Option Investor
Market Wrap

A Chicken In Every Pot!

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        WE 10-7          WE 9-28          WE 9-21          WE 9-14
DOW     9119.77 +272.56  8847.21 +611.40  8235.81 -1369.7  -   .34
Nasdaq  1605.30 +106.50  1498.80 + 75.61  1423.19 -272.18  +  7.67
S&P-100  549.38 + 16.28   533.10 + 41.40   491.70 - 66.88  +  4.69
S&P-500 1071.38 + 30.44  1040.94 + 75.14   965.80 -126.74  +  6.76
W5000   9837.11 +274.18  9562.93 +662.48  8900.45 -1203.9  + 37.95
RUT      414.97 + 10.10   404.87 + 25.98   378.89 - 61.84  -  4.46
TRAN    2209.42 + 15.43  2193.99 +139.15  2054.84 -621.65  - 36.65
VIX       34.66 -   .53    35.19 - 13.08    48.27 + 13.67  +   .24
VXN       63.35 -  1.84    65.19 - 12.54    77.73 + 13.89  -  1.61
TRIN       1.14              .73              .60              .68
TICK       +290             +995              +21             +100
Put/Call    .96              .61             1.27             1.01

President Bush went on TV and called for an additional $60 billion tax cut and the markets rallied off their lows to post solid gains on Friday. Now what will he do for an encore? Clearly the administration had to take center stage after the dismal Jobs Report showed a loss of -199,000 jobs in September. The Jobs Report confirmed the trend continued by the unemployment report on Thursday which soared to over 528,000 new claims in the last week. This is the highest level since the 1991 recession. Unfortunately the Jobs Report showed the state of the economy before the attack meaning next months numbers will be significantly worse. The Bush administration is scrambling to pull a rabbit out of the hat to stimulate the falling economy and the markets loved it. They see even more stimulus in the future and a blank check for government spending. Maybe more than a chicken in every pot!

As investors, whether you are republican or democrat, pro stimulus or not, you will reap the rewards of these programs in the markets. The effects will be temporary but welcomed. Greenspan, if he is still on the job, will work aggressively to take back the rate cuts and slow the economy once again but he may be a little more restrained than usual. Nobody in the financial community wants to relive the last two years again soon, least of all Greenspan.

For traders the good news appears to be breaking out all over. John Chambers, the Ralph Acompora of the networking sector, said on Wednesday that he was "very comfortable" with analysts estimates. CSCO stock jumped +33% and powered a huge rally on the Nasdaq. Tuesday there was a press release that Michael Dell had bought something close to $75 million of Dell stock. Thursday the president of Dell reaffirmed guidance for the October quarter and the only warning they issued was to their rivals. Michael Dell said he sees a rebound.....by summer 2002, but it was enough to capitalize on the Cisco news and gain $5 or more over the average $16.72 price he paid for 4.3 million shares. A cool $20 million payday for Michael Dell. You don't think he knew he was going to make those statements when he was buying the stock do you?

Who are we to complain about a few million here and there if the cumulative impact is a tech rally of +106 points for the week. Rather than look at the positive spin and the impact on the market I think it is more interesting to look at the ones that didn't. AMD warned that sales were plummeting and their losses could be as high as $220 million. They claimed that they were facing very aggressive competition which resulted in sharply lower average selling prices for the chips they did sell. The warning was basically ignored.

Gateway warned again and said that PC sales had fallen significantly since the attack and they would lose as much as four times what they had originally forecast. GTW gained +.15 on the news. On Friday SunMicro warned that it would post a wider than expected loss and cut 4,000 jobs due to uncertainties relating to the attack. SUNW gained +.56 on the news. About the only major warning that resulted in a big drop in stock price was Corning. GLW said that they would cut 4,000 more jobs and post an even larger loss due to the deterioration in global economic conditions. They said the fiber business was simply dreadful. The gloomy outlook and emphasis on the negative words are probably the reason for their drop. The other companies mentioned above still maintain a positive outlook and gave investors hope. Even Compaq gained over $1.00 from Tuesday's opening price after warning again.

