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Market Wrap

Surprise, Surprise, Surprise!

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        1-3-2002           High     Low     Volume Advance/Decline
DJIA    10172.14 + 98.74 10174.01 10051.95  1.4 bln   2106/1052
NASDAQ   2044.27 + 65.02  2044.56  1987.06  2.1 bln   2288/1353
S&P 100   595.13 +  6.15   595.13   588.61   Totals   4394/2405
S&P 500  1165.27 + 10.60  1165.27  1154.01
RUS 2000  495.51 +  8.32   495.52   487.19
DJ TRANS 2727.50 +107.52  2727.50  2620.91
VIX        22.83 -  1.09    24.19    22.82
VXN        47.07 -  0.98    48.78    46.63
TRIN        1.52
Put/Call Ratio       .68

Surprise, Surprise, Surprise!

The tech sector woke up from a holiday nap and roared into 2002. Upgrades were flying faster than presidents in Argentina, shorts were running for cover and bears were hunting for a bomb proof cave. Have the good times returned for good? Tomorrow and Monday will tell the tale. The chip sector led the parade and cemented a +13% gain since Monday's lows. The Nasdaq has gained over +5% since yesterday's lows. Pretty strong moves for a sector that was unloved just a week ago.

The good news was busting out all over along with stock prices for those that analysts favored. The chip sector was blessed by an abundance of upgrades and positive comments. Intel was upgraded by JP Morgan which suggested that investors buy the stock ahead of earnings based on improving economic conditions and PC sell through over the holidays. INTC soared +2.50 to $35.50 and an eleven month high! This was a stock that has been down trending since Dec 5th.

AMD was upgraded by Robertson Stevens on stronger than expected sales of their Athalon processor. Intel has been behind on shipments of P4 processors and AMD has benefited from the shortage. While this problem will be rectified soon as INTC increases capacity the analyst thought AMD was still undervalued.

Micron was upgraded by Salomon Smith Barney on rising DRAM prices and shrinking capacity worldwide. Micron has been selling DRAM for 80% less than the same period last year but prices have been rising as plants go offline in the glutted market. MU soared +3.27 to a five month high of $36.50.

AMAT soared +3.82 to $45.39 as shorts raced to cover against the prospects of a chip revival. KLAC +3.20 and NVLS +4.11.

The positive news was not limited to chips with multiple analysts making positive comments about the storage stocks as well and specifically EMC. Rumors that IBM might make an offer for EMC have cooled but Salomon Smith Barney upped EMC to buy from outperform saying they were undervalued at their present price. The analyst feels that the storage sector has been oversold and represents an opportunity. That opportunity corrected in today's trading with huge gains in the major players. EMC gained +12%, QLGC gained +9% or +$4.29. Gains in EMLX were relatively muted at +1.84 but it did break out to a seven month high of $43.90.

Goldman Sachs analyst, Laura Conigliaro, was pounding the table on IBM, SUNW and EMC again. Saying that these big caps would lead the league on any economic rebound she was recommending them. She felt that IBM had weathered the storm extremely well and probably did very good in the 4Q as companies upgraded backup systems and security networks. SunMicro also benefited from a post attack rebound and network upgrade. She felt the "easy" money was over for these three companies and they would struggle with gains in the first quarter but in the long run they would be the leaders of the pack. IBM gained +2.16 to stop right at strong resistance of $124. We added it as a call play but only if it can break $124.50 to the upside. We are concerned about a Dow roll over possibility and would like to buy it a little cheaper over the next couple of days. In English, buy the dip or the breakout but stay flat as long as it is flat. I suggested in the Market Monitor this morning that yesterday's close of $121 was a buying opportunity and anyone who took that suggestion and bought the $120.25 open did well.

Techs were not the only beaten down sector that was soaring. Continental Airlines said their load factor was higher this year than last, (on fewer planes don't forget) and the transports soared. A report by Merrill Lynch that said oil could fall to $19 a barrel in 2002 also helped the beleaguered airlines. CAL soared +2.44 or +9% and was the biggest gainer in the sector. FDX and UPS gained ground also on the prospects of lower oil and an economic recovery. Air shipments were down -14% in November but not near the -23% drop in October.

