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Market Wrap

Irrational Exuberance Meets Rational Confusion?

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        WE 1-11           WE 1-4         WE 12-28         WE 12-21 
DOW     9987.53 -272.21 10259.74 +122.75 10136.99 +101.65  +224.19
Nasdaq  2022.46 - 36.92  2059.38 + 72.12  1987.26 + 41.92  -  7.34 
S&P-100  584.20 - 14.41   598.61 +  6.86   591.75 +  5.34  + 14.03 
S&P-500 1145.60 - 26.91  1172.51 + 11.49  1161.02 + 16.13  + 21.82 
W5000  10698.22 -234.10 10932.32 +113.75 10818.57 +173.64  +201.37 
RUT      489.94 -  9.36   499.30 +  5.68   493.62 +  9.60  + 12.73 
TRAN    2706.77 -123.43  2830.20 +187.15  2643.05 + 37.82  + 28.13 
VIX       23.98 +  1.96    22.02 -   .31    22.33 -   .96  -  2.68 
VXN       48.37 +  1.51    46.86 +   .92    45.94 -  5.02  -  1.83 
TRIN       1.44              .94              .73             1.08  
TICK       +290             +996            +1098            +1184 
Put/Call    .68              .67              .69              .69  

The markets were Greenspamed again on Friday as the master of disaster took the podium to warn against "significant risks in the near term." Traders held their breath as his words were dissected for the real meaning beneath the constant barrage of adjectives, adverbs and $10 words. Unfortunately the most pertinent points came out crystal clear. The recession may not be over and rocky times may still lay ahead. Even the fact that Greenspan laid the ground work for yet another rate cut in late January could not prevent the Dow from closing under 10000 for the first time in 2002.

Greenspan was not the only harbinger of doom on Friday. Ford surprised the markets with a restructuring program that was almost twice as severe as analysts expected. Ford announced a cut of 35,000 jobs and the elimination of five plants and four cars from their product line. The massive restructuring including cutbacks at 20 plants, which will remain open, will produce a massive $4.1 billion charge in the 4Q of 2001. The cuts will take 15% off their North American production capacity and eliminate the Escort, Cougar, Villager and the Lincoln Continental from their product line. This huge admission that things are not going well at Ford plus the huge economic impact of the changes started the markets off in a bad mood.

Adding to this bad mood was a comment from Merrill Lynch that 70% of their tech universe was over valued since the September bounce. Leading their list of expensive stocks was CMVT, ORCL, MSFT, MXIM and LLTC to name a few. They said an aggressive recovery and return to strong earnings was already priced into most techs and there was little upside for investors. They did say that some stocks were still in the buy category including EDS, CSC, HWP, PSFT and surprisingly CSCO. They said that based on projected growth rates for CSCO the stock was undervalued. Still the blanket pronouncement of "over priced" for 70% of tech stocks put a lid on any bullish sentiment at the open. There was also a rumor that Cisco made some bearish comments in an upcoming Business Week article.

Still not depressed? A federal judge killed the proposed Microsoft class action settlement agreement where MSFT was to have donated over $1 billion in hardware and software to schools across the U.S. Microsoft foe Apple Computer won on the argument that giving MSFT software to educational systems would have been very noncompetitive. It was like starting kids on drugs while in school to insure they will be addicts to your brand later. I had written about this unbelievable win by MSFT in the past and why it would probably not fly so this was not a surprise. Microsoft is now faced with coming up with an entirely new plan or fighting each case on its own merit. Expect a new plan and another year of legal wrangling before any clouds are lifted from MSFT stock. The judge called the offer "critically under funded" which means more bucks when the next offer is negotiated.

By far the biggest depressant for the day was the Greenspan comments. While he tried to skillfully to walk the line between optimism and pessimism, the negative points attracted bears like Al Queda attracts bombs. The frustrated English professor tried to say things had gone from bad to mixed but he came off sounding like Tommy Franks when asked about Osama's whereabouts. Tommy Franks, "we just don't know what we don't know." Greenspan's "we just don't know" of course took several paragraphs to accomplish the same result. "Our economy has not been weakening in recent weeks and is seeing signs of stabilization in many respects." So far so good. However in closing, "I would emphasize that we continue to face significant risks in the near term." There was about 25 paragraphs between those two sentences but the closing comment was the damaging one.

Greenspan feels that there are five things that will weigh heavily on the economy going forward. Rising mortgage rates will stifle home sales. Auto sales are already slowing with the majority of the buyers having been coerced into buying in the last three months leaving a black hole in sales going forward. Energy prices have fallen about as far as they are going to fall so manufacturing will not have the benefit of future price cuts. Unemployment is rising with well over 50,000 cuts announced this week alone. This will put a lid on consumer spending without a significant economic rebound. And lastly something investors know all too well. The wealth effect from the falling stock market will impact consumer spending as well. This impact lags the occurrence by about a year meaning the 2001 drop has yet to be felt in the economy. This will curb household spending and remain a dampening force until stocks rebound. That rebound will require an improvement in corporate earnings to something more than is already reflected in the share prices. (See the Merrill Lynch comments above). All this pessimism triggered the shorts which had been ready to react to any negative Greenspan revelations and as they say, the rest is history.

The fear of darkness set in as the weekend approached and even the psychological 10000 level on the Dow failed to put a bottom under the markets. The event risk over the weekend, Eneron news, Pakistan- India, Argentina, Japanese banks, Arab/Israeli conflict and the continuing terrorist war, was too much for traders to handle. There was a brief short covering rally and a small buy program in the last hour of trading but neither were able to push the Dow back over 10040.

The Dow closed under 10,000 for the first time this year and only 37 points above decent support at 9950. Should that support fail it will not be a pretty picture. 9725 could become the handwriting on the wall. Liquidity is still a problem. Thursday saw yet another outflow of cash from mutual funds. Only $500 million but remember this is a period when cash is supposed to be flowing into funds like water from a tap. The Nasdaq stopped right on interim support at 2020 but should that fail it could be a quick drop to 1940. The earnings picture will become much more clear next week as over 300 companies announce. There will be some giants including GE, INTC, APPL, CPQ, YHOO, IBM, MSFT, NT, UTX, SUNW. Some of the contract manufacturers and smaller chip companies announce as well which should provide a leading indicator for health of the tech sector.

At 9987 and 2020 the indexes closed right on my bearish bounce objectives. The markets are oversold, on support and in the case of the Dow, down for five straight days. If it were not for the Greenspan comments I would have bet on a positive day. We are ripe for a bounce but obviously traders are fearing some negative earnings surprises or there would be more underlying support and more money flowing into funds. Last Sunday I warned about excessive bullishness built on wishful thinking and the probable desire by traders to take some profits off the table before the end of the week. The markets broke below my exit points and are now threatening to start a new leg down if these support levels do not hold. This sets up a key situation for us. I would go long on Monday on any positive move upward. This would be a trading bounce only but one that could turn into a longer term play if the first few earnings reports surprised to the upside. Plan B. If those levels fail (9950/2020) I would remain flat and wait for a new support level to show up. That level could be significantly lower if those first few earnings surprise to the downside. This is going to be an exciting week and one that should prove the worth of the Market Monitor to all Option Investor readers. If you have not tried our new streaming commentary offering you owe it to yourself to do it next week.

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Buckle your seat belts as we head into earnings next week because it could be an exciting ride.

Enter Passively, Exit Aggressively!

Jim Brown
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