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Market Wrap

Wow! Can We Repeat Friday At Least Once A Week?

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        WE 9-22          WE 9-15           WE 9-8           WE 9-1
DOW    10847.37 - 79.63 10927.00 -293.65 11220.65 - 18.13  + 46.15
NASDAQ  3803.76 - 31.47  3835.23 -143.18  3978.41 -255.92  +191.65
S&P-100  774.08 - 15.69   789.77 - 23.13   812.90 - 16.93  +  6.28
S&P-500 1448.72 - 17.09  1465.81 - 28.69  1494.50 - 26.27  + 14.31
W5000  13678.20 -135.50 13813.70 -236.50 14050.20 -279.70  +238.70
RUT      518.82 - 12.06   530.88 -  4.82   535.70 -  6.21  + 16.80
TRAN    2597.14 - 74.32  2671.46 - 61.32  2732.78 + 19.86  - 77.25
VIX       24.17 +  2.24    21.93 +  1.24    20.69 +  1.24  +   .35
Put/Call    .56              .65              .52              .53

Just another Fall Friday? Not hardly! Futures lock limit down, media pundits calling for an end to civilization as we know it and bulls huddling together for protection from the bears. This was BEFORE the open. After the opening minutes, with record volume delaying the opening of hundreds of stocks, the market reverberated with shock waves of capitulation selling. When the smoke cleared and floor traders and market makers came out from hiding they were greeted by buyers. Waves of buyers. Bargain hunters galore. The NASDAQ hit -214 at the open but never looked back. The second dip came at 10:00 as the index bounced off 3700 but just minutes later the day traders phoned home for more money to take advantage of the bargains and the NASDAQ rallied over 3700 and held. Considering the Dow was not having the same rebound as the NASDAQ this was good news. It was not until almost noon that the Dow shook off the -13 point Intel driven slump and charged ahead. Once the Dow took off the NASDAQ buyers opened the gates and the stampede began. The rebound off 3700 was strong and caught all the market naysayers off guard. Even noted bear Barton Biggs was amazed at the strength of the rebound in the face of Intel's news.

So what happened to "black Friday?" There were several factors and all combined together to bring traders off the sidelines and back into the fray. First, a surprise G7 central bank intervention to bolster the falling Euro. Do you think Greenspan called in a favor to head off a market disaster? Would not surprise me at all. In a move aimed at halting a brewing global recession, most of the G7, participated in the intervention. While experts are split on the effectiveness of this type of move the markets took this as a sign that things would be better soon. Dow consumer multinationals like MCD, KO, BA, PG and JNJ rallied on the news. Financials firmed and C, JPM and GE helped power the Dow to positive ground.

Second, almost every major tech company came out with affirmation of profit targets on track. HWP, TXN, EMC, DELL, CPQ all said they were on track in Europe and sales were fine. HWP said they were on track to hit their +15% growth estimates and announced a $1 billion stock buy back. Bullish buy backs in times of trouble never hurt and have been known to reverse bear markets. IBM has done it in the face of certain market crashes and helped stabilize the moment. HWP soared +9.19 from the after hours low of $94 for +45 Dow points. National Semi. (NSM) also announced an 8 million share buyback. Compaq said their worldwide momentum was continuing and Europe was on track. This circling of the wagons by the major tech stocks led analysts and investors alike to believe that the problem was with Intel and not the PC market.

Third, President Clinton decided to release 30 million barrels of oil from the U.S. strategic stockpile. Is this an election year? For whatever the reason the announcement knocked over -$1.40 off the price of oil and added fuel to the rally. Higher oil was depressing economies worldwide with over 1300 bankruptcies of trucking firms in the U.S. and over 35,000 owner operators have turned in their keys. The situation was becoming grim with $50 oil now being mentioned. 30 million barrels of the 570 million in the stockpile is only a drop in the bucket considering the 600 million the U.S. consumes each month but to investors but it must be the thought that counts. Intervention in the Euro, intervention in oil prices and a joint declaration of solidarity by the major tech stocks all led investors to jump back into the market. There is a possible fall rally in the future and everyone thought this would be a good entry point.

Intel captured a first place record today. No, not the biggest one day drop ever but the most shares traded on one day. Over 308 million shares were traded and the -13 drop removed over -$88 billion in market cap. The top three largest companies are now GE, CSCO, MSFT with Intel falling into fourth place. The previous daily volume record holders were JDSU 200 million, Comparator 180 million and ORCL 171 million. Intel has moved so far into the lead that they are not likely to lose the top spot anytime soon. The problems for Intel are only just beginning. Credibility with analysts has taken a serious setback. Just two weeks ago when Ashok Kumar announced his downgrade Intel went on record with analysts that the third quarter was on track. It is unthinkable that they did not know at that time that trouble was brewing. Just like it is not nice to fool Mother Nature it is very fool hardy to lie to analysts. If they will misrepresent the facts to investors about something so simple as increased expenses and weak European sales then what other more serious problems might they have that no one has tripped over yet. Some possibles would include design flaws in P4, memory interface problems or exaggerated performance claims of the new products not yet delivered. Once you open the Pandora's box of questions some will not return unanswered and those answers could cause even more problems for Intel investors. The PE for Intel dropped a whopping 11 points (-20%) on Friday from 53 to 42 and if any other problems come to light it could drop even further. Analysts were speculating privately that the drop in the NASDAQ over the last two weeks was what prompted Intel to warn. Recently they have been pumping up their earnings by selling stock they own in other companies. With the NASDAQ off -500 points from the September highs they may have elected to hold off on those sales until better times or they were not able to generate as much profit from those sales as in the past. We will not know the answer until Intel posts earnings in October.

