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Market Wrap

Bears Remain Frustrated From Lack of Sell Off!

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       WE 11-11         WE 11-02         WE 10-26         WE 10-19
DOW     9608.00 +284.46  9323.54 -221.63  9545.17 +341.06  -140.05
Nasdaq  1828.48 + 82.75  1745.73 - 23.23  1768.96 + 97.65  - 32.09
S&P-100  577.99 + 18.00   559.99 -  7.99   567.98 + 14.18  -  6.98
S&P-500 1120.31 + 33.11  1087.20 - 17.41  1104.61 + 31.13  - 18.17
W5000  10297.21 +280.40 10016.81 -168.72 10185.53 +290.64  -154.23
RUT      438.10 +  5.03   433.07 -  5.58   438.65 + 12.95  -  2.89
TRAN    2320.69 + 74.03  2246.66 -   .92  2247.58 + 73.30  - 60.45
VIX       28.76 -  3.64    32.40 +  1.87    30.53 -  5.31  -   .61
VXN       58.59 -  2.60    61.19 +  4.28    56.91 - 12.37  +  3.30
TRIN       0.90             0.92             0.87             1.19
TICK       +784             +701             +828             +342
Put/Call    .74              .70              .53              .80

Bears Remain Frustrated From Lack of Sell Off! by Jim Brown How can you complain about a week with almost a +300 point Dow gain? The Nasdaq posts almost a +5% gain for the week and many traders are miffed because it did not roll over. Go figure! I guess that is what happens when you have a preconceived idea about the market and the market moves in the opposite direction. Everyone knows I have been on the wrong side many times but normally I am expecting a bullish direction. I guess the bears are now experiencing the same thing we bulls saw for over a year now. It is about time for a change!

Wow! More positive economic reports? Is that the sun actually peeking through the clouds? The PPI number announced on Friday was the lowest since record keeping started in the 1940s. Producer prices fell -1.6% in October helped by sharply falling energy prices. Producer prices of gasoline and fuel oil fell by 21.2% and 20.9% respectively. Wholesale prices for crude goods fell by 9.1% in October compared to September. Vegetables fell by 11.4% and passenger cars were down 4.7% compared to the prior month. Inflation has completely disappeared from the economy and the Fed has no roadblocks to future rate cuts should they decide they are needed. Because of weak demand after the attack producers have zero pricing power and some analysts are afraid deflation is creeping in as a result. Since the fall out from the attack is an extraordinary one time event and the majority of the drop was energy related, I doubt the deflation threat is going to stick.

Also surprising traders on Friday was a better than expected consumer sentiment number showing that consumers are shaking off the impact of the attack and starting to go back to their daily routines. Given the daily barrage of negative bioterror news and continued terrorist alerts this was even more amazing. We all know that "out of sight is out of mind" and it appears that viewers are turning off news TV and going back to Friends, football and soap operas. Some networks even elected to not show the presidents speech on Thursday and kept regular programming instead. Definitely a sign of boredom by the public. The hope now is that maybe the holiday shopping season will be better than previously expected especially since more consumers are going to be spending the holidays at home instead of traveling as much as normal.

The markets were also bolstered by news that the Northern Alliance has taken Mazar-e Sharif which would be a major victory if true. The public has been warned for weeks that fighting for this city would be long and hard and it appears the Taliban troops turned tail and fled instead. If this is true then the morale of the Taliban troops is worse than expected and the war may be farther along then anyone thought. Capturing the airport in Mazar-e Sharif will provide a ground base for coalition fighters and allow them to fly many more sorties per day and be on target quicker. We are far from an end to the conflict but the flow of battle just took a significant turn against the Taliban if the news reports are true. The news produced a rally off the lows of the day and provoked some short covering at the close as well. Shorts do not want to be short if there really is a major change in status over the weekend.

The Dow finished Friday with only a minor gain of +20 points but closed above the September-10th pre-attack close of 9605. This is not a technical level but a sentiment level that could comfort investors and bring them back into the markets. The volume was light in front of the long weekend as many traders will observe Veterans Day on Monday even though the stock markets will be open. The bond markets will be closed and that means stocks will be on their own and struggling for direction. Many times this is beneficial for stocks since arbitrage trading is not active to put pressure on stocks.

Given all the gains over the last two weeks the action on Friday was very encouraging. Disney posted terrible earnings and warned that business was still down and the stock was still up fractionally on Friday. QCOM missed street estimates and warned that earnings would be weaker going forward and after falling as low as $51.19 on Wednesday rallied to over $58 on Thursday and closed the week on an uptrend and with a gain. Cisco beat estimates and had the audacity to say orders were increasing. Nivida beat estimates with a $.26 profit and flaunted in the face of the bears higher guidance for not only 2002 but also 2003. Not all stocks recovered from bad news and Heinz bled red, green and purple ketchup with a warning that food service sales had slowed significantly since the attack and their earnings would suffer. Yawn.

