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Market Wrap

Bad News Priced In!

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        05-24-2001        High      Low     Volume Advance/Decline
DJIA    11122.40 + 16.90 11173.40 11045.00 1.11 bln   1585/1461	
NASDAQ   2282.02 + 38.54  2282.19  2226.26 1.84 bln   2133/1667
S&P 100   668.30 +  3.11   668.74   661.01   totals   3718/3128
S&P 500  1293.17 +  4.12  1295.04  1281.22           54.3%/45.7%
RUS 2000  510.40 +  3.04   510.41   503.85 
DJ TRANS 2951.01 - 18.15  2969.99  2928.03 
VIX        22.94 -  1.71    24.65    22.84
Put/Call Ratio      0.59

Bad News Priced In!

After much crying and whining the Senate deed was done and the markets decided the economy was not going to self destruct and we moved up again. Actually the move was broader than indicated by the major averages. The Nasdaq dipped back to 2226 after the opening spike and then rallied to close back over resistance at 2250 again. The Dow tested 11050 twice but that was as close as bears could push it to 11000.

The Senate guessing game is over and there was no economic meltdown. Traders bought the dip on things like drugs, health care and some defense stocks. All the bad news, which was really uncertainty about what would actually occur, was quickly absorbed by traders and fund managers quickly put more money to work. They had money to spend according to TrimTabs.com which said in the week ended yesterday +$7.2 billion in cash came into equity funds. That to me is a sure sign that retail investors think the market has bottomed. Remember last week there was actually fund outflow as people worried there would be a post Fed drop.

The market choked for a moment on the New Home Sales numbers which were announced this morning. The -9.5% drop was the largest decline in four years and showed that despite decreasing interest rates consumers had pulled back from buying that new home on concern for the economy and their jobs. The market dipped on the news and then rallied because it would put pressure on the Fed to continue cutting rates to bolster consumer confidence and create new jobs.

Then there was the semiconductor sell off that was stopped in its tracks by Intel. Thank you Intel! Intel said they were still on track to spend $7.5 billion on capital expenditures this year. This was $1 bil more than last year and is 20% of the spending for the entire sector. They also said their Internet initiative was alive and well and doing fine. They said that PC penetration in Europe was only half that in the U.S. and growth was still strong. The SOX stopped on a dime at 640 and started back up again. That was exactly the point that the Nasdaq recovery started. Thank you again Intel!

Microsoft is slowly crowding strong resistance at $72 and appears ready to breakout. The cause is the persistent rumor that they are going to announce a settlement with the Justice Dept. Should that occur the stock could see $120 very quickly. The price depression for the last year has been severe on a stock that is adding literally billions of dollars in profit going forward. If this is really about to come to a conclusion leaps could be a wise investment. Somebody else thought so as well. Look at the volume today on the Jan-03 $100 leaps, 17,045 and 8,200 on the Jan-03 $90 and 2,164 of the $120. That is a huge chunk of speculative change!

Oil stocks suffered some today after Lehman analyst Jim Driscoll said prices were already 10% too high based on oil under $30 a barrel. Gasoline futures however were heading in the other direction and soaring in advance of the summer vacation season. Oil was not the only commodity under pressure. Gold stocks took a dive after the Russian president said he might sell some of their reserves and give the proceeds to flood victims.

Probably the foremost thing on investors minds tonight is Fedspeak. Governor Meyer was out in front today saying the risk was still for a weak economy (bullish) but then he said the Fed must calibrate the rate cuts to prevent overshooting the economy and increasing the risk of inflation. Speculation all day has been that Greenspan was going to be more bullish on the economy in his speech to the Economic Club of New York tonight. Meyer is a known inflation hawk and it is possible he was taking a pre-emptive shot at a bullish Greenspan speech in an effort to blunt any optimism. A little infighting here?

Friday we get a couple more economic reports, the first quarter GDP estimates and Durable Goods. GDP is estimated at a 1.4% rate and a drop in Durable Goods of -2.2%. Both should be a non-event assuming they come inline with estimates.

The breadth of the markets was better than the surface numbers would reflect. Advances beat decliners on both major indexes but just as important there was significantly higher new highs than new lows on both major exchanges. The NYSE was 122 to 22 and the Nasdaq managed 131 new highs to 24 new lows. I looked at a couple hundred charts tonight and there were far more moving up strongly than were moving down or sideways. While the battle between the bulls and bears is taking place in the bigcaps, the small and midcaps are gaining ground. If Greenspan does not give us another "irrational exuberance" speech tonight then we could see another breakout attempt on the Nasdaq in our near future. That is a big "IF" but Greenspan needs to bolster consumer confidence and a bullish speech is cheaper for the Fed than another rate cut. Greenspan is not stupid, late to the party but not stupid. The week after Memorial Day has been kind to investors in the past and hopefully that trend will continue.

Unfortunately the week after Memorial Day also signals the start of summer and the beginning of the earnings warning period for the second quarter. With pre-warnings already at record levels investors are betting that it cannot get any worse. Actually if things are starting to get better in certain tech sectors we could actually see some positive comments which could really spark the market if they occur. Volume has been light recently and even lighter summer volume could be the depressing factor. Volume on the Nasdaq Thursday was only 1.8 billion and 1.1 billion on the NYSE. Not good but not as bad as several days recently. Several brokerages have said they were seeing more retail investor activity and the +$7.2 billion inflow last week is a very bullish sign. Could it be there is a rare summer rally in the making? Time will tell!

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Enter passively, exit aggressively!

Jim Brown

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