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Market Wrap

Where Is The Volume?

HAVING TROUBLE PRINTING?
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      04-16-2002           High     Low     Volume Advance/Decline
DJIA    10301.32 +207.65 10308.17 10100.11 1.35 bln   2234/ 939
NASDAQ   1816.79 + 63.01  1816.91  1779.29 1.57 bln   2555/1042
S&P 100   561.29 + 13.57   562.20   547.72   Totals   4789/1981
S&P 500  1128.37 + 25.82  1129.40  1102.55             
RUS 2000  522.95 + 10.21   522.96   512.74
DJ TRANS 2881.40 + 78.75  2883.69  2803.04
VIX        20.30 -  2.08    21.72    19.92
VXN        39.44 -  2.43    40.75    39.05
TRIN        0.39 
PUT/CALL    0.64

Surprise earnings announcements from Novellus and Texas Instruments powered the chip sector to a +5% gain on strong short covering. The battered telecom sector was also powered by positive news from Sprint. Again, strong short covering was the key to the strong gains. Traders got caught by surprise and the short covering spread to other sectors as well but the $64K question is still, "where was the volume?" The NYSE managed only 1.35 billion and the Nasdaq only 1.57 billion. Awfully meager for a strong day in the markets. Are we lacking conviction here?

The glowing conference call from Texas Instruments set the stage for further recovery hopes. The CFO said it was a good beginning to the year and forecast a +10% rise in revenue in the 2Q. The company had just beaten the street by a penny but you would have thought it was a dollar. Adding to the chip euphoria was Novellus where CEO Richard Hill forecast six cents for the next quarter when analysts were predicting only a penny. Suddenly chip bears were running for cover and the short covering was turning into a rout.

If the chip surprise was not enough the telecom sector, tech lepers for the last year, was surprised by Sprint which beat the street and added subscribers. It affirmed its growth targets of three million new customers. Suddenly telecoms were targets of short covering themselves and that covering spread into the networking and fiber optics makers. Even Lucent, Corning and Nortel posted strong gains.

GM helped power the Dow with a profit of $228 million for the first quarter due to strong sales in North America. GM surprised analysts by beating estimates by fifteen cents and raising guidance for the full year to $5.00 from $3.50. Also helping the Dow was a move by Citigroup to raise its dividend to $.18 cents. C jumped +2.19 on the news. JNJ also beat analysts estimates and reported double-digit percentage gains in profits and sales. JNJ gained +1.10. Only two Dow components lost ground, CAT -1.34 and EK -.03 cents.

The chip news continued after the bell with INTC, VTSS and MOT. Intel met estimates with revenue coming in at the high end of the projected range. Intel said the product mix was improving and gross margins were at 53%. That is an incredible number considering revenue was near $7 billion. Intel raised guidance only slightly for the 2Q to a range of $6.4 to $7.0 billion. CFO Andy Bryant said there were still no signs of a broad economic recovery but we could see some uplift in the second half of 2002. Still the company is executing well and broadening their product offerings. The best news was that server chips were strong and overall units shipped set a new record. The stock closed at $29.45 but rallied back to resistance at $31 in after hours.

VTSS announced earnings inline with estimates and guided flat to slightly higher for the next quarter. The CEO said they would continue to remain cautious about system demand for the rest of 2002. Motorola beat the street with a smaller than expected loss but on sales that fell -20%. The best news after the bell for chips came from RFMD which posted results that showed a +85% gain in revenue in a down market. They said they "DEFINITELY" see signs that the handset business is picking up and DEFINITE strength in the wireless networking business. They are forecasting a strong second half. This should help produce more short covering in the telecom, wireless and chip sectors.

Economic reports showed a mixed picture again with housing starts falling -7.8%. According to analysts this was due to warmer than expected winter weather which allowed an earlier than usual start of spring construction. When taken in context with the gains in prior months it should not be a problem. February starts were revised upward and are on pace with the record set in 1998. The CPI also came in lighter than expected at only a +0.3% increase and should set the stage for a hands off Fed. That Fed policy should be telegraphed tomorrow as Greenspan speaks on monetary policy again. In his last several appearances he has claimed a recovery in progress and tomorrow is not expected to be any change.

Industrial Production soared +0.7% in March as production ramped up without an increase in the work force. This is normal in the type of recession we have seen. The inventory rebuild cycle is done with existing workers and only after an increase in long term orders is seen are new workers added. This was the strongest gain since May-2000. The manufacturing sector will now hold its breath over the summer in hopes that the inventory buildup will not die with no follow on orders.

This earnings cycle has produced its share of surprises which have cheered the bulls and worried the bears. Of the 75 S&P companies that have already announced 42 have beaten estimates and only 12 missed their targets. The quality of earnings has certainly been better than expected on the surface but still cautious on guidance. The positive surprises have produced some market internals which would have you believe a new bull market was in process. The advance/decline ratio on Tuesday was 2.5:1 and significantly better than recent history. But, the critical piece still missing is volume. The short covering caused a severe imbalance in up/dn volume which is a potential trouble signal. On Tuesday there was only 197 million shares of down volume on the Nasdaq out of 1.57 billion total shares. On the NYSE only 185 million shares were down volume.

This order imbalance knocked the VIX back to 20 and close to where it was just before the April market slide began. The TRIN is even worse at only .38. These numbers are very bad but as we know from experience they can get worse. More importantly to me was the rebound exactly back to resistance or slightly below. There were very few breakouts and many stocks rolled over again when they reached last weeks highs.

One analyst after the bell was relating the historically high PE for the S&P at 45 on a trailing basis. This is actually higher than this time last year and you know what happened then. While traders were caught off guard with better than expected results they are still not seeing the guidance necessary to hit that PE of 45. Something is going to have to change. Either the earnings will have to improve significantly for the next two quarters, and we are not seeing that in the guidance, or the PE will have to fall. (stock prices drop to push PE ratios lower)

Giants IBM and MSFT will announce earnings this week and IBM has already warned so expect no help there. MSFT is not showing any signs of investor confidence either. As investors we need to maintain our calm. Do not get caught up in the hoopla associated with these paper profits. Many of them have been generated artificially as we know. We just need to focus on the market and wait for our entry points.

Those entry points for me continue to be 10350/1800/1130. The short covering on the Nasdaq popped it back over 1800 to 1816 but the S&P closed right under 1130 at 1128. Remember, when the three indexes diverge you should weight them for confirmation based on the number of stocks in each. This means the order of ranking should be S&P, Nasdaq and then Dow. With the Nasdaq breaking over the entry point without confirmation by the S&P I would be cautious and wait patiently. There will be plenty of time to board the train once we are sure it is going in our direction. In English, this means wait for the S&P to break 1130 before going long. Should the S&P fall below 1130 again that would be my signal to go flat again.

The Dow and S&P hit my near term bearish targets on Monday of Dow 10100 and S&P 1100. This created an oversold climax and set the stage for the short covering we saw today on positive earnings announcements. That oversold condition is now diminished and it will take an even larger surprise to continue the rally. Intel will influence the major averages at the open on Wednesday with the $2 after hours gain as well as the positive results from MOT, RFMD and VTSS. However, with 35% of the S&P announcing this week the focus will turn quickly to the next set of announcements. IBM will be tomorrow and has already indicated they will miss estimates but the details are still unknown. Microsoft will be on Thursday and could be the next big market mover. Above all be patient! We are only two days into the April-15th to May-15th high risk period and we have seen a 238 point range on the Dow and a 76 point range on the Nasdaq. Need I say more?

Enter Passively, Exit Aggressively!

Jim Brown
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