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Market Wrap

Pressure Is Building!

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        05-02-2001        High      Low     Volume Advance/Decline
DJIA    10876.70 - 21.60 10939.20 10802.60 1.33 bln   1557/1504	
NASDAQ   2220.60 + 52.36  2232.66  2175.13 2.58 bln   2424/1484
S&P 100   657.33 +  1.78   660.31   651.38   totals   3981/2988
S&P 500  1267.43 +  0.99  1272.93  1257.78           57.1%/42.9%
RUS 2000  491.64 +  1.17   492.38   487.26 
DJ TRANS 2868.31 + 53.68  2868.31  2810.39 
VIX        27.77 +  0.18    28.04    27.32
Put/Call Ratio      0.55

Pressure Is Building!

The Dow gave back only -21 points of the +160 gain on Tuesday and is slowly creeping up on the 11000 barrier. The S&P came to a dead stop right on upper resistance of 1266-67 again and failed to breakout. The Nasdaq penetrated 2200 and held after a brief sell off on the first attempt. This is all good news for traders expecting a breakout soon.

The jump start this morning was a report from Morgan Stanley that they saw a significant uptick in orders for networking products in North America. CSCO would be a major beneficiary of this uptick but they held off recommending them based on current PE levels. Still the networking sector took off with CSCO jumping +2.20 to close at $19.99 and a two month high. Add to the good news in the networking sector an announcement from the CEO of Brocade that they will meet or beat estimates and you have the fuel for a rally. BRCD makes data storage products and jumped for almost a +7 gain. RBAK gained +4.57 or a +23% gain.

That was the good news. The bad news came from the oil sector and the health care sector. Oil inventories increased by 8.3 million bbls last week and June crude oil futures fell -$1.14 to $27.80. Also, licensing agreements were announced Tuesday to allow two refiners to manufacture reformulated gasoline this summer using a Unocal patent. UBS Warburg downgraded the oils on fears that higher gas prices this summer will lead to slower demand.

Cigna met analysts estimates of $1.76 with their earnings announced today but they warned that earnings going forward would be off due to higher costs and "stock market impact" on the companies retirement business. They only lowered guidance by -.10 but the stock got hammered with a -15.85 loss to $92.85. The "higher medical costs" comment rippled through the entire sector depressing all the HMO stocks.

After jumping up to a new relative high close over $118 on Tuesday IBM fell on profit taking -3.11 today. This was a big hit for the Dow but the index almost recovered to post a gain for the day. IBM was the biggest loser on the Dow with XOM -2.30 and MO -1.09 the next in line. In reality the Dow was coasting Wednesday compared to the big gains on Tuesday.

A preview of things to come? There were two new issues brought to the market today and both closed over the IPO price. SPLX did great, closing +9.20 over the $12 IPO price but BRZZ, a food preparation company, only managed to hold the $8.00 offering price. SPLX is makes software for chip companies and was obviously riding the current tech sentiment.

VTSS said they were cutting -12% of their workforce in order to maintain previous profit guidance. The cut was due to less than expected customer orders. VTSS gained +3.29 on the news.

Volume was good today with 2.6 billion shares on the Nasdaq and 1.3 bln on the NYSE. Advancers beat decliners substantially on the Nasdaq but were dead even on the NYSE. The closer we get to 2250 and 11000 the more cautious investors will be. The reason is the multiple failures at these levels in the past and the increasing number of earnings warnings for this quarter. Because everyone believes the bottom has passed and things are starting to look up for the economy, it is hard to ignore the record number of warnings.

According to First Call, who monitors this process, there have already been 263 earnings warnings for the second quarter. This is significant since the first quarter only had 176 at this same point on the calendar. The first quarter was the worst quarter ever and the 2Q already is running +50% greater than that. Earnings for Q1 were down only -4.8% overall but earnings for the 2Q are now forecast to show a drop of -11%. If the economy is already recovering why are earnings still falling? Investing minds want to know!

While the charts look very good for a breakout to the upside, the decreased volatility and shrinking put/call ratios may suggest there is another dip in our future. We are only one trading session away from the Non-farm payrolls and another check on the status of....(not the economy)...the potential -50 basis point rate cut for May-15th. This entire rally could be predicated on faith that the Fed will make the big cut as expected. The dangerous thing about this is what happens if the non-farm payrolls comes in stronger than expected and the Fed expectations abruptly change. The Dow may be very close to the 11000 ceiling when the payroll numbers become known. The numbers could either explode the index over this critical level or slam the lid shut on the struggling rally.

Regardless of the news and events in our future the indexes are literally pushing the envelope and straining at resistance. The S&P has serious resistance at 1266-67 and it closed at 1267.43, dead on the resistance. It penetrated the 1270 mark four times on Wednesday only to fall back again. Still the bullish trend is building pressure to the upside. Without a serious market event to vent this pressure it appears the index will break out soon. The non-farm payrolls could provide the event to break this deadlock to either side.

The Dow has broken over 10900 several times in the last three days only to fall back again. We expected this type of action at 11000 but 10900 is proving a serious resistance point. The longer it takes to break over 10900 the stronger run we will get at 11000. The odds are good that 11000 and nonfarm payrolls will be mentioned many times in the same sentence over the next two days. The pull back at the open today came right back to the current up trend line and then resumed the upward climb. If you are looking for a textbook trend line this is it. According to the trend line the Dow will break 11000 between now and Monday afternoon. That is the technical forecast which must be tempered by the sentiment which includes the payroll results.

Traders need to decide tomorrow if they want to be long, flat or short over the Payroll Report. Obviously the safest option is flat but a decent report could produce a +200 point day. A bad report may not cause a serious drop of the same magnitude but it could dim the current bullish sentiment. If I had to rate the risk/reward ratio for holding over I would rate it like this. Short/Flat - you risk a 75% chance of a +200 point Dow gain. Long - you risk a 25% chance of a -100 point Dow drop. Consider that CSCO is up +33% from last weeks lows. BRCM +25%, YHOO +30%, PDLI +40%, JNPR +20%. These companies will be very susceptible to profit taking on Friday, good jobs report or not. A bad report will only increase the chances for this to happen. What you do at the close on Thursday should be based on your personal risk level. Short, Flat or Long? What we have here is a common disease, the "paralysis of analysis." Portfolio managers are going through the same decision process today as you and coming up with the same answers. The Nasdaq closed at its highest level since March-7th and -30 points below resistance. Now is that glass half empty or half full?

Enter passively, exit aggressively!

Jim Brown
Editor

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