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Market Wrap

Beige, green and red were the colors of the day

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        04-24-2002        High      Low     Volume Advance/Decline
DJIA    10030.40 - 58.80 10163.40 10027.70 1355 mln   1507/1645
NASDAQ   1713.30 - 17.00  1746.52  1711.11 1735 mln   1599/1945
S&P 100   541.86 -  3.94   549.98   541.47   totals   3106/3590
S&P 500  1093.14 -  7.82  1108.46  1092.51  
RUS 2000  507.32 -  2.97   514.57   506.76
DJ TRANS 2674.74 - 23.31  2741.91  2674.59
VIX        22.67 +  0.54    23.08    21.39
VXN        40.20 +  0.27    41.08    39.36
Put/Call Ratio      0.78

Beige, green and red were the colors of the day

It was seesaw action today with market participants not knowing what to do as the market averages whipsawed from green, then to red, back to green and then red again into the close. The "culprit of uncertainty" looked to be the Fed's Beige Book survey of Federal Reserve Districts.

I won't go into great detail as the Beige Book survey is simply a report of various observations (not a finite number) of economic activity taking place in different financial districts in the U.S.

In brief, the survey showed that signs of economic improvement or increases in economic activity were present among the various districts since late February, with the sole exception being Boston, which described economic activity as mixed. While the overall tone was positive, a few districts expressed "qualifications" about the pace of the recovery or strength of their regional economies. A link to the Beige Book summary can be found at the Federal Reserve website at http://www.federalreserve.gov/FOMC/BeigeBook/2002/20020424/default.htm

Both the Dow Industrials (INDU) 10,030 -0.58% and the S&P 500 (SPX.X) 1,093 -0.71 were holding gains 30-minutes after the release of the Beige Book report, while the NASDAQ-Composite (COMPX) 1,713 -0.97 has edged lower just ahead of the report. NASDAQ losses were lead by semiconductors, which had been showing some technology leadership in recent weeks, but soon after the report was released, the Semiconductor Index (SOX.X) broke sharply from the 550 level and lost ground into the close, finishing down 3.76% at 534. For technology bulls, seeing weakness in one of the stronger segments of technology became disheartening and other groups turned more bearish.

Semiconductor Index Chart - Daily Interval

Yesterday's break of upward trend and inability to rally with other sectors in the market earlier in the day, sure has the look of determination that semiconductor bulls were and perhaps broader technology bulls were going to need a blow out type of Beige Book report to bring them to the table.

We had a bullish play set up with a trigger in shares of Applied Materials (NASDAQ:AMAT) $24.96 -3.62% just in case there were some upside surprises from today's Beige Book report. For weeks we've been looking for an entry point on the stock for a pullback and it looks like we're going to get it.

Applied Materials Chart - Daily Interval

Technology bulls have learned that waiting for a pullback and then taking some heat into levels of support has been the best way to attack a trade. With the Semiconductor Index (SOX.X) breaking firmly below trend, expect some risk management in inventories to be underway. The greater the pullback in AMAT to the December-March consolidation range the better the chance to find committed longer-term bulls and institutional sponsorship.

With the Beige Book report depicting a still growing economy, but perhaps not at the rapid pace of some momentum investors, expect technology stocks to get very volatile. The MARKET hates uncertainty and investors are beginning to question just how "robust" the economic turnaround is.

Other technical damage taking place

While a stronger group of technology like the Semiconductor Index (SOX.X) has fallen below an upward trend and experienced a 3.7% decline, one of our "key" economic sectors in the deep cyclicals and the Morgan Stanley Cyclical Index (CYC.X) 559 -1% also has broken below our upward trend and gives hint of a market's willingness to sell.

Morgan Stanley Cyclical Index Chart - Daily Interval

Today's "firmer" break of bullish trend is an alert to weakness in the scenario of more robust economic growth. While it is "tempting" to look for bearish opportunities in the group, there are undoubtedly some eager bears from lower levels looking for a pullback to get back to break even in their trade.

It's my view that if the Cyclical Index (CYC.X) is going back to the lows, then yes this group would be a good short. However, if that were to happen (I don't think it will, but won't rule it out), then look out for many technology stocks that have lacked sponsorship.

Another piece of mentionable "technical damage" came in the Dow Industrials (INDU) 10,030 -0.58% with a trade at the 10,050 level. On the 50-point box chart of the point and figure chart, this was a triple-bottom sell signal and this sell signal came below trend. In essence, on three previous declines, there had been enough buyers to prevent a trade at the 10,050 level, but today we saw more willing sellers than buyers at that level and this too is considered a technical breakdown in the Dow Industrials.

I now have resistance firming at 10,300. There may be some "psychological" support at the 10,000 level, but bulls most likely should begin assessing downside risk to the 9,800 level near-term.

Seeing rotation into Treasuries

While the Treasury market closed at 03:00 PM EST today (it normally closes at that time every day) there was still an hour left in trading after the Beige Book numbers were released. Bonds saw buying across the maturities and here too we see a break of trend (from our regression) in the 10-year YIELD ($TNX.X).

