Option Investor
Market Wrap

Positive earnings surprises power Nasdaq +373 points in seven days!

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          01-18-2001        High      Low     Volume Advance/Decline
DJIA    10678.30 + 94.00 10737.20 10567.50 1.37 bln   1626/1283
NASDAQ   2768.49 + 85.71  2769.98  2661.26 2.55 bln   2185/1747
S&P 100   704.00 + 12.02   707.19   691.58   totals   3811/3030
S&P 500  1347.97 + 18.50  1352.71  1327.41           55.7%/44.3%
RUS 2000  494.63 +  1.17   494.75   490.02
DJ TRANS 3046.00 - 16.49  3068.11  3031.96 
VIX        27.09 -  1.42    28.77    26.61
Put/Call Ratio      0.59

Please don't anybody jinx this rally! All we need now is for Ralph Acompora to come out and predict Nasdaq 5000 by March and you can kiss your gains goodbye! After only a brief dip at the open the Nasdaq and the Dow powered forward in tandem to post strong gains as earnings continue to please investors. The fact that the Dow and Nasdaq were both positive on the same day is a minor miracle. Still, with no negative earnings surprises in the tech world, the Nasdaq finally broke several resistance levels to close at 2769. This close over 2700 and a close over yesterday's intraday high confirms for most traders that the rally has legs.

About the only negative news item today was a warning from CAT that all of 2001 would be down as much as -10% from 2000 levels. Analysts had been expecting a gain from last year but the catch all excuse of slowing global economy was blamed for the shortfall. UK also warned that it would have a loss of -$.70 for last quarter which would be reported on Jan-29th.

Earnings after the bell cemented the positive sentiment beginning with MSFT. Microsoft posted earnings inline with reduced estimates of $.47 and traders bid the stock up +$3 to $58.88 in after hours action. The conference call was very positive and they left the guidance for the full year at present levels which means they expect a bounce in next quarter to make up for the current dip.

SUNW also announced earnings inline with estimates of $.16 even though the revenue was slightly less than expected at $5.12 bil. SUNW does not have long term maintenance and support contracts like IBM so the recurring income is not as strong. SUNW has to sell from scratch to meet its targets each quarter. The SUNW CEO said current market conditions would separate the leaders from the followers. They grew sales by +32% and forecast the next quarter to be flat to slightly up but the next quarter would see a return to +30% to +35% growth. SUNW traded on both sides of positive in after hours on strong volume. The CEO said sales were strong across the board and they were gaining market share.

EBAY also announced earnings and beat the street by two cents with $.09. EBAY also raised analyst guidance going forward and posted much stronger revenue numbers as well. EBAY was up another +$4 in after hours. EBAY also just raised rates for some items sold on their site which will favorably impact the next quarter. Revenue was up +390% over last year.

Nortel announced inline at $.26 and revenue of $8.82 billion which was stronger than expected. The forecast was positive and the CEO John Roth said full year growth rates were expected to be in the +30% range. He said that if the Fed continued cutting rates, capital markets would open back up for the telecom sector and results would increase. He said optical networking (Internet) sales more than doubled last years numbers.

EMLX also rocked the street with $.25 earnings compared to the $.18 cents analysts expected. They also raised their guidance for the next quarter to $.23 from $.19. EMLX gained +11 in after hours trading.

AOL/TWX announced a $5 billion stock buyback over the next two years. Are we cash flush as a result of the merger? Sure looks like it and you can bet investors will like that outlook compared to other net companies burning cash at record rates.

The semiconductor index shook off the bad mouthing by Dan Niles and soared another +48 to close at 726, a three month high. The SOX has now gained +36% since the low on December-21st. Investors appear to be looking two to three quarters out and buying chip stocks with abandon. MU soared +13% or +5.19 on short covering and heavy institutional buying.

IBM gained a whopping +11.63 for the day after their earnings surprise. This provided a strong foundation for the DOW even after the warning from CAT. Other leaders were HWP +3 and INTC +1.69. A surprise gainer was AMD, which missed estimates by two cents yesterday, but gained +4.19 or almost +23%.

Shares of VIGN took a tumble on a profit warning. Shares dropped from Thursday's close of $12.63 to less than $7.00 but rallied back slightly by the after hours close to $8.25.

The Philadelphia Fed Index for January fell to a -36.8 from the previous month's -4.2. This is the lowest level since 1990 and the biggest drop since 1968. The severity of the drop has analysts expecting a 36.9 reading for the next NAPM report. Anything below 42.4 is considered a recession.

Volume was good on both the major indexes. With 1.4 billion on the NYSE and 2.5 billion on the Nasdaq the gains took on more significance. The last several days of heavy volume and no major movement on the Nasdaq was starting to worry those with a cautious bias. The strong volume and strong gains today have confirmed the advance.

With the Nasdaq up five of the last seven sessions for over +373 points there is serious momentum building. Shorts are probably hoping for one last dip to cover but with each day stronger than the last their outlook must be grim. Remember that historically there is a dip that begins over the next two trading days and add the possibility of profit taking from the +373 points and you have bears pinning their hopes on Friday. The problem is who wants to sell? With investors worried the train is going to leave without them there may not be much of a dip on profit taking. Each day of positive earnings underscores the future outlook. The Reg-FD impact is now clear. As we speculated several times in the last month companies over warned to avoid stockholder suits and we are now seeing many upside surprises. The chicken littles had their day over the last month and now they have to pay as each earnings report proves the sky is not falling.

Trim Tabs reported that margin debt at all NYSE member firms dropped $20.4 billion to $198.7 billion at the end of December. Margin debt is down -31.8% from its peak at the end of March 2000. Historically, Trim Tabs said margin debt drops faster than the market at market bottoms. In fact, margin debt is down -13.1% since the end of 1999 and more than the -8.2% drop in overall market capitalization.

Friday has no significant economic reports with only the International Trade numbers and the Michigan Sentiment. It is option expiration Friday and we are likely to see a bounce at the open from the flood of positive earnings reports tonight. Remember, there may be profit taking as traders clear the books before the weekend to avoid any unpleasant weekend surprises. I am holding Jan calls and plan on selling into any morning spike and then opening new Feb positions if the opportunity presents itself later in the day. With the big gains from the last week I would like to see a strong dip on profit taking in the afternoon to take that problem off our radar for Monday. I would much rather go into Monday on a dip recovery than suffering from lingering overhead profit resistance. We should still be watching for the possibility of the mid-January dip. It may be a no show but we are better looking for something that does not happen than being blindsided by something we don't expect.

We have set the date for the spring Expo Seminar, April 5th-9th in Denver. Spring skiing will be at its best! Details will be in the Sunday Newsletter.

Enter passively, Exit aggressively!

Jim Brown

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