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Market Wrap

Job Cuts Equal Rate Cuts, Did You Buy The Dip!

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         WE 5-4          WE 4-27          WE 4-20          WE 4-12
DOW    10951.24 +141.19 10810.05 +230.20 10579.85 +452.91  +335.85
Nasdaq  2191.53 +115.85  2075.68 - 87.73  2163.41 +201.98  +241.07
S&P-100  658.74 +  9.63   649.11 +  5.45   643.66 + 35.89  + 30.42
S&P-500 1266.61 + 13.56  1253.05 - 10.07  1242.98 + 60.41  + 54.14
W5000  11687.27 +178.43 11508.84 + 99.07 11409.77 +557.12  +534.25
RUT      492.89 +  8.92   483.97 + 17.26   466.71 + 11.69  + 20.36
TRAN    2869.19 +  6.82  2862.37 +  1.07  2861.30 + 94.71  + 79.56
VIX       27.72 -   .05    27.77 -  1.24    29.01 -  1.27  -  6.48
Put/Call    .67              .48              .91              .76

It is going to be hard to restrain myself today from being overly bullish but I will try. The dip at the open on the Dow hit 10673 and the Dow closed at 10950, almost +300 points from the low of the day AND over 10900! Sorry, I can't be quite as bullish on the Nasdaq and S&P but they both turned in respectable performances. The Nasdaq added +45 points but still closed under the critical 2200 level. The tech worries are still with us. The S&P closed right back at resistance that has held all week of 1266. Good but no break out.

It all came down to the Jobs Report and the report was a disaster. The economy lost -223,000 jobs in April instead of a gain of 25,000 jobs as expected. OOPS! Manufacturing and services each lost more than -100,000 jobs showing that the economic weakness is becoming more broad based. This drop was far more than many analysts had even speculated and was the biggest drop since 1991. The unemployment rate rose to 4.5% and was the highest since 1998. It appears the "turnaround" may not have appeared as many had thought. The manufacturing sector has now lost -373,000 jobs since the beginning of the year and it is accelerating. The race is on between the Fed and a recession. Analysts now wonder if the Fed can cut rates fast enough to avoid a recession. The Jobs Report is a lagging indicator but with the flurry of recent layoffs announced it is by no means over. Inter-meeting cut anyone? Not likely since the FOMC meeting is only six trading days away but a -50 basis point cut is almost a sure thing with yet more cuts in the near future. The White House said it was "entirely possible" that the recent 2% GDP reading will be revised downward. Are you listening Alan?

Rambus may be close to its own recession after losing a crucial battle in court Friday. A Federal judge dismissed the remaining patent infringement claims brought by Rambus against Infineon. RMBS fell to under $13 on the news and some analysts say $13 is still too high if this ruling sticks. The key is not the royalties they would have gained from Infineon but the proverbial crack in the dike that this would cause. Rambus has multiple cases in court for this same type of infringement case and once the concept is tossed in one court the odds are very good the other courts will follow suit. The once high flying RMBS may be overrun with suits to toss out previous victories and their royalty income could suffer drastically. The keywords here are "could" and "appeal." RMBS has appealed the decision and feels they will be victorious. Any bets?

How many cell phones do you own? Goldman Sachs went bullish on wireless companies on Friday and added AWE, NXTL and PCS to their recommended list. Adam Harkness initiated coverage of Nokia at a buy rating. Nokia CEO, Ollila, said he believed NOK would be the number one 3G equipment provider with a goal of 35% market share. Since Nokia is gaining market share in almost all areas this should not be a difficult task. RFMD was upgraded by JPM based on the demand for cell phone chips, especially the GSM type. He said Nokia would likely choose RFMD for their continued supplier due to their good history in the past.

Cell phone carriers have got to get their customer service act together before they progress much farther however. For example I called AT&T Thursday to ask about converting an analog phone I have to a GSM phone which will work in Europe. After spending 15 min wandering through endless recorded menus I finally got a real person. "Do you have a phone that I can use in Europe?" No. "You have service in Europe, right?" No. "Are you sure? Not even on a roaming basis?" No. "What about your World Connect Service?" It works on GSM, not TDMA. "OK, can I get a phone that uses that?" No. Maybe by the end of the year..... I resigned myself to order a Nextel phone for $39.95 a month, good in 75 countries including the U.S., and just cancel my AT&T account. I was telling a co-worker, another AT&T user, about this at lunch Friday and he also thought it was strange that AT&T did not offer a product for this market. He went to an AT&T phone store after lunch and brought me a brochure about their 100 country product called, believe it or not, "World Connect." Duh! No wonder AT&T lost $300+ million last quarter if their wireless customer service reps can't even answer questions correctly. Enough griping......

What did you say? Merrill Lynch economist Bruce Steinberg shed his always optimistic view on Friday and issued a note saying "the economy could be beginning to look recessionary." Fifteen minutes later, he took it back. He acknowledged that two straight months of job losses are almost always associated with a recession but added that the Fed has never cut rates so rapidly. He admitted that there isn't any evidence yet of sharp recessionary cutbacks in consumer spending. Now who do you suppose dialed his number?

