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Market Wrap

Bullishness Breaking Out All Over!

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       12-06-2001           High     Low    Volume Advance/Decline
DJIA    10099.14 - 15.15 10169.44 10079.77  1.4 bln   1572/1539
NASDAQ   2054.27 +  7.43  2065.69  2037.64  2.1 bln   2068/1558
S&P 100   596.77 -  0.93   599.97   595.56   Totals   3640/3097
S&P 500  1167.10 -  3.25  1173.35  1164.43
RUS 2000  482.23 +  2.81   482.80   478.72
DJ TRANS 2619.40 +  6.91  2643.24  2596.81
VIX        25.09 +  0.30    25.66    24.63
VXN        48.39 +  0.95    48.99    47.76
TRIN        1.09
Put/Call Ratio       .80

"Better than expected" appears to be the key word for the day! Heavyweights SUNW, INTC, AMD appeared on the leader board after all said that sales were better than expected in this quarter. The consumer may not dead but in the case of SunMicro they want to see the next four weeks of orders before proclaiming a complete turnaround. IDTI was about the only complainer in the tech sector and said their earnings would be -15/20% less than expected. Who do you think will have more influence on our market? INTC, SUNW and AMD with combined quarterly revenues over $10 billion or IDTI with revenues of only $77 million.

The good news is breaking out all over but we may not be out of the woods yet. Beginning with the biggest tech with a major announcement on Thursday, Intel raised their estimates for their fourth quarter revenue to $6.7-$6.9 billion from $6.2-$6.8 billion. They said margins were going to come in on the higher side of their targets and that orders for their P4 processors were better than expected. No complaints here!

AMD also said that they were experiencing stronger demand than previously expected especially in their high speed Athalon processor. They said their 4Q loss would be narrower than expected and they would return to profitability in the 2Q.

SUNW said orders were on pace for their prior estimates (whatever that means) but the last four weeks of this quarter would be critical. The cautious words kept SUNW down in after hours. Analysts were questioning whether SunMicro's orders were from fewer competitors or new storage products. In other words they were unable to decide if SUNW was doing better due to increased demand or simply because alternatives had gone away. They did say that microprocessor sales were stronger than expected.

The companies most likely to profit from this news are Dell and Gateway. If Intel and AMD are racing to meet demand for processors then somebody is selling computers. With 60% of all computers being sold in the fourth quarter, Dell and GTW could be heading for a strong quarter. Dell is already trading at an eight month high but still taking market share from competitors.

Not all the news was from tech stocks. Great news came from the Jobless Claims which fell -18,000 to 475,000. This was encouraging but the drop in continuing claims from 3.987 million to 3.638 million was the largest drop in eighteen years. It is still at an elevated level but the big drop could indicate that hiring has begun. Friday's Jobs Report will be the next indication of economic recovery through job growth.

Productivity grew by only +1.5% last quarter as a result of massive layoffs and was much weaker than the +2.1% growth rate in the prior quarter. Greenspan commented that he expected productivity to continue growing and the fact that it grew at all in the 3Q after the WTC attack speaks good things about our current quarter.

The only negative economic news was the slowdown in retail sales but everyone had pretty much discounted that already. Retailers have been complaining about warm weather keeping shoppers out of the stores. The warm weather has not been a problem here in Denver with cold temperatures and heavy snow in the high country. I spoke about my "parking lot indicator" (PLI) at our office. Our office building is in a mall parking lot and during normal years it is tough to find a parking spot between Thanksgiving and Christmas. Not this year however! Shoppers are only about 10-15 cars deep around the mall and only once since Thanksgiving have several cars spilled over into our parking lot. Easily half of the shoppers have failed to appear. This will eventually work its way into the stock prices of retailers but today nobody wants to face this fact. Current bullishness is too rampant.

The bulls should be excited. The Nasdaq closed more than +100 points above its 200 DMA and posted another gain after a huge day on Wednesday. The tech news after the bell today should give bears another case of indigestion with better than expected results from the two major chip makers. Sounds like a recipe for another leg up, EXCEPT, for the already overbought conditions. How many investors would jump on a tech stock up over +30% since Monday? (PMCS for example) Not many I would guess!

The S&P-500, a broader indication of the market, came to a dead stop at 1167, its 150 DMA and only eight points under its 200 DMA at 1175. It has serious resistance between 1172 and 1200. The Dow hit a high of 10169 only six points below serious resistance at 10175. The Dow and S&P have a tough road ahead. The Nasdaq could move up to 2100 before hitting the same type of resistance.

Now here is our quandary. Technically the markets are overbought and due for a rest. Even with the three week consolidation on the Nasdaq (13th - 5th), where it traded in a tight 100 point range, individual stocks were still making progress. Despite the technical indicators the sentiment is strongly bullish and should get stronger after the Intel/AMD comments. There is still a mountain of money on the sidelines but many funds are still waiting for a clear buy signal. TrimTabs.com said $7.7 billion in cash came into stock funds in the week ended on Wednesday. Over $6 billion came in on Wednesday alone when the Dow/Nasdaq crossed 10000/2000. You want a clearer signal? Retail investors are coming back. The 10K/2K barrier was a signal to John Q Public that happy times are ahead.

Whether the road ahead is made of gold bricks or land mines is still up for discussion. Tax selling may begin any day and investors will be wondering what hit them. So far the earnings warnings for this quarter have been nonexistent. The economy may be recovering and investors may be willing to put money back to work. The wall of worry that the successful markets must climb appears to be eroding daily but there are still challenges ahead including significant resistance. Remember the Fed meeting next Tuesday? Everyone expects them to cut rates another 25 basis points but what happens to our rally if they don't?

I am happy as you about the huge rebound this week. I would however urge you to remain cautious on Friday. Nobody should expect big gains on the day after a big gain and that is exactly what happened on Thursday, nothing! That lack of follow through is also a concern. Look at the charts for Tuesday/Wednesday. The majority of the strong gains came in just over three hours. This was mainly a short covering rally. Friday could easily see profit taking pushing stocks down again. Don't worry, be happy, it will only be temporary. I am long term bullish and still believe that buying the dips is the correct strategy. We have been very successful using that strategy the over the last three weeks. I am however short term skeptical. There is simply strong resistance above us and that resistance could impede our progress. Be patient, there is a better entry point in our future. Wait for it!

Enter very passively, exit aggressively!

Jim Brown
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