Auto sales also came in strong as manufacturers extended their zero percent interest deals. GM posted a +7% gain in sales and led the group. GM announced a new gimmick for the 1Q of a $2002 cash back rebate in hopes of continuing the strong sales. 2001 was the second best year in history for auto sales with 17.18 million vehicles sold. Chrysler is extending its 100,000-mile warranty program as an incentive.

The bullish sentiment was so prevalent that a negative warning by Dow Chemical was completely ignored and the stock finished +1.25 higher. They said they would not hit their estimates of $.10 to $.20 but did not give any guidance of what they would earn. Normally this would be the kiss of death. A miss of the entire range with no new guidance but investors shrugged it off and bought the stock. Unbelievable! Merrill Lynch upgraded it from a buy to a strong buy saying they were undervalued compared to their peers. Is everybody smoking something funny or does this seem strange? MER suggested that investors look beyond the current weakness.

If the old January adage holds this could be a really good year if the trend from the last two days continues. There are two notable trends that investors cling to. One is the first five days indicator. Since 1950 all but four years that posted a gain in the first five days went on to post gains for the year. Three of those four were war related exceptions. The uptrend is a better forecaster than the down days.

Of the 18 years the markets opened down there were 10 that ended up with gains. It is said that as "the first week goes, so goes January." The next one is the monthly indicator where "as January goes, so goes the year." This is the most reliable indicator on record. Using the broader S&P-500 as the measure, 45 out of 50 times it has been right. This excludes four years that were flat. Obviously we are only two days into this January and nothing can be determined yet. Most feel this is just an old investors tale, like the Superbowl indicator, but the historical accuracy is amazing. Personally I would not bet money on it but others do.

The huge bounce we saw on Wednesday and the strong gains from today have powered the markets from oversold to overbought in only two trading sessions. The Dow bounced from threatening to break under support at 9950 to dead on resistance at 10170. The Nasdaq bounced from the bottom of its recent December trading range at 1940 to within 22 points of its Dec-6th resistance high of 2065. The S&P bounced off support at 1140 and then stopped dead under resistance at the 200 DMA of 1166. If you look at the individual stock charts you will see huge short covering bounces. Vertical candles for huge gains of over 10% in many cases. Look at MXIM, KLAC, CCMP or MCDT for examples of the gains. This was short covering after being surprised by multiple positive comments and upgrades on the same day. This was not funds putting money to work in the markets. According to TrimTabs.com $9 billion in cash flowed OUT of stock funds in the week ended on Wednesday. OUT OF STOCK FUNDS! Did that money go to cover holiday shopping? We will find out soon but the key remains, it did not buy stocks.

Friday morning we get the Jobs Report for December and it could easily be a market mover. The jobless claims on Thursday spiked to a four week high as seasonal jobs disappeared. Continuing claims rose again indicating that getting a new job is still difficult. I think the Jobs Report is the key on Friday. A large negative number would put a dose of fear back into investors while a smaller drop than expected would confirm the beginnings of a recovery. Positive news could give shorts another case of indigestion and power the S&P through that resistance.

I would really love to see a breakout of the S&P over that 200 DMA. That would be the biggest short covering signal we could get. Those funds holding cash would see that as confirmation of the market direction and those holding shorts would see it as a painful exit but one they must take. While I doubt it will happen on Friday I would love to be surprised just like the shorts were this morning. Here is how I see it, good jobs = continued rally, bad jobs = worries that the recession is not over, neutral jobs = earnings become the focus again. Many analysts feel the recovery is already priced into stocks and there is no reason to chase them until real earnings appear. With a neutral jobs report I think Friday will see some consolidation and maybe a midday pullback. If we get that and a rally into the close I would open new positions because that would be bullish for trading on Monday. We should still be cautious on a day by day basis despite the apparent bullishness.

Enter very passively, exit aggressively!

Jim Brown
Editor

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