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Market Wrap

Nasdaq +1.89, we should be thankful for small favors!

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        WE 1-19          WE 1-13           WE 1-5         WE 12-29
DOW    10587.59 + 62.21 10525.38 -136.63 10662.01 -124.84  +151.29
Nasdaq  2770.38 +143.88  2626.50 +218.85  2407.65 - 62.87  - 46.50
S&P-100  705.23 + 17.35   687.88 +  6.17   681.71 -  4.74  +  2.22
S&P-500 1342.55 + 24.00  1318.55 + 20.20  1298.35 - 21.93  + 14.33
W5000  12383.90 +202.60 12181.30 +308.80 11872.50 -294.50  +185.50
RUT      488.09 +  2.34   485.75 + 22.61   463.14 - 20.39  + 20.54
TRAN    2953.29 - 48.69  3001.98 -112.01  3113.99 +167.39  + 96.67
VIX       26.29 -  1.33    27.62 -  4.41    32.03 +  1.80  -  1.29
Put/Call    .48              .60              .63              .67

It was not much, +1.89, but after opening up +73 points and being dragged down by a -115 point Dow at its worst levels, we should be happy with any positive finish. The profit taking came back with a vengeance on the Nasdaq and declines beat advancers on both major indexes. We expected it but we did not expect the wholesale shorting of large blocks by hedge funds at the open. Obviously there were some large investors who believed in the possible return of the mid-January dip. The Nasdaq opened at 2841 and promptly dropped -89 points as the flood of selling overwhelmed the optimistic buyers. The Dow never recovered but bargain hunting slowly pushed the Nasdaq back over 2800 but traders clearing the deck before the weekend knocked -40 points off in the last hour of trading.

Microsoft (Nasdaq:MSFT) gained +5.50 after their upside earnings guidance on Thursday. This helped offset the -$4 loss by SunMicro. Nasdaq:SUNW got hit on Friday morning by a number of downgrades which impacted the stock price substantially. The SUNW COO on CNBC was amazed by the drop. With growth by SUNW of 44% for this year he felt that they were apologizing for ONLY +44% growth and said "if +44% is not good enough, what is?" I agree with him and would look at any further drop in price as a buying opportunity for long term investors. With a PE of 44 it may not be the cheapest stock on the Nasdaq but it looks like a real bargain compared to BRCD at 370. If you are feeling gutsy the Jan-2003-$50 Leap calls are only $7.25 today! That gives SUNW two years to make it to $100, split 2:1 and get back to $100 again. Maybe that is too optimistic but you get the idea. On Jan-13th 1999, two years ago SUNW was trading under $11, split adjusted, and it also traded over $64 in the last six months. SUNW traded over 130 million shares.

Critical Path (Nasdaq:CPTH) was the black sheep Friday. After the CEO said just last month that earnings were on track they announced last night a loss of -$.16 instead of a penny earnings as expected. The stock dropped from a high of almost $26 on Thursday to a low of $8.56 on Friday. It is not nice to fool investors and if the CEO owned many shares I am sure he learned a costly lesson. If researchers find a trail of insider trading in the last month it could well be a VERY costly lesson.

The DOW got hit before the open with an earnings warning by Home Depot. Nyse:HD used excuse #47, the slowing economy stupid, for a drop in earnings for last quarter. They also looked into their crystal ball and said they don't see any improvement until the third or fourth quarter going forward. HD lost -$3.25 and closed near the low of the day. Other major Dow losers included Nyse:WMT -2.25, Nyse:MMM -2.25, Nyse:KO -1.31, Nyse:AA -1.75.

In the back from the dead category, Nasdaq:YHOO closed Friday up +40% from last weeks Thursday open of $24.12. Closing Friday at $33.94 YHOO has gained +$9.28 after warning that advertising revenue would slow. It is now almost +$4 over its close before the earnings report that made public what everybody already knew. Nasdaq:CMGI headed back towards penny stock territory Friday after warning that they were not going to hit previous financial targets. The conference call was so negative I am surprised they did not drop to $2 instead of their $5.69 closing price. They said they had enough cash to get them to profitability although they did not know how long that would take. ??? With $1 billion currently in the bank and an estimated $600-$700 million balance at 2001 year end (their estimate) it would have to be sometime in the next three years. They are closing units and laying off employees left and right in order to lessen their dependence on Internet advertising. The low for the year is $3.63, last week, and the high for the year $163.

