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Market Wrap

Green On My Screen!

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       9-24-2001           High     Low     Volume Advance/Decline
DJIA     8603.86 +368.05  8649.39  8242.32  2.0 bln   2414/806
NASDAQ   1499.40 + 76.21  1507.51  1459.47  2.1 bln   2808/1109
S&P 100   513.03 + 21.33   516.35   491.70   Totals   5222/1915
S&P 500  1003.45 + 37.65  1008.44   965.80
RUS 2000  393.79 + 14.90   393.79   378.90
DJ TRANS 2129.99 + 75.15  2156.56  2055.25
VIX        41.33 -  6.94    45.52    40.05
VXN        69.52 -  8.21    77.79    68.93
TRIN        0.53
Put/Call Ratio       .55

Green On My Screen!

What a relief it was to boot up my charting application this morning and see the futures indicating a sharply higher open. It has been so long since I saw that, that it took me a few minutes to orient myself for the day ahead. Of course, a strong bounce was overdue and after getting through the weekend without a global meltdown, investors were in a far better mood than when they headed home Friday afternoon.

The extreme oversold condition of the market had the odds favoring a bounce after the weekend, and with a solid rally overseas (most European markets ended with 5-6% gains), and a bullish article in Barron's over the weekend, the bulls were pawing the ground by the time the opening bell rang. A strong gap-up open lifted most groups well off their lows and this movement managed to maintain traction throughout the day, helped along by upgrades on long-distance carriers (CIBC World Markets raised its ratings on T, WCOM, FON and Q) and bullish calls from the likes of Goldman Sachs and Banc of America Securities.

Whether it was real buying of perceived values or nervous shorts covering their positions, the internals of the markets looked good throughout the day. There was a slight slackening of the bullish move in the middle of the day, but then buyers pushed all the major indices higher, with all of them closing just off the highs of the day. The buying was broad-based, with strong gains in Internet (INX.X up 7.52%), Chemical (CEX.X up 7.10%), Software (GSO.X gaining 6.25%), Retail (RLX rebounding 5.98%), Semiconductor (SOX.X advancing 5.50%) and Banking (BKX up 5.49%) stocks all posting solid gains. This was in the face of some negative calls on Retailers and Semiconductor Equipment stocks, raising the possibility that the economic impact of the terrorist attacks of September 11th has been factored into the market.

At the closing bell, the DJIA posted a 367 point gain (it's fifth biggest ever) on just over 1.7 billion shares -- robust volume, but down from the record volume numbers posted last week. Up volume swamped down volume by a ratio of more than 5:1 and the advance decline was 3:1. The picture was similar over on the NASDAQ, as the Tech index gained 76 points, closing just below 1500 on just over 2 billion shares. Good volume, but not great. Up volume beat down volume by 6:1, while the advance-decline ratio was 2.4:1.

If it seems to you like we ought to be beating the bullish drum after a day like that, I'll point you to the daily chart of any of the major indices. How many big one-day rallies have we had since June that have just turned into failed bear-market rallies? I'll save you the time by saying that there have been a lot. What I found particularly unsettling is that the early buying surge failed to entice heavy buying which would have pushed the markets sharply higher from their opening gap. Instead, we saw a reluctant, gradual rally that dragged the short-term oscillators into overbought without clearing any major overhead resistance. And although volume was robust, it wasn't heavy when compared to the levels seen last week.

Despite a solid rally that took the hourly charts into overbought territory, we have yet to see the DJIA challenge even its near-term resistance at 8725. And even if the bulls can scramble above that level, they still have formidable resistance near 9000 waiting for them. You can bet there will be a long line of bears waiting to short any rally that gets that far.

The NASDAQ wasn't left out of today's rebound, but looking at the chart doesn't inspire great confidence. While the fast line of the daily Stochastics oscillator managed to creep out of oversold territory, the COMPX couldn't quite clear the 1500 resistance level. More overhead supply (likely a lot of it) is waiting near 1630, right at the bottom of last Monday's gap open.

What we need is a strong positive catalyst to power these markets higher, and with earnings season (likely to be abysmal) just around the corner, I don't expect the catalyst to come from that corner. This rally may last for a few days, or it could fall apart at the opening bell tomorrow...I just don't know. We could see some more weakness in the morning after AOL finally warned that ad revenue was going to impact their bottom line. Look for this type of admission to be more common as earnings season approaches. Bullish investors will have their conviction tested in the days and weeks ahead. They will need to hold firm, indicating that the current and future economic weakness is already priced into the markets, or the bears are likely to go another rampage. I expect to see a retest of last week's lows before we see a sustainable rally. For an in depth look into my expectations, check out my Trader's Corner article tonight.

There's one more factor that has me nervous in the near term and that is the action of the VIX relative to the broad market action. Not the direction of the moves, but the magnitude. After shooting above 57 last week, the VIX was due to retrace some of that ground, and with the markets in rally mode today, it was no surprise to see the VIX fall back. But look at the chart comparison of the S&P500 (SPX) and VIX below.

The SPX is off its lows by about 65 points, but the VIX has fallen a whopping 16 points! That is nearly 30% in less than 2 days. Pessimism doesn't evaporate that fast in markets that are behaving in a rational manner; hence my expectation that we haven't yet seen the bottom of the current decline.

In the non-news department, we had the LEI (Leading Economic Indicators) released this morning at -0.3%. This was just the latest economic report to be released with little fanfare due to the fact that the data preceded the market-shaking events of September 11th. We'll get a much better read on what to expect from the economy tomorrow morning when Consumer Confidence numbers are released. This report will include readings both before and after the terrorist attacks and should give us a glimpse of how badly consumers are reacting to the tragedy in terms of their future spending habits. Due to the sharp plunge in the University of Michigan index (-8.6%) prior to the destruction of the WTC, Briefing.com is estimating Consumer Confidence at 100.0, which is a 12.5% drop. Also on the economic front are existing home sales, but this is also based on August data, meaning the impact to investor sentiment will likely be minimal.

There is some speculation that the markets could stage a modest rally leading up to the October 2nd Fed meeting, where Alan Greenspan is widely expected to give the economy another interest rate cut. The debate over 25 or 50 basis points will likely intensify over the next week, but the actual effect of another cut is probably already factored into the market. Should we rally up to that event, I would definitely be looking for a "sell the news" reaction by the markets. In my opinion, any rally is suspect unless it can string together 3 or more solid gains in a row, and on strong volume. Today gave us the first day. Trade carefully until we see some conviction that can push the major indices through some of the overhead congestion.

Let patience and caution be your guide in what has become a treacherous market both for the bulls and the bears. Remember to trade only when the reward/risk ratio is in your favor.

Mark Phillips
Research Analyst

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