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Market Wrap

"Catalysts Can Emerge When Least Expected..."

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      10-10-2001          High     Low     Volume Advance/Decline
DJIA     3204.86 +188.42  9252.90  9000.14 1.30 bln   2239/ 871	
NASDAQ   1626.26 + 56.07  1626.99  1558.81 1.83 bln   2385/1214
S&P 100   554.76 + 12.92   555.42   539.80   Totals   4624/2085
S&P 500  1080.99 + 24.24  1081.62  1052.70             
RUS 2000  421.66 + 12.98   421.66   408.68
DJ TRANS 2228.61 + 99.94  2228.80  2126.97
VIX        33.46 -  2.53    36.64    33.25 
VXN        66.19 -  0.07    69.14    66.19
TRIN        0.53 
Put/Call    0.64

"Catalysts Can Emerge When Least Expected..."

Tuesday's pullback felt like another routine day of consolidation. But Wednesday's rally was anything but routine. It's been quite a while since I've witnessed a concerted, broad-based rally across the vast majority of sectors such as the one I witnessed Wednesday. The buying Wednesday was the real deal.

Of the 25 sectors I closely follow, only two finished lower Wednesday. The Gold and Silver Sector Index (XAU.X) shed 3 percent, but it's a defensive play so if other stocks are being bought, it's likely to be sold. And the Utility Sector Index (UTY.X) finished fractionally lower. What's important to note, however, is that the vast majority of sectors finished measurably higher. There weren't any sector rotations Wednesday, it was concerted buying across the board.

I could sense that a big move was nearing as I suggested in Tuesday's Market Sentiment column, but had no idea that it would take place so soon. In all honesty, I thought the major market averages would spend a little more time trading sideways to lower as I suggested in Monday's Market Wrap. I was wrong about that!

Reportedly, the catalyst that emerged Wednesday was a large institution allocating capital out of the bond market and into stocks. After viewing the sector list above, the asset allocation thesis makes perfect sense because of the highly visible buying across virtually all sectors. The short-term impact of such heavy buying is obviously a good thing for bulls. But, there's an intermediate-term impact to consider in the wake of Wednesday's big buy program. There was obviously a lot of money put to work in stocks by "strong hands." The buyer of stocks Wednesday, whoever it may have been, is probably going to hold onto those stocks for much longer than the run-of-the-mill "weak hand" holder. With some supply now securely held by "strong hands," the potential for a bottom in stocks grows stronger.

Last Monday, I used 60-minute interval charts of the major market averages to try to pinpoint support levels. After reviewing those same charts Wednesday evening, I noticed something quite interesting.

The Dow Jones Industrial Average ($INDU) and Nasdaq-100 (NDX.X) both ran right up to their 200-period moving averages on their 60-minute charts. Now, don't confuse this moving average with the 200-DAY; the moving average on the charts below is of the last 200 60-minute periods.

The INDU broke above its relative high at the 9190 level Wednesday and ran up to its 200-period moving average that currently sits at 9255. Of the three major market averages, the INDU is the only one above its relative high. If the INDU can advance above its 200-period moving average, I don't see any short-term resistance until 9600, which was its level prior to the terrorist attacks.

The NDX finished below its relative high, which was recently traced up around the 1313 level. The 200-period moving average of the NDX is currently at 1300. Yes, the NDX finished 5 points above that level, but it's right there nonetheless.

In addition to the 200-period moving average, the NDX has a double-top at its relative high around the 1313 level. But above that level is open space for about 50 points. Like the INDU, I think that the NDX could trade up to its short-term resistance level if it can clear its immediate hurdles.

While the INDU and NDX were "pinned" at their 200-period moving averages Wednesday afternoon, the S&P 500 (SPX.X) settled well above its moving average. Yet, the SPX didn't manage to climb above its relative high around the 1084 level. If the SPX does advance past its relative high in the coming days, which is only 4 points away from current levels, then it should be able to trade up to its pre-attack levels around 1100.

The corporate earnings releases began to flow following Wednesday's close. Internet bellwether Yahoo (NASDAQ:YHOO) reported a 1 cent profit before various items, but fell short of revenue estimates. The company recorded sales of $166 million during the quarter, while estimates had been pegged at $170 million. While Yahoo stuck by its guidance for a 5 cent profit during the fourth-quarter, the company lowered its revenue expectations for the quarter to $698 million from a previous forecast of $720 million. Despite the lowering of expectations, shares of Yahoo added about 45 cents in the after hours session.

Redback Networks (NASDAQ:RBAK) reported a net loss, after a $2.7 billion write-off of goodwill, of 28 cents per share, while estimates had been calling for a 29 cent loss. That was good for about a 20 cent rally in shares in the after hours session.

E-Trade (NYSE:ET) reported a 3 cent profit -- 3 cents better than estimates. But, the company fell short on the revenue front by about $3 million. The stock also traded higher in the after hours.

The truly good news in the after hours was delivered by two biotech companies. IDEC Pharma (NASDAQ:IDPH) raised EPS estimates by one penny ahead of its earnings release next week. And Genentech (NYSE:DNA) reported a solid quarter; its shares added about $2.20 in the after hours.

If the myriad earnings reports weren't enough this week, there are several big economic reports due in the next two days. September retail numbers are set for release Thursday morning. Retailers will report their September monthly sales figures, which are expected to be the worst numbers in more than 50 years because of the terrorist attacks. Just how bad the numbers are remains to be seen, but the market is expecting a 0.7 percent decline.

The producer price index is slated for release Friday morning. Inflation has remained in check so the number is likely to be a moot point. But the consumer sentiment data released on the same morning could move the markets. Estimates are calling for a sentiment reading of around 75.7 percent.

Ahead of economic and earnings reports this week, the major market averages are bumping into resistance and are still relatively overbought in the short-term. But, as I've written many times in the past, an overbought market can always grow more overbought.

Eric Utley
Option Investor

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