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Capitulation anyone?

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        08-03-2000        High      Low     Volume Advance/Decline
DJIA    10706.60 + 19.10 10744.30 10623.40 1.05 bln   1327/1529
NASDAQ   3759.88 +101.42  3761.07  3521.14 1.83 bln   1753/2197
S&P 100   791.14 +  8.12   793.39   776.71   totals   3080/3726   
S&P 500  1452.56 + 13.86  1454.19  1425.43           45.3%/54.7%
RUS 2000  499.45 -  0.77   500.22   489.24
DJ TRANS 2887.11 + 12.57  2890.10  2860.18
VIX        22.79 +  0.03    23.81    22.46
Put/Call Ratio       .50

Capitulation anyone?

It does not get much better than this. After a blowoff drop at the open this morning the Nasdaq rallied back from a -140 drop to post a triple digit gain of +101. The Nasdaq gave us the entry point we have been writing about for over a week at 3521, dead center in my 3500-3550 projected support range. The open was a classic. Futures down leading into a huge gap down open with the leaders touching lows not seen in several months.

If you want to see the leader capitulate and then rebound to lead the rally then you have to look no farther than today. CSCO traded as low as $58.50 fifteen minutes after the open only to rebound to a high of $64.88 near the end of the day. The bounce for CSCO occurred almost exactly on its 200 DMA of $58.75. Intel also took part in the drop with a low of $60.44 at the open and a high of 65.38 near the close. Dell traded as low as $37.63 and ORCL had a low of 71.63 but closed +4.31 at $77.50. SUNW mounted an incredible $98 to almost $108 swing and was shooting up strongly at the close. As big as these swings were for the big cap leaders, they were nothing compared to the hot sectors like the networking stocks.

Brocade, BRCD, dropped on the open to $162.25 only to close +28 higher at $190. SCMR hit $101.38 and closed 25% higher at $123.81. Juniper, JNPR, traded in a $20 range between $118.06 and $141.63 near the close. Semiconductor stocks were hit hard at the open with the $SOX losing almost -8% to a low of 880 but rebounded to close almost even at 950. AMCC for example traded as low as $116 but closed at the high of the day $141.12, +25 points higher.

There were the required winners and sinners on the earnings front and the market took most of them in stride. The big name for the morning was Motorola. Lehman Brothers said MOT had a conference call with suppliers and told them they would only produce 80-85 million handsets compared with previous estimates of 100 million. While the 80-85 million was what analysts were basing their earnings estimates on, the bigger number was common knowledge and suppliers all traded down on the decreased outlook. Suppliers SSTI, AMD, SNDK and TQNT all dropped early but recovered well off their lows after several analysts reiterated their ratings. Also warning was The Gap Stores. GPS said they would miss 2Q earnings by 2-3 cents and the stock got killed dropping -$8 from $38 to $30. KLIC also warned of delayed shipments impacting earnings and dropped -35% from $22 to $13.56 but recovered slightly after positive comments by several brokers.

The big winner after hours was Disney. The mouse network roared with earnings that beat the street significantly. Posting $.21 versus estimates of $.14 DIS traded as high as $43 in after hours up from a close of $40.75.

The retail sector was mixed with apparel retailers taking it on the chin as results showed that consumers were buying less clothes but more hard goods. Blame it on the weather, the Fed or the market down turn, many did, but whatever the reason the sector was a black eye on the market.

The IPO calendar rumbled forward with nine issues coming to market today. Only 5 of 9 finished higher with Screaming Media being one of the high profile issues that did poorly. SCRM dropped -1.50 to close at $10.50. If you look at an intraday chart on SCRM you can see someone, probably the firm that brought them to market, setting a solid bottom at $10.50 all afternoon. With out that bottom it could have been really ugly with the low for the day under $10. With the barely better than breakeven winners and losers for today, promoters may think twice before pricing some of the weaker issues for next week without a soaring market.

The Dow, suffering from the Motorola news, traded down substantially at the open but quickly rebounded and moved up slowly the rest of the day UNTIL THE NASDAQ STARTED TO RALLY! Once the Nasdaq broke 3700 the flight out of the old economy stocks began. Fair weather investors fled the blue chips in favor of the Nasdaq once the tech rally appeared to have legs. The gold star definitely went to the Nasdaq. The gap down to 3521 was exactly what traders wanted to see. Actually they wanted to see if 3500 would hold and if money would come off the sidelines. Considering the nonfarm payrolls are Friday morning this was a gutsy move. The last several months have produced a rally on the announcement and I am sure this was part of the incentive to buy the dip as strongly as they did.

I said it was a gutsy move based on the surge in Factory Orders this morning. The report showed a +5.5% jump in June which was the biggest advance in nine years since July 1991. This was led by a +42.2% increase in orders for aircraft and other transportation products. Do you think maybe there was an increase in jobs to produce those orders? The Factory Orders report was tamed by a lag in retail sales in what has been a disappointing summer for retailers. The key here of course is the view that the Fed may not raise rates again in August. If the nonfarm payrolls comes in stronger than expected, +68,000, then the market could start adding 2+2 with stronger GDP, factory orders, durable goods, the biggest increase since 1991 as well and jobs, etc and start factoring in another rate hike two weeks from now. The PPI/CPI reports start next week as well and will provide the last real solid info for Greenspan.

Still this was an amazing rally today. The strong bounce off support at 3500 could, and I repeat "could", be the bottom of the July/August correction. Money is waiting on the sidelines with an eye toward a fall rally and at 3500 the risks are perceived as very light. The millionaire question that will stump all the analysts tonight is "can the market hold these gains?" Remember there is still the contingent out there that is calling for a Nasdaq 3200 before September. Somebody, of course, is always wrong and provides the wall of worry for the market bulls to climb. I personally stated that I would be a buyer at the 3500 level and I stand behind that. If this is a bear trap rally then it is one of the best I have ever seen. I like the sideways action since the 28th with the blowoff capitulation today. Call me a sucker but if we get a decent jobs number on Friday I think we may have seen the bottom. From the intraday high of 4289 on July 17th to the low of 3521 today was a -768 point drop of -18%. To those of you who took my warnings in early July, when everyone else was yelling summer rally, congratulations. But before you jump back on the bandwagon with both feet I should caution you that the Nasdaq has not broken the prior weeks resistance at 3750. Yes, it closed 9 points over but that is a technicality. A good jobs report could catapult it significantly upward and break the 3750 jinx but just be aware. Secondly, the VIX is back down at 22.79 and may give the OEX traders a headache. Just like when everything looked bleak last Sunday we said it is always "darkest before the dawn." Things look "too good to be true" for the Nasdaq at this point. Let's just hope that saying doesn't come to pass also.

The Orlando seminar is sold out. Due to strong demand we have changed the Detroit seminar Aug-28th to a full three day advanced seminar instead of the two day that was scheduled.

Good luck and sell too soon.

Jim Brown

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