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Market Wrap

Hello 3000!

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        12-11-2000        High      Low     Volume Advance/Decline
DJIA    10725.80 + 12.90 10792.20 10670.10 1.21 bln   1671/1180
NASDAQ   3015.10 + 97.67  3028.75  2901.48 2.45 bln   2312/1674
S&P 100   733.97 - 14.84   739.71   725.55   totals   3983/2854
S&P 500  1380.20 +  0.62  1389.05  1364.14           58.3%/41.7%
RUS 2000  487.23 +  8.16   487.23   477.92
DJ TRANS 2938.37 + 58.42  2939.89  2860.91 
VIX        26.51 +  0.38    27.00    25.75
Put/Call Ratio      N/A

Hello 3000!

For the first time since mid-November the NASDAQ Composite traded above the 3000 level. The increased likelihood of election resolution and, more importantly, the fact the Fed is expected to soon begin easing its hawkish interest rate policy combined to lift all major market averages for the second consecutive session. And because of the two aforementioned items, the NASDAQ's pop above the 3000 resistance level today may be just the beginning of a strong rally.

Three high-profile market pundits publicly stated Monday morning that the major market averages should enjoy a big rally into the end of the year, and beyond. In a research note to Credit Suisse First Boston's clients, Tom Galvin wrote of the high probability of the Fed lowering interest rates to prevent a recession and achieve the soft landing that the market desperately wants and needs. UBS Warburg's Ed Kerschner declared that the recent oversold conditions in the market have given investors "one of the five most attractive opportunities of the past 20 years." The third, and final pundit to opine this morning was the recently converted bear from Morgan Stanley Dean Witter known as Barton Biggs. Just last month, Mr. Biggs was predicting a hard landing in the U.S. economy and continued weakness in the major market averages. However, Mr. Biggs converted his long-running bearish stance last week and reaffirmed his beliefs this morning by calling tech stocks "extremely oversold." Biggs told his clients at MSDW to expect a 10% rally in the Dow and S&P, and possibly a move back to the 3500 level for the NASDAQ by year's end.

As we enter into the new year, we have the major Wall Street pundits on our side, and more importantly, the Fed is now on our team. The sentiment has definitely shifted to the bulls favor and the bears are running out of ammunition. And although it seems more and more likely we'll finally get our year-end rally, it doesn't mean we can throw caution to the wind. In order to take advantage of any forthcoming rallies, it will be key to remain disciplined and practice sound money management. There will be plenty of opportunities to profit from the long-side in the coming weeks, but any operation in the stock market should be approached with defined risk parameters, which means cutting losses. And equally important is to let profits run.

After breaking back above the key 3000 level this afternoon, the NASDAQ Composite (COMPX) will now face resistance near the 3045 level, and 3100 soon thereafter. The 3100 resistance level may prove to be a major pivotal point for the COMPX as it marks the index's descending trend-line which was established in early September and reaffirmed in early November. When looking to enter new long positions, it may be prudent to monitor the action in the COMPX as it approaches its near-term resistance levels and its descending trend-line. There's no doubt that major market technicians will be monitoring the COMPX's behavior around the 3100 level, and we may see a burst of buying accompany a breakout above that level. On the other hand, institutional investors may have a large supply of stock sitting near that level and might be looking to sell. Either way, it may be helpful to watch how the COMPX acts at 3100 in the coming days.

Along with the COMPX's behavior around 3100, it may also be useful to watch how the NASDAQ-100 (NDX.X) behaves around the 3000 level. Many traders and market technicians feel the 3000 level for the NDX.X is both psychologically and technically significant - more so than 3000 for the COMPX. If the NASDAQ is going to take a rest before rallying into the end of the year, it may do so with the NDX.X at 3000. The fact is the NDX.X has rallied by over 20% since hitting bottom around 2450 in late November and a little profit taking may be in order - it feels so good to be able to write 'profit taking.' However, a resolution to the election may throw any potential for profit taking out the window. Nonetheless, keep an eye on the NDX.X as it negotiates the 3000 level.

There were a few notable announcements and warnings after the market closed that are worth mentioning. Intel-rival, Advanced Micro Devices, warned of lower-than-expected profits due to a slowdown in consumer spending on PCs. How many times have we heard that? The AMD warning wasn't a real big surprise given the fact Intel warned last week. And like Intel, AMD actually traded higher on the news in the after hours session. The warning will probably not have a major impact on the chip sector Tuesday, but traders should be cognizant of the news.

After Yahoo received a downgrade due to a slowdown in online advertising this morning, Double Click confirmed the soft ad market with an earnings warning this evening. The online advertiser said it was seeing softer ad spending and lowered its guidance for the fourth-quarter. And you guessed it, the stock added $1 in the after hours session.

As crazy as it sounds, the recent earnings warnings in the tech sector by the likes of Intel, and the above mentioned AMD and DCLK, are actually healthy for the overall group. Wall Street is gaining better visibility on future earnings through the recent warnings and a lot of uncertainty has been removed. The clearer the earnings picture the better.

And one earnings picture that hasn't been very clear over the past two trading sessions is that of Sun Microsystems. The company has been attacked by a professional short-seller and debated by analysts over the past two days. But after the market close, Sun's CFO, Michael Lehman, issued a press release in defense of the company's stock. Lehman said the rumors of Sun's bad accounting, which were raised by a bear last week, were false. Shares of Sun have lost over 20% since last Friday, and may be due for a rebound as the rumors were refuted by the company's CFO. The stock gained $2 above its 4:00 EST closing price in the after hours session.

The 10% rally in the NASDAQ last week was a breath of fresh air to traders and investors alike. With the earnings picture becoming more clear every day, and the Fed waiting in the shadows to lower interest rates, we may see a few more weeks with double digit gains before this year is over. There is still a lot of cash on the sidelines sitting in money managers' pockets just waiting to be put to work. Add to that capital all the foreign money that has left the market while the whole election mess has played out. It's highly likely that some of the foreign capital worked its way back into the U.S. equities market last week, but I think there is still some international investor money sitting out. As soon as we get resolution in Florida, that money will quickly move back into the markets and boost stock prices further. At time of writing, there was not yet any news from the U.S. Supreme Court. Obviously that news will influence trading tomorrow and may help the NASDAQ break above the key resistance levels I mentioned above.

Remain disciplined and trade smart!

Eric Utley
Assistant Editor

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