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Market Wrap

Dow Continues to Lead!

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      02-26-2002           High     Low     Volume Advance/Decline
DJIA    10115.26 - 30.45 10186.88 10033.75 1.31 bln   1798/1320
NASDAQ   1766.86 -  3.02  1788.75  1750.36 1.64 bln   1827/1642
S&P 100   562.67 -  1.11   566.98   559.47   Totals   3625/2962
S&P 500  1109.38 -  0.05  1115.05  1101.72             
RUS 2000  471.29 +  3.10   471.93   466.60
DJ TRANS 2808.30 + 30.91  2820.56  2771.16
VIX        23.57 +  0.29    24.58    23.10
VXN        44.77 +  0.70    46.12    43.97
TRIN        1.04 
PUT/CALL    0.82

It is amazing what a couple of well placed comments can do to an oversold market. Caterpillar soared after a bullish weekend article in Barrons and Qualcomm said it was experiencing better than expected demand for its cellphone chips. A revival in a heavy equipment and a back from the dead telecom stock. Will wonders never cease! That added to the explosion in existing home sales rocketed the Dow over near term resistance and squeezed shorts yet again. Tuesday however was a different story.

The "recovery in progress" crowd was thrilled with Monday's news and voted with their money as the Dow rose 177 points. While this was bullish the news on Tuesday failed to confirm the trend and the markets paused to digest their gains. The biggest heartburn on Tuesday morning came from an unexpected drop in consumer confidence to 94.1 from 97.8 in January. Both the expectations and current assessment indicators fell. This showed that after three months of gains consumers may have decided that the economy could stay flat instead of rebound. The lack of an economic stimulus package and lack of an extension to the 26 week unemployment period were named as problems impacting consumer confidence. The Fed is on hold as well as the economic stimulus packages and consumers are beginning to fear a dip back into recession over the summer. With two million workers running out of unemployment benefits over the first six months of this year, many are probably seeing the end approaching and are still without a job prospect. This could continue to accelerate a decline in confidence as workers run out of money. Shrinking profits continue to keep a lid on hiring producing a classic chicken and egg scenario. Firms cannot hire until consumer spending picks up and consumers cannot spend until they get a job.

After gaining at the open on a continuation of the short squeeze from Monday, the markets immediately dropped to the lows of the day by 10:30. The reason given by traders was a revived rumor that the U.S. had advance troops in IRAQ and the Consumer Confidence release. The Pentagon denied the rumor again for the second time in a week and the markets recovered slightly. Oil stocks finished mixed on the news after supplies of oil came in higher than expected. Everyone expects the U.S. to eventually attack IRAQ, which accounts for continued drops on false rumors. Nobody really expects oil supplies to suffer from any attack. There is a glut of production and the drops in the stock market are simply a knee jerk reaction to the news. It does show that there is no confidence in the current market levels.

After the bell today several companies failed investor hopes and may be setting the stage for future trends. The Gap, the nations largest clothing chain, posted a loss for the 4Q and warned that February same store sales are falling below expectations. Citing the heavy markdowns required to move product the Gap said sales had eroded in its basic lines. Inventory on hand had fallen to mid-1990 levels due to poor cash flow and was hampering its ability to make sales. They said the problems were due to internal struggles and the evolution of consumer interest from traditionally boring Gap styles. The Gap said it would close another 51 stores and two distribution centers as same store sales fell -16%.

Clear Channel Communications (CCU) the nations largest owner of radio stations reported a 4Q loss that nearly doubled analyst's estimates. The company cited a weak advertising climate prompted by the September attacks. They said the cut of 2000 workers would help profits going forward as they combined their divisions to create cross selling opportunities.

Tomorrow the markets will get another dose of Dr Death, otherwise known as Alan Greenspan. This is the semiannual report to congress on the state of the economy. He will likely be asked everything from when interest rates will rise again to where is Osama Bin Laden. Many questions he will duck as each panel member gets their two minutes of face time on camera but the markets will be holding their breath as the tough questions are posed. Most likely the toughest ones will be "where is the recovery", "will there be another dip" and "when will the Fed start raising rates again." Any of those questions should not provoke another "irrational exuberance" comment but each is loaded with a minefield of negative possibilities. After admittedly coming off as too bearish on the economy last month Greenspan is likely to tread lightly with the porridge not too hot and not too cold approach. The economy as Greenspan is likely to portray it is showing the first signs of recovering but the patients pulse is still to erratic to be let out of intensive care. The risks are probably still weighted to the downside but the key is in how he says it. If Alan paints a picture of another dip in our future then the markets are likely to oblige quickly. He will probably avoid any reference to raising rates unless they nail his hands to the table and start pulling out finger nails. He will not want to play that card anytime soon because once out of the box investors will expect a long string of hikes in their future.

He will probably be asked about Enron and the government response but that should be a softball question. More important will be his take on new capital investment by business or the lack thereof. Make no mistake. Although I have poked fun at tomorrows barbecue I expect Alan to make every effort to paint a rosy picture (if he can) of our economic future. Without an optimistic view from Alan, investment will stop, business will stop, employment will stop, consumer spending will stop and the markets will stop. Some may disagree with me but he will have far more impact on our future in his couple hours of fame tomorrow than the coming months of interrogation of the Enron co-conspirators.

Next target 10300. What the heck happened to the Dow? With everybody preaching doom and gloom last week, including me, the Dow surprised everyone with a near miraculous performance. By closing over 10100 two days in a row many institutional investors are scratching their heads at the prospects. Is this the real thing? Far be it from me to throw more cold water on this index because the truth will soon be known. 10300 is the next serious resistance level and a failure there would be a clear double top formation. We are still a month away from the normal April sell off and anything is possible. The S&P failed again at 1115 but is showing surprising strength. It is still in a longer term downtrend until we get above 1125 so keep your fingers crossed. The Nasdaq could not make it two green days in a row despite the recent positive guidance from QCOM and XLNX. This could be just normal profit taking after Monday's bounce but I would still be cautious. I have not changed my spots but I am still on the sidelines until the trend changes. Advancers beat decliners on the NYSE and the Nasdaq yet both indexes finished down. Volume was very light on the Nasdaq at 1.6 billion. Nobody is betting the farm just yet which means there is no conviction. When in doubt follow the volume.

Enter very passively, exit aggressively!

Jim Brown
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