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Market Wrap

Who's Afraid of the Big, Bad Bear?

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        11-19-2001        High      Low     Volume Advance/Decline
DJIA     9976.50 +109.50  9976.50  9870.40 1.30 bln   1955/1166	
NASDAQ   1934.40 + 35.90  1934.70  1905.36 1.88 bln   2234/1427
S&P 100   595.07 +  7.00   595.08   588.07   totals   4189/2593
S&P 500  1151.06 + 12.41  1151.06  1138.65           
RUS 2000  457.71 +  6.40   457.71   451.31
DJ TRANS 2532.52 + 35.15  2541.13  2499.76
VIX        25.72 -  1.45    27.21    25.46
Put/Call Ratio      0.43

Who's Afraid of the Big, Bad Bear?

Apparently nobody, as the markets continue their advance, with broad market indicators showing that fear is disappearing faster than the Taliban front lines. The CBOE Market Volatility index continues its retreat into the historical range between 20-30, as investors vote with their wallets that the economy will be much healthier next year. Coupled with 10 consecutive interest rate cuts and hope of more to come and a sharp decline in energy costs, many investors clearly believe the worst is behind us. I think the really important question is whether earnings are really going to recover enough over the next 2-3 quarters to justify the recent (and substantial) rebound in PE ratios. It will take a smarter man than myself to answer that question, and as a trader, I'm thankful that I don't need to.

Pardon me a brief gripe, but it seems CNBC is becoming the center for all news other than that which is market related. Is it just me, or have they forgotten that their viewers watch for information on the markets, not every comment made by a resident of the Washington beltway. It seems like every time I'm watching an interesting market-related story, the guests get pre-empted for a speech by a member of the administration to one school group or another. It may be news, but what does it have to do with the markets? Wouldn't it be more useful for investors to hear what is ACTUALLY moving the markets and what the attendant risks are at this time?

I think what may actually be going on is that there isn't much market-moving news going on right now, and that is being exacerbated with a holiday-shortened week. There was one news item getting a fair amount of airtime on Monday and it was the big oil industry merger between Phillips Petroleum (NYSE:P) and Conoco Inc. (NYSE:COC). This $15.2 billion merger of equals will create the largest refiner in the country and judging by the price action, investors liked the deal. Both stocks spent the day trading higher with COC gaining $1.68 and P tacking on $1.53. That's not bad, considering the pressure the oil patch has been under lately, with the sharp declines in the price of both crude oil and gasoline. For the record, the December Crude Oil contract traded as low as $16.70 today, a new 2-year low. That has helped the Airline index (XAL.X) to stage an impressive 5-day, 37% rally, reaching a new post-attack high of $89.55. But even after such a stellar move, the XAL is well below the September 10th level of $117, highlighting the significance of the damage that is just in the beginning stages of being repaired.

Housing starts were out this morning, showing a mild nationwide decline of 1.3%, mainly due to the 17% plunge in the west. While still 1.6% above the year-ago level, the 1.55 million housing starts are 6.5% below the record peak (1.66 million) posted in July. The emerging trend of weakness in the housing market points to further economic weakness ahead, but the equity markets shrugged it off and all the major averages worked higher again.

Speaking of market action, it was another encouraging session for the bulls, at least the ones that haven't already flown the coop early for the Thanksgiving holiday. (How's that for a mixed metaphor?) The DJIA inched ever closer to the psychological 10,000 level and NYSE volume was downright impressive for the beginning of a holiday week at 1.3 billion shares. Not only that, but the internals were solid too. Advancers led the decliners by nearly a 2:1 ratio. While much hay is being made about the 10,000 level, a look at the DJIA chart reveals that 10,200 will be a much more important technical level due to the number of times it acted as support in July and August.

Not to be left out, the NASDAQ Composite vaulted through the 1925 level for the first time since the September lows, closing at the high of the day on nearly 1.9 billion shares. The advance decline line was positive here too, coming in at 11:7. Who says there aren't any solid trading opportunities in 'quiet' holiday weeks?

Last week, I mentioned that bulls would want to continue monitoring two of the leading sectors, Semiconductors and Networkers, to gauge the internal strength and longevity of the current Technology rally. I think it is worth reviewing the charts from last week and then looking at the action since then.

Last week's Semiconductor (SOX.X) chart:

It clearly looked like the SOX might be giving up its leadership role after running into firm resistance in the $540-550 area. Recall that the descending trendline began with the highs in May, and the horizontal resistance line acted as support numerous times over the past year before giving way in the wake of the September attacks. So let's see what the recent action has to tell us.

So the SOX appears to be giving up its relative strength. How about the Networking sector? Remember last week it was coiling for a possible breakout over the $310 level and we were looking for continued leadership here to help the broader NASDAQ to push closer to the formidable 2000 level.

Last week's Networking (NWX.X) chart:

Sure enough, the NWX delivered in spades, following the breakout over $310 with an advance through resistance levels at $322, $335 and $345. All this without so much as missing a beat. The NWX led the NASDAQ higher on Monday as well, pushing right up to the $358 level with another 3.5% gain. If the NWX can clear $360, there isn't much resistance until $386 and then $405.

Pardon my optimism, but that looks like a setup for a sizeable advance in select Networking stocks, which could drive the NASDAQ up to challenge 2000 in fairly short order. Take a look at the Call list and you can see we are positioned to take advantage of such a move with our plays on Juniper Networks (NASDAQ:JNPR) and Finisar (NASDAQ:FNSR), also today's Play of the Day.

Bullish bias aside, it is difficult to find an equity or index (that isn't being plagued by bad news) that doesn't have an overbought chart. Does that mean that the current rally is over? Not necessarily. Just as we saw charts remain buried in oversold for weeks on end earlier this year, it is entirely possible that we could see overbought charts remain so for weeks to come.

Both the week of Thanksgiving and the week following have a historically bullish bias, and if today's action is any indication, the markets are in a repetitive mood. My advice is to continue to play the upside in those sectors that are pushing the markets higher. But keep those stops tight, particularly as the DJIA approaches the 10,200 level and the NASDAQ tests 2000. Given the holiday-shortened week, I wouldn't be surprised to see investors move to the sidelines in the next couple of days, locking in gains and heading off to enjoy some low-stress time with family and friends. That will certainly be my plan!

Until next time, I think Jim's advice to "Sell Too Soon" may be the most prudent course of action. Afterall, nobody ever went broke by taking profits!

Mark Phillips
Research Analyst

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