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Market Wrap

Everyone Take A Deep Breath

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       WE 10-27         WE 10-20         WE 10-13          WE 10-6
DOW    10590.62	+364.03	10226.59 + 34.41 10192.18 -404.36  - 54.38 
Nasdaq 	3278.36	-204.78	 3483.14 +166.37  3316.77 - 44.27  -311.78  
S&P-100  726.18 - 11.98	  738.16 +  9.15   729.01 - 21.96  -  8.86  
S&P-500 1379.58 - 17.35	 1396.93 + 22.76  1374.17 - 34.82  - 27.52 
W5000  12860.60	-196.80	13057.40 +253.90 12803.50 -338.60  -471.30 
RUT      479.85 -  7.60	  487.45 +  7.06   480.39 - 10.63  - 30.35  
TRAN   	2528.97 + 59.90	 2469.07 + 38.89  2430.18 -113.47  + 22.01 
VIX    	  30.15 +  2.73	   27.42 -  3.56    30.98 +  5.31  +  1.82 
Put/Call     .59	     .50              .76              .75        

Everyone Take A Deep Breath

The week is finally over. And what a week it was. After CNBC convinced the world that the entire future of the NASDAQ was hinged upon one particular fiber-optic company's earnings, it's nice to just have the event in the past. All eyes were on JDSU and fortunately they didn't disappoint. So what should we make of Friday's market action? Well, putting in a bottom is a process, not an event, and Friday was just another trading day. Traders sorted through earnings and economic numbers as the INDU soared with strong confirmation and the NASDAQ just tried to stay in the green.

During the course of the week, the NASDAQ tested the 3520 area twice, establishing a double-top, and then went for a retest of the recent lows. The low this week: 3081. A higher low I might add. This will be an essential level going forward. I don't think anyone will complain if we never see 3081 again, but a break below this level in the near future will be reason for concern. When the NASDAQ hit this level on Thursday ahead of the JDSU earnings after the bell, it performed a miraculous rally that could only be orchestrated by...none other than Dick Arms. Yes, it must be true as Bob Pisani broke the news on CNBC. I actually got a chance to speak to Dick Arms, creator of the ARMS Index and the Equivolume model, this weekend at our Advanced Option Seminar in Denver. "So Mr. Arms, how did you create such a forceful rally?" He was a pleasure to speak with and he chuckled about the sensationalism of it all. What really happened was Mr. Arms advised some of his institutional clientele that his technical analysis said "buy," but not bet the farm. Well, Pisani got wind of that from one of the institutional clients, broke that story and bang! We got ourselves a 180 point rally! Amazing how information and the market work. More importantly, how investors filter information through their minds.

But that was Thursday. On Friday, the NASDAQ looked like it just might rally after JDSU's better-than-expected earnings, but it sold off throughout the morning. Yet, it did manage to mount an intraday uptrend before stumbling to the close. Even though the NASDAQ didn't rally hundreds of points on the comfort of JDSU, it did close up 6.18 points to 3276. In fact, a move like this is more welcomed since it indicates an element of consolidation. Especially considering volume was a robust 2 mln shares. Just another leg in the bottoming process. We are now almost out of the notorious month of October and the tax-loss selling that comes along with it. So that's positive number one. Positive number two is that we have, hopefully, endured the most difficult times of the bottoming process. Looking overhead, resistance near the 3520 area will be the breakout point where I'll back up the truck. Until then, we should still see volatile trading as investors determine which stocks will be given the honor of high valuations after this recent shakeout. How about CMTN at $10.75? The VIX.X closed the week at 30.15 as fear lingers in those option premiums.

The INDU had a very strong day on Friday with a 210 point gain, further extending its rebound from the sub-10000 levels. Friday's trading activity was a breakout from resistance around 10430, which continued to strengthen throughout the week. The next level of resistance will be 10600, previous support on the way down to 10000. It would be likely that the INDU retraces to test the breakout point of 10430. Leading the INDU was JPM(+12.81). Financials rallied after the GDP data released Friday morning pointed toward a cooling economy with a 2.7% annual growth rate for the 3rd quarter. This is the slowest pace since April 1999. It was expected that this headline number would be lower given that 3rd quarter earnings reports from S&P 500 companies have reflected a slowdown in revenues and profits. Yet, most economists expected a GDP growth rate in the range of 3% and 3.5%. Probably more important to the markets, and Greenspan, was the GDP Deflator. This key measure of inflation tied to the GDP rose at an annual rate of 2.2% in the 3rd quarter, versus 2.1% in the previous quarter. With clear signs of slower growth, it's unlikely that the Fed will move on interest rates at their upcoming November 15th meeting.

Helping the INDU was MSFT's breakout over $65. Finally coming back to life after better-than-expected earnings on the 18th, investors find themselves once again looking at the old favorite. Even in the face of a hacker attack on the software giant on Friday, MSFT climbed 5% to close at $67.69. While it is still unclear what intellectual property is at stake here, the company assured investors that the stolen codes are not related to the flagship Windows operating system, or the Office suite. Yet, security experts think that there may be more to this industrial espionage that MSFT isn't speaking about. Namely, the company's recently announced .Net software. Experts expect that any stolen source codes will either show up on the Internet or be sold off to the highest bidder, probably overseas. MSFT officials are still investigating how such a high-profile security breach could have happened.

Looking eagerly ahead to November, the economic calendar is full with Personal Consumption Expenditures(PCE) and Personal Income on Monday. Non-Farm Payrolls and the Unemployment numbers will follow on Thursday and Friday, respectively. Earnings are winding down next week, highlighted by PG on Tuesday and QCOM on Thursday. Once again, traders will be watching for 4th quarter guidance. Global concerns with the Euro continue to linger and traders will be watching to see the next move by the ECB. With the bottoming process in full swing, the NASDAQ will be in a volatile consolidating mode. If we take out Thursday's low of 3081, watch out. Otherwise, buying the dips can provide profitable opportunities as we have seen many high fliers bounce 30 or 40 points. It was nice meeting some of you this weekend at the Seminar and I wish you continued good luck.

Matt Russ

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