Bullishness was breaking out all over with resistance evaporating like morning fog. One minute you can't see fifty feet and suddenly the sun breaks through and a beautiful day appears. That is what happened in the markets on Friday. All the bearish and cautious comments that were clouding investor's decisions were blown away by the mornings economic reports. Euphoria reined supreme and after three days of afternoon sell offs the bears got a Friday surprise. Stocks rallied strongly into the close producing even more short covering.
Traders woke up to a combination of positive surprises on Friday. Economically, the ISM index rocketed to 54.7, well over the estimates of 50.8 and showed a huge increase in manufacturing for February. This was the first time the number reflected an expansion in the manufacturing sector in the last eighteen months. This was the highest level since April-2000. The news that manufacturing was expanding after 18 months of decline was bolstered by a huge jump in new orders to 62.8 from 55.3 in January. Even order backlog jumped to 53.0 from 44.5 in January. Every indicator of the index rose except the critical inventory component which fell again to 39.5 from 40.5. This of course is also bullish since it shows a drop in inventory even after a jump in production. The new orders rose to the highest level since 1994 suggesting that the ramp up of production has begun.
The ECRI Weekly Leading Index edged upward again spurred by robust growth in new mortgages and the increasing money supply. The index is predicting a good chance of recovery over the next three to six months. The Monthly Mass Layoffs also declined in January compared to the prior two months but still remains at an elevated level. There were 2146 mass layoffs in January including 263,821 workers. Despite the continued rise in unemployment Personal Income rose by a larger than expected +0.4% in January. However the gains did not come in salaries. It was in insurance payments and unemployment insurance benefits. This means most households did not see any gain and could have contributed to the drop in consumer sentiment.
The final Consumer Sentiment numbers for February were announced at 90.7 compared to 93 in January. The current conditions component rose slightly but the expectations component fell sharply to 87.2 from 91.3. This means consumers are expecting less from a future rebound and are again becoming worried about their jobs. This index could also have been impacted by large numbers of workers coming to the end of their 26 weeks of unemployment without a job as well as the falling Nasdaq. Historically, consumer confidence has tracked the rise and fall of the Nasdaq since tech employment and retirement contributions have been tied to tech stock prices. The nearly -20% drop in the Nasdaq from the 2098 high in January to the 1696 low in February depressed investor hopes and expectations. This was reflected in the drop in the consumer confidence index. This was the first drop in five months.
Adding to the positive economic news was a surprising announcement from Novellus that the December quarter was their bottom and they were raising guidance for 1Q 2002. They even went so far as to predict a return to profitability in Q2. They raised their guidance for 1Q by a penny but a return to profits by Q2 would beat analyst's estimates of a four cent loss by a mile. Robertson Stevens upgraded the stock to a buy after the company said bookings were increasing from DRAM makers. The CEO said bookings could rise +36% from the 4Q levels. It is not a broad based recovery yet but it is becoming broad based, Hill said. They said DRAM prices were rising and dormant DRAM buyers were coming back to life. NVLS jumped nearly +$6 to close at $48.51 and powered the entire chip sector. The SOX was within 10 points of a three-month low on Thursday but rallied to add over +56 points on Friday's news. Gains in other chips included KLAC +6.31, CCMP +5.50, VSEA +4.94, NVDA +4.93, MXIM +4.92, SLAB +4.88, AMAT +4.51, BRCM +4.41, DPMI +4.25, LLTC +4.14, XLNX +3.70, IDTI +3.33. You can see by the huge gains that many and I repeat MANY traders were short chip stocks and the NVLS news caught them off guard.
As you can from the charts on KLAC and VSEA above this was not normal buying. VSEA did not trade over four times its daily volume because investors suddenly decided that chips were where it was at. They bought these stocks because they were short chips based on the negative comments from CEOs and analysts over the last several months.
If the chip sector is in the middle of a recovery it has not rubbed off on the telecom sector. Sprint went the way of the other telecoms and announced a -$400 million drop in cap-ex spending for 2002. There is just no life in the telecom/networking sector and even the blowout market day only succeeded in adding .73 to the Cisco stock price which closed at $15.
The software sector voted to join the rally with gains by everybody but Oracle and after the bell the reason was clear. After a bullish day with soaring markets ORCL tried to slip in after the bell with an earnings warning. Oracle shares dropped over -$1.25 to $14.79 after warning that they would miss estimates and that software sales and income growth would be flat. Oracle blamed slow sales in Asia as the main culprit. They had already lowered the bar for the quarter but the results proved even weaker than expected. Analysts expected comparisons for this quarter to be easy considering the bounce out of the September lows. Merrill Lynch warned on Friday morning that there was "pretty severe discounting" and an absence of large deals in the U.S. and Europe. Several analysts polled by Reuters said Oracle would also need to lower guidance for the next quarter when they release earnings on March 14th. The current estimate is for .17 to .18 cents which analysts now say is very unrealistic.
