Option Investor
Market Wrap

Remarkable, Almost Unbelievable!

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       WE 10-12          WE 10-7          WE 9-28          WE 9-21
DOW     9344.16 +224.39  9119.77 +272.56  8847.21 +611.40  -1369.7
Nasdaq  1703.40 + 98.10  1605.30 +106.50  1498.80 + 75.61  -272.18
S&P-100  560.78 + 11.40   549.38 + 16.28   533.10 + 41.40  - 66.88
S&P-500 1091.65 + 20.27  1071.38 + 30.44  1040.94 + 75.14  -126.74
W5000  10049.12 +212.01  9837.11 +274.18  9562.93 +662.48  -1203.9
RUT      428.59 + 13.62   414.97 + 10.10   404.87 + 25.98  - 61.84
TRAN    2234.73 + 25.31  2209.42 + 15.43  2193.99 +139.15  -621.65
VIX       36.45 +  1.79    34.66 -   .53    35.19 - 13.08  + 13.67
VXN       65.98 +  2.63    63.35 -  1.84    65.19 - 12.54  + 13.89
TRIN       1.08             1.14              .73              .60
TICK       +283             +290             +995              +21
Put/Call    .76              .96              .61             1.27

The markets pulled back some at the open after getting some economic news that was not market friendly but the pullback was not surprising. The market was due for some profit taking and the economic news was simply the excuse. What was remarkable was the recovery after the new case of Anthrax was discovered in New York. The Dow dropped another -125 points after the announcement to 9193 and a -215 total loss but then rallied again and gained strength into the close. Despite the monumental implications of Anthrax cases in multiple locations the bullish under tones were starkly evident. Don't forget this is also October but it appears that nobody cares!

It is amazing what a couple of positive earnings reports can do for the bullish sentiment. Stocks that were written off as dogs are now leading the parade and the faithful are lining up to send in their orders. Broadcom has moved from $18.50 to almost $32 in the last two weeks. Nvidia gained from $24 to close over $40 today. Cisco is up from $11 to $17. Juniper $9 to $21. Have the good times returned? Is this just a killer head fake that will take the last dollar of everyone rolling the dice with their last remaining IRA dollars?

Now that I have your rapt attention I will try and let you down easy or at least try not to build up your hopes too high. Two weeks ago I suggested going long over 9050/1550 the day before the markets broke over those levels. I wish I could say I knew it was going to happen the next day but there are no guarantees. I knew it would happen soon and I wanted our readers to be ready regardless of the date. I believed that the markets would go higher because the sentiment was building on the bullish side. Companies were not warning in droves as expected. The bad news was already priced in and patriotic feelings about the coming war was rubbing off on the markets.

The news that everyone expected was simply not showing up on the stock TV channels. John Chambers was no longer complaining about how bad business was and trying to talk down expectations. Michael Dell was buying his own stock back and both were expected to warn. Neither did and both reaffirmed earnings. Surprise! Sure there was Corning and Nortel warning for the umpteenth time but nobody seemed to care anymore. Investors were starved for good news. You could almost imagine them sitting in front of CNBC with their hands over their ears to close out the constant drone of negative news. They were instead like a man crossing a desert of sand and wishing more than anything for a glass of water. His total thoughts are on the water not the miles of hot sand around him. If he got the water it would not make the sand go away but the refreshing drink would enable him to travel several more miles through the wasteland. We, the investors dying of thirst for good news, were so excited by the few swallows we got last week that we were almost dizzy.

Cisco, Dell, Juniper, Sonus, YHOO, MOT, LRCX, NETA, DCLK, SSTI, the dogs of the tech world surprised us all with better than expected comments. Not necessarily better than expected earnings but positive comments in a wasteland of despair. Other sectors were seen posting gains as well including biotechs, brokers, homebuilders and oil while defensive stocks like gold and healthcare were losing ground. This indicates that investors are becoming more risk tolerant and expecting the techs to rise again.

