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Bears Losing Their Resolve?

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        04-25-2001        High      Low     Volume Advance/Decline
DJIA    10625.20 +170.90 10639.20 10444.10 1.17 bln   2069/993 	
NASDAQ   2059.81 + 43.20  2066.97  2000.83 1.97 bln   2374/1513
S&P 100   635.59 +  9.85   637.55   624.68   totals   4443/2506
S&P 500  1228.75 + 19.28  1232.36  1207.38           63.9%/36.1%
RUS 2000  472.74 + 10.39   472.75   461.99 
DJ TRANS 2761.96 -  2.68  2781.97  2733.93 
VIX        31.27 -  1.19    33.41    31.02
Put/Call Ratio      0.58

Bears Losing Their Resolve?

If you walked away from the markets in disgust after the lunch hour today, you were in for a shock when you saw the closing numbers. All the major indices were stuck in a narrow range for the first 4 hours of the day, but the bulls must have eaten their Wheaties for lunch judging by the ensuing buying frenzy.

After the nip and tuck battle between the bulls and bears this morning, a buy program went into effect at about 1:20pm ET, quickly lifting the DJIA through intraday resistance near 10525. That's when the real buyers started to show up, extending the rally throughout most of the afternoon. By the closing bell the DJIA managed to post a gain of +170, ending the day at 10625, once again above the critical 200-dma. Volume was solid on the NYSE, coming in at 1.37 billion shares, increasing in the afternoon session. Internals were encouraging too, with advancers solidly beating decliners by a 2 to 1 ratio.

Bringing Tuesday's decline to an abrupt end, we had housing numbers for the month of March out at 10am ET, and bulls took solace in the surprisingly strong numbers. New Home Sales were expected to show a decline due to the weakening economy actually surged to a record high of 1.02 million in March. Proving it wasn't a fluke, Existing Home Sales showed a corresponding surge, rising 4.8% in March to 5.44 million.

The effect could be clearly seen in housing related stocks, as Home Depot (NYSE:HD) edged higher by $1.00 to once again flirt with its 200-dma. More good news in the sector came from home-builder Centex Corp. (NYSE:CTX) when they posted earnings this morning. Blowing away the $1.45 estimates with actual results of $1.73 per share, the company followed it up by projecting 2002 earnings to be significantly above current estimates.

Even Durable Goods Orders showed an unexpected rise before the open this morning, with a 3% increase versus the expected rise of 0.5%. The numbers were skewed to the upside by the Transportation sector as Boeing (NYSE:BA) led the charge here with orders for 38 aircraft, the largest gain since November. Ex transports, orders fell 1.8%, with the decline continuing to be led by the electronics sector, followed by metals and machinery. The important measure for the report is that the "core" component, made up of non-defense capital goods, minus aircraft, fell 0.7%. This is the 5th decline in the last 6 months. Economic recovery? Nope, not yet.

Tobacco stocks were on the move again today, primarily motivated by two factors. The Washington Post reported this morning that the Justice Department may soon drop its lawsuit against the tobacco industry owing to reports that the Bush administration has not allocated nearly enough funds to continue this costly legal battle. Coupled with that, the sector was lifted by some positive press from Credit Suisse First Boston, pointing to a possible near term price increase on cigarettes by industry heavyweight Phillip Morris (NYSE:MO). The entire sector rallied on the news, and by the closing bell MO had tacked on a respectable $2.75 gain. Sure enough, the company confirmed just before the close that they are raising wholesale prices by about 14 cents per pack.

So what happened in our beloved Technology sector? UBS Warburg was out this morning, downgrading the Telecom Equipment stocks. All of the big boys, Ciena (NASDAQ:CIEN), Cisco Systems (NASDAQ:CSCO), Juniper Networks (NASDAQ:JNPR), Nortel Networks (NYSE:NT), ADC Telecom (NASDAQ:ADCT) were downgraded from Buy to Hold. While the firm sees little downside from here, they can't justify Buy ratings in a poor telecom capital spending environment.

Despite negative news and earnings continuing to come out of the Technology sector, the NASDAQ managed to shake off its blues in the afternoon session, posting it's best performance since last Thursday. After once again testing the 2000 support level, buyers took their cue from the DJIA and rallied to close at 2059. Consistent with the price action, volume was respectable at 1.94 billion shares, and a 2 to 1 advance decline ratio here too.

Big gainers in Technology included the Biotechs, Internet Stocks and Semiconductors, all of which had been leading the profit taking earlier in the week. Lifting the Biotechs were the likes of Abgenix (NASDAQ:ABGX) with much narrower than expected losses last night and Genzyme General (NASDAQ:GENZ), announcing a 2-for-1 stock split to cap off their recent run to new all time highs. This helped the AMEX Biotechnology Index to post a 5.24% gain. Of course that good fortune could change tomorrow, as Affymetrix (NASDAQ:AFFX) disappointed the street after the close tonight, posting a wider than expected loss and guiding estimates downward.

It was impressive that the Chip stocks could shake off yesterday's dismal earnings report from Applied Micro Circuits (NASDAQ:AMCC) to launch the Philadelphia Semiconductor index (SOX.X) to a gain of more than 3%. Big gainers in the sector included Micron Technology (NYSE:MU) +2.68, Novellus Systems (NASDAQ:NVLS) +2.48, KLA-Tencor (NASDAQ:KLAC) +2.27 and Xilinx (NASDAQ:XLNX) +2.12.

Once again, we had a slew of earnings out after the close. There were notable disappointments to be sure. Chief among them were Qualcomm (NASDAQ:QCOM) and New Focus (NASDAQ:NUFO). While QCOM met estimates, they followed it up by revising guidance downwards and then stating their "hope" that they would see an improvement in 2002. Investors didn't buy it, smacking the stock down for more than an $8 loss in the extended session. NUFO missed expectations by 2 cents and was similarly punished, losing more than $2 or 13% in the after hours session.

Looking at the broader earnings picture, it is actually rather encouraging to see the results that are coming in. Of the 150 companies announcing results today, the vast majority have either met or exceeded estimates, with only 27 missing estimates. While this looks good on the surface, we need to keep in mind that most of these estimates have been revised sharply lower in advance of the actual report. But investors seem to be pleased with what they are seeing from the current batch of earnings, and don't seem very worried about the future. Bulls rejoice! Well, maybe...

The economic calendar is fairly light for the remainder of the week, with the Employment Cost Index (ECI), due out tomorrow before the open. Estimates are for a gain of 1.1%, and it is unlikely to have a significant impact on the broader markets. Then on Friday, we get the revised Michigan Sentiment for April. The preliminary report 2 weeks ago indicates consumer sentiment is still falling and we should get confirmation of that on Friday.

Where do we go from here? Honestly, I don't know. My bias is still to the downside over the near-term, but as you can see from the above charts, the bulls are stubbornly defending the upward trend that began in early April, despite a series of earnings disappointments. They know the Fed is in hyperactive rate cutting mode, and with the consensus on CNBC being that the "bottom" is in, they are increasingly willing to buy. Throw in the fact that the bears are not selling every rally, and you can see the bulls getting confident again.

Keep in mind that historically, the markets weaken after April earnings, and our next gift from the Fed is still 3 weeks away. We still haven't finished filling the gaps from last week. The NASDAQ needs to fill the gap down to 1925 and the DJIA really needs to fill the post-rate cut gap down to 10,350 before we will be clear to really run to the upside. Play the long side, as long as it lasts, but be ready to scoop up your profits and step aside if the bears rumble back into town.

Determine your exit strategy before opening that trade!

Mark Phillips
Research Analyst

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