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Market Wrap

No Change Yet..

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      03-19-2002           High     Low     Volume Advance/Decline
DJIA    10635.25 + 57.50 10673.10 10577.48 1.24 bln   1707/1421
NASDAQ   1880.87 +  3.81  1891.51  1873.17 1.35 bln   1827/1710
S&P 100   592.09 +  2.46   594.02   589.62   Totals   3534/3131
S&P 500  1170.29 +  4.74  1173.94  1165.55             
RUS 2000  504.73 +  1.93   504.97   502.56
DJ TRANS 2930.64 - 17.25  2951.06  2908.22
VIX        20.35 -  0.40    21.38    20.21
VXN        38.99 +  0.24    40.01    37.77
TRIN         .85 
PUT/CALL    0.65

Who is on first? It appears that nobody knows. Greenspan and company changed the bias to neutral but stressed that real demand over the next several quarters is still uncertain. Meanwhile Merrill Lynch and Saloman Smith Barney see first quarter growth exploding at between +5% and +6%. Somebody is wrong. Greenspan is becoming increasingly optimistic as to the strength of the economic recovery but if he thought the first quarter was going to post a 6% growth rate the decision today would have been entirely different.

The major area of discussion appears to be growing demand or the lack of it. Many analysts claim the current economic rebound is being powered solely by a rebuilding of inventory levels and not increased demand. The FOMC called it a "marked swing in inventory investment which was expanding at a significant pace." Considering how low the inventory levels had fallen while corporations weathered the recession it is not surprising that the "stocking" orders are large. Unfortunately those same inventory levels are now rising rapidly which indicates there is no buying on the retail side. That lack of buying is the fly in the ointment.

Still the FOMC is hedging their bets and already telegraphing their intent to raise rates in the near future. The key word in the FOMC announcement is "accommodative". The statement said "although the stance of monetary policy is currently accommodative..." which means in English "we think the rates are too low for the current circumstances." However, after barely escaping with any hair left on his head after the economic crash Greenspan is not likely to rush back into an aggressive rate hike policy anytime soon. There is no inflation pressure and no signs of a long term recovery. Either way the FED should stay on the sidelines which they did today. The next meeting is May-7th and that is the meeting which could cause investors problems. It is also right after the majority of earnings for this cycle. Mark that on your calendar.

As evidence of the strengthening economy the semiconductor book to bill numbers announced after the bell showed a +10% growth from January to February. The book-to-bill ratio rose from .81 to .87 which means $87 of new orders were received for every $100 of revenue recognized. This "recognized" label was changed from "orders shipped" after problems arose with channel stuffing and orders refused during the recession. To recognize revenue the customer must accept the order and take delivery. The brightest outlook is in the equipment makers stocks. Chip equipment makers sold $28 billion of equipment in 2001. With newer, smaller, thinner, faster and cheaper chips the continuing trend the equipment makers are due to sell an entirely new wave of equipment. Intel just announced a move to the .09 micron process for the next generation of processors which make much of the old equipment obsolete.

The industry is reporting a dwindling inventory of chips and a sharp upturn in demand from China. Some analysts estimate that orders for chip equipment could rise by +17% this year which would equate to nearly $33 billion in orders. This should be very bullish to the semiconductor equipment stocks but may not impact the chipmakers themselves. Ordering new equipment may be bullish but if orders for the chips themselves do not increase then earnings will continue to suffer.

Did you vote? Millions did and according to HWP CEO, Carly Fiorina, the merger is a go. While she said it was still too early to tell for sure she felt from the number of institutions on their side at the close of voting gave them the win. Dissident Walter Hewlett insisted the vote was still too close too call. It will be a couple weeks before the official vote tally is released and the verbal battle ends. HWP dropped to $18.80 on the news and CPQ rose to $11.00.

In other tech news shares of Red Hat fell in after hours after saying that sales were slowing. The Linux system maker is finding it tough to compete and is losing market share to other vendors. Mercury Computer dropped nearly -$6 after warning that earnings would fall to only .05 to .12 cents from analysts estimates of $.24 cents. The company cited delays in shipments on defense contracts and a delay in recognizing revenue on those shipments. Not all the news was bad with Jabil Circuit gaining nearly $1 on earnings that beat the street and comments that they saw continued growth ahead.

The major indexes reacted to the FOMC news in typical fashion. They began the day with an upward bias and then crashed when the announcement was made. It never ceases to amaze me when the FOMC does exactly what analysts expected but the Dow trades in an exaggerated range at the announcement. The Dow dropped from 10664 to 10597 in the seven minutes following the news but rallied to close well over 10600 at 10635. Exactly on resistance again! For the bulls this is a strong signal since this represents the highest close since June-22nd last year. Every day that the index trades in this area, or in the case of Tuesday, spent several hours well over the 10635 area, the resistance is slowly eroding.

The S&P also dropped sharply after the announcement but recovered to close very near resistance at 1175. When these resistance levels are tested over and over again they will eventually produce a major move in one direction. The war between buyers and sellers is being fought and the ranges are becoming smaller and higher. Still, even with the post announcement volatility the VIX closed at another relative low at 20.35. I received several emails reminding me that the VIX can trade below 20 for some period of time without a market meltdown as in 1995. I agree. There is no magic number that instantly sets off a panic selling binge but there is a correlation between low VIX numbers and eventual sell offs. Selling occurs when there is nobody left to buy. Everybody who has money has already bought and everyone is waiting for the markets to rise. This causes complacency and the eventual market drop.

If everyone of our readers had $1,000 each on July 1st of last year and they were instructed to invest it (not trade it) when they felt the markets offered the best chance of a decent return, how many would still be holding their money? Everyone thought the drop after 9/11 was overdone and represented a tremendous buying opportunity. Doubtless, many would have invested then. As the markets rallied into late December many more would have taken the plunge not wanting to be left behind. Those that felt the market was already overvalued in early January would probably have bought the dip back to the Dow 9600 level at the end of January. There would likely be very few still holding money today as the Dow/S&P are struggling to break that overhead resistance dating back to late spring of 2001. Now you see the problem.

Everybody is already invested, or at least the majority of the buy and hold community. The volume is slowing as conviction wanes. The next opportunity to convince the remaining holdouts will come in the April earnings period. If they are convinced then we could make a new leg up. If they are not then we are doomed to slide into summer as those investors who bought the 9/11 dip and the February dip decide to take profits. The VIX is very low because nearly everyone has already voted in favor of a rally. When storm clouds appear over the markets the VIX will climb as investors take steps to protect themselves against a drop either by selling, buying puts or setting tighter stops. With good economic news appearing every day why do you think the markets are struggling to break this resistance? Is it because there are few investors with money left to spend?

Despite the VIX comments above there could still be several days of positive movement in our future. The end of the quarter is coming and many fund managers are still sitting on cash they did not want to invest until the next pullback. With no drop in site and positive news every day they may be forced to spend it to dress up their statements. The competition for fund dollars this year will be intense as the non-performers from last year are dropped in favor of a new horse for the next bull market. Managers will not be able to entice cash without showing a promising stable of thoroughbreds. They are buying every dip but the dips are becoming shallower. Should we get a breakout over 10635/1175 there could be some serious buying and short covering. Regardless of what we think may happen we need to keep those stops in place and our fingers crossed. The earnings warnings cycle has been very calm to date but that could change at any moment. Remember, the biggest surprises occur when you are not expecting them.

Sell Too Soon!

Jim Brown
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