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Market Wrap

Election limbo, earnings hell!

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       WE 11-10         WE 11-03         WE 10-27         WE 10-20
DOW    10602.95 -215.00 10817.95 +227.33 10590.62 +364.03  + 34.41
Nasdaq  3028.99 -422.59  3451.58 +173.22  3278.36 -204.78  +166.37
S&P-100  719.11 - 32.59   751.70 + 25.52   726.18 - 11.98  +  9.15
S&P-500 1365.98 - 60.71  1426.69 + 47.11  1379.58 - 17.35  + 22.76
W5000  12688.80 -694.10 13382.90 +522.30 12860.60 -196.80  +253.90
RUT      480.90 - 26.85   507.75 + 27.90   479.85 -  7.60  +  7.06
TRAN    2704.22 - 57.53  2761.75 +232.78  2528.97 + 59.90  + 38.89
VIX       32.50 +  6.19    26.31 -  3.84    30.15 +  2.73  -  3.56
Put/Call    .83              .57              .59              .50

Chomp, chomp. That is the sound of me eating my words from last night. While my prediction came true it appears that it was only a minor victory in a major war. We may have dodged the CSCO bullet only to step on an election landmine. The smoke cleared just in time for us to be flattened by the aftershocks from the Dell earnings warning. Just another fun week in the markets as we absorbed a -422 point Nasdaq drop. Yes, there was support at 3100 but sellers finally over powered buyers after several attempts to rally and the fear of weekend darkness drove the index to the low of the day. Dead on support from the October 18th low and only +2 points above the low for the year. The bad news is the negative sentiment resulting from the Dell aftershocks. The charts are not pretty and could get worse.

Where do I start? Yes, the election is still in the news and the ultimate reason for the sell off at the close but the main culprit is still Dell. By guiding growth estimates lower AND saying that they see PC demand slowing they sent ripples through the sector that looked more like shock waves. There were multiple downgrades Friday morning with the worst going all the way to neutral which is a polite way of saying "sell" in analyst speak. Dell has fallen -54% YTD and closed the day at $23, down -$10 from Tuesday's high. Dell's estimate of +20% growth is not that bad except for their astronomical growth in the past. This is the same problem analysts had feared from CSCO on Monday. CSCO came through, Dell did not. The between the lines comments from Dell sent almost every sector that even remotely touches the PC business into free fall. They indicated that margins would be falling as competition heated up for a smaller market. What a mouth full! Why not just say Michael Dell is going to work moonlighting for somebody else because Dell will lose money soon and needs more capital?

A price war may be good for consumers but it is terrible for stock investors. Component prices are already about as low as they can go with packing and shipping sometimes more than the price of the component. Unfortunately the PC makers will be unable to profit from this trend now that the PC itself is becoming a commodity and box makers have no pricing power. Once demand slows to far less than capacity the profits evaporate. Remember just two years ago there was a shortage of components and top line computers were on allocation and price did not matter? That bubble has now burst and the major players are undoubtedly in fear of the months ahead.

Intel was a major recipient of the bad sentiment. With demand slowing the need for chips will slow and with Pentium III chips available in quantity the P4 may not soar off into the record books. Intel dropped more than -10% to $37 and Morgan Stanley downgraded them to neutral. Intel may be suffering from the death of 1000 cuts. They have many products, great profits and great expectations BUT every time a broker, analyst, reporter or talking head says something about slowing PC demand or slowing economy they endure the equivalent another paper cut. After today investors feel the Intel era may be fading. Remember as little as six years ago very few people had a home PC and the Internet was something you heard about on TV. Granted the Internet era is far from over and it is not likely to go the way of the CB radio but as evidenced by the bursting advertising bubble and Internet incubator stocks like CMGI heading toward penny stock status, times are changing.

The major chip, computer, networking, software and Internet stocks fell steeply and the bad news is they could continue falling. Gateway, which deals mostly with consumers in the U.S. and has few business sales, dropped -6.50 to a 52 week low of $39.75. Compaq, with a large business sales effort, only dropped -1.41 and was seen as finally gaining ground against Dell after years of fierce competition. Several analysts said they felt Dell was failing in the enterprise server area with major competition from CPQ and SUNW. Somebody forgot to tell SUNW investors as the stock dropped -8.38 to a four month low of $89.25. This is confusing since SUNW has been posting stronger sales and should also benefit from the IBM announcement today. IBM announced they can not make large scale systems fast enough to meet demand and the stock dropped -6.44 to 93.31. There appears to be computing demand for big business and the right vendor.

The PC sector was not the only sector under pressure. JPM warned that Target and Wal-Mart have a tough quarter in front of them and their margins will come under pressure from competition. TGT fell only -1.44 to $26 but WMT got hammered for almost a -$10 loss in the last two days. The problem here is the slowing economy and the growth of the niche players like Abercrombie & Fitch (ANF).

