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Minor Meltdown!

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        04-11-2002        High      Low     Volume Advance/Decline
DJIA    10176.08 -205.65 10378.89 10176.08 1511 mln   1072/2081	
NASDAQ   1725.24 - 41.83  1762.28  1725.24 1620 mln   1214/2334
S&P 100   549.46 - 15.89   565.35   549.46   totals   2286/4415
S&P 500  1103.69 - 26.78  1130.47  1103.69           
RUS 2000  503.73 -  7.57   511.30   503.60
DJ TRANS 2792.29 - 51.15  2843.88  2791.56
VIX        22.24 +  2.02    22.55    20.48
Put/Call Ratio      0.91

Minor Meltdown!
by Leigh Stevens

The Dow Average suffered its worst slide since Feb. 4th., shaving almost 2% off it closing price level of Wednesday.

With institutional, or should we say industrial-strength, selling going on today, the S&P 100 and Dow stocks market especially got hammered, keyed by Q1 earnings disappointment from General Electric (GE), a reported SEC investigation into IBM accounting practices, and distaste for AT&T's proposed 1 for 5 reverse stock split. These developments proved unnerving to fund managers and investors.

Few money managers and analysts (such as our commentator last night), could see much fundamental reason for the Wednesday run up, with much of that attributed to a large institutional buy program. I don't mean one related to index arbitrage, but the systematic buying of a sizable block of blue chips. In fact, today, a large institutional sell program was around, possibly related to some large fund readjusting its portfolio.

Due to the narrow number of stocks that were getting sold, NYSE decliners did not totally swamp advancing issues. NYSE advancers were 1072, and declining issues stood at 2081. However, volume stats told the story, as declining volume was a whooping 1.5 billion versus advancing volume of 246 million. You'll note that total NASDAQ total volume was LESS than NYSE, which is unusual. As one of the media talking heads said today, the institutions were BACK, big time.

The hourly charts tell today's story -

DOW (DJX) DAILY & HOURLY CHARTS -

S&P 500 (SPX) DAILY & HOURLY CHARTS -

TRADING STRATEGY & WHAT I'M WATCHING -

As Buzz noted last night, if you're looking to exit some puts and short positions, wait until the hourly oscillators are all the way down again and that has happened again as can be seen above. The S&P (SPX) is down into a support area in the low 1100 region, so I'm watching if a rebound in IBM and a bounce due to no more earnings reports Friday, ignite an oversold bounce. If so, it might be worth playing for short- termers.

The technical negative for anything more than a short-term play, is the continued trade of the S&P under its 50 and 200-day moving averages. The Dow had been holding above its 50-day average, but slipped under it today - a moderate rebound would put it back above it. The Dow is digging into a support area in the low-10,000 area that has held before.

It seems likely that the see-saw pattern continues until the extreme jitters engendered by earnings season, settle out. If hedged, short and in index puts, there is no fundamental reason to change strategy this early in the reporting cycle.

Technically, the market is now quite oversold and extended on the downside. However, as I'm reminded recently, watching any long index positions I've attempted get swamped, it's still a bear market. A trading range may be developing here however; e.g., 1100 - 1170, in the S&P 500 (SPX). This range offers some great plays. The Indexes are on the low end of possible ranges now. However, 1100 SPX and DOW 10,000 should develop as solid support before taking more than a flyer on the long side.

Some sharp upside moves are now coming on the upside, with good volume, but absent a 2-3 day sustained rally, the intermediate trend is still down. Bigger surprises are still coming mostly on the downside.

STOCKS & EARNINGS NEWS -

GE - Posted a loss of 3.45, for the day (-9.27%) and had their worse drubbing since 9/11. The company had it's first ever teleconference, the company tried to put a positive spin on their business. Investors were more interested in the money than the spin! The slowing economy was seen to be now clearly affecting the biggest and best of American corporations.

GE earned 2.5 billion, or 25 cents a share, compared to 2.6 billion a year ago or 26 cents a share. 25 cents was not far off from consensus estimates but revenues were under expectations due to slowing profit trends in some of their core businesses was enough to cause a number of big funds to readjust their holdings of GE downward. GE is the biggest company in terms of capitalization on the NYSE. This heavyweight then impacted the cap-weighted S&P indices proportionally more than in the Dow Average, which is an arithmetic average.