The rush of analysts to the spotlight to brag on the market rebound is almost scary. When even Barton Biggs speaks glowing words about the NASDAQ and the coming rally it is enough to make you sell short. Barton Biggs bullish has got to be a contrarian indicator. Al Goldman at AG Edwards put it in pure English. "The correction is over, investors will spend the weekend deciding where they want to put their money and next week should be the start of the Fall rally." Pretty far out on the limb there Al! Actually he is in good company. About the only market spokesman I did not hear Friday was Ralph Acompora. The fix is in if you believe stocks follow money. AMG Data said today that the week ended Sept 20th had the largest inflow of cash into growth funds in the last 14 weeks. Over $7.6 billion in new cash was deposited and over $16 billion was moved from money market funds into equity funds. This $20+ billion moving into stock funds through Wednesday should have been put to work Friday. The rebound was incredible and the very short time we spent at the 3614 bottom Friday should be seen as a preview of things to come.

With the very successful retest of the August 3rd lows under very negative conditions today it is hard to imagine a sell off any time soon. The Dow, which could have really fallen with the tech leaders INTC, MSFT, HWP, CPQ all losing multiple dollars, did not even get close to the 10567 low from Wednesday. The low from Friday of 10621 is not likely to be seen again soon. The volume on both indexes was huge with the NASDAQ posting 2.1 billion shares and the NYSE almost 1.2 billion. Strong recoveries on strong volume are always a welcome sign. Given that most traders will see Friday as a bottom and mutual funds putting all their cash to work before the end of the quarter next Friday we could have a pretty good week. The key word here is "could."

The knee jerk rebounds like we saw Friday catch the shorts by surprise and everybody runs for cover. You have to imagine that anyone short at the open on Friday was celebrating all night Thursday night and when the market started rebounding from the opening bell they ran to place their orders to cover. This only accelerated the rebound causing an age old short squeeze. Just look at some of the huge gains. GLW +27, BRCD +20, HGSI +20, EXTR +19, ARBA +16, JNPR +15. JNPR was rolling over on Thursday and ARBA has flat lined for two weeks. There was no positive trend and no indication of pending $20 moves. Companies that could have benefited from all the positive earnings press like SUNW only gained +1.56. Other NASDAQ big caps which should have joined the party but didn't included CSCO -.81, Dell -2, MSFT -.94. If the rally was so strong why didn't CSCO bounce off its support at $60 for a huge run? I am betting on a short squeeze as the primary mover. Whatever the reason we will take a trading day like Friday every week. Just let us know a day in advance please!

We do not care what lit the fire under this rocket we only care about how far it will fly. The positive impact of the cash moving into position for an expected October rally and the quarter end window dressing by the mutual funds should help us maintain positive momentum next week. With no major economic reports next week other than the GDP traders will have one eye focused on the rear view mirror at the 3600 retest and the other on the road ahead looking out for the next earnings warning. The readers poll yesterday picked IBM almost 2:1 as the next warning target. IBM has huge exposure to Europe and they have been struggling with earnings for some time. They have been aggressively buying back stock to increase their EPS and many analysts fear they will miss estimates. We don't know if IBM will be the next one to confess but you can be sure there are more to come. I wonder who had planned to warn on Friday afternoon but held off because of the market reaction to Intel? We will know next week. If the GDP report confirms the slowing economy then the Fed should be done for the rest of the year and traders would have just one more reason to celebrate.

The NASDAQ recovered +189 of the -214 point drop at the open and the Dow rebounded +229 points off its lows. Triple digit rebounds on both major indexes, does that bring back memories of last year? The VIX soared to 27 briefly before falling back to neutral at 24. The Dow closed over its 200 dma and back above the ascending support dating back to March. At 3800 the NASDAQ is back above ascending support dating back to May. If you had scripted the rebound you would have been hard pressed to wish for numbers this good. The second dip came just as expected and 3700 acted as an intraday floor just like we wanted. It does not get any better than this. That may be the problem. This was too easy, too perfect. The big intraday moves from the capitulation selling at the open to the big spikes at the close were $10, $20, $30 on some stocks and if the rally stalls on Monday or Tuesday the profit taking will come immediately. Strong momentum moves go a long way to convince traders the rally is for real but any slowing and stalling will bring back the paranoia in spades. 3900 is still the real confirming number we must reach. Any failure before then will bring the October bears back in force. One new challenge to the market next week will be the huge slate of 22 IPOs. These will soak up plenty of the cash that is currently flowing into the general market. September is not the month I would choose to IPO and I am sure there were many Maalox moments on Thursday night after the Intel warning. With every analyst on the street calling for a rally this week there seems to be nothing left to do but go long. But do you remember the last time this happened? Right, the week before Labor Day and everyone was lined up on the same side of the boat shouting rally. Lets hope this week works out better than that disaster. The key is still earnings warnings. If there are no big cap confessions this week then we might get out of September alive. Should IBM or MSFT feel the need to clear their conscience then things could get a little choppy! The Intel problem may remain a cloud over the market for another week as investors have a little more time to think about it. Keep those life preservers handy until we dock.

Trade smart, sell too soon.

Jim Brown

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