While you may think this is no big deal let me remind you that we are in a war that is not only being fought overseas but on American soil as well. We have daily warnings of imminent terrorist attacks by the FBI including new outbreaks of biological terror. Just understanding the concept that the two confirmed outbreaks of Anthrax were both launched weeks ago and they are not likely to be the only two is enough to strike terror in every investors mind. They are probably the only two that have been discovered and that is the scary part. There was a story late Friday that there was another possible case in Reno and there was a similar letter sent to the New York Times. Both letters were sent from Florida. Anti-American demonstrations were growing overseas and the coalition was showing signs of cracking. Uzbekistan withdrew permission for U.S. over flights due to pressure in the region.

Many investors are proving to be very hardy and capable of ignoring the constant barrage of negative news. Unfortunately, not all investors have shown this ability. TrimTabs.com said that stock funds saw a -$3.2 billion cash outflow for the week ended Oct-10th. Not all investors are ignoring the negative news and many waited for the oversold rebound to bail out of the markets.

The economic news that blunted Thursday nights positive earnings news on Friday morning included the PPI number which came in at +0.4% which was twice the consensus estimate. While the number was not critical it was another shock for investors to see prices rising when the economy is falling. Evidence of the fall after the WTC attack was evident in the retail sales report which fell -2.4% in September. Clothing retailers fell the worst at -5.9%. It does appear that consumers are adjusting to the new reality however with the Univ Michigan Sentiment rising slightly from last month to 83.4. This is still the second lowest reading in the last year but any rebound is encouraging. However many layoffs have yet to take place and as many as 300,000 workers will be hit over the next 60 days from previously announced layoffs. Ironically the expectations component improved significantly to 77.9 from 73.5 the prior month. This means consumers feel the worst is over and everything is under control. The lack of another disastrous attack and decreasing rates of video replay of the falling towers has given way to a positive outlook as life goes on.

Next week will be crucial to the eventual recovery. I said two weeks ago that the coming week would be the timeframe for any normal October crash. At the close on Friday we appeared to be far from any crash fears. The averages were climbing strongly at the close in the face of possible weekend events that could tank the markets on Monday. This kind of bullish "contrarian" sentiment is the bear worst nightmare. Art Cashin said the biggest evidence of an impending rally was the tape. It is refusing to accept reality and roll over as the bears and pundits expected. The expectation of further positive earnings surprises next week is overcoming the fear of an October crash. This is the good/bad news. When people are expecting the worst, as in last week, any good news can spark a rally. When people are expecting surprises to the upside any lack of surprise or a negative surprise can be even more disastrous. Check out this chart of the Dow for Sept/Oct 1999. Look familiar?

Now lets roll the time forward a few weeks and see what happened.

The positive earnings surprises everyone expected did not come to pass along with some global economic problems. I do not think anyone would disagree with me that there are serious global and economic problems today. There is also the bullish sentiment which is expecting more positive surprises when earnings start in earnest next week. IBM, INTC, MSFT, SUNW, NVLS, RFMD, RMBS, TLAB, AOl, APPL, BRCM, CDWC, CLS, EMC, EXTR, SYMC, TXN, NT and about 300 other companies including over half the Dow components announce next week. If lightning is going to strike, next week will be the week. It is also options expiration week and the volatility is going to be tremendous. The markets on Friday pulled back to 1650 and 9200 respectively along with the S&P to 1075. Based on the overwhelming negative news on Friday I think we can safely say that these levels could now be considered support. If we can rally from there while under terrorist attack on a Friday afternoon then I would think those levels should hold on Monday unless we see an even bigger attack by then.

I guess you would call me cautiously bullish. I think it was remarkable that the markets did not sell off more on Friday. I have to temper my bullishness however with the low volume but low volume on a down day is good. Only 1.3 billion traded on the NYSE and 2.1 billion on the Nasdaq. Decliners did beat advancers but you would also expect that during profit taking from the three weeks of gains. My editors plays this week are all bullish and were picked to take advantage of expiration week and cheap premiums. The game plan as I see it is continue to go long until the market convinces us otherwise. I would expect to close long positions by Thursday since the majority of the major earnings will be over at Thursday's close. Even the most bullish scenarios would include another pullback by weeks end and bearish scenarios would be even worse. Remember, if we are going to get a normal post earnings October crash it could come in the five day period beginning next Thursday. Be prepared to close and move to the sidelines if the situation warrants.

Definitely, enter passively, exit aggressively!

Jim Brown

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