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Market Wrap

Bears Getting Nervous?

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       9-25-2001           High     Low     Volume Advance/Decline
DJIA     8659.97 + 56.11  8695.54  8506.36  1.9 bln   1896/1290
NASDAQ   1501.64 +  2.24  1528.33  1480.69  2.2 bln   1975/1978
S&P 100   517.92 +  4.89   521.00   510.13   Totals   3871/3268
S&P 500  1012.27 +  8.82  1017.14   998.33
RUS 2000  396.18 +  2.39   397.29   392.20
DJ TRANS 2092.80 - 37.19  2150.63  2062.53
VIX        38.87 -  2.46    40.41    38.38
VXN        67.56 -  1.85    69.81    66.34
TRIN        0.99
Put/Call Ratio       .51

The Dow confounded many analysts by rebounding from the days lows to close positive by +56 points. After being up over +100 points shortly after 10:AM the Dow sold off to drop -88 points into negative territory. The shorts, who were loading up for the next leg down, were suddenly confronted with a rising market again. The back to back positive days contributed +421 points to the Dow and marked the first time since Sept 5th there was a two day positive string.

The Nasdaq was not so lucky. The +28 point morning bounce gave way to negative afternoon numbers and only a minimal +2 point close. The positive close was due in part to fractional gains by INTC, DELL, WCOM, JDSU and a strong showing by QCOM. Tech stocks have just not caught fire like some of the Dow blue chips. Fears that there is still bad news ahead is keeping a lid on the Nasdaq.

We were remarking around the office this afternoon that there has been very few warnings in the last week. With the third quarter being the most back loaded of the year we can only theorize that corporations are scrambling to shift as many sales into this week as possible and minimize the severity of the warnings. The current outlook for most techs is very grim and many are probably very reluctant to go public with the severity of the news. They are grasping at the hope that something will change.

A glimmer of the coming storm came from the RBAK warning after the close today. They warned that revenue could drop as much as -33% due to uncertainty surrounding the WTC disaster. They said they were seeing sales and orders being cancelled and it would have to take substantial charges for excess inventory and significantly cut its cost structure in the near term.

Micron did not blame the attack for its poor performance but announced a loss of $576 million on revenue of $480 million for the last quarter. Analysts expected a loss of about half that amount but average selling prices fell -55% during the quarter due to excess inventories, price competition and lack of buyers. CSFB analyst Tim Mahon said they did not expect any positive pricing trends until the middle of 2002 which does not bode well for the industry.

The markets in general reacted amazingly well to the bottom falling out of the consumer confidence in September. The number reported today was 97.6 and the biggest drop in a decade. The consensus number was 105 and had factored in a drop from the 114 in August. The number was primarily derived from data collected before the WTC disaster which means the October numbers could be substantially less. By all accounts the country has now fallen into a deep recession but a quick series of positive events on the global terrorist problem could make it a short one. Consumers will put off spending and traveling until they feel more comfortable about the risk factor.

Contradicting the consumer confidence numbers was the jump in existing home sales to a record 5.5 million units in August. This was substantially more than the 5.2 million estimated. Low interest rates are driving the trend and another cut on Oct-2nd could help this trend overcome the falling confidence. After all, interest rates will be at the lowest in years and everyone knows it will not last forever. There was also a corresponding rise in inventory levels of existing homes suggesting that there is a huge number of homes coming onto the market for various reasons. That supply could also depress prices again prompting more sales.

AMD took another hit today with Gateway announcing that it would no longer make computers with chips from AMD. They have decided to use only Intel chips in order to cut costs and ensure reliability. AMD said it will cut 2300 more employees and close two plants. With the PC market weakening Intel is still producing and the over capacity is going to pressure prices and make AMD chips less competitive. New price cuts by Intel are coming and manufacturers are finding that there is not enough difference in the price points to warrant the multiple assembly paths, parts lists and advertising differences. Take out the part about price erosion and excess inventory and it would be more bullish for Intel now but long term Intel is looking more like a buy every day.

The positive close today was refreshing. The bounce on Monday was expected since the extremely oversold conditions could not continue without a pressure release. When the midday sell off began on Tuesday I was afraid we were going back down again. Fortunately buyers were lurking just under the bid and hoping for another dip to buy stocks cheaper. There was not enough sellers to push the prices down and the bulls won the day. This was a moral victory but not the end of the war.

Remember, this is the end of the quarter and mutual funds are buying stocks to dress up their statements. Long term investors are nibbling at stocks with the understanding that they could dip another -5% to -10% before hitting bottom. If your time horizon is 10-20 years than another $3-$5 is immaterial. The pension funds, which are faced with interest rates under 3%, are also moving money into stocks a little at a time. Everyone knows that once earnings start to fly in two weeks there is going to be a lot of really negative guidance and the October crash is likely to make its appearance again.

Until then the Dow is not likely to make any more big moves to the upside. Volatility will stay with us and the trading range could be 8000-9000. We are still in a news driven environment and that is not likely to change in the next several weeks. The Fed meeting next week will be watched not so much for a rate cut but for the economic direction language after the meeting. If the Fed still sees the risk to the downside then earnings news will have a bigger impact. If the Fed sees a bottom being formed then the earnings will be ignored to some extent.

The Nasdaq is still showing weakness or more appropriately a lack of strength. 1550-1600 could be a top for any continued rally. Personally I don't consider a +2 point day a rally but at least it was moving up at the close.

The volume on the NYSE was weak at 1.6 billion shares and showed that there was no conviction on the follow through. We have had a great week already and the oversold pressure HAS been relieved. The put/call ratio for instance has fallen from record levels back to .51 which is complacent. Definitely not a buy signal. The window of opportunity for buying has passed for the moment. We need to be keenly aware of the internals in the market and be ready to trade the trend when it reappears. There is no incentive to enter the market now that the oversold conditions have eased. Be patient, time is on our side!

Definitely, enter passively, exit aggressively!

Jim Brown

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