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Market Wrap

Is That A Rally About To Breakout?

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        01-23-2001        High      Low     Volume Advance/Decline
DJIA    10649.80 + 71.57 10679.10 10553.80 1.22 bln   1973/ 861
NASDAQ   2840.39 + 82.48  2845.39  2736.28 2.28 bln   2393/1456
S&P 100   712.04 +  8.87   713.45   700.39   totals   4366/2317
S&P 500  1360.40 + 17.50  1362.90  1339.63           65.3%/34.7%
RUS 2000  502.06 + 11.91   502.07   490.08
DJ TRANS 3002.00 + 32.15  3003.91  2960.23 
VIX        23.86 -  2.08    26.37    23.77
Put/Call Ratio      0.60

After an opening dip caused by weak earnings reports on Monday night the markets rallied on various reports and upgrades by late morning. The volume was light but the bullish sentiment is building. Dell warned yesterday and was up +.88 today. Stocks are rising on bad news and that is a sure sign of a bottom. Advances beat declines by more than a 2:1 ratio and new highs are beating new lows 7:1. The expected pull back on profit taking from the +500 point gain over the last two weeks was wimpy at best. The barely negative showing on Monday was severely trounced by the strong gains today. Buyers are coming off the sidelines and there are no sellers. Up volume on all markets today was 2.55 billion and down volume only 914 million, almost a 3:1 margin.

The dip at the open, driven mostly by the Dell, TXN and AXP warnings, was jumped on by buyers anxious to put money to work before the coming Fed meeting. We will not know if it was the right decision until after the speech by Greenspan on Thursday. The fact that buyers came into the market after three serious warnings is nothing short of bullish. Earnings remain center stage but if investors have decided to ignore the bad news then any good news should power us higher.

The earnings parade continued today with some outstanding winners. Compaq, who had already warned, beat the reduced estimates by two cents. They did say they were going to take a charge of $1.8 billion which was mostly due to the decline in their investment in CMGI. CPQ gained +$3 in after hours after affirming full year guidance of +20% to +25%. They did say the next quarter would be difficult but expected a recovery for the next two quarters.

BRCM also announced earnings that beat the street by a penny and the CEO said this was their best quarter ever. With revenues at $1.1 billion they raised their guidance for analysts and estimated better than +100% growth for 2001. Even though that sounds great it is actually a decrease from their historical +30% per quarter growth but we all know bigger is slower. BRCM was up +9 in after hours at $141 and a long way from the $122.63 intraday low. That would have been a great entry point for an aggressive naked put!

Another fallen angel that announced today was EMC. After trading at -50% off their yearly high on worries about slowing sales, EMC announced profits that beat the street by two cents on revenue that soared by +40%. Profits grew by +50% in the same period. The company said rising software sales was creating a strong demand for storage devices and this was their strongest fourth quarter ever. The CEO said there was simply no slowdown in sight and business was booming. The stock had been plagued lately with persistent rumors they would miss earnings and traded as low as $53 this month. EMC closed at $79.56 today.

SEBL also announced earnings that beat the street by a nickel and jumped about +10% in after hours. SEBL posted $.20 which beat estimates of $.15 by a nickel on revenue that more than doubled. Earnings of $106 million far outstripped the $39 mil earned last year in the same quarter. SEBL was up over +$8 in after hours to $85.94.

QLGC announced earnings that beat the street by two cents and LRCX beat estimates by a nickel. There were no major earnings disappointments today and that helped the bullish sentiment and drove the markets higher. AXP, which warned yesterday, was upgraded today by Merrill Lynch and gained +1.50. Dell warned and gained +.88. Investors are ignoring the bad news with the idea that the Fed is going to cut rates, the economy will soar and 201Ks will turn back into 401Ks again. Is that storm clouds I see in our future?

The generally accepted concept is that the Fed will cut rates another -.50% next Wednesday. This event is quickly being priced into the market. The problem is the likelihood that it will not occur as expected. The Fed tends to telegraph its intentions far in advance of the actual event. I know there was no advance warning on the -.50% cut several weeks ago but that was a political event not an economic event.

The problem I see is the over whelming positive sentiment from the Fed members. Seven Fed officials have recently dismissed fears of recession and are preaching calming words about an economic rebound soon. Michael Moskow, president of the Chicago Fed, said recently that job growth was strong and the economy was not heading into a recession. Echoing that same sentiment was Anthony Santomero, president of the Philadelphia Fed, and Cathy Minehan, president of the Boston Fed, both of which see moderate but positive growth for the economy in 2001. Robert McTeer, president of the Dallas Fed, expressed doubt that the economy would shrink and Jack Guynn, president of the Atlanta Fed said the low unemployment rate would act as a safety net for consumer confidence. Probably the most vocal opponent is William Poole, president of the St Louis Fed who said that growth prospects remain excellent.

Now here is the scenario as I see it. Greenspan has a chance to talk to the markets during his testimony to the Senate Budget Committee on Thursday. Investors were worried that Alan saw something coming in the economy that no one else saw when he cut rates by 50 basis points. Inquiring minds want to know what it was. While I maintain it was the Bush tax cut proposal he took aim at, he may use this event as an opportunity to answer those questions. The Fed normally has a blackout period of one week before a FOMC meeting. Still, Greenspan is likely to take the center stage spotlight this Thursday and either try and fix the misguided worry about the unseen monster under the bed OR make another political statement about a dangerous (his words) tax cut. In either case I expect Greenspan to say something that will cool the market, not heat it up. If the rest of the Fed is talking down a recession then it is unlikely that they will cut by 50 basis points. If the last cut was political then even more reason not to rush into another 50 point cut.

The problem with all of this stems from the assumed 50 basis point cut already being priced into the market. While a cut of 25 basis points would be good long term it would produce a "buy the rumor, sell the news" drop. Perish the thought that the almost +600 point Nasdaq rally from the January lows would cause the Fed to think the market was heating up too fast and not cut rates at all! That would be a disaster. My guess is a 25 point cut to keep the pressure on Bush to justify the tax cut and to take pressure off the economy.

My point to all of this is Greenspan has rocked the markets both ways by hundreds of points many times in the past. Just remember back to the "irrational exuberance" speech and the disaster that followed. Any time Greenspan is in the spotlight we should have our hands in our pockets protecting our meager bankrolls until the danger is passed. I would strongly suggest you protect yourself against a possible verbal bomb on Thursday. It has happened several times in the past and will happen again as long as Greenspan is in power. With the Nasdaq up +25% from its January lows, it would not be unthinkable that Greenspan would want to "talk" the market back into a more gradual assent. With the VIX at 23.86 and at three month lows we should already have our finger on the sell trigger. Were you thinking about buying or selling tomorrow? Should you reconsider?

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Enter passively, exit aggressively!

Jim Brown

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