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Market Wrap

Three Days Does Not Make A Year!

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         WE 1-4         WE 12-28         WE 12-21         WE 12-14
DOW    10259.74 +122.75 10136.99 +101.65 10035.34 +224.19  -238.31
Nasdaq  2059.38 + 72.12  1987.26 + 41.92  1945.83 -  7.34  - 68.09
S&P-100  598.61 +  6.86   591.75 +  5.34   586.41 + 14.03  - 19.40 
S&P-500 1172.51 + 11.49  1161.02 + 16.13  1144.89 + 21.82  - 35.24 
W5000  10932.32 +113.75 10818.57 +173.64 10644.93 +201.37  -301.81 
RUT      499.30 +  5.68   493.62 +  9.60   484.02 + 12.73  -  9.92 
TRAN    2830.20 +187.15  2643.05 + 37.82  2605.23 + 28.13  - 51.16 
VIX       22.02 -   .31    22.33 -   .96    23.29 -  2.68  +  1.08 
VXN       46.86 +   .92    45.94 -  5.02    50.96 -  1.83  +  2.61 
TRIN        .94              .73             1.08             1.06 
TICK       +996            +1098            +1184             +388 
Put/Call    .67              .69              .69              .72  

Every bull currently in the market is wishing the trend would remain their friend as the first three days of 2002 roared off to a flying start. The Dow and S&P have begun to clear significant resistance and the Nasdaq, while lagging the others on Friday, is poised to do the same. Bulls are literally jumping with joy as it appears their Christmas wishes have come true. There has to be a grinch around here somewhere but like Bin Laden, all the kings horses and all the kings men can't find him.

Jump starting the markets on Friday was a better than expected Jobs Report. The economy only lost -124,000 jobs in December which was much better than the expected -175,000 number. While the unemployment rate sank to a six year high of 5.8% it increased much slower than in previous months. The -124K loss compared to -371K in Nov and -448K in Oct. The average hourly workweek rose slightly and this was looked at positively as increasing productivity without increased hiring. This has a positive impact on earnings and is seen as the beginning of a recovery process. It could be that orders are starting to increase but not yet to the point where employees must be hired to handle them. Existing employees just work a little longer. When employees run out of available hours employers are forced to then hire more workers or so the economists say.

Other signs of economic growth included the NAPM index, now called the ISM Non-Mfg Index, which rose for the second month in a row with a number over 50. This represents a continued recovery in the services sector. The number hit an all time low in October at 40.6 but the December number of 54.2 is the highest number in a year. Can you say rebound in the services sector? If the services sector is growing strongly the manufacturing sector may not be far behind.

While all of this may be only thin strands of hope for traders it has given them new life and scared shorts to cover open positions. This is even more surprising with the constant news about Argentina devaluing the Peso and a continuing deterioration in Japan. Investors want the markets to rise and they are clinging to every bit of good news as an excuse. The money flow that I reported about on Thursday was severely negative. $9 billion flowed out of funds in the week ended on Wednesday. This must have been a one-time event to pay holiday bills or taxes because Thursday there was an inflow of $4 billion into stock funds. The retirement contributions may have had some impact in that but it was more likely retail investors seeing/expecting the January bounce and putting those Christmas bonuses and 2% money market cash back to work.

The tech sector garnered another boost on Friday when Corning said they were reopening two of their five fiber optic plants that had been shutdown for lack of demand. Corning said they did not see any immediate rebound in demand but traders cheered the announcement anyway. Now, let's see if I understand this correctly. They shut the plants because there was no demand. They claim there is still no demand. They said the reopenings don't signal a bottom, a recovery or that their business was doing better. Enquiring minds would like to know, "Why did they open them?" Was it just because of the 2500 workers which had been laid off since October at these two plants? I doubt it. What I think is that demand is starting to rebound but they don't want to admit it and have analysts raise earnings estimates. It is probably just a glimmer of demand and they want to be ready if it grows but they do not want to be held accountable if it doesn't. Just my opinion. Still GLW gained +10% to $10.69 and Lucent and Nortel posted gains as well.

There is also a rumor gaining speed that many companies will report better than expected earnings for the 4Q based on firming orders and better than expected sales in December. This rumor will be faced with the glaring light of truth beginning next week. Earnings will begin in earnest and all the hopes and dreams of investors will either be proven correct or smashed into dust along with stock prices. In reality I think there will be some better than expected results and companies may start bragging again about the future. If they don't we could be in trouble. The Nasdaq has rebounded +45% off the September lows and we are entering into the exact same quicksand of a trading range that we saw in Jun/Jul/Aug when earnings were better than anybody expects them to be this quarter. The talking heads are constantly sounding the same tired mantra of "stocks are overpriced" at these levels without serious gains in earnings. This refrain seems to be growing even as the perma bulls are screaming buy from the rooftops. This give and take is constant in any market and you can always find those on either extreme. It just appears that the "overpriced" for this stage in the recovery crowd is growing today. There is even talk about another Nasdaq bubble forming.

Let me put on my bullish hat for a moment. I am impressed! The Dow jumped right over strong resistance at the open and was moving up at the close. Very bullish! The Russell-2000 is on fire and now back to resistance at 500 not seen since July-3rd. The S&P finally closed over its 200 DMA of 1166 and within one point of the December highs. Next resistance is 1184, only 12 points away and a level that could be touched on Monday. Essentially the broader market is confirming the Dow move. The Nasdaq finally closed above the December high and at a post attack high. It only managed +15 points for the day but it rallied back from a midday loss to make it three in a row. I repeat, I am impressed. Could it be a new bull market? Whoa there pardners. Before we get that carried away let's review the facts.

Bull markets last more than three months and are powered by increased earnings and a strong economy. In my opinion what we are seeing is a good old fashioned earnings run. Yep! Remember those? When stocks raced to see who could beat estimates the most instead of who would have the biggest loss? This rally is powered by the normal January liquidity and rising investor sentiment. The thinking is it has been so bad for so long that surely the bottom is behind us. Maybe but the rubber hits the road beginning next week. If there are no upside earnings surprises and optimistic guidance then that liquidity will dry up in a heartbeat and the summer doldrums will start early.

My thoughts for next week begin optimistically. I suggested that investors buy any midday dip and end of day rally on Friday and it came to pass pretty much like we expected. Without any pre-open surprises on Monday I expect the markets to rally again as funds decide to join the party and shorts who lost sleep over the weekend buy to cover again. It is also possible there could be a Bin Laden factor by Monday if they find him in the rubble of that training camp they leveled on Thursday. While I would not count on it that is always a wild card in our future. On a side note, if it does eventually come to pass and the markets spike up strongly, I would sell that bounce. Take profits and look to get back in on the next pullback.

What happens after Monday is less predictable. A strong gain on Monday will stretch our bounce off last Wednesday's lows to over 400 points on the Dow and there will be profit taking soon. With earnings starting this week the desire to take profits off the table and avoid unpleasant surprises will be strong. That would mean to me a late Tuesday, early Wednesday pull back. There is an extreme amount of bullish sentiment and it is all based on wishful thinking. The coming earnings announcements will validate or disprove this thinking. Stay invested until the markets tell us otherwise! To me that means a break below Dow 10200, Nasdaq 2000 or S&P 1155. Just because we have had a good run does not mean we should be willing to give it all back. Until further notice those are my suggested entry and exit levels. Stay long above and flat/short below.

Enter Passively, Exit Aggressively!

Jim Brown
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