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Market Wrap

POOF - Instant Bull Market

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      02-25-2002          High     Low     Volume Advance/Decline
DJIA    10145.71 +177.56 10172.62  9966.36 1.30 bln   1931/1182
NASDAQ   1969.88 + 45.34  1776.61  1730.92 1.70 bln   1934/1658
S&P 100   563.78 +  9.74   565.83   554.04   Totals   3865/2840
S&P 500  1109.43 + 19.59  1112.71  1089.84             
RUS 2000  468.19 +  3.12   468.20   464.56
DJ TRANS 2777.39 + 51.74  2782.50  2727.01
VIX        23.28 -  1.61    24.69    22.75
VXN        44.07 -  4.50    48.08    44.07
TRIN        0.59 
PUT/CALL    0.75

POOF - Instant Bull Market
By Buzz Lynn
Click here to email Buzz

Thank Qualcomm (QCOM), General Motors (GM), and the January resale home numbers for today's equity gains. Investor action seems like that of horses wearing blinders. Then they can't see the barn, the hay, the pasture, and the other horses. Thus they remain focused on what lies straight ahead of them as distractions are eliminated. So too with horses, err, I mean investors.

I still believe we are in a primary bear market and that there are many fundamental reasons why the equity markets should not be rising. However - and this is important - my job is not to force the market to comply with my will. As a trader, my job is to play the market I'm given, either up or down, and trade in the direction it leads. Strap on my halter with blinders and lead me there. If QCOM, GM , and housing numbers are the only things in my field of view, then so be it.

The point is to avoid the temptation to jump on perma-bull bandwagon and think that, "This rally is different". It isn't and there is nothing to distinguish it from the multiple bullish headfakes we've seen over the last two years. It is not the beginning of a primary bull market until we take out old highs. Don't get me wrong, there will be bullish moves within the bear market. But it does not change the nature of the bear.

That said, let's find out about the news that triggered the dominos today.

Through the blinders: First, GM upped their earnings forecast to reflect better than expected sales in Q1 and forecasts for all of 2002. The outlook is now at $1.20 (up form earlier estimates of $1.00) in Q1, and $3.50 (up from $3.00) for the full year.

Reality: As reported in the Wall Street Journal this morning, "The Big Three auto makers (GM, F, DCX) each face potential labor conflict over the next year over plans for big cuts in North American production capacity. The three co's are facing tough competition from Asian and European co's that are running at close to full capacity in and are looking to expand in North America." That according to a briefing.com summary.

Second (through the blinders), QCOM's targets for Q2 shipments of phone chips are coming in at the high end of 13-14 mln estimates, and CDMA 200 chip shipments are expected to exceed original estimates by 1 mln units. After the close and during the conference call, QCOM said that it does not see excess inventory of phones or chips in the channel.

Reality: Surprisingly, not much different, at least for CDMA, which is the wireless information protocol of Verizon and Sprint PCS and NTT DoMoCo. Gilder Technology reports that sales of CDMA phones and equipment continue to grow at a significantly faster pace worldwide than older protocols GSM (commonly used in Europe and Cingular in the U.S.) and TDMA (predominantly used in the U.S. by AWE). The good news probably really is good news for the CDMA end of wireless telecommunications.

Third, housing numbers knocked a homer over the center field bleachers of tallest stadium we could imagine. Yep, existing home transactions came in at their highest level EVER, reaching 6.04 mln units in January. That's 16% above the December figures, and a big surprise over the estimates of 5.25 mln. That puts year over year gains in the price of an existing home at about 10%. Those holding over the last few years or buying now have seen tremendous gains thanks to cheap loan rates that make it possible for so many (and their banks) to buy.

Reality: I have no clue how long this can go on, and right now seems like a great time to buy since prices are steadily rising on heavy volume (a market condition we'd love to see). For I am one of those people in the process of now buying an existing home. Yet every bone in my macro-economic, Fundamentals Guy body is screaming all the way to the lender that it is not a good idea to borrow a huge amount of money against tangible assets in a deflationary environment. My family disagrees as do apparently 6 mln other families across the nation. Whether I kick myself or congratulate myself in five years is anyone's guess now.

