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Market Wrap

If Bad News Is Priced In, What Do We Do With Good News?

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        04-17-2001        High      Low     Volume Advance/Decline
DJIA    10216.70 + 58.10 10219.40 10075.50 1.11 bln   1859/1163	
NASDAQ   1923.10 + 13.60  1941.57  1869.34 1.90 bln   2068/1723
S&P 100   611.53 +  5.54   612.36   599.89   totals   3927/2886
S&P 500  1191.53 + 11.85  1192.25  1168.90           57.6%/42.4%
RUS 2000  455.58 +  4.68   455.60   449.42 
DJ TRANS 2758.07 + 21.03  2758.07  2724.00 
VIX        30.24 +  0.20    31.68    30.13
Put/Call Ratio      0.82

Cisco muddied the water yesterday yet the markets shook it off and rallied in front of dozens of potentially troublesome earnings today. Surprise, the earnings today were mostly positive with several actually saying they saw sales increasing! Now what are we supposed to do with good news? It has been so long I forgot! The rally by CSCO, yes rally off session lows to close down only -.55, had the bulls cheering for techs and calling bottoms all day. The bad news was obviously priced in thanks to John Chambers talking down estimates and the economy for the last three months. The magnitude of the CSCO warning was stronger than expected but investors shook it off and CSCO was actually trading positive for the day in after hours at $17.50!

What a difference a day makes. The earth shaking announcement by CSCO yesterday was met with a -37 point drop in the Nasdaq at the open and then a +66 point bounce. Investor sentiment has definitely changed. Watching after hours trading on Tuesday brought back memories of better times in the past. The most common comment was "at least now we know how bad it is." Duh! Just call it a reason to buy and be done with it! Investors did buy with INTC gaining almost +3 and RFMD over +3.

The biggest earnings announcements today were of course led by INTC which beat the street by a penny at $.16 cents. Before you start jumping up and down that was half of their previous estimates. Intel warned not once but twice this quarter and the sixteen cents was far less than the 31 cents earned last quarter. They did say they were standing by the commitment to spend $7.5 billion for research and capital equipment. This was encouraging since it expressed their confidence in the economy going forward. Pentium Four processor sales were very weak with only 800K sold instead of the two million previously estimated. They also said it was hard to forecast sales going forward but next quarter is expected to be about the same as this one.

Chip stocks were given an injection of hope today after CSCO said they were writing off most of their current inventory as obsolete and moving on to the next generation of equipment. Stocks like AMCC, which is a big supplier to CSCO, rallied on the hopes of renewed orders for new chips.

RF Micro Devices, RFMD, posted earnings that showed a drop of -35% compared with the year ago quarter and -31% from last quarter. However the company noted improved visibility going into the next quarter with orders already booked to provide a +20% sequential revenue growth for next quarter. This "improved visibility" was like a bottle of cold Gatorade at the end of a grueling race. You just can't get enough! Investors cheered every stock reporting positive earnings after the RFMD announcement.

ONIS beat the street by a penny and saw revenues increasing! VRTS beat by a penny, RNWK met estimates, RATL beat by a penny, MO by a penny and the other chips winner...TXN beat estimates by two cents!

Economic reports today included the CPI which came in at +0.1% as expected on a -2.1% drop in energy prices. Industrial Production rose +0.4% in March which was significantly above expectations of -0.2% The biggest gain was a +0.9% jump in business equipment. Manufacturing also rose for the first time since September. All indicators point to a rebound off the bottom for the economy. The Fed is still likely to cut rates but not as aggressively as indicated in the past. There are still rumors of an inter-meeting cut but without a dire economic event I suspect the next cut will be at the May meeting.

The markets appear to be cheering this recent turn of events. Bad news is priced in and good news is surprising to the upside. What a concept. The challenge here is the historical end of April drop in the markets as well as resistance at 10300/1975 respectively. Because the markets are so oversold long term the odds of a repeat of the April 2000 sell off are slim. However there is strong resistance above us which we will have to penetrate with volume in order to make a convincing run.

The rest of the week still contains some very big earnings reports. IBM, AOL, AAPL, BRCM, ITWO, TLAB on Wednesday, MSFT, EMC, EMLX, GTW, NT, PMCS, SUNW on Thursday. There are over 100 other companies also reporting this week. What goes up can just as easily come down. The The S&P futures spiked to +18 after the close and assuming Asia rallies overnight represents a huge spike at tomorrow's open. Fund managers who have been patiently waiting for confirmation could start buying stocks tomorrow if volume appears. The futures spike is most likely based on shorts, who were expecting gloom and doom earnings reports, trying to cover before stocks explode and profits evaporate before their eyes.

As traders we do not want to chase stocks at the open. Once earnings are out and ALL the skeletons have been revealed there will be plenty of time to buy. The opening spike could provide some windfall profits for traders who guessed right last week and those same traders may take those profits when the euphoria is over. The Dow needs to close and hold over 10300 for confirmation and the Nasdaq must close and hold over 2000 on strong volume. Strong volume is 2.8-3.0 billion shares not 2.2-2.4 as reported on CNBC. Volume provides conviction, conviction promotes buying which promotes more volume. We should be thankful for good news and also continue to look carefully at every "gift" the market provides us.

Enter VERY passively, exit VERY aggressively!

Jim Brown

Update for seminar attendees: The Naked Put stock hit a low of just over $27 today and I came real close to pulling the trigger again but with earnings tomorrow I held back. I am still short the one contract left over from last week and will add to it when appropriate. CSCO is looking very good for this strategy with the Jan-03 $50 puts having an open interest of almost 10,000 and over 4500 volume today.

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