The volume was very heavy for a day that ended very close to unchanged again. I mentioned this last week that heavy volume and no movement was a problem. With 2.6 billion shares traded on the Nasdaq it is obvious that the battle between sellers and buyers is far from decided. The declines beat advancers on both the Dow and Nasdaq but the new highs continue to beat new lows by about 7:1. If I had to pick an indicator to determine internal market health, new highs and new lows would rank high on the list. On both exchanges combined there were 345 new highs and only 48 new lows. The NYSE, even though it was down -90 the ratio was 119:9 highs to lows. The last time there were more new lows than highs was back on December 29th! New lows have been under 100 since January 10th. To put this in perspective new lows were 1694 and 1522 on Dec-20/21st. This was the bottom on the Dow of 10300 and 2288 on the Nasdaq. The 48 new lows on Friday was the lowest number of new lows on one day since October.

The Nasdaq has finally broken above the 50DMA at 2740 and has now put together two 3-day winning streaks and the first two week winning streak since August. Can you see I am grasping at straws here? I am trying to paint as positive a picture as I can, bear with me! According to analysts there is still a pile of cash on the sidelines approaching 7% of all available funds. Many fund managers have been vocal about missing the rally and as many as 40% are still waiting for that last pull back to buy. There is that January dip theory again. The excuse was heard several times that they just wanted to make sure Clinton did not pull a last minute executive order out of his hat before passing power to Mr. Bush. Come on guys, you have got to come up with a better excuse than that! According to John Lloyd, Merrill Lynch mutual funds analyst, fund managers are sitting on more than $660 BILLION in cash, the biggest hoard since the mid 1990's. If they decide to put that to work THE RALLY WILL HAVE LEGS!

Next week is where the rubber meets the road. Earnings have been coming in better than expected by the headliners although First Call says the total of all reported companies is running about -2% less than expected. That is the equivalent of an A- in my book! So now investors are going to have to decide if they want to invest or sit on cash for the next nine months. Because many investors move to the sidelines in April anyway and sit out over the summer months, that only leaves three months before the vacation starts. My guess is they are already in withdrawal and want to put that cash to work, especially with the Fed rate cut expected Jan-31st. OOPS! Does anybody else worry about a Nasdaq rally before the Fed meeting possibly leading to only a -.25% cut instead of the hoped for -.50% cut? That worry is making the rounds among the fund managers as well. Still, I doubt that will cause any of them to withhold purchases next week should the market give them another chance to buy under 2700.

I went through the after hours trades of a couple dozen stocks and all but one closed higher in after hours than in regular trading. That is encouraging for a Friday. The +519 point Nasdaq gain from the Jan-3rd low of 2251 is holding. Friday would have been a good day for serious profit taking but even the massive short selling by hedge funds at the open could not cause the Nasdaq to sell off. Even the -100 point Dow could not push the Nasdaq into positive territory at the close. This does not mean we will not have a dip next week. It just means that bullish sentiment is very strong and tech buyers are meeting sellers head on and not flinching. The longer we hold over 2700 the better chance we have a making a run to 3000. The only major economic report next week is the Employment Cost Index on Thursday and that is going to be pivotal in the Fed's decision the following Wednesday. That makes Monday direction day. If the Nasdaq can hold 2700 then the next leg up should begin. If we break and close under 2700 then traders will start worrying again. If this happens keep your eyes on the new highs and new lows. As long as the ratios stay the same and new lows stay under 100 then it is a buying opportunity. If new lows start to climb then shift to puts or sit out until the next rebound. Sounds simple, over 2700, party on. Under 2700 watch the internals for negative clues and check this column on Monday for direction.

Let's hope the markets react the next eight years like they have the last eight. With the inauguration on Saturday the news has been full of presidential comparisons. When Clinton took office the Dow was only 3255. That is a 7,334 point gain in eight years. The Nasdaq was 696 and gained 2,074 points to Friday's close. Obviously significantly down from the 4,436 gain as of March 10th of this year but still a nice gain. To put the +2,074 point gain in perspective however, that is only an average of +259 points per year. Heck, we do 259 points on almost any good week now. So, yes the gains were great but if we can get the same percentage growth over the next eight years the Nasdaq will be well over 11,000. The Dow increased +225% from 3255 to 10589. The same percentage increase over the next eight years puts us well over 34,000. Am I starting to sound like Harry Dent? I am not forecasting it, just extrapolating numbers. I am sure we would all be really happy to see it come to pass! Now how much are those DJX leaps again? The DEC-02 140-call (14000) for $4.00 is looking really good if we could just be sure of the same percentages repeating again!

Trade smart, enter passively, exit aggressively!

Jim Brown
Editor

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