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Market Wrap

Shorts On The Run!

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       11-6-2001            High     Low    Volume Advance/Decline
DJIA     9591.12 +150.09  9600.60  9386.51  1.3 bln   2053/1054
NASDAQ   1835.08 + 41.43  1835.49  1777.91  1.9 bln   2079/1513
S&P 100   576.30 +  9.62   576.86   563.14   Totals   4132/2567
S&P 500  1118.86 + 16.02  1119.73  1095.36
RUS 2000  442.78 +  5.24   442.79   435.70
DJ TRANS 2291.15 +  6.43  2292.36  2257.71
VIX        29.85 -  2.09    32.66    29.22
VXN        57.34 -  1.62    60.13    57.26
TRIN        0.91
Put/Call Ratio       .58

You have heard it before but today was really pretty. The tenth Fed rate cut energized traders and contrary to historical trends the markets rose significantly into resistance. Once that resistance was broken the shorts started covering in mass. Volume increased significantly in both the cash markets and the futures markets. Disbelief abounded and traders were scratching their heads as the final bell rang.

The Fed cut rates by another 50 basis points lowering the target rate to 2% and the lowest rate in forty years. You have to go back to 1961 for a lower rate. Traders were caught by surprise after the consensus of opinion fell from a 65% chance of a 50 point cut at the open on Tuesday to only a 43% chance by the time the decision was announced. Essentially the 50 point cut was subtracted from the market with the morning weakness. Traders then over reacted to the decision and bought the cut and the "bias toward weakness" statement, which suggests future cuts, and all bets were off.

Today went against the historical trend for the year. For the five scheduled FOMC meetings this year the historical trend was for a sell off on the news. On the day of the meeting the Dow lost an average of -63 points. Only one meeting day resulted in a gain out of the five so far this year. What this will do to the day after historical trend remains to be seen. The day after the last five meetings averaged a +103 point gain with only one day posting a loss. The day after the March meeting lost -233 points but every other meeting resulted in triple digit gains. May +343, Jun +132, Aug +102, Oct +173.

The ramifications here are clear. The markets rose to close over previous resistance levels of 9575/1795 respectively and any further gain on Wednesday could send a serious message to anyone still short. Cover at any cost! If the 2001 historical trend of a triple digit gain the day after a meeting holds true then we could have a major blow out on Wednesday. Should, would, could? If it was as easy as simply analyzing recent history to forecast future trends there would be a lot more billionaires in the stock market.

Events after the close gave bears a ray of hope to cling to and that creates more unknown for tomorrows open. Qualcomm missed its earnings estimates and got slaughtered in after hours trading to the tune of -$5. They also warned about sales and earnings going forward and the sector tanked taking with it many of the chip stocks that depend on cell phones for survival. This tainted the broader tech market which traded lower on the news. Never a dull moment!

Cisco beat estimates and said sales were increasing and that helped power investor sentiment on Tuesday even though Cisco was basically flat. Maxim Integrated also beat estimates on increasing order rates and said good things about their business which would have helped the chip sector. Both of those could be ignored as a result of the QCOM news.

The Qualcomm news may make traders pay more attention to the already record rate of earnings warnings for the 4Q. Still isn't this news already priced in? The Qualcomm stock drop in reaction to the news could be isolated to QCOM since the recent low was in the $38 range and they never miss earnings. They blamed the miss on lower interest rates for carriers that they financed but still lowered the guidance going forward. Company specific or not, nobody knows what the market reaction will be tomorrow.

Will the shorts that covered today go back short again tomorrow?

Would you feel comfortable shorting IBM again after seeing the jump at the close as prior resistance levels were broken? I suspect that shorts were hoping to see a 25 point cut and selling on the news and most will want to wait on the sidelines for a couple days before testing the water again on the short side.

This brings us back to Wednesday. The only economic reports are the Productivity and Wholesale Inventories. Neither have major market moving histories but anything is positive. The Dow has been up four days in a row and has gained +574 points since the 9014 low last Thursday. Can you say profit taking soon? The Nasdaq has gained +189 points since the last dip to 1646 six days ago.

I get hate mail for talking about the VIX but the facts remain that it closed at a post attack low of 29.85 on Tuesday. This is not bullish and added to the low put/call ratio of .58 it means that fear has left the markets. The post meeting rally could have been just short covering and with almost 600 points under our belt we need to be cautious. However, the S&P-500 did break above strong resistance at 1100 and would have to suffer some real selling to fall below that level again!

It appears on the surface that we could be facing a very strong move on Wednesday. Even in the face of the lack of bullish fear there could easily be another strong leg up before profit taking creeps back into the picture. The VIX could easily fall another three points and still be in historical buy territory. The fear we have had over the last two months has thrown short term historical analysis into a shambles. About the only thing an investor can do today is trade what the market gives us and try not to form opinions about what should be happening. Key resistance has been broken on every major index. Hedge funds and equity funds could easily decide that the time is right to put available cash back to work. We are riding the crest of a +600 point gain but history is on our side. Five of the last six Novembers have seen nice gains and limited profit taking. Could we be so lucky again? Tighten up those stops and buy any dip below 9500.

Don't Sell Too Soon Just Yet!

Jim Brown

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