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Market Wrap

A Rally or a Trap?

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       9-27-2001           High     Low     Volume Advance/Decline
DJIA     8681.42 +114.03  8681.42  8471.97  1.69 bln   1930/1197
NASDAQ   1460.71 -  3.33  1465.70  1418.15  2.04 bln   1799/1910
S&P 100   521.96 +  5.67   522.39   510.73   Totals    3729/3107
S&P 500  1018.61 + 11.57  1018.92   998.24
RUS 2000  392.96 +  3.17   393.32   384.43
DJ TRANS 2069.05 -  7.74  2081.25  2036.63
VIX        37.59 -  1.56    39.65    37.20
VXN        65.19 -  0.75    68.63    65.19
TRIN        1.03
Put/Call Ratio       .81

A Rally or a Trap?

Lightning struck at 12:30 just as the shorts were starting to drool over the prospects of another leg down. The Dow hit the lows of 8471 on a weak sell program but that same dip under 8475 also triggered a buy program. That buy program shocked the shorts into covering again and a few buyers were forced to chase bids as the day drew to a close. The volume was far from convincing at 1.5 billion on the NYSE but we will take everything we can get.

The Nasdaq volume was better at slightly over two billion but most of it was to the down side. All the Nasdaq big caps closed in negative territory but the Nasdaq did finish +42 points off its lows. The tech sector is still getting beaten up by the analysts with constant downgrades and forecasts of gloom and doom. The semiconductor sector was pounded with a downgrade by Goldman Sachs and the SOX.X hit three year lows at 344. As the SOX goes, so goes the Nasdaq.

The oil sector got a boost today after OPEC decided to leave oil production at current levels. There is an increasing mood to increase drilling closer to home and avoid our dependence on oil that could stop flowing on a moments notice. Is it my imagination or haven't we been here before? Each time we take the easy way out once the crisis is over. Eventually the oil will stop when somebody of importance gets mad at us and we are going to be in real trouble. Until then talk will take place of action.

The numbers are in! Actually they are out since TrimTabs.com reported that over $10 billion in cash flowed out of U.S. stock funds for the week ended on Wednesday. $10 B here and $10 B there and pretty soon you have some real money. Actually since the attack on Sept 11th the Nasdaq has lost -$285 billion in market cap while stock funds have lost almost $20 billion in cash. Funds are starting to report that redemptions are up but not significantly. Still this is a change from last week when the united answer was that investors were holding firm.

Other numbers of importance today included the Help Wanted Index, New Home Sales and Jobless Claims. The Help Wanted index fell five points to 53 in August and is the lowest level since 1983. These numbers represent the levels prior to the attack and could drop even further in a post disaster climate. Faith in the home building sector was rocked as August sales of 898,000 units were below the estimates of 925,000 and June/July numbers were revised downward as well. The pace is still healthy but not as strong as analysts have led investors to believe. The new wave of post attack layoffs should blunt this number even further in Sept/Oct. The earliest real numbers following the attack came from the jobless claims. Last week 450,000 new claims were filed which was the highest in nine years. While too early to draw any conclusions it is quite possible that claims could exceed 500,000 with next weeks release. Continuing claims rose to 3.298 million and prove that there being rehired in a worsening job market is increasingly difficult. Over 150,000 new layoffs have been announced in the last week which have yet to be terminated or shown in the official numbers. This will continue to drag on consumer confidence and pressure retail sales.

The drop in stock prices as a result of the attack has prompted the Nasdaq to drop the listing requirements for stocks. Previously stocks had to trade over $1.00 to maintain their Nasdaq listing. Once they trade under $1.00 for 30 consecutive days they were subject to being kicked off the exchange. Seven of the Nasdaq 100 are now trading under $1.00 and over 600 current Nasdaq stocks trade under that level. They approved a temporary easing of the restrictions until Jan-2nd 2002 when the delisting period will begin again. Stocks currently under review for delisting were grandfathered into the reprieve and for the next three months they are back to business as usual.