So, at the risk of being labeled pessimistic let's recap. CSCO and DELL affirmed their previously lowered estimates. Yawn. Michael Dell sees a "possible" rebound by summer 2002. Yawn. Corning said new business is dreadful. Hmmmm. SUNW is cutting almost 10% of its workforce because of slowing global demand but COULD return to profitability by the June-2002 quarter. Are you excited yet? So, in the words of the old Wendy's commercials, "where's the beef". Where is the good economic news that is moving the markets?

The bottom line is simply we had a great rally on some weak spin from the tech giants because the markets were ready to grasp at any lifeline out of the September disaster. The real question is how far will it go before the negative news starts weighing on the markets again. The Dow is now up +877 points from the Sept-21st low. That is a +10% rebound. The Nasdaq has gained +217 points from that dip which is over a +15% gain. Normally, and I stress NORMALLY, that type of rebound would generate a week long pause for profit taking. This is not a normal circumstance and from our severely oversold condition we could continue moving up from here. How high and for how long is still anybody's guess.

The internals are not shouting rally. The Dow gain on Friday was done on almost dead even NYSE advance/declines of 1569/1530. The Nasdaq gained +8 on with decliners beating advancers by 305. Unfortunately you cannot draw any long term conclusions by analyzing Friday's trading. There was a fear that a coalition strike over the weekend could cause a retaliation strike in the U.S. Shorts were afraid to hold over in case a patriotic rally from a strike came on Monday. Longs were afraid to hold on the impact of a retaliation strike. The volume on the NYSE was positively anemic at only 1.3 billion.

The news reports were filled with negative outlooks on future terrorist attacks. With warnings that there is a "100% chance of retaliation", along with "credible and ominous evidence" of other plans in progress. Officials warned that "sleeper" agents were already in the country and targeting tunnels, dams, tankers, refineries and symbolic military and civilian locations. That is certainly not a setup for a continued bullish rally.

Still, all the major indexes posted gains. Bullish results from bearish news and continuing profit warnings. The markets are moving on sentiment alone and almost in denial of the facts. This bullish sentiment caused the first positive inflow of cash into stock funds in the last 10 weeks. Not much, only +$200 million. Compared with last weeks -$10 billion outflow the $200 million is only a drop but the most important fact is that the bleeding has stopped for the moment. Most investors know that this is the best time to be taking long term positions. Every day that passes in October without a directional change in the markets is a great day. The closer we get to expiration Friday the closer we get to the normal end of October rally as investors look forward to the next year.

There is no beef! The earnings and signs of economic recovery are absent. Investors have been conditioned by history and the constant barrage of news reporters and financial analysts that this is a buying opportunity. They looked at CSCO at $11 last week and took Chambers comments as a signal to buy. Considering how vocal he has been in talking down the prospects for the last year maybe the "very comfortable with estimates" was very bullish for investors.

The September lows exhausted the sellers. The margin calls are over and the markets are technically stronger. Even another drop on profit taking should not create the serious selling that we saw in September. This is why the market is surprising analysts in the face of earnings warnings from tech giants. The sellers ran out of stock and the shorts are nervous.

Bulls are still bullish, just nervously bullish. Abbey Cohen abandoned her year end price targets for the S&P after being burned repeatedly by reality. She has now instituted "rolling price targets" for 2002. Her target for the S&P for EOY 2002 is 1300 to 1425. Significantly less bullish than her prior 1525 EOY target for 2001 but still bullish. She is telling her listeners to "buy stocks now" and up their portfolios to at least 75% stocks to benefit from any profit recovery in 2002.

The economic calendar is light next week with the biggest numbers due on Friday. Traders will be paying more attention to the final warnings and the start of real earnings. Make no mistake, there is a lot of bad news already priced into the market. There is however a lot of bad news still unknown. Now that earnings are going to start flooding out there will be some high volatility events. The VIX is still high at 34 even though it is down significantly from 57 in September. The wall of worry the market will have to climb from here is huge. Guidance from companies announcing earnings will be more critical than ever. How high and how far this rally will climb is anybody's guess. This is October and typically the coming week is very risky for bulls. Last Tuesday I suggested going long if the Nasdaq broke through resistance at 1550 and the Dow at 9050. Both of those events occurred on Wednesday. The Nasdaq pulled back on Friday to exactly 1549 before rebounding again. I would continue to use these levels as entry/exit points. Stay long above them and go flat if we fall below them again. The excitement is building in the investor community. Let's just hope it is warranted!

Definitely, enter passively, exit aggressively!

Jim Brown

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