10-year YIELD Chart ($TNX.X) - Daily Interval

Today's action in the bond market was quite "defensive" looking. Note the rather "sharp" decline in YIELD. This hints to me that Treasury bulls are getting more aggressive with their buying in the bonds, despite a lower YIELD than found near our "YIELD top" of March 21st of 5.452%. While the difference between 5.45% and current YIELD of 5.095% may not seem like that much, imagine you're moving several million dollars a day among various investments (stocks or bonds).

With the information currently at hand, I will go on record as saying I don't think the 10-year YIELD will break below the 4.854% level (50% retracement). I think there is enough underpinning economic strength to have an unfavorable risk/reward trade in bonds versus stocks (not all stocks) at that type of YIELD level.

We will deal/monitor with this one day at a time. Just like we always have, but for now this bond action looks more defensive. I've "benchmarked" the March 21st date on the YIELD chart. Use it if you will to perhaps understand how this YIELD may have impacted securities you're trading, have bought, shorted, etc.

It isn't all bad news!

Bulls and bears that have been with us awhile know that there are opportunities to make money from both the bullish and bearish side of a trade.

It's interesting to note that the Dow Jones US Home Construction Index (DJUSHB) 382.24, gave back just fractions of recent gains. All of a sudden, the "higher YIELDS driving mortgage rates higher" than may have priced buyers out of the housing market have started to come down a bit haven't they? (see 10-year YIELD chart above).

A month ago, there was plenty of chatter that the higher YIELDS would have an adverse impact on mortgage rates and homebuilders would get crushed. So far this week, homebuilders have been reporting some stellar earnings and guiding estimates higher.

True! A bear will now turn the table and talk about consumer confidence and how a "not so robust" economic picture will put a damper on consumer confidence and buyers for new homes will dry up.

The bull will simply ask, "then explain what the heck happened to that scenario over the past two hears?"

Look, arguing points of economic philosophy can be left for those that have a lot of time on their hands. What you and I need to do is stick with our disciplined methods of trading. Identify good action points where we can properly assess risk/reward and take it from there.

Let's quickly review this morning's New Home Sales report that came in at 878,000, which was below the consensus number of 884,000. In an effort to perhaps "clear things up" we must understand that the consensus estimates were bumped higher to "account" for higher revisions to the February data.

In February (prior report), the New Home Sales numbers were reported as 875,000. However, those numbers showed a higher revision (based on more complete data) to 906,000. Part of the reason the homebuilders saw some selling near the opening of trading was that the "3.1% decline" was taken from the 906,000 revised number, not the previously reported 875,000 data.

Who knows. Next month, "today's" New Home Sales data can be revised (up or down). Again, if you and I are going to trade the homebuilders, we simply need to stay disciplined in our trading and let the stock tell us what to do.

New Subscribers and those that have been with us!

I get a lot of questions from subscribers regarding our play list and why we're doing the things we're doing with stops, targets, etc.

Let it be the first priority that YOU do what is right for your account.

If you feel a stop of ours (as outlined) is too tight and you want to give it more room, then you have the right and the priveledge to make the adjustments you feel are warranted.

If you've got a nice gain going in the trade and want to exit the position, I STRONGLY advise you to do so! Hey, I will never tell an investor/trader that they shouldn't have taken a profit. That's what we're here for.

By golly, that Amazon.com (NASDAQ:AMZN) $16.79 +19.4% is something else isn't it? If you would have told me at the beginning of the month that I had to pick one stock that might just end up representing the biggest gain from profiled entry, you'd have had to twist my arm to make the one bet on Amazon.com (AMZN). I can't say that I'm "surprised" that the stock has acted well, but 19% gains in a single day are very hard to find, especially from a bullish trade under current/recent market conditions. That gain should be protected and any subscriber taking partial positions or full positions off the table today should be proud that they sucked it up, traded their plan, and now have the opportunity to reap the benefit. Don't let it slip away!

You can also bet there are some bears out there in other stocks on our play list that have also "sucked it up" and are playing the downside of things.

I think we've got some stocks profiled on both the bullish and bearish side of things that have some good potential. A trader that will stay disciplined and true to the trading strategy will not only survive, but thrive!

AOL earnings

If you thought that earnings from Microsoft (MSFT) $53.02 -1.79% last week were "confusing" then you'll most likely find tonight's earnings report from AOL Time Warner (NYSE:AOL) $19.30 +0.99% an equal.

After the close of trading, AOL reported Q1 earnings (excluding charges) of $118 million or $0.18 per share, which was 5-cents better than Multex consensus of $0.13. Q1 revenues came in at $9.76 billion versus consensus of $9.5 billion. AOL said it sees "light at the end of the tunnel" and sees Q2 revenue growth in mid to signle digits year-over-year, with full year revenue growth of 5-8%.

While the numbers were reported concise and clear, many were shocked that INCLUDING CHARGES, AOL lost $54.2 billion in the first-quarter, the largest quarterly loss reported in U.S. history. AOL said the charges/losses stemmed from expenses in the aftermath of the January 2001 merger between America Online and Time Warner.

My advice on AOL? Stay clear. There are too many other stocks to trade or invest in with less uncertainty surrounding the stock. Let things settle down and let the MARKET digest this earnings report. Gamblers only at this point, and premierinvestor.net attempts to avoid "gambling" when risk/reward is so difficult to assess.

Jeff Bailey


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