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Market Wrap

Networks Crash, Chips Dip, Enron Strikes Again

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       12-20-2001           High     Low    Volume Advance/Decline
DJIA     9985.18 - 85.31 10076.03  9985.18  1.4 bln   1264/1851
NASDAQ   1918.54 - 64.35  1972.32  1918.50  2.0 bln   1278/2410
S&P 100   584.30 -  4.42   590.34   584.26   Totals   2542/4261
S&P 500  1139.93 -  9.63  1151.42  1139.93
RUS 2000  474.08 -  7.99   482.07   474.08
DJ TRANS 2602.85 - 41.81  2659.21  2596.13
VIX        24.37 +   .80    24.76    23.70
VXN        52.91 +  3.23    53.07    50.50
TRIN        1.06
Put/Call Ratio       .92

It was a disaster buffet with something for everyone on Thursday. The networking sector, already under pressure from declining economic conditions, was crushed by negative news from Juniper. The chip sector, which was already leading the Nasdaq down this week, was hit again by a warning from JBL. Just when you thought the Enron debacle was over JPM said it could have as much as $1 billion in additional exposure. Plus, tomorrow we will get a chance to see if the Argentina problem is really already priced in with the announcement that their president resigned after the close on Thursday. Can we just start the holidays early, please?

The biggest hit to tech hopes came in the form of an earnings warning from Juniper. JNPR said that weakness in the communication sector would cause a drop in 4Q earnings to half what analysts had expected. Part of the problem is the shrinking router market. More than 25% of the demand has evaporated and Cisco is gaining market share on Juniper and Sycamore. Juniper also had nothing positive to say about our future recovery prospects. JNPR fell over -$4 for the day.

The chip dip continued to sour as JBL warned that continued soft demand would cause them to miss estimates for this quarter after announcing an -82% drop in profits for the last quarter. "There is not going to be a dramatic recovery anytime soon" said James Savage, an analyst at Thomas Weisel. This echoed sentiments from JBL and sent their stock into a -14% drop to $21.25. PLXS also warned and added to the chip sector dive. S&P downgraded Solectron's debt to junk status and ACTM, another competitor said it was considering bankruptcy.

Microsoft was not immune from the market weakness with a drop of -$2.73 after saying there were "critical" security problems with their new WindowsXP product. Reviewers said this was the most serious flaw in the history of windows. Intel, the second biggest tech in the Dow also fell on worries that the recovery might be slower and farther away then previously expected.

Just when you thought the Enron problem had gone away JPM reported that they may have an additional $1 billion in exposure because of failure by insurance companies to honor debt guarantees. This one billion in additional exposure is double what JPM had previously disclosed. JPM lost -1.48 on the news.

This worry on "insured debt default" soured prices on other banks as investors worried that others could announce new problems. Other news depressing banks was the continued story out of Argentina. With a state of siege in progress investors worried about possible losses from international companies from riots or mobs. The president of Argentina resigned after the markets closed and the state banking authority announced that banks would be closed on Friday for a "bank holiday". This is normally a prelude for some kind of government activity like seizing deposits and nationalizing assets. Authorities do not expect a big problem from this holiday since there have been severe restrictions on withdrawals for some time. Still, the resignation of the president because he could not get approval for needed economic reforms, is not a good sign. We will get to see just how much of this is priced in when markets open on Friday.

Another challenge investors face is the death of the stimulus package. Most analysts, predicting a 2002 recovery, had factored in another stimulus package, however bloated, with some incentives for corporations to jump start new investment. With this package now dead amidst political wrangling they will need to remove the potential impact from their profit estimates.

The economic news today was bullish with new jobless claims falling to lows not seen since September 29th at 384,000. This is the most significant indicator that the bottom of the recession may be behind us. We could still be in it but the worst is behind us as reflected by the mid-October peak in jobless claims. The markets should have celebrated the event had it not been for the numerous earnings warnings. Adding to the positive indicators was the Philadelphia Fed Index jumping to -5.5 for the December period. This is remarkable considering analysts expected -18. This is very optimistic with the new orders component jumping from -15.7 to -3.8 indicating a pickup in business for the near term.

