floor and traded as low as -33.00 before the open. Bonds sold off quickly with the yield dropping to 6.39% for a short time. This trend quickly reversed as investors fled the stock market in droves and flocked to the safety of bonds. With the Fed tightening bias in place the only thing that kept Alan from raising rates on Friday was the carnage already in place from his bubble speech. The one two punch of a rate increase AND the speech could have set him up for a Hoffa like disappearance. Not wanting a visit by the men in black he will probably hold off until after the CPI on Tuesday and depending on the state of the market, maybe even until the Nov-16th FOMC meeting. Rest assured that it is almost unthinkable that they will not raise rates at that meeting. If the CPI comes in strong like the PPI then even Y2K may not defer the rate hike.

With this backdrop, the disaster on Friday may not be the end of the story. The -267 point drop ranked as the sixth biggest point drop of all time and the -630 point loss for the week ranks as the worst week since 1987. The broader market technicals were the worst I can remember. At one point the new highs/new lows on the NYSE were 465 lows to 8 highs. They eventually recovered to only -383 to +11 (recovered?) The totals for all exchanges were 1043 new 52 week lows to 82 new highs. Regardless of what the Dow and Nasdaq numbers are showing, investors are fleeing the second and third tier stocks in record numbers.

After dipping below -10% intraday on Thursday the Dow is now firmly in correction mode at -11.5% off its recent high. Most traders now believe that the lack of a bounce at the close on Friday means we are not at the bottom yet. The volume of 889mln on the NYSE, while heavy, was not enough to show a true capitulation event. There are still too many traders who have been conditioned to hold on to their positions because the market ALWAYS comes back after a -10% dip. The market normally does come right back after a 10% drop. There has been 109 ten percent (or greater) drops in the Dow. The average is one per year. With statistics like this it is no wonder why investors are willing to hold. Until the fear level gets to the point where small investors begin to hit the panic button, large investors will not come back into the market. The Nasdaq has not entered the correction zone yet and investors may wait to see if the Nasdaq is going to rally or follow the Dow down. Remember the Nasdaq corrected -15% in Jul/Aug and the Dow did not.

Where do we go from here? With the CPI on Tuesday it is a very good chance we will have a rocky Monday. We are approaching very oversold again and our friend the VIX has spiked to 31.48. If you remember last Sunday I pointed out that the VIX was at a low of 21.20 and was signaling a market top. Well today, at 31.48 the VIX is signaling a market bottom soon. The VIX is a general market indicator and only gives us a general indication of market sentiment. It is very accurate but only accurate within days not hours. Nothing precludes the VIX from moving higher from here but we have only been in this range five times this year. The highest level of 36.80 intraday was in January, when we were setting the lows for the year at 9100. The next time the VIX was close to 32 was three days before the June 1st market low of 10400. The next time we hit 32 was the 10560 low in August. (what would we give for a 10560 low today?) The next 32 was two days before the 10080 low in Sept. The intraday high on Friday was 33.44 and should be signaling another market bottom soon. Now before you start selling the kids into slavery to buy this dip, let me warn you that while this may point to a potential bottom now, we did spend the entire month of Sept and most of last Oct over 34 with highs over 60. Just like every other indicator there are extremes brought on by world news and economic events which can negate all the normal rules. Another market indicator which is pointing to a bottom is the put/call ratio. At 1.05 today it is showing a strong spike of fear and pessimism in the markets. This range also signifies a near term bottom.

The most likely scenario is another bout of high volatility on Monday as traders adjust positions ahead of the CPI on Tuesday. If we get another strong drop intraday, I would take a chance on buying any REBOUND from the 9900-9950 range. Just be ready to pull the trigger on the sell side if the rebound fades and things start looking grim again. The adv/decl line will be no help since it will probably be negative until after the CPI report. The safe move would be to WAIT UNTIL AFTER THE CPI before making any new plays.

I know you have heard this before but we are at a crucial point in the market. With the Dow closing almost at the low of the day and right at 10000, we are peering over the edge of the cliff. This is when we will see if Y2K is going to impact the markets. With only 53 trading days left until Y2K the urge by some to avoid all this market instability and move to the sidelines is going to be great. If we can hold 10000 and the CPI is not off the charts then we have a chance. This is the busiest week for earnings in this cycle. There are 452 companies announcing this week. The challenge if you remember from last week, is that earnings are priced into the market BEFORE they happen. This means that these earnings are already discounted. There is nothing to look forward to after these earnings except the Fed meeting on Nov-16th and that is not high on my wish list. If investors continue to move to the sidelines and we close under 10000 after the CPI then the outlook is not good. In normal years with no Y2K fears, Nov/Dec/Jan are normally up months as investors take positions in preparations for the new year and fourth quarter earnings. This is a once in a lifetime year end event and there is nothing to compare to historically.

Like I said in closing on Thursday, DON'T BUY TOO SOON.

Good Luck

Jim Brown

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