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Market Wrap

Bulls Bomb Bears Into Submission!

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       10-11-2001           High     Low     Volume Advance/Decline
DJIA     9410.45 +169.59  9432.04  9242.63  1.66 bln   1982/1128
NASDAQ   1701.47 + 75.21  1701.48  1649.55  2.47 bln   2448/1194
S&P 100   563.39 +  8.63   564.78   554.76   Totals    4430/2322
S&P 500  1097.43 + 16.44  1099.16  1080.99
RUS 2000  431.04 +  9.38   433.10   421.66
DJ TRANS 2314.80 + 86.19  2318.11  2228.65
VIX        32.64 -  0.82    33.18    31.70
VXN        61.65 -  4.54    66.36    61.11
TRIN         .63
Put/Call Ratio       .62

Bulls Bomb Bears Into Submission!

Bears went to bed Wednesday night scratching their heads about the unexplained rally. They woke up Thursday to rumors that Osama Bin Laden and the Taliban leaders had been captured or killed in very heavy bombing raids overnight. The bear's worst nightmare had appeared to come to pass. The markets gapped up on very heavy short covering before the rumors were denied. The Nasdaq closed up a whopping +75 points and at the exact high of the day. Many bears simply called it quits and decided to not fight the tape. Rumors also abounded that several hedge funds had tried to short the rally over the last two days and got caught flat footed with huge short positions and were scrambling to cover all day.

The "rally for no reason" was gaining speed at the close as some tech stocks were actually suggesting that business was getting better. Stocks that had been beaten flat like Brocade (nasdaq:BRCD) and Silicon Storage Tech (nasdaq:SSTI) saw huge gains after positive comments. BRCD CEO, Greg Reyes, said he would be surprised if the company did not meet estimates for the 4Q. Not especially a bullish comment but good enough for a +20% jump in the stock price. SSTI said on Wednesday that they would beat estimates and CSFB increased the forecast from four cents to eleven cents for 2001. Almost a +200% jump! SSTI gained over +30% on the news.

Redback (nasdaq:RBAK) soared +50% after it said that their orders for the fourth quarter would increase over the third quarter. They also need to sell less to make a profit after their recent restructuring. Their proforma results beat analyst's estimates.

Chip equipment stocks roared out of their mid-week slump and the SOX.X posted almost an +11% gain. NVLS, TER, AMAT, KLAC, TXN, KLIC and others posted huge gains even after the sector was downgraded by JP Morgan on Wednesday. Even Intel gained ground and padded the $5 gain over the last two weeks.

Earnings reports after the close on Thursday gave bears an even worse case of indigestion. Juniper (nasdaq:JNPR) jumped to $21.80 in after hours trading after closing Wednesday at $15. They beat estimates by three cents and said their business had not been impacted by the WTC attack. Actually they felt business had increased due to the increased effort to provide backup networks. The +40% gain and positive comments will power networkers on Friday as well. Sonus Networks, a maker of communication equipment, posted a loss of -.06 cents as expected but posted much higher sales that increased almost +160% over last year.

Network Associates, (Nasdaq:NETA), beat analyst's estimates with help from three different computer viruses in the last quarter. Sales were well above expectations at $209 million and they are predicting earnings of 7-10 cents in the fourth quarter. DCLK also beat estimates slightly on revenue of $92 million and promised to show a profit again in 2002 after a very bad quarter. They actually raised guidance for 4Q.

In addition to positive earnings reports the economic picture was also a surprise. The new jobless claims were reported at 468,000 which was significantly less than expected and -67,000 lower than the prior week. While this excited traders on the surface the drop was caused by a statistical quirk from a seasonal adjustment and not an improvement in the actual labor market. There are some analysts that expect a jump of as much as +200,000 in the next couple weeks as announced layoffs take effect. Chain store sales fell sharply as consumers stayed home and watched news reports on TV. Discount stores and drug stores were the only standouts with apparel and footwear stores losing the most sales. The year over year gain of only +0.8% was sharply down from the August gain of +3.6%. The holiday is fast approaching and the current stimulus being discussed in Washington includes more rebates in some form for lower income consumers.

The earnings reports after the close today are sure to produce a bounce at the open as long as President Bush does not say something in his national press conference tonight that spoils the mood. The FBI issued an "imminent warning of impending attacks" tonight and the futures appeared to ignore it. As I mentioned on Tuesday night, the apparent success of the air war coupled with vivid pictures of bomb craters and no new terrorist attacks at home, would lull the average investor back into a spending mood. Spend they did! The Nasdaq has soared +130 points from that brush with support and the Dow has gained +360 points in two days. On Tuesday the Dow bounced twice off 9000 and the close today at 9406 seems light years from those levels.

The obvious question, is this a bear trap rally or the real thing? I started the article with the term "unexplained rally" but is it really? Numerous tech companies have reported better than expected earnings and raised guidance for the future. Like something from the twilight zone the tech world has rallied on the news just when the obituary writers were sharpening their pencils for the death of tech. Juniper beat earnings and raised quidance. Chips stocks shook off multiple downgrades and rallied to levels not seen since the attack. The heartbeat of tech, chips, and the lifeblood of communications, networking, have exploded and investors are buying them with reckless abandon. Or should I say shorts are covering frantically? Volume was good today and advancers beat decliners 2:1. That can't be all bad.

The VIX has fallen back to pre-attack levels and by anybody's measurement the markets are overbought for the short term. I would strongly advise anybody not to open any new call positions on Friday morning. Any bounce at the open will be a knee jerk reaction to the after hours earning announcements and more short covering by those who felt Juniper would miss earnings and whine about the disaster. Once that is over there is a significant chance that there will be profit taking ahead of the weekend. With more attacks possible and uncertainty about the targets, no institutional investor wants to wake up on Monday morning to a repeat of the September 17th drop. If you went long last week at 9050/1550 as I suggested then you should be very profitable. I would suggest setting stops on those positions after the open and then hope for perfectly boring day.

Definitely, enter passively, exit aggressively!

Jim Brown
Editor

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