Merck became the first major blue chip to drop Arthur Anderson as their auditor after a 30 year history. They chose to go with Price Waterhouse Coopers instead. This was the first domino to fall and doubtless there will be many more. Check out the article by Buzz Lynn last week for the complete list of all the AA major accounts. AA also agreed to pay $217 million for their part in the collapse of a non-profit fund raising company. It was the second-largest payout by a big five, soon to be big four, firm. Ernst & Young paid $335 million in 1999 for concerns related to Cendant. That number is also likely to fall from the record books as rumors now place the Enron settlement number being discussed at between $750 million and $1 billion.
+400 points! That is the gain by the Dow for the week. Considering the other major indexes were teetering on the edge of support last Friday it is a remarkable achievement. The close at 10368 clearly broke resistance at 10300 from the first week in January and will have many traders questioning direction over the weekend. The leading consumer and cyclical stocks HON, BA, UTX, PG, JNJ, MMM, MO, MRK, KO, EK and even SBC were joined by MSFT, INTC and IBM for a major gain. Every component of the Dow closed the day positive with IBM rebounding for a +$4.90 gain and a close back over $100. The Dow close was the highest since August-27th last year and the biggest one day point gain since September-1st.
The Nasdaq, which has been a laggard and a serious weight on the Dow rallied over strong resistance at 1790 and closed over 1800 for the first time in two weeks. Considering the steady down trend for the Nasdaq since Jan-9th this was a strong performance. Much of the gains were driven by the chip stocks which I outlined above. It is amazing how the markets can go from nearing new lows to nearing new highs in just a matter of several trading sessions. While we should be pleased with the show of strength we need to also be aware that what goes up quickly can fall even more quickly. While I am not predicting a Nasdaq sell off the gains by the chip stocks were nothing short of amazing when you consider that the picture only changed for one stock, not the whole sector. Cooler minds may prevail soon and even considering the positive economic data we should never chase gains made quickly. The Nasdaq still has to break even stronger resistance at 1875 in order to confirm a change in the trend. We should remain cautiously optimistic on tech stocks until that occurs.
The S&P performed even better than the Nasdaq in my opinion. It broke resistance at 1125 with convincing strength and appears ready to conquer the next level at 1135-1140. Once that is accomplished the double bottom reversal will be complete and a new up trend firmly in place. That trend will be challenged at 1175 but that could be several weeks away.
I am impressed. Doubtless thousands of other analysts are also looking at charts this weekend and actually beginning to believe that a new bull market is about to be born. Positive economic reports, raised guidance, upgrades to GDP estimates and a gradual dulling of the senses to the Enron accounting crisis all added to the explosion we saw on Friday. The range bound down trending markets suddenly appeared to have new life and floor traders were seen smiling and dialing with great enthusiasm. The market internals were strong with advances beating declines by 2:1 on decent volume. Decent volume, not great. Only 1.8 billion on the Nasdaq on a +71 point day. The NYSE managed over 1.4 billion as listed stocks saw the greatest interest. It was a great party while it lasted.
The janitors have long since finished sweeping away the debris from the days trading and the profits and losses have already been booked by computers. The hangovers from the post trading happy hour are gone and everyone is facing a new week. That new week will be met by another round of shorting by bears that can't accept that the economy may be powering stock prices. It will also be met by fund managers that are sitting on a pile of cash while watching a +400 point gain last week. Questions will be flying. Are cyclicals overextended yet? Will techs have the historical April slump and should I buy now or wait? Are the credit worries over yet and if not why are BAC and WFC about to break out? There is no clear-cut answer and that is what makes a market. Indecision and reaction, fear and greed, profits and bonuses. A fund manager is faced with committing money to a runaway market which could fail again at any moment or wait on the sidelines for the next crash that may never come. One path creates a winner and the other another previous job listing on his resume.
My bet is that most fund managers would rather take the bet and get into the market now. They will assume the risk that the next pull back will stop at a higher level and not below where we closed today. I believe that the real risk is not being in the market if the economic numbers are to be believed. Real investors are probably deciding this weekend that they may not get another chance at this level. It is decision time. Some will vote to buy, others will vote to wait. You have heard the old adage. Burn me once, shame on the market. Burn me twice shame on me. Most investors of the last two years have been burned so many times they could qualify as smoke eaters for the coming forest fire season. Still, I think most of these crispy critters are seeing that ray of light through the smoke and are about ready to take one more chance at investing. Will this happen next week? Did the next multiyear bull market begin last week? It is entirely possible and while most of our readers were not around to see the start of the last one in the early 90s, they are conscious, educated and ready to rock on this one. Let's hope that Friday was not the mother of all bear traps. Let's hope that the Oracle warning is seen as company specific. Let's hope that the Dow resistance at 10450-10600 evaporates as easily as 10300. Let's hope that the next round of profit taking is just another buying opportunity and not the market breakdown we were worried about last week. Let's buckle our seat belts and let the new bull market begin! Was that overly bullish? If I am dreaming, please don't wake me up! Monday will come soon enough and reality always has a sobering effect.
Enter Very Passively, Exit Aggressively!
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