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Market Wrap

Still Holding Our Breath!

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        WE 7-27          WE 7-20          WE 7-13          WE 7-06
DOW    10416.67 -159.98 10576.65 + 37.59 10539.06 +286.38  -249.72
Nasdaq  2029.73 +   .36  2029.37 - 55.42  2084.79 + 80.63  -156.38
S&P-100  620.26 -  5.33   625.59 -  1.26   626.85 + 13.90  - 19.07
S&P-500 1205.93 -  4.92  1210.85 -  4.83  1215.68 + 25.09  - 33.79
W5000  11166.00 - 46.37 11212.37 - 59.55 11271.92 +212.36  -347.59
RUT      485.02 -  2.91   487.93 -  2.78   490.71 +  7.45  - 29.38
TRAN    2909.88 - 55.78  2965.66 + 25.31  2940.35 +191.43  - 81.04
VIX       24.73 -   .24    24.97 +  1.10    23.87 -  1.10  +  3.34
Put/Call    .47              .82              .65              .90

A typical summer Friday put lulled everyone to sleep and prompted many traders to leave early, confident that all the fireworks for July were over. Volume was mediocre with only 1 billion on the NYSE and 1.56 billion on the Nasdaq. Advancers beat decliners and new highs beat new lows. What is wrong with this picture?

What was missing was the big closing move in either direction! From 1:PM all the major indexes traded perfectly flat and market commentators were scratching their heads trying to make news where there was none. Welcome to a normal summer Friday! This was still bullish in my humble opinion. I mentioned that I expected some profit taking from the Tuesday dip rebound as well as some traders going flat before the weekend. We got both but the impact on the markets was minimal.

We had bad economic news but many traders were relived it was not worse. The GDP limped in at an annual rate of only +0.7% and business spending dropped -13.6%, the biggest drop in 19 years. There are rumors that the GDP may even be revised downward as more data becomes available. There was no sign of a turnaround in the current quarter with the slump in IT equipment sales accelerating. Inventory decreased but at a slower rate than the prior quarter. Exports dropped as the global weakness increased. Many other countries are developing recessions of their own which will hurt the possibility for a quick recovery by our own economy. This was the slowest growth rate in over eight years and with no signs of improvement the Fed has a green light to accelerate rate cuts if needed. The next FOMC meeting is August 21st but futures indicate only a 25 point cut. No hope for traders here but the markets did not sell off! The Consumer Confidence number dropped to 92.4 as layoffs weighed on the workforce. Consumers start getting their $38 billion in tax rebates next week and history shows us that they will spend it or most of it almost immediately. On a side note the $38 billion tax rebate is $12 billion less than the $50.6 billion JDSU lost this year. This is thought to be the largest corporate loss ever. Now you know why the stock is only $8.

Continuing the good news Friday thought process, HWP gained slightly as investors fished for bargains even though their warning was fairly drastic. JDSU only lost -.92 after missing earnings by several miles and was actually climbing at the close. Compaq was the proverbial stepchild that continued in the dog house with a small loss but was also improving at the close. The winners of the day were QCOM and VRSN. QCOM gained +3.52 after saying that things "might" be looking up for the fourth quarter. Verisign soared with a 6.93 gain after beating estimates of fourteen cents with actual earnings of a quarter. They also raised their estimates for next quarter and the full year. AFCI beat the street by a penny and they said "orders from traditional customers...showed year over year growth during the quarter". A fibre company with order growth? That should be a major sign for somebody! AFCI gained almost $4 or +17% on the news.

One of the bright points of the day was not from an earnings report but from an acquisition. Cisco announced that they were going to buy Allegro Systems, a security company, for $181 million. While the deal itself is not remarkable it is the second CSCO buy in the last two weeks. They announced on July-11th that they were buying AuroraNetics, a data transmission company, for $150M. This is important because Cisco CEO John Chambers has repeatedly said they would not make any acquisitions until business improved and have been notably silent from their deal a month program for some time. Several analysts speculated that Cisco must be feeling better about the future if they suddenly have moved into a "deal a week" acquisition mode.

Earnings were relatively quiet on Friday with 79% of the S&P-500 already reported. Of the 395 S&P companies reporting over 56% have beaten (mostly lowered) estimates while only 14% have missed estimates. 81% of the S&P tech stocks have reported. So far this season we have had 213 warnings about Q3 compared to only 26 for the same time last year. As earnings draw to a close the focus will move to the late cycle stocks like CSCO (Aug-7th) and DELL (Aug-16th) to see if their guidance has changed. While the furious announcement pace will decline more credence will be given to those who have yet to tell all. No more slipping in undetected while the spotlights are on a big cap being crucified in the press.

