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Market Wrap

History returns with a roar!

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       WE 12-22         WE 12-15          WE 12-8         WE 12-01
DOW    10635.56 +200.60 10434.96 -277.95 10712.91 +339.37  - 96.69
Nasdaq  2517.02 -136.25  2653.27 -264.16  2917.43 +272.14  -259.09
S&P-100  684.23 -  5.25   689.48 - 37.58   727.06 + 31.07  - 15.17
S&P-500 1305.95 -  6.20  1312.15 - 57.74  1369.89 + 54.66  - 26.54
W5000  11981.50 -112.40 12093.90 -572.60 12666.50 +629.10  -316.20
RUT      462.99 +  4.96   458.03 - 21.04   479.07 + 22.23  - 15.03
TRAN    2849.93 +151.25  2698.68 -181.27  2879.95 +116.80  - 86.74
VIX       31.52 +   .32    31.20 +  5.07    26.13 -  5.46  +  2.01
Put/Call    .61              .94              .59              .61

With an explosion of good will and holiday euphoria the markets roared open at the bell and never looked back. On what is typically a low volume trading day the normally bullish sentiment returned with a vengeance. Santa Claus came early with a +176 point gain on the Nasdaq and +148 gain on the Dow. Almost nothing was spared the outpouring of investor Christmas money with many stocks gaining +20% to +30%. Is it the rally everyone has been waiting for or just a holiday aberration? Several factors will help us decipher this puzzle.

There was no material good news between Thursday's close at the low of the day and the gap open on Friday morning. There was still a flood of earnings warnings but no high flyers. Warning Friday was UAL, LZB, DNY, STTS, CRO, AVCT, CRN, GLK and MDS to name a few. You probably don't recognize most of those symbols and maybe that is the reason the market did not drop. Actually many of those stocks finished positive for the day!

Some of the news that prompted the strong market was positive talk by analysts on some of the biggest tech stocks. John Jones at Salomon Smith Barney came out on IBM saying the earnings warning worry was way over done. He feels they will make their quarter and called them the super star of the tech sector. IBM rallied off Thursday's 52-week low of $80 for a +7.44 gain and added +38 points to the Dow. Other major Dow movers included AA +3.06, CAT +1.88, XOM +2.06, HWP +2.81, IP +2.69 and MSFT +3.0. Notice anything about the big gainer list? AA, CAT, XOM, IP are not tech stocks. That means there was not a total sell out in favor of the Nasdaq. We should be encouraged about that. Investors in those stocks are normally longer term investors and that means breadth is alive and well. Other analysts made positive comments about SUNW, ORCl HWP and EMC which helped the promote the positive tech sentiment.

The Nasdaq was not without some real superstars with stocks that closed at the lows Thursday on heavy volume rocketing double digits on Friday. Check out these gains, JNPR +29, CHKP +25, QLGC +18, CIEN +17, BRCM +16, BRCD +16, EMLX +15, NTAP +14. Almost anything tech rallied back to recover yesterday's losses and then some. Did I miss some news item about a magic economic recovery? Did the Fed cut rates over night? Not to my knowledge. The miraculous gains were the combination of several factors. First the January effect is still alive and well. The outflow of cash from stock funds, -$9.5 billion this week alone from equity funds, will stop abruptly next week. Retirement funds, Christmas bonuses and gifts will begin flowing toward the markets. Funds that have been hoarding cash for year end redemption's will start to breath easier and put some of that cash to work with expectations of more to come.

Another factor was the end of tax selling. Not really but the biggest chunk anyway. Funds faced with skeleton work forces next week dumped stocks this week when it became apparent that the Santa Claus rally was not going to make an appearance. Most of the heavy volume on Thursday was funds cleaning house. With only five trading days left in the year time was running out.

The Nasdaq was also simply way oversold and the apparent final capitulation Thursday afternoon was the signal for bargain hunters to start shopping. You won't see anybody complaining today but let's look at the numbers. I said on Thursday night we would probably get a short covering rally on Friday and the shorts ran for cover after the opening gap failed to roll over as it has so many times in the past. We got the relief bounce, it held and the highly profitable shorts started covering with wild abandon. The spiking stocks drew buyers fearing a runaway which fueled the gains. You know it was short covering when stocks like JNPR gain +$29 in one day from a close of $89. That is a +31% gain. CIEN +29%, CHKP +22%, QLGC +29%, BRCM +21%, BRCD +24%. Do you think funds were throwing money at stocks up +25% for the day? Not hardly. The fear from the shorts was that the holiday history lesson would repeat itself next week as well with a continued rally and they just wanted to be flat before the close. One of the most spectacular performances was by SUNW which posted a +$5 gain or +18%. A new pick on Wednesday night at $27.44, SUNW gapped open and only briefly hesitated on the JDSU scare before closing at the high of the day. Good volume and a steady climb all day.

