Option Investor
Market Wrap

Turnaround Tuesday!

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        05-01-2001        High      Low     Volume Advance/Decline
DJIA    10898.34 +163.30 10904.20 10731.40 1.17 bln   1872/1174	
NASDAQ   2168.24 + 52.00  2168.42  2088.61 1.92 bln   2365/1510
S&P 100   655.55 + 10.08   655.56   642.93   totals   4237/2684
S&P 500  1266.44 + 16.98  1266.47  1243.55           61.2%/38.8%
RUS 2000  490.47 +  5.15   490.48   482.79 
DJ TRANS 2814.63 - 12.41  2827.94  2798.37 
VIX        27.59 -  0.60    29.55    27.59
Put/Call Ratio      0.64

The rally, which pulled a brief disappearing act yesterday afternoon, came roaring back with a vengeance today with the Dow adding +160 and trading within two points of Monday's high. The Nasdaq actually beat yesterday's high by eight points and closed at the today's high. Advancers beat decliners on both exchanges and volume increased as the day came to a close.

Confidence in the market appears to be growing with each point gained. Portfolio managers are beginning to lose some of their skepticism and are beginning to put some money to work in the more speculative issues. The concept expressed today was basically expectations now reflect reality. The pie in the sky growth targets from last year have finally fallen to realistic levels as each company/sector have pretty much disclosed all their sins. There are still earnings warnings but the major players have already announced. Also rumblings from some chip companies have investors actually thinking positively again.

Manufacturing held its ground in April with a reading of 43.2% which was up only slightly from March.

This was the third month up in a row from the January low of 41.2%. Any number under 50 represents a contraction in manufacturing and the number today was actually under the consensus of 44%. Traders however cheered the 41.2% as evidence that the Fed may still be forced to cut rates by another -.50% at the May-15th meeting and at least one more cut after that. This may be wishful thinking by some since a rebounding stock market and a rebounding economy may force them to be more patient. Construction spending has risen for five months and while residential building has slowed business building is exploding. There may be a lot of "see throughs" in our future and with massive layoffs and downsizing in every newscast there may be a lot of excess inventory soon.

Proctor & Gamble rallied for over +4.00 as shorts covered after PG beat their earnings estimates on lower than expected revenue. Surprise! Many traders had been selling PG since its high of $77 back in February due to the softening economy. When PG surprised to the upside they were caught expecting a miss instead. PG is a Dow component and a major contributor to the index today.

Microsoft rallied to close over $70 for the first time since Nov 27th even after announcing news that the current Windows-2000 IIS-5.0 server software was very hacker friendly. They also announced a patch to fix the problem. They also announced alliances with several other companies including Citigroup. Citigroup will offer its "c2it" online money transfer system to users of the MSN network of Web services. This will allow users to send money by email. Microsoft is now struggling against resistance created last November when it was not able to break much over the $70 level.

Rambus was dealt a blow by a Federal judge today when he threw out all but three claims against Infineon Technologies. The judge also said he would hear arguments why he should not throw out all the claims. One of the claims was the "clearly knew" claim that would have produced the most damage. RMBS said IFX clearly knew and willfully violated their patents over the last seven years. By throwing out that claim the RMBS case is weaker but RMBS still says their case is strong and they will prevail. RMBS fell to a 52-week low of $15.70 on the news. The SOX initially sold off on this news to 640 but recovered strong to lead the Nasdaq higher at the close.

The news from IBM was also instrumental to the tech rally. IBM said it will team up with CSCO to jointly develop new, advanced networking systems. IBM beat out Intel on this project and also unveiled an entirely new series of networking chips and hardware and software tools for advanced communication and "customized" chips. BRCM and AMCC are also fighting for market share in this arena but IBM appears to be gaining the most ground. IBM networking chip sales tripled in the first quarter despite the economic downturn. IBM broke out of a period of consolidation following their outstanding earnings and gap up gains. This was the highest close for IBM since Sept-27th.

Dell was one of the few tech stocks that did not post gains and continued its two week decline. Rumors were floating that Dell would cut even more jobs to preserve profits amid falling computer prices. The price war is in full swing and profits for all the PC makers are shrinking fast. Dell is just the one on the bubble this week. The other PC makers, GTW, CPQ, HWP were either down or had minimal gains.

The biggest (old) news today was the $1.35 trillion tax cut approval. I will not go into the politics here but don't expect to get a windfall return anytime soon. I still believe it is a good thing and the current administration is calling it the most tax relief in a generation. It will be almost half a generation (11 years) before all this money actually gets cut from our taxes but it is a start. Add this tax cut to the current Fed rate cuts and we could see another boom over the next 18 months. That is good news to investors and as you can see by the markets preparing to test resistance again there is plenty of positive sentiment.

The Dow posted a strong +160 point day, mostly on the backs of IBM, PG and MSFT but then who is counting... The up trend line from April 4th is still intact and the dip yesterday came right back to the trend and bounced. This is very positive but we are only 106 points away from the magic 11000 level. As I reported last week the Dow has come within ten points of 11,000 eleven times since September of 2000 without closing over it. There is significant resistance there.

The S&P also closed right at resistance of 1266 where it failed yesterday. It appears poised to breakout and make a run for a new relative high. There are many analysts who are calling the current S&P formation a bullish head and shoulders and a breakout here could run over 1350 without any outside interference. We will see...

The Nasdaq is preparing to bump up against previous resistance at 2200 again and I think we have a good chance of breaking out. 2250 would be the next resistance level but if portfolio managers start playing with real money and not just trickling in a few bucks here and there, we could see a real rally any day. We are still heading into the summer doldrums and once the Fed excitement wears off we may struggle for future gains. With the FOMC meeting only nine sessions away there is still a good chance of a rally into the meeting and then a "sell the news" event even if they cut 50 basis points as expected. Only time will tell.

For those currently out of the market the risk/reward ratio appears skewed towards risk. With the markets up strongly many traders are concerned that stocks are too pricey already and are waiting for a pull back. The risk to them is possible profit taking soon. Others are afraid stocks will not pull back and their risk is lost potential instead of lost profits. Either way investors are only sure of one thing. Failure to participate in the eventual rally could be expensive. They are faced with biting the bullet and jumping in now or waiting another thousand points and doing the shoulda, woulda, coulda excuse thing. Anybody need a bullet?

Enter passively, exit aggressively!

Jim Brown

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