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Market Wrap

Impressive Comeback!

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        10-22-2001        High      Low     Volume Advance/Decline
DJIA     9377.03 +172.92  9392.81  9167.45 1.09 bln   1836/1266	
NASDAQ   1708.08 + 36.77  1708.09  1660.22 1.51 bln   2090/1482
S&P 100   562.52 +  8.72   562.99   551.82   totals   3926/2748
S&P 500  1089.90 + 16.42  1090.57  1070.32           
RUS 2000  430.50 +  4.80   430.50   424.95
DJ TRANS 2203.58 + 29.30  2208.69  2170.63
VIX        33.11 -  2.73    36.49    32.85
Put/Call Ratio      0.59

Impressive Comeback!

Try as they might, the bulls couldn't put together a decent rally last week. But judging from the moves on Monday, traders must have gotten some much-needed rest over the weekend. Despite a mixed open this morning, due in large part to the weak SBC earnings (they missed estimates by a penny for Q3) announcement, there was a decided lack of follow through to the downside. This paved the way for the bulls to grab the ball and run for the endzone, which is precisely what they did.

Along with the earnings miss, SBC announced thousands of job cuts and a 20% haircut to their capital spending budget. On any other recent day, this would have sent the averages tumbling from the potential fallout to the likes of Alcatel (NYSE:ALA), Advanced Fiber Communications (NASDAQ:AFCI), Cisco Systems (NASDAQ:CSCO) as well as Nortel (NYSE:NT) and Lucent (NYSE:LU). But the earnings news wasn't all negative, with several companies reporting better than expected results. Giving a genuine bullish boost to the DJIA, Minnesota Mining (NYSE:MMM) posted results a penny ahead of expectations (excluding one-time items) and tacked on 5.1% by the closing bell. That's right, the results used those pesky pro-forma results, but investors didn't seem to care and the DJIA began to solidify during the lunch hour before seeing a sharp rise in the afternoon. Listening to MMM's conference call made it clear that the results came in ahead of estimates due to successful cost-cutting estimates, rather than a strengthening business climate, but by that time the rampaging bulls weren't interested in pesky details and propelled the DJIA to a nearly 173 point advance on unimpressive volume.

Good news throughout the cyclical sectors lifted Paper Products by 2%, Chemicals by 3% and even Airlines by more than 3.7%. Looking at a broader picture, the Morgan Stanley cyclical index gained 2%, even though First Call is now projecting 22.4% decline in S&P earnings. That is the largest drop in earnings, but investors seem convinced that that dire prediction is already priced into stocks. Let's just say I remain unconvinced.

That isn't to say the day's rally wasn't impressive. It was, especially given the breadth of today's advance. Widely regarded as a leading sector for the Technology market, Semiconductors were the percentage leader on a percentage basis. The SOX index vaulted higher by more than 5%, helped out by a statement from INTC that cap-ex spending for 2002 would drop by 10-20%, which is a smaller decline than was widely expected, and the chip giant gained nearly 5% to close back over the $25 level for only the second time since September 11th.

Other sectors moving the markets today were Biotechs (+3.84%), Insurance (+3.70%), Brokers (+3.47%) and Oil Services (+3.32%). The biggest losers included Gold & Silver, Natural Gas and Utilities, but there wasn't enough selling pressure to keep the markets from posting a solid gain with decent internals. Just over a billion shares traded hands on the NYSE, and the 3:2 advance/decline ratio was enough to push the DJIA within reach of the 9400 level once again. As the chart below demonstrates, the DJIA has been mired in a roughly 400-500 point range for the past 3 weeks with the 8950-9100 emerging as the support zone and 9400 as significant resistance.

This range will eventually break one way or the other, but until it does, we can continue to play the range. A failure to penetrate the 9430 level will give us the opportunity to play the downside on the weaker Dow components such as AXP, which disappointed investors and analysts with its earnings report this afternoon. A continuation of the current rally above the 9450 level gives bullish investors the chance to play the long side on stronger components such as MMM or IBM. Bounces from the 8950-9100 area look good for aggressive dip buyers as well, but wait for the bounce before playing.

The NASDAQ is making a convincing case that it is back from the brink of irrelevance as investors have propelled the Composite back over 1700. Ending today's session at 1708 marks the Technology index's second highest close since the tragedy of September 11th. As mentioned above, the good news from INTC helped to drive the Semiconductor sector higher, leading to a solid 5% SOX gain. Chip stocks will likely be put to the test on Tuesday after Altera (NASDAQ:ALTR) and Xilinx (NASDAQ:XLNX) announced disappointing results after the bell tonight. Bullish Semiconductor investors will need to overcome the prospect of a continued slowdown in the fourth quarter if they are going to push the SOX higher on Tuesday.

The potential economic impact of the ongoing war in Afghanistan and the expanding anthrax threat are taking the lion's share of the media coverage, with the subsequent result that scheduled economic reports are getting less attention. Proof of that came this morning with the release of the Leading Indicators report this morning which was met by a collective yawn from investors. Just the same, here is the report roster for the next few days. On Wednesday afternoon, the Fed will release the Beige Book survey and then Thursday gives us a full plate with Initial Claims, ECI, Durable Orders and Existing Home Sales.

Earnings are still coming in and will provide scattered catalysts for market movement, at least for the next couple of weeks. On deck tomorrow we have Amazon.com (NASDAQ:AMZN) and Qlogic (NASDAQ:QLGC) in the afternoon, along with a long list reporting both before the open and after the close. Needless to say, it's a minefield out there with numerous potential disappointments, while the likelihood of positive surprises uncommonly slight due to the persistently weak economic climate. Once the supply of reporting companies has been exhausted, we'll be at increased risk of a significant downward market event. Except the hope of an upside surprise from a big-name company, there just isn't anything to motivate buyers to accumulate stocks at current levels.

Capital preservation is key in these uncertain markets, so trade only when the risk/reward ratio is in your favor.

Mark Phillips
Research Analyst

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