With all the bad news in the markets at least I can report that the election crisis is over. Well, maybe by next Sunday I can report that but not today. If it is possible it is getting worse. In case you do not have a TV, radio or newspaper subscription the votes in Florida seem to have stabilized at +327 for Bush. However there are now multiple counties (democratic) which are going to do a hand recount of millions of ballots. Sounds like fun to me. Any volunteers? Add to this the fact that New Mexico has moved back into the "too close too call" category and Oregon now has gone into the Gore column AND so on and so on and so on. The absentee ballots from Florida do not have to be received until next Friday to still be valid. We will be faced with more hours of TV sound bites over the next week than anyone should have to endure. Both sides have claimed the majority of absentee ballots will be in their favor. In theory we will not know the final result in Florida until 5:PM on Friday the 17th. This means an entire week of even more market uncertainty.

In reality I think this recount rule may be a good thing. If you don't like the results of something just demand a recount until the results come out the way you want. In that vein I hereby demand a recount of the market from Friday. I think it should have stopped at 3100 and I should not have been stopped out of my trades. Anyone else that feels that way should sign our investor rights petition. We are thinking about suing the market makers, class action of course, and injuncting them from lowering prices more than $.25 in any trading day. Our constitutional rights to profit have been infringed. Oops! Sorry, I guess real life doesn't work that way. I paid my money and took my chances and was proven wrong yet again. I am sure I am the only one that ever has that happen. I am thinking about creating a new indicator, the Jim Brown Contrarian Indicator. You know the one. I will put my trades up on the website in real time and you will know which stocks to short and which ones to buy based on me doing the opposite. You can see a prime example of capitulation in BRCM today. The low of $156 at 11:45 on Friday was exactly when I closed my naked put position for a loss. BRCM ran for +20 immediately afterwards. Enough sour grapes from me because I am sure you have plenty of your own.

Next week should be real exciting. That I can guarantee. That is about all I can guarantee about next week. I keep hearing bearish targets of 2850 give or take a hundred points for the Nasdaq. Based on what? We are only -40 points below where we were on November 8th last year. We are only +2 points over the low for the year. As I said last night, this election event has not happened before and nobody knows what the eventual impact will be. If you are looking at the purely technical indicators you will either be scared to death of borrowing money to invest next week depending on your bias on the market. If you are bullish you are looking at the May low of 3042 and the October low of 3026 and screaming retest, retest! If you are bearish you are looking at the same data and screaming "look out below." Funny how your bias will color your interpretation of "purely technical" indicators. If you have been reading our newsletter for long you know we are news and event players. Technical indicators can be pointing entirely in one direction but if we have a news event which is coloring the picture then we try to consider that in our recommendations. Thursday this was just an election event. Friday it became an earnings event. One only wonders what Monday will bring. Rumors are surfacing that OPEC is going to cut back on oil again soon. The Fed meets on Wednesday this week. If the market does not like uncertainty then we are in for trouble. Still greed is alive and well and tech stocks are starting to look really cheap once again. After a news filled weekend we are very likely to see them even cheaper. When do the commercial traders finally cover their extreme short positions Austin has been writing about? 2900, 2800, 2700? When does extreme oversold become too much for buyers to bear? Soon we hope.

Does -422 points in one week guarantee an oversold bounce? No, but the odds are good we are very close. When things look their worst it is time to buy. Ask any long time investor. It takes guts to jump in the gap but there are billions of dollars on the sidelines that will be put to work soon. With the Nasdaq over -900 points below its 200 DMA there are some really good deals. With the purely technical groupies by the bushel calling for 2850 next week it should not take much in the way of news over the weekend to make it a self fulfilling prophecy. With 2850 the target we will have dropped -2300 points or -44% from the high of the year. Once we break 3026 on the downside we will start another entirely new series of technical problems. That will be a lower low and confirm the longer term down trend which started back in March. Can it get any blacker? Sure. Will it? I doubt it. Are we going back to 1000? Not hardly. What should we do? I am sitting on the sidelines licking my wounds from today and deciding what stocks I want to buy next week. I am still bullish. It is like those analysts that put a strong buy on some stock at $100 with a target of $150. The stock drops to $75 and they maintain a strong buy. $50, $40, $30, $20, and they drop it to a neutral. If the business did not change between $100 and $20 and you liked it at $100 then you should love it at $20. I liked BRCM at $260, at $160 I love it. If you liked CIEN at $150 you should love it at $85. JNPR $240 or $170. Before you fall into the trap of "if it was good at $300 then $100 should be a great deal" you should consider CMGI $325 to $15, ICGE $212 to $10. Cheap is not always good but if you do your research and pick some good stocks over the next couple days you could be well rewarded before November is over.

Next week is going to be financial quicksand. There will be strong volatility. The VIX closed Friday at 32.50 and the put/call ratio at .83. Both signs of near market bottoms. The VIX has only been this high eight times this year. I can't tell you what to do but my wounds will heal by Monday and I will be ready to lock and load. Art Cashin said today something I thought was very simple yet profound. "Buyers have the luxury of time, Sellers have the urgency of losing money." As buyers, and you should all be buyers after being stopped out today, we have the luxury of waiting until the absolute darkest moment before executing that trade. Those who have better sense and don't have to try and buy the absolute bottom can wait even longer for post election result daylight and clarity of thought before opening that new trade. Trust me, we are not going up +2300 points next week. You will have plenty of time when the Fall rally begins. Who knows, we could get a market stabilizing rate cut from the Fed meeting on Wednesday. Now where are those Band-Aids?

Trade smart, don't buy too soon.

Jim Brown
Editor

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