Friday we will get several more reports which could reveal the true direction of the economy. The GDP for Q3, Personal Income and Spending and the University of Michigan Sentiment Survey. Also, something that could turn around the semiconductor drop is the Book-to-bill ratio for November. If that shows an increase then bulls will cling to it like the holy grail and buy tech stocks. Likewise a decrease would be negative but the bulls would try very hard to ignore it. With warnings from just about every chip maker recently I am hard pressed to believe it will show gains.

There was a large amount of volatility on Thursday associated with the "triple witching" expiration this week. There were many stocks that have hit resistance right at a major strike price with heavy open interest. This was a factor in holding back many issues that could have helped the markets. There were many stocks that just got whacked for big losses for no reason which could be associated with tax selling. Symantec (SYMC) was one example with +125% gains since Sept-21st it fell victim to profit taking/tax selling which pushed it back to support at $64. NVDA was another stock, which had gained from $22 to $69 since Sept-21st and got whacked with strong profit taking. Both of these stocks violated our stops but I requested that we keep them as plays because I think these are good entry points for any post holiday rally. NVDA would best be entered around $60 and SYMC around $61 if we can get a pullback to those areas. GNSS was another stock that took a bigger beating than the rest of the crowd. I would look to enter it in the $64 range if possible.

Predicting Friday's direction may be harder than finding Bin Laden. The sell off today was overdone in the leaders but there were many stocks that did not sell off at all. It really looked more to me that traders were clearing the books before the holiday and just dumped the winners to take profits. Considering the markets were moving up earlier this week despite the earnings warnings and move to push the recovery into 2003 I think there is still plenty of underlying bullishness. The Nasdaq bore the brunt of the chip/networking warnings and the Dow shook off the Alcoa warning as though it never happened. The semiconductor index has shed nearly -75 points from the highs this week and is only 13 points away from decent support which could spark a rebound, even if only temporary. Support for the Nasdaq is pretty heavy in the 1875-1900 range and should provide a nice bottom if tested.

The Nasdaq is below my exit point of 1950 but the Dow is well above the 9800 level. The S&P is also above 1125. Clearly the Nasdaq, which had gained significantly more than the other two indexes since Sept-21st needed to digest some gains. We are stuck in a twilight zone of investor indecision. If investors think that a recovery is underway, as evidenced by the economic reports on Friday morning, then get ready for a Santa Claus rally after the holiday. If a SC rally is indicated with the Friday reports then Friday could see investors moving into stocks they think will out perform next week. At the risk of seeming too simplistic I think the game plan should look like this. If the economic reports are positive and the Nasdaq starts moving up again, I would open new positions to get a jump on any post holiday buying. Earnings warnings could fade from view the next several days with only a few suspects trying to slip in under the cover of holiday boredom hoping to be unseen.

One of the biggest problems investors face is the recognition of a trend. Once recognized it ceases to exist. The trend for the markets to rally the last five days of the year and the first two of the next year has been recognized for some time. The new trend, which will develop, is buying earlier, like we had earlier this week, and then selling into those post holiday rallies. I am not trying to make a case for that this year but considering the gains from the September lows it is entirely possible that sellers will appear next week. Confused yet?

This all boils down to just one point. We need to trade what the markets give us or not trade at all. If we jump into the markets "expecting" a Santa Claus rally and continue to hold our positions with the market falling because "it WILL start tomorrow", we WILL lose money. I have done this more times than I care to recount and I lost money every time I played the "historical trend" instead of what the market was giving me. The markets NEVER "have to go up" when they are supposed to and normally fail to fall when most expected.

Everyone should have received notice by now that IndexSkybox is merging back into Option Investor as of Jan-2nd. Current subscribers will have the benefit of Austin Passamonte, Buzz Lynn and Russ Moore and their excellent market analysis and trades at no additional cost. The Option Investor subscription price will remain the same at $39.95. We are taking this step to help our readers be fully prepared for all the opportunities that 2002 may present us. Just another good reason to sign up for the year end renewal special below.

Enter very passively, exit aggressively!

Jim Brown
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