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Market Wrap

Profit Takers Get Their Fill!

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       WE 12-07         WE 11-30         WE 11-23         WE 11-16
DOW    10049.46 +197.90  9851.56 -108.15  9959.71 + 92.72  +258.99
Nasdaq  2021.26 + 90.68  1930.58 + 27.39  1903.19 +  4.61  + 70.10
S&P-100  591.78 +  6.98   584.80 -  8.47   593.27 +  5.20  + 10.08
S&P-500 1158.31 + 18.96  1139.45 - 10.89  1150.34 + 11.69  + 18.34
W5000  10745.37 +213.92 10531.45 - 64.95 10596.40 +109.73  +189.46
RUT      481.21 + 20.43   460.78 +  2.36   458.42 +  7.11  + 13.21
TRAN    2628.26 +116.48  2511.78 - 23.12  2534.90 + 37.53  +176.68
VIX       24.89 -  1.25    26.14 +  1.36    24.78 -  2.39  -  1.59
VXN       50.18 +  1.73    48.45 -  2.36    50.81 -  4.23  -  3.55
TRIN       1.18             1.19             0.70             0.99
TICK       +828             +852             +976             +750
Put/Call    .78              .63              .61              .50

Weaker than expected economic reports provide another excuse for traders to take profits from the recent rally. In reality we should thank them for providing us another buying opportunity. Despite the down day all the major indexes finished the week with another healthy gain. Even a major hit to many stocks by a ruling in an asbestos case could not push the Dow/Nasdaq below 10000/2000.

The best news of the day in my opinion was interpreted by traders as an excuse to sell. The Jobs Report showed a larger than expected drop in November with -331,000 jobs lost. Analysts had expected only -200,000. October job losses were revised downward to -468,000 as well which was a 25 year low. The unemployment rate increased to 5.7% and a six year high. The impact of the 9/11 attack is slowing but increasingly being felt in the service sector which had been stronger before September. Manufacturing cuts accounted for almost half of the job losses. Remember, this is a trailing indicator. This was the picture for November and it shows an improving trend over October. Still the numbers will almost certainly cement another rate cut when the Fed meets on Tuesday. The numbers may have been negative on the surface but the lasting impact is bullish.

The other positive economic news was a jump in consumer sentiment to 85.8 and the third consecutive monthly improvement. At 85.8 it has yet to achieve the pre-attack levels of 91.5 but it is accelerating from the 81.8 September bottom. The expectation portion of the index rose to 76.6 and the present conditions component rose to 95.3. In light of the increasing unemployment any gains now point to an explosion when the economy actually turns around.

With traders looking at this news as positive one analyst suggested stock prices were already looking farther ahead than Nostradams. Chip stock investors must have seen a negative prediction in the three tech affirmations on Thursday. Investors sold the news from Intel as "not good enough" and SUNW as too vague. AMD was the only winner with news that sales of the Athalon processor were hot. The chip sector also took a hit with a downgrade on Altera. Morgan Stanley cut ALTR to neutral from outperform. They also increased the price targets on SLAB from $30 to $50 and XLNX from $40 to $50. The Semiconductor index had been close to breaking the 600 level but rolled over as investors sold the INTC/AMD news to close at 571. Investors should not interpret this news and reaction as negative but just a normal reactionary event. INTC had gained +20% since Nov-21st in anticipation of the quarterly update. This was simple profit taking again.

Microsoft help influence the major averages to the downside after the dissenting states filed their own plan to remedy the antitrust concerns. They want a stripped down Windows or unbundled product which is cheaper and more affordable. They also want full release of Internet Explorer as an independent product and an release of the Java code for developers. An independent "special master" would oversee the plan and complaints for a ten year period. MSFT fell to an intraday low of $66.60 before analysts shrugged off the proposal as no big deal. It has to go to the court and it will be mid-2002 before any action is taken on it.