The markets traded on both sides of zero all day but the lack of a serious sell off is telling for future prospects. Whether you are ready or not it appears the foundation for a recovery in 2002 is slowly falling into place. Every day that passes with no tales of further earnings drops puts us closer to a real rally with legs. If you listen carefully there are tidbits of information almost every day now that point to better earnings ahead. Come on, how much worse can they get anyway?

There appears to be a bottom under the market and the bears are having a tougher time pushing and holding it down. Twice in the last three days sellers have tried to take the Dow back down and they were unable to even reach 9500. Support on Mon/Tue was in the 9400 level and that support level is rising daily.

Traders still short are watching uneasily as every day the tape goes against them. Noted technical analysts continue to call for a retest of the September lows but sentiment is slowly but surely turning against them. The old adage that the market needs a wall of worry to climb in order to build a successful rally is proving true. The continued news stories cover every gamut from terrorists, earnings, bioterror, recession, deflation, cocooning, layoffs etc but the markets continue to look ahead and build on their base.

I was criticized for being bullish this week. Sorry, come out of your cave and enjoy the sunlight! There may be dips ahead but I continue to believe that they will be buying opportunities. If you took my advice to buy dips at 9500 you had two great entry points in the last three days. Can the Dow fall below 9500 again? Sure! The next level of support is 9400 but nothing says it has to stop there. Every market, regardless of time or era, will cycle up and down regardless of trend or direction. The current market is trending up but the dip on Nov-1st proves that nothing goes up in a straight line. The -140 point drop from the high of the day on Thursday was pure profit taking. More could be in front of us. We have had a good, no great run. I personally believe that we have move gains ahead of us but we while we position ourselves for those gains we should also protect ourselves against the next wave of profit taking.

We take a risk just driving to work every day but that does not mean we should cower in fear at home. You get in the car and go, fully expecting to arrive safely. You do however maintain insurance in case somebody runs into you. Using the same analogy we should get in the market and fully expect gains as the projected 2002 recovery begins to take shape. While in the markets we need to maintain insurance in case a bear mauls our expectations. That insurance is a stop loss whether physical or mental. It separates the real traders/investors from those who are gambling with their future. What would happen to your retirement if you were in an accident on the way to work on Monday, your car totaled and you were laid up for three months in the hospital without insurance? The same thing is true for investing in the stock market. Many are afraid to get back in. They have post traumatic stress syndrome and are afraid to lose again. They have been shell shocked by month after month of dips since the May highs. Commentators have beaten them senseless with story after story about how bad it is. I have a clue for you. These stories are about how bad it WAS not is. Everyone believes the worst is behind us, even the biggest bears. So where is the beef?

Now I will temper my bullishness with a little caution. We are setting exactly at the long term resistance of the S&P since May of this year. If the markets are going to fail they should fail here. If they don't it would signal a perfect Fall breakout buy signal like in Oct-1998 & 1999. We should be so lucky!

Next week should be an exciting week in the markets. The economic calendar is slim with Retail Sales on Wednesday, Business Inventories on Thursday and CPI and Production/Utilization on Friday. There are several biotech conferences this week which should help the depressed biotech sector. IBM has an analyst conference and should attempt to pump up expectations about their very broad product line. Microsoft officially releases the XBox video game. The smash hit Harry Potter makes its debut and is widely expected to generate an economic recovery in the movie/video/toy sectors all by itself. Estimated net profits for AOL Time Warner are somewhere in the $350 million range. Did I mention COMDEX in Vegas this week? Major earnings for the week include BEAS/NTAP on Tuesday, AMAT on Wednesday and DELL/HWP on Thursday. The underlying thread here is that life is continuing and there are plenty of positive things to encourage investors.

Don't get me wrong the 4Q has already set a record for earnings warnings. I just think it is already priced into the markets. Consumers are refinancing homes and cashing out equity at a record pace thanks to the cheap interest and that money either saved by cheaper payments or received from excess equity will find its way into the economy or into the markets. We know the end of the story. The economy will recover. We will win the economic war at home and life as we know it will improve. Cash in money markets at 2% a year will decide that a one day gain in most tech stocks will equal that with ease. Option investors will continue to capitalize from those trends. Nasdaq 3,000 soon, not hardly, but BRCM @ $50, NVDA $60, FDX $50, CHKP $40, count on it! The profit opportunities are there if you are not afraid to play them. The trading plan for next week should be buy any rebound from the 9500 level on the Dow and 1780 on the Nasdaq. Be prepared for dips as well as bounces. Maintain stops on any open position and let's roll!

Enter passively, exit aggressively!

Jim Brown

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