Don't look now but historically the biggest leading indicator for the Nasdaq, the SOX, is back over 600 again. In several of the economic reports recently, semiconductor orders have shown a slight increase. Texas Instruments also said they were seeing an increase in orders for Q3. LSI Logic said they were seeing higher revenue already for Q4 and Taiwan Semiconductor said orders had stabilized. Numerous chip stocks were upgraded to "buy" status by several analysts this week. After being on a chip free diet it appears investors are starting to nibble at this sector. The SOX above 600, while encouraging is also sitting right at resistance dating back to July-6th. If we can break out of the 605 range then the 50-DMA is 613 and the 200-DMA is 627. Once over those the next major resistance is 700. Typically investors buy chips 6-9 months before they expect profits to surge. Based on the current forecast of Q2-2002 being the crest of the next tech wave, we are seeing the most aggressive traders take positions. Mainline investors will wait until the resistance points mentioned above are penetrated before putting their toe in the waters.

Next week the markets will have to wade through several hundred earnings announcements from many companies most traders have never heard of before. The possibility of positive, market moving announcements is slim but negative news could be a challenge. The market will also have to digest the Personal Income/Spending and Chicago PMI reports on Tuesday and Construction Spending on Wednesday. Has it been a month already? The Non-farm Payroll Report is Friday. Lest we forget we are entering the three week window for the next Fed meeting on Aug-21st.

As traders we will watch anxiously as the major indexes enter the week right on support. The Dow pulled back to lose -160 points for the week but rebounded to close just over 10400. The Nasdaq closed the week exactly even with where it entered at 2029 but comfortably over 2000 again. The S&P-500 is back over 1200 and trading in the high end of it's recent range. Not a bad place for the indexes to start the new week as long as they continue ignoring the bad news like they did with JDSU, CPQ and HWP. This is a key point. The few investors still trading seem to be immune to the bad news. The problem is luring those retail traders back off the bleachers and into the game. After being on injured reserve for months these traders are gun shy and are not sure if they want to rush back into the game now or save their strength for the fourth quarter.

Ah but greed is a wonderful thing. As soon as we get any upward movement from these levels those same shy traders will be throwing money at tech stocks to avoid being left out of the victory dance. Just when this rush to buy will begin is the $64K question. You know my thought process. A Nasdaq close over 2100 is my entry point signal. The Dow needs to get back over 10600 as well to make everyone feel bullish again. You can see from these numbers that we still have to retake 75 points of ground from the bears on the Nasdaq and almost 200 points of blue chip territory. These points may be hard fought. Every fifteen minutes on stock TV, regardless of what channel you watch, there are competing analysts predicting 9000 or 11000 as the next major level we will hit. The economy is still in the tank and any buying now is pure speculation that it will recover in the next six months. Of course we do have the Fed on our side and a 100% chance of another 25 point rate cut next month. Still the Fed cannot control the global economy no matter how hard they try. The U.S. is still consumer heaven but without the help of the global village there is no way our economy will explode again. Historically, after a period of rate cuts such as we have experienced the economy eventually roars back to life. Also, historically economic downturns and bear markets are time dependent and their average time has expired.

This is what investors are betting on when they buy stocks next week. They are investing on faith. "Faith is the substance of things hoped for, the evidence of things not seen" Hebrews 11:1. They will be betting on a recovery that has not yet been seen. Now the problem becomes, how much faith do investors have? We are all optimistic, some more than others. Just how optimistic we are will be tested next week. If we pass the test then maybe the bottom is behind us. If not then there is more pain ahead. How much faith in a rebound do you have?

One last thought. Ralph Acampora said last week that if we could hold above the March lows of 9100 on the Dow and 1600 on the Nasdaq then we might make some gains in the fourth quarter. Ralph, where is your faith? Take that bear coat off and enjoy the summer sunshine! He makes a great contrarian indicator!

Definitely, enter passively, exit aggressively!

Jim Brown

Fall Seminar

The fall seminar has been moved to November instead of September in order for us to have a broader range of speakers and allow us more time during market hours for live trading. The new dates are Nov 12th-16th and we will be announcing the complete lineup of speakers next Sunday. This will be our biggest trading event ever! Five days of real time trading and market analysis! Don't miss it.

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