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Market Wrap

Profit Taking Means Lower Prices

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       11-20-2001           High     Low    Volume Advance/Decline
DJIA     9901.38 - 75.08  9976.73  9893.49  1.3 bln   1451/1678
NASDAQ   1880.51 - 53.91  1930.21  1877.79  1.9 bln   1363/2246
S&P 100   590.03 -  5.04   595.65   589.61   Totals   2814/3924
S&P 500  1142.66 -  8.40  1152.45  1142.17
RUS 2000  453.90 -  3.81   458.82   453.76
DJ TRANS 2489.44 - 43.08  2530.67  2484.33
VIX        25.93 +  1.13    26.55    24.97
VXN        51.41 +  1.14    51.69    50.05
TRIN        1.51
Put/Call Ratio       .60

This may sound crazy but many overly optimistic people think that profit taking only happens to other people or to stocks they don't own. A day like Tuesday catches them totally by surprise even though the "profit taking ahead" warning has been prevalent. The Dow was up over +20% from September lows and the Nasdaq +35%. The topic of conversation for Monday was the appearance of the "new bull market" now that the twenty percent threshold had been breached. Today was simply a case of sell on the news coupled with a desire to be flat over the long Thanksgiving weekend.

The market news was slim Tuesday with nothing much to power the markets in front of the holiday. Microsoft is considering a deal that would settle the majority of the private antitrust cases against the company. The deal would require that the company provide free software and computers to the 14,000 poorest U.S. schools over the next five years. The deal would cost Microsoft between $1.1 billion and $1.7 billion but that could easily be seen as an incredible windfall for Microsoft. By supplying PC based computers and software to the next generation of computer users, children, they effectively get a jump on Apple Computer in the future sales cycle. People tend to buy what they are familiar with and shun that which is different. After years of critical errors and lapses by Microsoft it appears that all the stars are in alignment for them now. The Justice Dept rolled over with a slap on the wrist and a pat on the back and now a chance of a lifetime with the civil case settlement. MSFT lost -1.14 for the day with the pre-thanksgiving profit taking but it pulled back to support at $65. With even stronger support at $64 and all the bad news disappearing this could be the last entry point before triple digits again next spring.

IBM fought the trend with a fractionally positive gain based on news that their server revenue climbed +7% to a year over year 30.3% in the third quarter and extended the companies lead as the world's largest server vendor according to Gartner Dataquest. According to Gartner, IBM was the only one of the top four Intel processor based server vendors to gain revenue share in the last two quarters. They based their gains on a complete line of servers from entry level to giants running all types of operating systems including UNIX. IBM said their competitors try to shoehorn customers into one-size-fits-all solutions. SUNW, CPQ and DELL all lost ground on the news. IBM has been moving sideways in price since Nov-7th with a solid top at $117 but also a solid bottom at $112.50. I would use any weakness to that level to institute new long positions in IBM. $110 is the next stronger support level.

Not all news on Tuesday was good. ADI announced earnings and an -88% drop in net income and warned that revenue growth would not resume until the 2Q of the next year. They said demand for their signal processing chips remained weak. They lowered guidance to $.11 instead of the prior $.15 estimate. ADI fell to $39.50 in after hours after trading near $47 on Monday.

Triquint Semiconductor also warned after the close that sales were less than expected and said revenue would be at the low end of the prior estimates. They said most of this quarters sales were booked in the last quarter and bookings this quarter were not as strong. Both ADI and TQNT said they were beginning to see a bottom forming but that bottom is ahead of us not behind us. This is contrary to prior thoughts that the 3Q-2001 was the bottom.

Mandalay Resort Group, a Vegas hotel group, also warned that 4Q earnings would be light because gambler visits had not yet picked up due to the reluctance to travel. While this is a recreational hotel chain the same is true for the regular business destinations as well.

Goldman Sachs' chief investment strategist Abby Joseph Cohen went on record again as being bullish on the current market. She raised her equity allocation to 75%, the highest ever, on Sept-24th after the 9/21 lows. She feels that earnings may bottom in the 4Q even if the economy doesn't. Her lowest level for the year-end S&P-500 is still 1300 which is +158 points higher. Her upper target is 1425. She moved to a range recently after being soundly trounced on her last few specific predictions. Still, she is on the right track.

We looked at a lot of charts today after the market closed and the consensus of opinion was a draw. As everyone knows the markets have been on a really good run and have been due for profit taking for several days. That profit taking will be assisted by the negative chip news after the bell today. BUT, most of the charts had only given back their gains from Monday. Normal profit taking is not giving back one days gains. Many of these charts pulled back to just above support and while they could still fall further they are not likely to fall much farther.

The fix is in for the markets. The war is almost over or at least the highly visible portions. Now it is just a manhunt and not a 150 plane daily bombing campaign. American citizens are becoming more secure in their daily lives with no further terrorist attacks and stronger and stronger security safeguards. Gas prices are falling to double digit levels with no strong indications that they will be successful in cutting production ahead. (Thank Bush for the barbecue and handshake with Russia for that. One word from Russia that they will go along with the cuts and prices could have soared again. Don't think it was not discussed and agreed!) The earnings warnings for the 4Q have been dire and will get worse but therein lies the possibility of better than expected real results. Stocks are warning because of the past 90 days trend. Cheaper oil will break that trend and show up as better than expected earnings on the manufacturing side and the trend on the consumer side is also changing.

How do I know? Our office building shares a parking lot with a shopping mall. After thanksgiving it is almost impossible in normal years to find a parking place. Over the last several months it has literally been vacant with only dozens of cars instead of thousands. That has changed in the last two weeks. The numbers of cars are increasing daily and are almost back to their pre-holiday levels. I can't say for sure until next week but I expect the lines into the lot will return this weekend and continue through December. Why am I so sure? The retailers have been making it clear that they plan to discount everything to rock bottom. Remember, they ordered their current inventory well before the 9/11 attack. Now they have money tied up in merchandise that they have to move at any price. This produces sales that will be legendary in magnitude. Those "sell at any price events" will drag consumers board with war TV off the couch and into the malls. Consumer confidence will soar as cheap purchases produce the same feelings as 99 cent gas. I will keep you posted on the PLI (parking lot indicator) as the holidays approach.

The bottom line for me is still bullish. I see any dip as another buying opportunity unless conditions change. About the only things that could change the picture would be another big terrorist attack or a change in Fed policy on Dec-11th. Until then any further dip in stocks is an undeclared "blue light special" which we should buy.

Enter passively, exit aggressively!

Jim Brown
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