Option Investor
Market Wrap

One Day Does Not Make A Rally

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      04-30-2002           High     Low     Volume Advance/Decline
DJIA     9946.22 +126.35 10006.28  9818.90 1.54 bln   2214/ 942
NASDAQ   1688.23 + 31.30  1697.03  1652.93 1.86 bln   2248/1312
S&P 100   532.40 +  5.56   536.02   525.93   Totals   4462/2254
S&P 500  1076.92 + 11.47  1082.51  1063.52             
RUS 2000  510.67 + 10.13   510.68   500.09
DJ TRANS 2704.72 +  9.88  2718.55  2683.84
VIX        23.78 -  2.33    26.64    23.49
VXN        42.86 -  2.26    45.59    42.70
TRIN        0.74 
PUT/CALL    0.80

I know it, you know it, and analysts know it. Then what is all the excitement about? The talking heads did their best to add fuel to the fire but resistance held and selling still returned at days end. The bounce was almost a sure thing after the TRIN, an evidence of oversold conditions, closed at 2.40 on Monday. The VIX also hit a high of 26.64, a level not seen since Feb-22nd as sellers fled the market on Monday. The key? Minor capitulation on Monday with all the major indexes closing on key support levels 9800/1650/1065. Fund managers then went shopping for bargains on the last day of the month to dress up portfolios.

Historically this is a bullish week as tax refunds peak and mutual funds see an inflow of retail cash. The markets being severely oversold were a bonus factor in powering the strong bounce. Sure there were other factors but they were mostly fluff. Analysts without a clue were pointing to the Consumer Confidence numbers out today as evidence that the economy is still improving. Kings-X! There may be a recovery underway but it is far from enthusiastic.

The Consumer Confidence numbers were basically inline with estimates but fell to 108.8 from 110.7 in March. Expectations were flat and current conditions are slipping. The labor market is beginning to weigh more heavily on consumers and a continued barrage of "business conditions still weak news" is producing a more cautious outlook. The unemployment numbers are still rising with more layoffs announced every day. So, why would this confidence number be market positive? Add the seventh weekly drop in Retail Sales in the last ten weeks and you have growing evidence the consumer is weakening.

The Chicago PMI numbers showed a deterioration of the strong numbers from last month with the index dropping to 54.7 from 55.7. The Prices Paid component increased by four points and the New Orders rate slowed from 62.6 to 59. While any number over 50 indicates economic growth the March momentum is clearly slowing.

The big news today was the resignation of Bernie Ebbers from Worldcom as the CEO, President and Director. The board was becoming increasingly concerned over the drop in stock price and increased SEC scrutiny of the financial dealings between the company and Ebbers. The former basketball coach built Worldcom from a struggling long distance company into a communications giant but leveraged the company into more then $30 billion in debt along the way. The company announced they had paid off more than $700 million of that debt in the past year but analysts were not impressed. There is an increasing worry that WCOM will be forced into bankruptcy, the stock erased and new stock issued to the debt holders in lieu of payment. Bernie will not go hungry despite having to pay back the loan. He has huge assets that can be converted to fully liquidate it and rumor has it he was buying the stock at this level to average down. WCOM traded 295 million shares today and came close to the 346 million share record held by Enron when their bankruptcy rumors were heating up. WCOM finished at $2.48 with a six-cent gain.

Another stock under pressure is Tyco but on their conference call today they said they will have no liquidity issues for at least nine months. The company said it has enough cash to cover the refinancing of $3.5 billion in debt coming due next February. That is good news for investors who have watched -$82 billion in market cap erased from TYC since the accounting questions began. The stock jumped +1.45 to $18.45 on the news.

IBM is at it again. They announced another effort to buy investor confidence as the stock threatened to break the 83.34 low from April-11th and hit levels not seen since Dec-2000. They raised the dividend by a penny and, this is the important part, announced another buyback of up to $3.5 billion of their stock. If you have been reading my comments long you know that IBM is the poster child for attempting to manage earnings by repurchasing shares to increase earnings per share. The key here is that analysts never know exactly how many shares are outstanding at any given time. This allows them to reduce shares when earnings are in jeopardy and still appear to hit their numbers. Follow the math. With 1.7 billion shares currently outstanding their trailing twelve month earnings are $4.06 per share. Reduce the outstanding shares by 42,168,675 ($3.5 billion divided by $83 a share) and your 1.657 billion then outstanding shares converts those same earnings into $4.16 per share. Nice trick and if you have the cash you can buy back those shares as needed to manage the results. Investors were not impressed and after an early retail bounce to over $85 the stock lost ground and closed down -.13 cents.

After the close the judge threw out the Hewlett suit and cleared the way for the HWP/CPQ merger to begin. Both stocks were up in after hours. Hewlett said he had not decided whether to appeal it and if he did it would be a really tough fight. The Supreme Court only reverses about one in 22 cases that are appealed and it would be especially tough since the lower court found no evidence of wrong doing. In short, look for a merged company very soon. This is good news according to Michael Dell who said he expects to gain market share while the two giants struggle to overcome the scale and complexity of the merger. I guess the odds of my Dell/CPQ merger idea are pretty much toast based on the ruling today! (grin) Did I mention that 15,000 workers will now be laid off in the HWP/CPQ merger?

The rest of the week could be interesting. With almost every trader in the market last week on the short side there is plenty of negative investor sentiment. The little bounce today did not convince them and as you can see by looking at a chart of the Dow or S&P, both rolled over exactly at strong resistance (10000/1080) as shorts loaded up again. Should we get another strong bump at the bell on Wednesday those shorts could be flushed out quickly. If any bounce at the bell fails immediately then we will probably be looking at another retest of the Monday lows before the week is out. I would suggest that more than usual nobody attempt to pick a direction this week. The oversold conditions have eased considerably but while the market internals were decent they were not outstanding. The advances beat decliners substantially on 3:1 up:down volume but there is still no conviction. While it would appear I am leaning to the downside there is still a considerable short interest among investors and those shorts are probably nervous tonight. If something triggers a bounce then they could decide to take substantial profits and cover those positions. The bottom line, despite the rebound today there has not been a trend change, just a pause. We need to wait patiently for the market equalization process to complete and the next direction decided. Keep those seatbelts buckled!

Enter Very Passively, Exit Aggressively!

Jim Brown
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