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If the Nasdaq drops -100 in the morning but rebounds +65 in the afternoon, is that a rally?

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       1-27-2000           High     Low     Volume Advance Decline
DOW    11028.00 -   5.00 11164.10 10915.40 1,124,137k 1,482  1,557
Nasdaq  4069.91 -  97.50  4140.09  3973.59 1,710,684k 1,829  2,284
S&P-100  759.61 -   3.18   770.77   737.32    Totals  3,311  3,841
S&P-500 1398.56 -   5.53  1418.86  1380.71            46.3%  53.7%
$RUT     517.02 -   4.02   526.02   513.73
$TRAN   2615.27 -  49.52  2688.36  2610.64
VIX       25.06 -   0.02    31.37    23.50
Put/Call Ratio       .49

If the Nasdaq drops -100 in the morning but rebounds +65 in the afternoon, is that a rally?

The Nasdaq gapped open this morning and traded higher for over an hour before giving in to another broad sell off. From the high of 4140 at 11:00 to the low of 3973 at 3:20 was a drop of -167 points. But the optimists out there are probably pointing to the +67 point bounce off the low into the close and claiming a rally. Call it what you want, the final score was -30.35 for the bears. It is only a rally in my book if it closes positive. Put a week of days like this together and you could have a 400 point trading range with lots of winners and sinners but you would still be -150 points when the smoke cleared on the last day. Another way to look at it based on the intraday high on Monday of 4300, we were down over -327 points for the week at 3:20 but we are only down -260 at the close. Does that make you feel better? If it did then the Dow's -451 point intraday loss from Monday's high of 11366 to today's low of 10915 probably will not faze you either. After the closing bounce we are only down -335 for the week. And to think I was worried! The Dow is now down -700 from the highs of last week. The good news, and it is good news, is the Dow support at 11000 held again for the third time this week. This support dates back to November of last year and was tested prior to this week only once on Jan-5th. The Nasdaq also tested technical support at 4040 and psychological support at 4000 and held. This support dates back to last December as well.

If you look at all three charts above you will see one common point. All three indexes are exactly on their last ditch support before a serious drop. The Dow and the S&P are teetering on the edge of a large cliff. The Nasdaq has some intermediate support but still could drop -200 more points very easy if the support breaks. I always think it is amazing that all the indexes seem to drift back to support levels right before major market events like the ECI report and the FOMC meeting. The cautious investors get out and the aggressive investors start nibbling right at support.

Santa Claus, Easter Bunny, Dell and Qualcomm.

The market as a whole reacted extremely well considering the Dell earnings warning. Dell actually traded up for a few minutes after the open but the volume of shares to be sold were just too strong for the bulls. 127 million shares of Dell stock traded hands today and Dell closed down -2.81 at 37.56. For the Dell diehards who realize this is a great company being punished for slow shipments from Intel and Y2K lock downs, this the time to buy those long term options. The Jan-2001-$30 call is only $12.75 and the $40 leap is only $7.75. For less than the cost of a short term call on an Internet stock you can buy a leap on Dell and have almost zero risk on the down side and a 100% to 200% profit on the upside. Does anybody not think that Dell will be back to $60 before the year is out?

Everybody knows by now that Qualcomm warned and the selling is not over yet. The warning that chip deliveries were slowing caught everyone off guard and many investors still refuse to accept the facts that their super stock is not bullet proof. This is like finding out after the fact that Superman wore lace panties or the Lone Ranger was a racist. First we find out there is no Santa Claus, the Easter Bunny does not exist and Dell and Qualcomm are just normal stocks. Dorothy, we are not in Kansas any more.

On the economic front, the news was mixed. The Durable Goods orders came in this morning with a jump of +4.1% compared to the expected rise of +0.8% The figures were skewed, however, by a 16.2% advance in orders for transportation equipment, specifically airplanes and aircraft parts. Excluding this, orders grew by 0.7%. The weekly Jobless Claims inched up only +1000 to 266,000 proving that the labor market is still tight even after the holiday jobs were eliminated. Last weeks 265,000 was the lowest number of filers since Dec-1973. Friday we will have two more important pieces of Fed data. The Employment Cost Index, which is expected to rise by +0.8% and the Q4 domestic product which should confirm the +5% growth rate again. The markets will be watching the ECI for signs of excessive inflation that could cause the Fed to raise over +.25% on Tuesday. The Mon/Tue meeting by the FOMC is of course the biggest challenge facing this market. Most agree that there will be a +.25% hike but there are some who worry that Greenspan could take aggressive action and raise it +.50% to shock the markets and the economy. I cannot understand this line of thinking. Greenspan is an incrementalist. He may decide to raise rates by +1.00 to +1.50% this year but he will do it in +.25% increments. This is an election year and Greenspan was just nominated for another term as Fed chief. Not known for stupid moves he would be out of character to shoot himself in the foot now.

Breadth of the markets was still negative but that should be no surprise. The volatility on the Nasdaq is reaching monumental proportions. The average daily intraday spread last December was 85 points. For the month of January the spread has averaged 109 points. Today the spread between high and low was 167 points. As I have said before, this is a clear sign of a market top or bottom. Since we are nowhere near a bottom the other choice is not pleasant. Volume remains very high at 2.94 bln shares and the market is slowly sinking. High volume on down days is not a good sign. The Russell-2000 finally rolled over on the 24th. As long as the small caps were gaining ground the big caps would not have given up many points. Now that the Russell is confirming the Dow drop we have two strikes against us.

The bond market has staged a major recovery in the last four days. Yields are down to 6.52% from 6.75%. However, this is coming at the expense of stocks. Money is flowing out of stocks and into the safety of bonds as we get closer to February and the Fed meeting. The question is really "when will the trend reverse?" Why is the big money running to the sidelines? Is it just the seasonal portfolio rotation or something bigger. CNBC has been hyping the margin factor all day. They keep pointing out that for every major market top and reversal in the past there was an increase in margin debt. Margin debt is at an all time high today and almost double previous market top levels. Greenspan also talked about margin this week and its impact on the wealth of the consumer. With extremely high margin usage there is a foundational weakness in the markets. People who over extend themselves on margin are at risk to lose large percentage amounts relative to their capital base and are at risk of being liquidated at a substantial loss in the event of a market downturn. The use of margin has been widely debated recently and several major brokerages have already put plans in motion to increase the requirements and curtail future excesses. This will be good for the markets eventually and take some of the volatility out but it could also cause some ripples as the changes are implemented.

Be very careful in the market at this critical inflection point. If we break support here the next stop on the Nasdaq could be 3800 which would be -10% from the last closing high. The -10% correction level on the Dow is 10530 but that would be much harder to hit do to the available cash on the sidelines.

Keep your stop losses close and sell too soon!

Jim Brown

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