Using the Dow's performance on Friday as an indicator of next weeks action we could almost find ourselves thinking the markets have returned to 1999. Just consider the indicators. The markets are rallying on bad news. Dip buyers are being rewarded handsomely. Earnings warnings are not an excuse for a -50% haircut. Advancers are beating decliners by large margins. The Dow closed over recent strong resistance. If we could just get the S&P and Nasdaq to do the same, the bears would be in full retreat. Earnings are almost over with 434 of the S&P-500 already reported. Spring is here and the sun is actually shining in some parts of the country. What could possibly be wrong?

There is a 74% chance of the Fed cutting rates by 50 basis points once again as evidenced by the Fed fund futures. The only dark cloud on the horizon is the fear of recession. The only two major earnings reports in our future are CSCO and Dell and both have already warned. The Cisco warning barely caused a blip in the markets and Dell is rumored to be close to beating the lowered estimates. (Sure..) So we only need to worry about the recession cloud and the Fed is racing the storm with almost biweekly rate cuts. The only problem now is the fear that the consumer will hear all the negative job news and start withholding their spending. If that happens the recession will appear. The continued drop in jobs is having a negative impact on consumer confidence and those with jobs are wondering if their company will be next with the pink slips. Enter the stock market. As long as Greenspan and crew can keep the markets moving ahead, consumer confidence from those who still have jobs, will improve. The economy is teetering on the brink of disaster but the Fed is making it obvious that they are not going to let it happen.

This scenario has energized the markets and as I stated on Thursday the underlying sentiment is seriously bullish. Everybody wants the markets to go up and that desire turned into buying on Friday morning. Make no mistake, the markets are still overbought from the start of the April-4th rally. That does not mean they cannot get even more overbought. The charts are setting up for a breakout and we still have over a week before the Fed meeting. The possibility of a strong pre-meeting rally next week is huge. This is the type of market that drives bears crazy. The Dow is only -50 points from extreme resistance and closed at the high of the day. If you remember my comments from last week I said there is an army of shorts ready to open new positions when we hit 11001. This is exactly what we need. "IF" buyers jump on any dip from over 11000 like they did the open on Friday, then the race is on! The shorts will be forced to cover and buyers, upon seeing a rebound over 11000 again, could pile on like a school yard game of dogpile.

Of course this scenario assumes we actually break 11000 next week. Without any negative news over the weekend the first attempt should come on Monday. Remember this level of resistance has failed 11 times since September. The Nasdaq may lag any Dow rally because of the CSCO earnings on Tuesday. We think we know what they will say but until they say it traders may be cautious. There are so many traders waiting for a break over 11000 as the definitive buy signal that once we are over, a chain reaction could occur. There is nothing fundamental to support it since the economy is still falling but that bullish sentiment is ready to run wild. This "trading rally" may also come to a screeching halt as the FOMC meeting gets closer just in case the Fed feels less pressure to cut big. Investors should listen closely to any Fed speak next week. If they are not going to cut big they should be telegraphing their intentions to prevent a market meltdown on the announcement.

The market next week will be anything but tame. The bears are nervous that the market may keep going up. Ironically the bulls are also nervous the market may keep going up. They want another dip to continue easing into positions a little at a time. If we get a blowout over 11000 they may be forced to chase stocks and they are worried about that possibility. Has dip buying come back into vogue? Sure looks like it! Selling into rallies has finally become hazardous to your health.

Those preceding paragraphs were my bullish side speaking. There are still a lot of bearish things to consider as well and in the interest of balance I want you to hear these thoughts as well. There are some technicians that are pointing to the declining volume as the rally progresses as signs that everyone who wants to buy, has done it already. There are also those that see bearish wedges on the Nasdaq and Dow as well as converging resistance lines. No magic there, I have said this repeatedly.

My problem is this. Chartists love to tell you what happened but very few can tell you where we are going. If you have been reading my articles long you know I am a "news and events" player, not a technician. I have technicians send me charts constantly saying XYZ stock is about to breakout and we should recommend it. I ask them when they are going to announce earnings and they say, "why?, I don't know anything about earnings!" Investing is simply not about JUST looking at a chart, it involves news and current events for the company as well as the market and the economy. It also involves cycles in investor sentiment.

So back to the point. While I think the market is setting up for a great trading rally next week, I also feel that there will be another dip around the Fed meeting. The current rally is based on the expectations that the Fed will cut 50 basis points. Even if they do, it is already priced in. Secondly, earnings are over. There is no positive event to continue to power the market. The biggest news now is the impending recession possibilities which is not market positive. The current market is running on hope, bullish hope. Volume is slowing which means hope is slowing. The summer season is normally a negative for the markets. Volume goes down, traders go on vacation, kids are out of school which takes the focus off investing for a large portion of the retail traders. It is entirely likely that the current Dow rally which started on April 4th will fail in the next eight days and we will go back to being locked in a trading range until fall.

My suggestion, now that I have pointed out both sides of the picture, is trade any rally we get this week but go flat before the FOMC meeting on the 15th. Wait for the smoke to clear and see if the market conditions have changed. Remember, the markets go down over 80% of the time on the two days after a FOMC meeting, even if they cut rates! Buy the rumor, sell the fact.

Trade smart, enter passively, exit aggressively!

Jim Brown

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