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Market Wrap

October Going Out With A Bang!

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       10-30-2001           High     Low    Volume Advance/Decline
DJIA     9121.22 -147.52  9264.52  9065.59  1.3 bln    944/2156
NASDAQ   1667.41 - 32.11  1686.68  1646.30  1.7 bln   1276/2323
S&P 100   545.06 -  8.28   553.34   541.25   Totals   2220/4479
S&P 500  1059.79 - 18.51  1078.30  1053.61
RUS 2000  422.83 -  6.58   429.41   420.11
DJ TRANS 2195.26 - 23.70  2219.69  2168.89
VIX        34.80 +  2.41    36.28    34.43
VXN        53.41 +  3.12    65.94    62.09
TRIN        2.15
Put/Call Ratio       .91

Remember Sunday? I cautioned you that a pullback was likely this week even though "historically" the last five days of October are bullish. I actually believe the last two days have been bullish. No, I did not lose my mind but you will have to read the entire article to see why. The "excuse of the day" was the disastrous consumer confidence report which hit a 7.5 year low after the attack. It is incomprehensible that anyone thought confidence would be up or even down only slightly so where is the beef?

The Consumer Confidence fell to the lowest reading since 1994 at 85.5 and well below analysts estimates of 96. The magnitude of the drop "surprised" analysts (duh!) and caused an instant reassessment of the forecasts for the 4Q. If the consumer is nailing their doors shut and avoiding the malls then the coming holiday season could be very dreary. How anybody could expect consumers to be buoyant and carefree with weekly FBI warnings about impending terrorist attacks is beyond me. Still I think analysts had taken all the patriotic flag waving as evidence the consumer was going to clean out their savings accounts and buy something as their patriotic duty. It is not going to happen!

The excuse of the day helped the indexes pick up speed but the direction was already known. The Dow was getting hit from all sides and PG was the only stock showing green most of the day. Phillip Morris was cut from the Goldman Sachs recommended list saying that profit growth is likely to slow in tobacco. Raising prices will continue to be harder and smoker drop off is growing. MO fell -2.00 to September levels.

Eastman Kodak fell after Lehman Brothers said Wal-Mart would introduce its own private label brand of film. Kodak is already under price pressure from overseas competitors and Wal-Mart has the power to take serious market share immediately upon introduction of the new label. EK lost -2.07 for the day.

McDonalds also went on a diet today after warning that earnings will grow by only 5-10% in 2002 and much less than the 12% analysts were expecting. MCD lost -1.29 and closed at a seven month low.

IBM and PG were the only Dow stocks that finished positive for the day. PG was up on news that although sales fell -5% they managed to beat analysts estimates. IBM was up on news that the board had authorized another $3.5 billion share buyback. They have already repurchased $4.3 billion shares this year. We added IBM as a call play today due to their strong relative strength and positive outlook, but only buy them on a breakout above $110.

The negative corporate news today was broad based with a flurry of tech stock earnings misses and downgrades. JNPR was cut by Merrill after doubling its price in the last month. OPWV fell more than 20% after disappointing results. ENE continued to head for penny stock status on the basis of questionable accounting. CSGS warned that revenues would be at the low end of estimates and lost -7.53 to close at 31.67.

Not to be left our Argentina continued to be a looming shadow of impending debt default to the tune of $132 billion. The president of Argentina is trying to work out a new plan but rumors are rampant that a default will come first. How this news could not already be priced in is beyond me. Traders have been listening to this for months.

The market event we saw Tuesday was a follow through from the profit taking on Monday. The Consumer Sentiment report was just another excuse to take them lower. The markets are scared of the economic picture that is being painted this week. The consumer sentiment was the first hurdle and the GDP on Wednesday morning is the next. The estimate is for a recessionary -.8% to -2.7% drop in GDP. The -0.8% number would be bad enough but gladly accepted by investors compared with the lower number. What most investors are forgetting is that the GDP number on Wednesday is for the 3Q, the last quarter not the current quarter! It was already looking bad before the attack but not -2.7% bad. There are three post-attack weeks in the quarter and analysts will be trying to project the 4Q based on what impact those last three weeks had. Here is the rub, if they knocked the GDP into deeply recessionary levels then the 4Q is not likely to be positive either.

The rest of the week is not looking any better for economic high points. The Chicago PMI is also out Wednesday and NAPM, Personal Income/Spending and Jobless Claims on Thursday. Friday has Nonfarm payrolls. This week's calendar is more Dangerous to investors than any mine field in Afghanistan. This is really good news!

Yes, good news! Every institutional investor has been waiting for a retest of the prior lows to confirm a base. The lows on Tuesday fell to exactly the lows of Oct-19th, our last bout of profit taking. Without a much better than expected GDP on Wednesday I think we will see lower numbers still. A good reference point would be 8969, the intraday support from Oct-5th and the last time the Dow traded under 9000. Volume was decent on Tuesday which would increase the validity of another washout coming. The best of all scenarios would be a blowout in one of the remaining economic reports this week. That blowout could cause another spike down to the sub 9000 level and then a quick recovery as investors rush in to take advantage of the dip.

Many investors watched the +20% rally from the Sept-21st lows and thought I will wait until the "October" crash. That crash had failed to appear until this week and many were wringing their hands thinking they missed the train. Well that train is coming back to the station and this time there will be no empty seats. Remember, once a recession is official the markets typically rally into the hope of a recovery. They crash into a recession but rally once it bottoms. From all signs the economy will not be worse than the 3Q/4Q of this year. Most forecasts have the rebound gaining speed in 2Q of 2002 and investors will want to be onboard long before that.

Even without any new economic disasters the markets are approaching very oversold conditions again. The TRIN closed at 2.15, very high, and the put/call ratio settled at .91 which also signifies a near term buy. The VIX/VXN spiked to highs corresponding to the last profit taking dip. We are getting closer to an action point but we need to be patient.

The wildcard here is still the "impending" attack. When/if it occurs and the severity will decide our future. News that airspaces over nuclear plants had been cleared due to the current alert this week brings up visions of new challenges ahead of us. All bets will be cancelled if the magnitude of the next wave increases substantially.

I said on Sunday that this week would probably offer a new buying opportunity and we certainly got it. Wait for the rebound before taking new positions. I would buy any rebound from under 9000 on the Dow. The next stop on the Nasdaq could be 1625, the Oct-19th low, and worst case 1550, the Oct-5th low. I think institutions will buy 9000/1550 again with all available cash without any new terrorist attack. If you followed my instructions on Sunday you were stopped out on Monday morning and you are in cash and waiting on the sidelines for the bottom to appear. As always we will not know it is the bottom until after it passes so use the levels recommended above for entering new positions. BUT, in no case should you enter positions on the way down. WAIT, for the rebound back through those levels instead!

Conspiracy in play? If a group of funds with billions of dollars to invest wanted to make sure the bottom had passed AND reap a side benefit how could they do it? By taking advantage of the current instability and low volume ahead of the economic reports, funds could sell short stocks and try to force the market down and using their clout to accomplish it. Once the market stops falling and stocks reach support levels that hold up under attack then they cover their positions and go long confident of the bottom in place. The side benefit? With the Fed meeting next week they might influence a larger rate cut than expected if the markets are looking unstable again. Add a -50 point cut to already depressed stocks and their risk in going long is just that much less. A conspiracy? The truth is out there somewhere but we may never know it. As traders we need to only trade what we see not what we believe.

Definitely, enter passively, exit aggressively!

Jim Brown
Editor

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