The volume today was decent given that the Yom Kippur holiday kept many traders away from the action. The drop at the open had those traders who were in the market holding their breath. As I mentioned on Tuesday there are buyers in the market. They are not aggressive but are simply providing a soft bottom by keeping their offers under the current bids. Many fund managers were probably holding off with their quarter end buying until they knew what the redemptions were going to do to their cash position. They were also hoping for another dip to make their buys. This meant Thursday was decision day for the quarter and I think we saw the results this afternoon.

Managers feel that stocks are undervalued in general. After all Abbey Cohen said so twice in the last week! While I doubt they really care what Abbey says they do care what their investors think. They want to be heavily positioned in the blue chips and light the tech stocks for their quarter end statements. They want to make the statements a sales brochure to prevent new redemptions and solicit new cash.

Friday should be a follow through day as shorts cover in the morning and go flat for the weekend. The spark that triggered the buying on Thursday afternoon was widely credited to RFMD affirming guidance for Q2 and raising guidance for Q3. This triggered short covering in the semiconductor sector right after the buy program had brought the market off the lows. If the shorts that were still staring in disbelief at the close decide to cover we could get a significant Friday morning bounce. The challenge on Friday will be the GDP report, Michigan Sentiment and Chicago PMI report. The GDP is likely to show the economy is officially in a recession and the Michigan sentiment is sure to show a significant drop. Should the numbers be significantly bearish the market could react negatively. However, most investors and analysts already know conditions are bad and that is factored into the market. Numbers that are not as bad as expected could encourage traders to buy thinking the bottom has been seen.

The Fed meets again on Tuesday and analysts are mixed on the cut potential. Almost everyone agrees we will see another 25 point drop but there is also a significant case for another 50 point cut as well. The past cuts have had no real impact on the markets or the economy and the consensus is that now is not the time to stop being aggressive. Therein lies the rub. The market could be expecting a 50 point cut and the Fed may decide to keep it slow and consistent. While I don't think the actual cut will have any real impact on the markets next week, it is the long term impact that investors will bet on. While you can't tell from the results of the last nine months of cuts they will eventually power the next bull market.

There will be a recovery eventually and stocks are not going to get much cheaper. The risk of being in the market today is much lower than being out of the market when the rebound occurs. Funds know this. Their time horizon is much longer than the individual traders. Funds cannot just "get in" on a moments notice. When you are buying hundreds of thousands or even millions of shares you have to scale in over weeks or even months. Those funds that have been waiting for the customary October dip to create or add to positions are thinking long and hard about the gains from this week and wondering if the time is right to strike. The end of the quarter window dressing just accelerated that decision for a select few. The rest are still on the fence and the countdown clock is running.

Don't get me wrong. Things have not miraculously changed in the tech sector. Cisco set another 52-week low on Thursday. All the Nasdaq big caps finished negative. I simply see that glimmer of light in the distance and every positive day in the markets brings that light closer and puts a little more uneasiness in the bears who are still expecting the normal October crash. One constant in the markets is that once a trend is recognized, trading habits change to capitalize on the trend and the trend disappears. Could this be the year that October goes down as the largest monthly gain instead of the biggest drop? Who knows but bears are becoming increasingly hesitant to bet against it. Did the WTC disaster change the normal patterns? Of course! Has your mindset changed since you started reading this article? I hope so! As traders we should trade what we see not what we believe. If your belief has been challenged then you will be a better trader. Some analysts believe that the Nasdaq completed a successful retest today of the Friday close of 1423. The intraday low on Thursday was 1418 before the rebound to close at 1460. The afternoon support last Friday was in the 1412 range and we did not hit that today. This is all grasping at straws but past rallies have been built on less. If last Friday's lows were the bottom then we should know that very soon. Each higher low will win more converts and buyers will appear. Lower lows will cause bargain hunters to move back to the sidelines. Watch the 1420 level as we go forward from here. If it breaks then the October trend is alive and well.

I get emails daily telling me that the Nasdaq is going to 900, 800, 700 etc, and get on the train. Sorry, that train is not going in my direction but I will trade which ever direction the markets go. If you are not a "put" trader that is fine. The time for calls will come. Those who have been following our put plays recently saw a $24 drop in Checkpoint and a $10 drop in PMCS in just the last seven days. Could you have profited from those moves? Does Osama wear a turban?

Definitely, enter passively, exit aggressively!

Jim Brown
Editor

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