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Market Wrap

Five more days and we are out of here!

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        WE 10-22         WE 10-15          WE 10-8          WE 10-1
DOW     10470.25 +450.54 10019.71 -630.05 10649.76 +376.76  -  6.33  
Nasdaq   2816.52 + 84.69  2731.83 -154.74  2886.57 +149.72  -  3.56  
S&P-100   685.63 + 33.88   651.75 - 46.70   698.45 + 28.14  -  2.49  
S&P-500  1301.65 + 88.12  1247.41 - 88.61  1336.02 + 53.21  +  5.45  
RUT       418.69 +  3.99   414.70 - 13.01   427.71 +  4.18  +  6.44  
TRAN     2863.15 +  7.67  2855.58 -226.13  3081.71 +213.37  - 10.38  
VIX        22.89 -  8.59    31.48 + 10.28    21.20 -  5.26  -  3.08  
Put/Call     .55             1.05              .67              .68

Five more days and we are out of here!

With Halloween only a week away the fear of a market collapse appears to be dwindling. With past Octobers being featured players in the Nightmare on Wall Street series, the tendency to play it safe and keep cash locked up on the sidelines has been strong. After the apparent rally last week it is "possible" we have seen the lows for the month. The markets appear unconcerned that the Employment Cost Index, due out on Thursday, may show inflation creeping into the economy. Investors appear to be disconnecting from the inflation worries and charging off to pour more money into the markets in anticipation of ever climbing stock prices. With the Fed meeting only three weeks away and odds of a rate hike hovering around 100%, again investors appear unconcerned.

The Dow on Friday rose at the open and never looked back until the last thirty minutes of trading. Actually the Dow was accelerating into the close until rumors surfaced that CSCO was going to miss earnings. The rumor raced through the markets and left some traders scratching their heads after an eighty point drop. The Nasdaq lost -36 points of its +40 point gain but struggled back before the close to post a +14 gain for the day. Note the advance/decline line on the chart below. There is a small glimmer of hope as the free fall from last week started slowing. Three of the last five trading days the advances won the battle. The new highs are still trailing the new 52 week lows. Friday's new highs were only 213 and new lows were 738. Remember this was on the last day of a very positive week and you would have thought the new lows would have slowed substantially. The 7:2 ratio is still much better than the 10:1 from Monday but still very bad.

The market would have closed much stronger had it not been for the CSCO rumor. The rumor could not be verified and CSCO did trade up again in after hours. The company was contacted and they said they were standing by their guidance to analysts. Look for a rebound in CSCO on Monday without any new news.

The biggest reason given for the Friday rally was the agreement in Washington on the Financial Services Reform Bill. This bill reforms the prohibitions put in place in the depression. The agreement would allow the lines between different types of financial companies to blur. One of the cross pollination events for instance would allow banks to sell insurance and insurance companies to offer banking. This sets up the possibility of financial supermarkets. Companies like American Express, Citigroup, JP Morgan, Bank America, could become a one stop shop for all financial services. The smaller insurance companies soared on the news as takeover speculation was running rampant. Before you rush out and sell your tech stocks, I would caution you that we do not have a signed bill yet and it could be some time before this actually happens. Still the rally in financial stocks was enough to send the Dow back to levels not seen since the day after the Nasdaq set a new high on Oct 12th. JP Morgan led the charge on the Dow with a +8.44 gain. Also up were C +1.25, they already have Travelers in anticipation of the reform, AXP +3.75, GE +2.38. The next vote could come as soon as next week but we all know how slow good changes occur. Another reason these stocks did so well was because they had been beaten down so severely with interest rate worries recently.

Other Dow leaders were the previous dynamic duo of IBM and Phillip Morris. IBM and MO both were performing their versions of the dead cat bounce. IBM gained +2.94 after their -$23 drop on Thursday. MO regained +1.13 of its -$9 drop. A very small recovery for their stockholders.

Volume has been good on the NYSE with four days last week trading over 900mln shares. Normally a major move, +450 points, accompanied by strong volume, would signal the start of a major rally. Many analysts however still believe that the lack of a real sell off by the tech stocks has only put in a soft bottom at this level. A confirmation of this would be the selective failure of the previous leaders. Many of the stocks that took the Nasdaq to a new high only two weeks ago are slowly losing momentum. Some of the leaders are being taken out and shot one by one. Some examples from Friday are PHCM -19, INKT -17, ARBA -16, EMLX -12, CMRC -10, DCLK -6, EBAY -6, RNWK -6, BRCM -4, YHOO -4.

Earnings for this cycle continue to come in ahead of estimates. With 60% of the S&P already reported, 28% came in higher than estimates and only 5% missed their numbers. There are six Dow stocks reporting Monday. AXP, T, CHV, XON, MMM and UK. Any unexpected problems from any of them could derail this fragile rally but good news could set the tone for the week.

After signaling a clear market top (10719) on Oct 11th at 21, the VIX did an about face to move upward and signal a market bottom (10000) on Oct 15th at 33. The pendulum has now come full circle and the VIX is now back at 22. Remember, this indicator does not show the exact day each top or bottom will occur but is usually very close. Using the VIX as a forecast for the coming week we could expect a possibly weak follow through on this rally. We are not out of the October woods yet. Thursday is the anniversary of Black Thursday in 1929 when the selling was fierce and the Dow closed at 299. Anniversaries like this have a tendency to cast a pall over the bullish enthusiasm. The big news for the week will be the ECI and the GDP on Thursday.

If you are not currently in the market then any pull back from the +450 points gained last week would be a welcome event and a buying opportunity. The Y2K fear is rapidly turning into Y2H (hype). Even with the constant stream of earnings warnings that are using the Y2K excuse, the market continues to shake it off. The most recent survey of investors shows that those still in the market are planning to stay invested and ride out any dips. This is causing great concern among the Y2K bears who wanted the buying opportunity for their personal portfolios. If, in fact, the average investor has decided to remain invested then the recent Dow 10000 could be the bottom. While we may not have confirmation until later in November, it may be time to start thinking about some leaps. If we get another dip between now and the FOMC meeting on Nov 16th then those who prefer long term investing should target some leaps on their favorite stocks. We will have a special section on Nov 6th to highlight some great leap plays.

Pick your entry points carefully this week and sell too soon!

Good Luck

Jim Brown

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