After the opening gap the Nasdaq ran up to 2500 and stopped dead for the rest of the morning. The midday dip you will see on the chart was due to JDSU. DB Alex Brown made some negative comments to their sales force about JDSU and the possibility of a warning and the rally came really close to self-destructing. JDSU dropped from $48 to $37 on the news before a qualification took the sting out of the rumor. CIEN dropped from $77 to $67 in sympathy as well as drops in the other big caps also. It was the fear that every daytrader feels just when they get all their trades in place and profitable and suddenly the balloon bursts. Fortunately it turned into a buying dip and there were plenty of buyers ready to take a chance after seeing those same stocks run away from them at the open. Intel also failed to take part in the rally after Banc of America Securities and Wachovia Securities both expressed concern that Intel will miss its already lowered estimates.

Even with the +7.6% gain today the Nasdaq finished the week down -136 points, and -38% for the year. The two-day Dow rebound however added +200 points for the week. With the Nasdaq closing over 2500 analysts could not say enough good things about the future. The economic reports provided no smoking inflation gun with Personal income up +0.4% and Spending up +0.3%. Durable Goods rose +2.3% in November compared with a drop of -6.5% in October. No major surprises and the economy is still slowing. This seems to continue the feeling that the Fed will make an inter-meeting rate cut the second week of January. The Fed funds futures are slowly factoring in almost a 44% chance. Adding to the pressure on the Fed is the anemic earnings forecast for next year. First Call said that based on the current consensus estimates for the S&P 500 companies, earnings growth is expected to be up only +5.9% for the current quarter and +6% for the first and second quarter of 2001. Compared with the +24% growth rate from earlier this year that is a recession! Granted it is not negative growth but the impact to the economy will feel like a recession. This is what is prompting the analysts to expect a rate cut. The Nasdaq has priced in this earnings drought and is now prepared to rally on the expectation of better times ahead. The tech market tends to anticipate the results of rate cuts by two to three quarters in advance. This is all analyst speak and expectations can change faster than bids in a falling market. Let the Fed say anything next week that even remotely suggests they will wait for the next Fed meeting and storm clouds will instantly appear. The economic calendar next week is devoid of anything meaningful so there will be nothing material to take investors eyes off the market.

Next week should be exciting. Tuesday we will see if the rally has legs or it is just another one day wonder. The week is normally up but we went from seriously oversold to some absurd gains in only one day. The VIX is still hovering around 32 which considering the monster rally on Friday is disturbing. It means there is still a lot of uneasiness in the market. The -60 point drop in the Nasdaq on the JDSU rumor illustrates this point. The last major tax selling day is Tuesday with the last three days of the year reserved for window dressing portfolios for those year-end statements. With no economic reports to speak of, all eyes will be focused on the December Non-Farm Payroll Report the following Friday. This would be the trigger for an interim rate cut. Earnings challenges for next week should be slim, but the following week could be a killer. Historically 43% of the earnings warnings for the fourth quarter occur in January. The first week is normally when companies get their first look at the year-end books and decide to confess early and avoid the rush. Still, in spite of the clouds still on the horizon, the week after Christmas is historically up. If you are in the market then tighten up those stops. Expect some profit taking on those rockets from Friday. If you are on the sidelines then spend some time this weekend deciding what you are willing to pay for the stocks you want next week. Set some limit orders and hope for a profit taking dip to get a fill. If you sat by Friday in frustration as stocks ran away from you, be patient. You may get another chance. A JDSU warning next week or somebody similar and we could be right back where we started again.

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I would like to take this opportunity to wish everyone a very Merry Christmas. Take some time out from your investing pursuits and reflect on why you are doing it. Most of us will never benefit from the accounts we are building. The benefits will go to our families and that may be the best reward of all. We all need to remember who we are working for and if the truth be known those same family members would probably rather have us spend more quality time with them now instead of promises about later. Just a thought. The markets are closed for the holidays. That is not just a coincidence.

Trade smart, choose your entry points carefully!

Jim Brown

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