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Market Wrap

March Winds Whipping the Markets?

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      03-05-2002           High     Low     Volume Advance/Decline
DJIA    10433.41 -153.41 10596.09 10425.05 1.53 bln   1586/1544
NASDAQ   1866.30 +  6.98  1886.15  1849.75 2.04 bln   1900/1689
S&P 100   581.95 -  4.57   588.64   581.40   Totals   3486/3233
S&P 500  1146.14 -  7.70  1157.74  1144.78             
RUS 2000  487.59 -  0.41   490.95   486.08
DJ TRANS 2980.60 - 69.36  3050.30  2979.63
VIX        21.81 -  0.27    23.02    21.46
VXN        42.28 +  1.49    42.81    40.76
TRIN        1.33 
PUT/CALL    0.71

After a +500 point two day gain for the Dow it was only reasonable to expect a pullback on profit taking. The Dow obliged with a -153 point drop which equates to a retracement of about -30%. Ironically the Nasdaq, which has been an anchor for the broader market, posted a gain of nearly +7 points on several strong sectors including chips. Intel helped power the Nasdaq gains after being upgraded by Morgan Stanley to a "strong buy" based on improving economic conditions.

The retail sector was hit at the open as CSFB downgraded a handful on concerns that their valuations had reached lofty levels. Those downgraded included ANF, FDO, FTS, JCP, KR, BBBY and ZLC. The UBS Warburg chain store sales index dropped -0.8% for the week that ended on March 2nd compared to the prior week. It was the biggest drop since Dec-1st. The monthly sales figures are due out on Thursday from retailers and are expected to show an increase of about 5% but some analysts are worried that the trend will slow. Costco dropped nearly -$2.00 despite reporting results that were inline with First Call estimates. Dillards however rose to $21 after reporting a +55% increase in earnings to $1.21 per share. This beat estimates of $.79 and the CFO said it was due to tight controls on expenses and strong private label sales. The Gap was upgraded to a buy at Merrill Lynch which said the troubles were behind it and changes they had made would reap benefits ahead.

Caterpillar also fell from its 52-week high during regular trading on profit taking. After the close they announced that sales for 2002 would be flat but earnings would be up slightly. CAT had previously announced on Jan-23rd that earnings would rise but did not say sales would be flat.

After the bell today the institutional research firm ISS recommended that HWP investors approve the Compaq merger. They said the deal could be an excellent long-term strategic move for both companies despite the sizable risk. Since more than 20% of HWP shares are already stacked against the deal and only 5% already voting for the deal, this was a strong supporting move. Analysts estimate that nearly 40% of the outstanding shares are held by institutional investors or investors that will be influenced by the report. The deal now has a 50/50 chance of approval according to arbitragers. The ISS group does research for many funds and provides them a risk free decision process. Individual investors with shares of a fund are not likely to sue the fund for its voting record if they follow the recommendations of ISS which are seen to be impartial although they normally lean toward management suggestions. CPQ rose in after hours and HWP fell slightly as the chances of the deal completing got better.

Amazon CFO, Warren Jenson, announced he would resign later this year after assisting Amazon in finding his replacement. He has been with Amazon since 1999. The stock has been rising steadily since mid-Feb but saw some profit taking on this news.

In a tale of two stocks MCDT said that it now sees a loss of two to four cents where analysts had expected a two cent profit. The warning came only one day after the company asked a court to grant an injunction against Brocade to stop using technology at the center of a patent lawsuit. MCDT dropped -2.20 for the day. SNDK however gained +2.39 after Morgan Stanley raised its rating to outperform and set a price target of $30. The analyst said the quarter was shaping up better than expected. SNDK closed at $18.33.

In the first shot in a possible new war, a trade war, Bush imposed tariffs on imported steel of as much as 30%. The industry has been crippled by a flood of imports and producers wanted a 40% tariff to slow the dumping. Import dumping is blamed for 31 bankruptcies in the steel sector since 1977. The plan will run for three years and could be cancelled early if conditions improve. Some countries are already warning that they may retaliate by raising tariffs on U.S. products coming into their countries or their non-steel products being exported into the U.S.

That is not the only war the markets focused on today. In Israel the fighting is heading for all out war with dozens of fatalities on both sides. In Afghanistan the resistance to American ground troops has intensified and some of the heaviest fighting in the war is underway. Previously the attacks were done remotely with smart bombs and rockets. Now the ground war has intensified with U.S. troops attacking and being attacked by large numbers of Al Queda. The fatalities over the weekend were the most since the war began and with more troops in harms way it could get worse.

The war worries along with sizeable profits from the three-day rally competed with more positive economic data from the ISM Non- Manufacturing Business Activity Index. The index increased +9.1% in February to 58.7% and was much higher than expected. This was almost a 10 point jump from the 49.6 number in January and indicates that the services side of the economy is expanding at a rapid pace. New orders jumped from 49.4 to 57.3 indicating that future business activity should rise. This is just more concrete evidence of the recovery in progress. This index however is not as reliable as the manufacturing index but does act as confirmation.

The markets should have seen the ISM numbers as rally confirmation but after a +500 point gain and wars on three fronts mixed with a flood of downgrades this was a day to rest. The Nasdaq was the highlight and the fact that it held with the Dow crashing could spark the next move. The MCDT warning after the close could depress the tech sector slightly on Wednesday but as we saw with Oracle the news may be taken as company specific and ignored on a broader scale. What traders may not ignore is the fact that a +500 point gain may have been too far too fast. We had a nice short covering rally followed by rising volume as funds put money to work. The strong volume on Tuesday was deceptive since the advances beat the decliners on a down day. In this case the high volume was a plus.

The negative indicators included the VIX at only 21.81 and the equity put/call ratio at .56. Neither is bullish and each bears watching. The Dow screeched to a halt exactly at strong resistance (10600) from July/August of last year. The Nasdaq also halted its rise at strong resistance of 1875 from mid-Feb. The S&P stopped dead at its 200 DMA of 1155 before losing ground. The road signs are clear from this point. Strong resistance ahead which if broken could provide an even more explosive upside potential than we saw recently. The downside possibilities should be limited due to the continued positive economic news. Of course "limited" may not be the right word since we are sitting on a +350 point Dow gain. The markets could easily trade flat to down another day or two before charging ahead but I believe up is the general direction for the next couple of weeks. Once April earnings start flying that is an entirely different ballgame. As always news events remain the wild card that makes investing exciting. Keep those stops in place!

Enter very passively, exit aggressively!

Jim Brown
Editor

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