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Market Wrap

Is is real or is it Memorex?

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       5-30-2000           High     Low     Volume Advance Decline
DOW    10527.10 + 227.90 10528.10 10302.30   842,043k 2,019    919
Nasdaq  3459.48 + 254.37  3460.24  3286.54 1,457,529k 2,724  1,303
S&P-100  761.42 +  25.34   761.42   739.53    Totals  4,743  2,222
S&P-500 1422.45 +  44.43  1422.45  1382.65            68.1%  31.9%
$RUT     476.70 +  19.33   476.70   457.37
$TRAN   2741.70 +  54.15  2742.60  2687.25
VIX       26.53 -   0.96    28.07    26.38
Put/Call Ratio       .43

Is it real or is it Memorex?

Most of the younger investors today are too young to understand the headline above so a more appropriate title might be, "Is it a real rally or an incredible bear trap?" The analogy is the same. Either option could easily be true or false. Only one is real! The "summer rally", (don't hold your breath), as they are calling it came right on schedule according to media pundits. Whose schedule? My email is full of gloom and doom articles from readers over the weekend showing the bull to be dead and disaster ahead. If the world of market timers was predicting disaster last week then who was forecasting a summer rally to start today? Nobody I know!

To me the term summer rally means a protracted time of rising markets occurring during the summer. It does not mean a one-day oversold bounce the day after Memorial Day. Don't get me wrong, I would love to think this was the start of a multiday rally. Even the term sounds foreign, "multiday." It seems like forever since we had positive gains on the Nasdaq for multiple days. We should have had a bounce today. The constant selling pressure from the last two weeks, with only a couple of up days, had put the Nasdaq into a strongly oversold position and the bounce was due.

Even the stronger than expected Consumer Confidence Report this morning had no impact on the already strong futures. Traders who left early last week for the holiday came back with a desire to trade and the Nasdaq gapped open +100 points and never looked back. The key here of course, is can it hold.

One of the positive news events moving the market today was the initiation of coverage on INTC by Dan Niles. Dan moved from Bank Boston, Robertson Stevens to Lehman Brothers and his closely followed semiconductor recommendations were transferred as well. The semiconductor sector soared with RMBS adding +25, INTC +8, AMD +11, MU +4, XLNX +8, TQNT +13, PMCS +21, AMCC +13, BRCM +13. Absolutely incredible!

Brokerage stocks rallied after Goldman Sachs analyst Richard Strauss upgraded the sector. MER +3, LEH +4, were the leaders. Citing evidence of slowing due to Fed hikes he said these stocks typically bottom one month before the market and he thought the Fed was almost done with rate increases. The slow down in big ticket items and autos is a result of the hikes and with each hike requiring 6-12 months to be felt, the six hikes since last summer still have 6-9 months to work their way through the system. The Fed has not raised rates seven times since 1994. Many analysts are now expecting only a +.25% hike on June-28th and they expect that to be the last hike. Lets hope they are right. With consumer spending at the lowest rate since last July the ripple down into reduced sales, layoffs, reduced productivity and finally higher wage costs as a result will impact stock prices as well.

We are moving into the earnings warning period where Fed watchers will be looking for further evidence of rate hike impact. If the rate hikes are working then this warning season will be rocky as companies began disclosing profit problems. Several major warnings could trip this rally up really fast. Defensive stocks circled the wagons today but they still gave up some of their gains from last week.

New Home Sales will be announced tomorrow and the estimates are for a drop of -3.2%. If this comes in much stronger then the fear of the Fed could start creeping back into the market. The big reports are the NAPM on Thursday and the Non-farm payrolls on Friday. This could cause stagnation as cautious traders move back to the sidelines before the report.

Many analysts are chalking up much of today's rally to short covering. With pessimism strong last week many speculators had gotten short with the idea that the Dow would break 10300 to the downside. The rally today was on very weak volume of only 1.4 bln on the Nasdaq and only 842 mln on the NYSE. Advance/decliners were positive 2:1 but without any real volume there is much skepticism about the record gain. Today was the largest percentage gain ever at +7.35% and only below the previous record point gain of +254.41 by -.04 at 254.37. Clearly a strong gain even if the volume was weak. Futures for tomorrow have traded on both sides of positive but traders are hopeful for a continued rally. The S&P posted its seventh largest gain at +44.40.

If investors decided it was for real there is plenty of cash on the sidelines. Mary is reporting in her article tonoght that there is $1.68 trillion in cash which could be put to work if the owners felt positive about the markets. I think it is going to take more than one day of strong gains to convince them. After two months of twice as many down days as up days the multiple bear trap rallies have bitten the hands that feed the market. The pace of funds returning to the markets is likely to start out as a trickle until after the Payroll Report on Friday. Once investors feel confident there are no surprises there and feel like the Fed is about done then cash will appear by the billions to power the bull again.

Before you start feeling too optimistic I should warn you that there are some long term trends which are still unbroken. The Dow is still down trending as well as the Nasdaq. The channel on the Nasdaq is showing a top at about 3500 which is only 41 points from the close. Technicians will be watching the open closely tomorrow. One analyst told me that to confirm the reversal he wanted to see an open above today's close and a close above today's close. We could trade down intraday but the open and close had to be higher to confirm. The upside on the Dow could come anywhere between now, 10527, and 10700. A close over 11000 would be first confirmation of a breakout and a close 11400 would be very strong.

In reality, this had better be the real thing. Another breakdown after today would be met with a really pessimistic outlook for the rest of the summer. There are only so many times that trader optimism can be dashed without making cynics of us all. Remember we never retested the lows from last week and with earnings warnings and the Fed ahead the markets have a huge wall of worry to climb. On the positive side many big caps appeared to have put in a bottom. GE and CSCO for instance are uptrending again.

Trade the winners, avoid the losers, watch for a roll over on the $SPX or the $NDX. The S&P-500 ($SPX) has strong resistance at 1460 and the Nasdaq-100 ($NDX) has resistance at 3466. Be prepared to close long positions if either has trouble breaking those levels.

The Houston 2 day, Technical Analysis, Stock and Option seminar is this week (thr/fri) and we still have seats available. We guarantee you will not be disappointed. The class size is only 20 so you will get plenty of individual attention from Chris Verhaegh and the staff. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. http://www.OptionInvestor.com/seminar/seminar.asp

Good luck and sell too soon.

Jim Brown
Editor

Current long positions include:

NOK, VOD, VIGN, MSFT, MLNM

Yep! In meetings today, missed the open and decided to wait to see if it held. Cussed myself all afternoon.

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