IBM - losing another 5+ percent today on top of an already steep YTD loss. IBM is now off some 20% for the month. Word that the SEC, as reported by the research service, SEC Insight, had opened a preliminary investigation into IBM's accounting's practice, caught market participants in a very unforgiving mood for even the hint of this kind of activity. No more cooking the books!

** After the close it was reported that the SEC had CLOSED it's probe of the company and stock moved up in after-hours trading.

AT&T (T) - Worth mentioning because its weakness (-1.15 or -nearly 8%) was a drag on the DJX, as it weights as much as GE. Because a negative mood prevails, investors react quite badly to any attempts to improve company performance by "financial engineering" such as the proposed 1 for 5 reverse split; i.e., for every 5 shares owned, a shareholder would get 1 new share. The flavor of this had the feeling to too many owners of the stock of desperation. No more Internet type stock ploys! AT&T, along with Dow stocks IBM and Merck, all reached new 52-week lows.

MERRILL LYNCH (MER) - Mother Merrill, as the monster broker is known on the Street, was down some 7%, as the firm continued to feel shareholder wrath at the widening probe by the NY State Attorney General -- they allege that analysts laid off turkey stocks on the public to gain fat fees on the investing banking side. The Analyst side of the room is supposed to be walled off -- they call it the "Chinese Wall" even -- from the interests and activities of the fat cat investment bankers. Did they bump into each other in the cafeteria?

WE'RE STILL SHOPPING! - Dow stock Wal-Mart (WMT) reported that its same store sales rose 9.5 percent, whereas Gap (GPS) saw a 12 fall off in March comparable sales. Target (TGT) said its March comparable-store sales increase 6.8% and made the claim that above plan sales gave it confidence it would outperform prior expectations for the quarter. Wal-Mart was up 1.1 percent, Target +1.8 percent and Gap off 1 percent

YAHOO (YHOO) - The stock suffered a drop of 15%, even after reporting late-Wed., earnings in line with expectations and increasing its profit forecast for the balance of 2002. Is there no Justice! There is also none for AOL Time Warner as it fell to a new 52-week low. Seems that GE was not the only conglomerate to fall out of favor. Apple Computer (AAPL) bucked the tide and gained nearly 2% on a research rating upgrade. Network Associates (NET) was also up a couple percent, after posting better than expected Q1 results -- possible lesson, keep those consensus numbers low!

BOND MARKET - The bond market gained from equities troubles, as prices were bid up, as yields rose 9/32nds in the 10-year Govt. note.

EARNINGS REPORTS AHEAD - Juniper (JNPR) reported Q1 net after the Thursday close, of $0.00 a share, in line with consensus. This versus year-ago EPS of $0.25. Tomorrow there are no big reports due, so maybe market people can escape out of town in a hurry on Friday.

POLITICS & OIL - On the political front, Secretary of State Colin Powell hit the shores of Israel and talked about the need to separate the two parties with some possible US (troop) presence, as well as the need to establish a Palestinian state. His presence in the region lent hope that something could be done to keep a lid on the violence.

The price of crude oil has jumped nearly $7 in the past three months, with spot trading around $26. Oil markets were quiet today however, as export blockages in Venezuela were discounted in that Russia and Norway seemed ready to make up any shortfalls. Estimates were around that oil prices at $40 a barrel could shave as much as 1 percent off from GDP, but the likelihood of that kind of jump seems remote.

ECONOMY - The Labor Department said today that import prices rose at their fastest rate in 18 months in March as imported oil prices rose sharply.

Meanwhile, continuing claims for unemployment benefits rose to a 19 year high, the result of the federal extension of benefits for an extra 13 weeks. The data highlight a possible bind for the Federal Reserve. The labor market appears to be recovering only slowly, arguing for patience in raising interest rates. However, the Fed does not want to let higher oil prices fuel inflationary expectations. The question is whether the Fed will opt for a pre-emptive rate hike to dampen potential inflation.

Leigh Stevens
Chief Market Strategist
Click here to email Leigh

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