Hewlett-Packard rose in after hours after the family foundation voted against the Compaq merger. The Packard Foundation, which controls 10% of HWP stock, sided with other family members already on record and bringing the total to 17% of the voting stock against the transaction. HWP jumped to $25 in after hours and CPQ fell to $10. The foundation said the merger would over expose HWP to very low margin products like personal computers. I am still on record as suggesting Dell buy CPQ. It takes out a huge competitor and puts them into the retailer marketplace. The additional volume would only decrease their costs. Of course it would probably not pass the regulators but it should be worth a try. You can't tell me Michael Dell has not thought about it.

The major averages came right back down to "psychological" support intraday on Friday but the minor selling was bullish in my mind. There were several negative events, which could have easily killed the markets just weeks ago. Argentina was at deaths door again as Economy Minister Domingo Cavallo was in Washington trying to get a last ditch reprieve from the IMF. After a strong run on the banks over the last two weeks it was feared that Argentina would default as early as this weekend. This event has been predicted for months and is already priced into the markets but the actual event could have caused a knee jerk reaction. There was a flurry of rumors that the drop in the U.S. bond market was due to Argentina selling U.S. Zero coupon bonds, which had been held to secure their debt, to raise cash and avoid a weekend default. This rumor was never substantiated but the bond market sold off heavily. Japan announced another recessionary quarter and continues to spiral downward. Nobody even noticed.

Halliburton (HAL) fell more than -40% on news that a Baltimore jury had awarded $30 million in asbestos damages against its Dresser subsidiary. The verdict brings the total to over $150 million in awards against the company. The recent flurry of verdicts in asbestos cases have brought the problem to the forefront again. Other companies including GP, CBE, GR, SEE and even Viacom dropped on worries about their own exposure problems. Why does Viacom (VIA), a media company, have asbestos exposure? VIA purchased CBS many years ago and CBS was originally Westinghouse which was involved in manufacturing. It appears that you can't distance yourself far enough from the problem to escape it. Many of the companies have sold or divested themselves of the problem units decades ago but the problem continues to haunt them even through bankruptcies. The point to this paragraph is that even a major loss by over a dozen companies, HAL dropped from $22 to $11, failed to crash the markets. That is bullish in my opinion.

The bottom line to this article today is good times are still ahead. The Fed will likely cut rates yet again and even though they will take back some of these cuts next year the low interest rates are impacting the economy in a positive way. The rebound is beginning and huge rallies always follow recessions. The only question remaining is how soon the recovery will catch fire and rocket the markets. The absence of earnings warnings should be our clue to the future. On Friday the Dow and Nasdaq pulled back to within two points of their critical psychological support of 10000/2000. No kidding both hit 10002/2002 before the rebound. Slap a retracement bracket on both of them and you will see exactly a 38.2% Fibonacci retracement of the gains from the Monday close to the Thursday's high. The convergence of the technical numbers with the psychological numbers may be pure coincidence but the drop stopped and as traders we should be happy. The selling in the bond market over the last three days has produced billions in cash which could be poised to enter the stock market next week. Normally a jobs report like we saw Friday would have sent investors running for the safety of the bond market. Exactly the opposite of what happened. This could be a leading indicator of next weeks trading.

No, I have not lost my mind since my Thursday commentary where I restated the strength of the resistance above us. It is still there but just maybe it will take the place of the wall of worry that is eroding daily. The only almost sure thing is that the markets will go up over the next several months and they will not go up in a straight line. For traders that is a great scenario. Rallies that create profits and dips on profit taking that will create new entry points. As option traders we do not want to be married to our positions like some stock investors. Rapid rises increase call premiums and profits for those that capture those gains. Rapid drops decrease call premiums and produce profitable entry points for new positions. As traders we need to be alert for these cycles. I said on Thursday that there was a better entry point ahead and someone sent me an email saying I was an idiot for not realizing we were in a rally. Fortunately our "rally" produced a better entry point on Friday as expected. It is not heresy to teach market cycles. It is sound investing to expect them. My directions for next week have not changed. A. Buy the dips. B. Take profits early. C. Repeat A&B.

Enter very passively, Exit aggressively!

Jim Brown
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