Any sector get clocked today? Yep, drug stocks. Don't know if it's the complete answer, but Goldman (GS - more on them in a minute) issued cautious statements on the sector early this morning citing new FDA initiatives that would make it much more expensive to perform clinical trials, which could also lead to greater manufacturing and marketing scrutiny. Read that, "More regulation".

Notice how I haven't commented a peep about market-specific scuttlebutt? Contrary to popular belief, it doesn't mean much. For what really counts is found in the charts and the internals.

For those keeping score, NYSE volume was roughly 1.3 bln shares today - respectable, but not even close to a dead-ringer for a bull market despite that the Dow tacked on 177 points to close at 10,145. That is a significant amount over the psychological 10,000 barrier.

The NASDAQ turned in respectable, but not anywhere near heavy volume on its 45-point gain to 1769. It eked out roughly 1.7 bln shares.

Both A/D lines were positive for the bulls, but nothing we haven't seen on many other days.

So, the charts? All have a nice bullish bias in most cases.

Dow industrial chart INDU (weekly/daily/60):

Let's deal with oscillators first. Weekly/daily have made bullish moves and are now pointing north presumably on their way to overbought. Notice on the daily chart that the bottoms have been rising, never making their way to oversold. While it may look strong, it really represents a house of cards since sellers have yet to be exhausted before eager bulls step in to reverse the process. Bears are patient and will happily outlast bulls run amuck. Even so, we can see the potential for trading support at 10,050. More to the point, we can also see on the weekly/daily chart the overhead resistance at 10,300. Note too that daily chart while breaking through its 200-dma (gray line) has reached its 62% retracement off the September lows, which could act as another point of resistance. We'll focus on the current level after amateur hour and go from there. Volume is simply too light to name bulls the hands down winner in this never-ending battle.

NASDAQ chart COMPX (weekly/daily/60):

NASDAQ bulls (if there are any left or newly born) can only cross their little hooves that current stochastic action is prelude to a nice move up for a while. Trouble is that 1780 is the first point of resistance with weekly resistance at just over 1800, and the NAZ is almost there. If the daily descending range of candles is any indicator though, reaching those levels may make just another good short opportunity. The 60-min chart stochastic certainly suggests that for a trading opportunity, we are nowhere near a call entry with the stochastics overbought and just now flashing "tired" signs. However, I would be a call buyer if the 60 min stochastic chart cycles down to oversold with intentions of turning up while the candles find support at a higher low than 1700, say 1750 or 1730. Only then with a small test of risk capital. Calls on the NASDAQ? What am I thinking? Well, the charts are there to suggest that that may be the next best course of action. Too early now.

S&P 500 SPX (weekly/daily/60):

SPX however is showing some signs of strength. Weekly and daily stochastics are working hard to turn upward. The 60 min chart is already there and has filled the gap from last week. I would thus look for support to come in as SPX approaches 1100. The immediate trading danger is that now the 60-min stochastics have topped out, thus we could see some pullback to support. Yet, since the weekly/daily have just begun their upward turn, puts have come un- safe. The next obvious play will likely come on the call side, but only after SPX backs off to oversold on the 60/30 charts, then reverses from there.

VIX? 23.28 and falling - bull biased, but nothing that suggests bears will soon find the honey pot either. This one is inconclusive.

One note before we sign off tonight -- some of the put plays including CHKP, GNSS, GS, and VRTS are dangerously close to stopping out. We're keeping them tonight, but the major index charts on a risk/reward basis look more to favor the bulls right now than the bears. While there may be some backing and filling tomorrow morning that could lop some pennies from the price of equities, be vigilant in honoring your put stops. Bigger moves up tomorrow after the open suggest there will be no turning back for a few days (except for traders who can play both directions in the same day). On the other hand, if the market sputter tomorrow right at levels of resistance, then you might consider put entries there. Pivotal points. Exit losing puts on strength or make put entries on weakness. Whether you choose to ignore amateur hour or not is each trader's individual decision. I tend to ignore the first half hour and see where we are from 10:00 to 10:05. I'll make a decision then. But we all remain free to choose.

See you at the bell!


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