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Market Wrap

October Ends on a High Note

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        WE 10-29         WE 10-22         WE 10-15         WE 10-8
DOW     10729.86 +259.61 10470.25 +450.54 10019.71 -630.05 +376.76
Nasdaq   2966.43 +149.88  2816.52 + 84.69  2731.83 -154.74 +149.72
S&P-100   717.03 + 31.40   685.63 + 33.88   651.75 - 46.70 + 28.14
S&P-500  1362.93 + 61.28  1301.65 + 88.12  1247.41 - 88.61 + 53.21
RUT       428.64 + 10.22   418.69 +  3.99   414.70 - 13.01 +  4.18
TRAN     3058.98 +195.83  2863.15 +  7.67  2855.58 -226.13 +213.37
VIX        22.56 -  0.33    22.89 -  8.59    31.48 + 10.28 -  5.26
Put/Call             .51      .55             1.05             .67

October Ends on a High Note

Wow! On the 70th anniversary of the 1929 stock market crash in which the Dow dropped 30 points, which was 12% at the time, stocks made a major move upward. For the second consecutive day stocks soared higher on very heavy volume, signaling a big change in market sentiment. Even a week ago many were saying the market was headed lower and interest rates were going to hit at least 6.5%. Both of those things may still happen but right now it looks like a renewed bull market for both stocks and bonds.

Alan Greenspan, who in the past seems to have tried to keep stocks from getting too high, made comments Thursday night that helped fuel the huge gains seen on Friday. He made some comments about the changing economy that to many seemed fairly dovish and made some traders hopeful that the Fed will leave rates alone in November. Currently most expect a rate hike. These comments came day after the GDP and ECI reports indicated very high productivity with relatively low price pressures and ignited a strong rally. Greenspan virtually guaranteed a continuation of the rally on Friday. It did not hurt that new home sales dropped over 12% to a 2-year low, indicating a cooling economy, which the Fed wants to see.

Like yesterday the rally started right out of the gate, with the Dow rising about 130 points in the first half-hour of trading. It held on to most of those gains until some late afternoon profit taking brought the indexes down a little, but the Dow still finished with another triple digit gain. The magnitude of the rally came as a surprise to most everyone who follows the market. The NASDAQ easily pushed to a new record high and the Dow is up over 7% since October 18 when the Dow dropped below 10,000 for the first time since April.

Closing figures show the Dow at 10729.86, finishing up 107.33 points, or 1.01%. Friday was the last trading day for the Dow in which Sears, Goodyear Tire, Chevron, and Union Carbide will hold it back. On Monday Intel, Microsoft, Home Depot, and SBC Communications take their places. By booting some of the laggards (dogs of the Dow) and adding these high growth, high performance type stocks the Dow will be more competitive with the NASDAQ, which has outperformed the Dow lately.

Speaking of the NASDAQ outperforming the Dow, the NASDAQ tripled the Dow's percentage gain, rising 3.17%, or 91.21 points, to close at an all-time closing high of 2966.43. It was the sixth highest point gain ever for the NASDAQ, and now it looks like it won't take long for the NASDAQ to hit 3,000, its next milestone. The S&P 500 also had a strong day pushing its way up to 1,362.93, up 20.49, or 1.53%. The follwing chart shows that for the past six months, the NASDAQ has risen 15% while the Dow is at break- even.

The main weakness the market had shown recently, both in rallies and sell-offs, was poor market internals. If it wasn't weak volume it was an awful advance decline line. For the past two days the internals could not have looked better. Friday's volume was huge, with over 1.09 billion shares trading hands on the NYSE, in spite of some traders taking some time off to go outside and watch the Yankee parade. The NASDAQ had an even better volume day, trading 1.43 billion shares making it the second highest volume day ever for the OTC market. Advancing stocks outnumbered decliners 21 to 9 on the NYSE and 23 to 17 on the NASDAQ. In what might be the telling sign of the strength of the rally was the new high / new low line. On the NYSE new highs beat new lows 120 to 90. It was the first time new highs won out since July. On the NASDAQ, which has held up better, new high more than doubled new lows 205 to 99. These figures show that most stocks are off of their lows and pushing higher.

Like Thursday, it is difficult to find entire sectors that showed any weakness today. The only exception was the financial services sector, which had been soaring and suffered from profit taking and the feeling that the rally in financial stocks may be overdone. The PHLX/KBW bank index fell 0.5% and the AMEX Broker/ Dealer index declined 1.2%. The financial sector, however, is not a weak sector and will benefit if interest rates continue to decline. Most of the big banks like Citigroup, American Express, and JP Morgan are just slightly off their 52-week highs.

The strongest sectors were in technology fields, which again seem to have assumed the leadership position in the market. Semiconductors in particular had a good day, with the PHLX Semiconductor index rising an attention-grabbing 6.3%, led by Intel and Applied Materials. Along with chips, software makers rose 4.9% and the hardware index gained 3.9%. One sector that had a very sharp rise was the paper products group. Riding on some analysts' bullish comments about Boise Cascade, the PHLX Forest and Paper Products index gained an amazing 7.8% in one day, shaming the Internet sector, which rose only 4.3%.

It was a good day to take a tech company public, which is just what Akamai Technologies did. Shares of Akamai, a maker of computer software designed to speed up Web page delivery, soared over 450% from its initial offering price of 26. It finished the day at $145.20. They are already in a position to declare a stock split.

At this point it is easier for technicians to call a market bottom. With the NASDAQ at all-time highs that sounds ridiculous but a lot of traders were running scared only a few days ago. Bond yields also may have bottomed, with the 30-year Treasury bond finishing the day with a yield of 6.15%. The yield has dropped a quarter percent since Monday and sentiment has improved tremendously. A week ago it was hard to find an analyst who did not see at least a yield of 6.5%.

The huge volume and strong price moves would indicate that there is some pretty strong support now, and while support does not necessarily mean the market will shoot through the ceiling, the downside seems more limited than it did just a week ago. It should also be noted, however, that on Thursday and Friday the markets gapped up on the major indexes, and some technicians would way that those gaps have to be filled before going a whole lot higher.

It should be noted that nothing fundamental has changed - only sentiment and expectations. Earnings have been very strong but they were strong during the market decline. The easing of interest rates has helped but a quarter point move one way or another does not make a huge difference to stock prices. Fundamentals drive the market long term, but investor sentiment and forward-looking expectations drive it in the short term. If investors expect good things to happen, they are willing to put their money in the market. Thursday and Friday a lot of money that had been on the sideline poured into stocks, so obviously expectations are getting higher. As long as those expectations are met the market should be in good shape going into next year.

An old market axiom states that the market drops twice as fast as it rises. That was definitely not the case with this rally. Some profit taking early in the week would be expected so Monday and Tuesday there will likely be some weakness, but barring really bad news it would be just a few percentage points. It is important to note that the Nasdaq closed just 34 points from 3000 and investors may be holding off on selling as they figure traders will take the stocks to that level. Everyone likes to see a milestone hit and it may come early on Monday. October has historically been a month for market bottoms and judging by the last two days of the month that could very well be the case this year as well. For all of us involved in the stock market, Halloween will not be as scary as it could have been this year. So unless you have short positions causing you horror, enjoy your Halloween weekend.

Chad Poulson
Research Analyst

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