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Market Wrap

Was That a Real Rally I Saw?

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        04-10-2001        High      Low     Volume Advance/Decline
DJIA    10102.74 +257.59 10155.24  9849.57 1.35 bln   2098/992	
NASDAQ   1852.03 +106.32  1868.10  1771.68 2.20 bln   2759/1169
S&P 100   597.85 + 16.38   601.01   581.47  totals    4857/2161
S&P 500  1168.38 + 30.79  1173.92  1137.59           69.2%/30.8%
RUS 2000  451.84 + 10.17   452.44   441.67 
DJ TRANS 2791.65 + 74.67  2798.13  2718.50 
VIX        33.30 -  3.44    35.35    32.44
Put/Call Ratio      0.59

We will have to wait a week or so to see if it has legs but I will gladly take a +29, +402, -126, +54, +257 five day series. The +616 point gain off a serious oversold condition is very exciting but all the big earnings reports ahead of us also makes us very cautious. Most of the spike on Tuesday can be tracked to short covering after a failure of the markets to follow through on the Friday profit taking.

Outstanding if you were long! Very frustrating if you were short. I can just hear it now, "but why are they going up in front of obviously bad news?" Shorts were caught with their shorts down and gave back some of their gains from the huge market drop. There was a rumor during the day today that shorts were buying to close positions to pay their taxes. WOW!! What a concept! In past years it has always the longs which had to sell in April to raise cash for the tax man but if you think about it the shorts have profited considerably more than the longs in the last year. The fact that longs were profiting off the shorts today is kind of ironic.

A preview of future market moving news events came after the bell with Motorola being the first big name to miss estimates and post a larger than expected loss. MOT reported its first quarterly loss since 1985 and missed already lowered estimates by two cents. The CEO for Motorola used the "R" word to describe the economic outlook for the U.S. economy in general and technology companies in particular. Sales in their mobile phone segment dropped by -29% from the first quarter of last year. The company said sales were down all over the world with some areas down over -50%. Ouch! MOT fell over -$1 after the bell to $12.05.

The market move today was explained away by the talking heads as all the bad news being already priced into the market. The bond market reacted strongly to the market rally by selling off significantly. The asset allocation shift from bonds into stocks may be just surface money and not a real change in attitude. Other factors causing the sell off was the assumption that an inter-meeting rate cut was doomed. Fed member Poole said that the next meeting in May would be the right timing for another rate cut. A head fake by the Fed? Not likely. The Fed heads do telegraph their intentions as time passes and this was probably a scripted response after the big gains last Thursday to tell the markets to not expect any rate help soon. Give them the bad news during a rally instead of a sell off!

Changes In Attitude

The broader market averages advanced during Tuesday's session on what appeared to be a major shift in the dynamic of investor psychology. The market's ability to advance in the wake of two relatively noteworthy earnings disappointments yesterday morning signals, in my mind, a shift in market psychology.

Cypress Semiconductor (NYSE:CY) announced Tuesday morning that its revenues for the first quarter fell short of estimates by roughly 20 million. Albeit a small miss, Cypress fell short of estimates nonetheless. However, shares of the communications chip maker finished at 16.34, higher by 0.94 cents, or 6.1 percent.

In addition, Aetna (NYSE:AET), the Nation's largest health insurer, warned of substantially lower profits for its first quarter, due to increased costs. The company said it would not give guidance for fiscal 2001. Shares of Aetna shed 6.35, or 17.5 percent during Tuesday's session, finishing at 29.80.

Despite the two previous warnings, the market plowed forward on very impressive price action. The advance in terms of price Tuesday was similar to the initial rally attempt across the broader markets last Thursday. Although the volume on the Nasdaq was a bit on the light side I noticed several issues that advanced steadily throughout the session, which appeared to be under normal accumulation.

Last Thursday's rally in the market, and the follow-through Tuesday may have the shorts in the tech sector running scared. If the market can hold these gains for the final two trading days of this week then investors still sitting on the sidelines will start worrying about missing the train. Everybody agrees stocks are undervalued and nervous fingers are poised over mouse and phone buttons everywhere. They are doing the same thing the traders still short are doing tonight, trying to decide if the rally is for real.

The Nasdaq closed right under resistance from the end of March and about -125 points under serious resistance of 1975. Any rally from here will have to have some serious volume behind it in order to break through these levels. The Dow did manage to break out of the sub 10000 dungeon but the next level to test is strong resistance at 10300. This had been a floor for the Dow's trading range for about two years and support becomes resistance once broken.

Significant earnings events for this week are limited to YHOO and LRCX on Wednesday and RMBS on Thursday. Not much chance for an earnings explosion. Next week however is when the flood begins including IBM, INTC and MSFT as the leading tech giants which can influence market direction. As traders we would hate to miss the beginning of a market rally but do we really want to commit capital before a potentially rocky earnings week? Consider Motorola tonight. Multiple that by the over 150 companies that will announce next week. This creates a very rocky road full of potential landmines for the rally to traverse. However, this produces the kind of environment in which real bottoms are formed and real rallies appear. Since the downside for most stocks is limited the possibility for a positive reaction may outweigh the risk to the downside. It is a call that each individual investor may make and presents a very good case for scaling into positions. If the market is going to rally you will benefit and if it rolls over again your downside is limited. I would however be careful about jumping on rockets like CIEN after a +25% gain of $9.25 today. The urge to take profits after that kind of gain is huge.

Enter VERY passively, exit VERY aggressively!

Jim Brown

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