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Market Wrap

Thanks For Nothing Alan!

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      05-07-2002           High     Low     Volume Advance/Decline
DJIA     9836.55 + 28.51  9919.03  9810.53 1.35 bln   1394/1758
NASDAQ   1573.82 -  4.66  1594.57  1560.29 1.87 bln   1433/2076
S&P 100   518.22 -  1.26   523.31   517.90   Totals   2827/3834
S&P 500  1049.49 -  3.18  1058.67  1048.96             
RUS 2000  498.98 -  3.93   504.07   498.97
DJ TRANS 2683.84 - 19.57  2723.17  2681.60
VIX        24.38 -  0.50    25.10    23.94
VXN        50.00 +  0.88    50.99    49.73
TRIN        1.22 
PUT/CALL    0.75

The FOMC meeting closed with no change in the current 1.75% Fed funds rate. Nobody expected a change so no problem there. The language of the announcement, while not specifically negative, gave the distinct impression that substantial problems still exist in the economy. This sent traders into turmoil. It was not bullish or bearish but was tinged with more caution than traders wanted to consider. After the normal 30 minutes of post Fed volatility the markets attempted a weak rebound which failed just below the highs of the afternoon. Once the slide began there was little doubt of the outcome.

The morning began with a nice calm rally with the Dow posting gains over +100 points for some time. This was due to short covering by those who were afraid to hold over the announcement and some retail buying by Fed optimists. Once the news was out and the lack of optimism was evident, traders decided discretion was the best move and started lightening up. Bears developed a wide grin as they loaded up again in preparation for the next leg down.

The wild card here was the Cisco earnings after the bell. Would they beat, hit or miss estimates? Only John Chambers knew for sure. The stock slid to $12.27 intraday as investors feared the worst. The key here was "feared the worst." Shorts have been leaning on Cisco for a month and most feared they would make statements similar to the IBM comments yesterday. When the earnings were announced they beat the street by two cents but were close on revenue. Shorts got creamed in after hours trading as CSCO jumped from a $13.08 close to near $15. The $.11 cent profit beat the $.03 profit for the same period last year. Suddenly CSCO netted nearly a billion dollars for the quarter and the networking downturn became an upturn.

The bounce in Cisco led to a bounce in tech stocks across the board in after hours and S&P futures soared +8.00 to 1055. This should provide another short covering spike at the open on Wednesday but nothing fundamental has changed. The economy is still weak and the recovery is crawling. Cisco simply wrote off enough losses over the last several quarters to post a profit going forward. Remember, revenue was slightly less than expected. Also, Cisco has taken a page from the IBM playbook and has been buying back shares to improve the earnings per share. There is no recovery here when sales are flat. The CFO said sales for the current quarter could be flat and the book to bill ratio was less than one. Last quarter it was one and the quarter before that it was higher than one. Looks like business is going down, not up. Now where is that recovery?

Economic reports showed that productivity soared +8.6% and labor costs dropped -5.4% This was due to a surge of inventory replacement orders without a rise in employment. Until the order stream becomes stable employers will not hire more workers and simply work the current staff harder. This was not some major change in the economic landscape but simply an anomaly based on the surge in inventory replacement orders.

The news that big blue was going to become smaller blue was met with surprising results. IBM finished up +.50 for the day. Investors sometimes have a short memory and the drop on Monday was evidently seen as a buying opportunity by some. $82 held as support for quite a while but $75 may be in our near future. At $75 institutional traders could become interested again despite the shrinking company.

With CSCO CEO Chambers claiming current visibility to be "limited" and IBM cautioning against minimal growth through 2003 and the Fed saying that "degree of growth still uncertain", why buy? This is the challenge for investors going forward. There is still no burning reason to buy stocks. This problem could continue for another month or so. Investors should wait until there is clear evidence of a trend change before opening any new long positions.

The Nasdaq has lost ground in 13 of the last 15 sessions but that could improve on the Cisco bounce tomorrow. The index closed at 1574 and next support is not until 1560. There is no strong support until 1475 although 1545 could provide a pause. 1625 is overhead resistance which could be tested tomorrow. That may provide a good entry point for shorting the next drop. The S&P closed at a low not seen since October-3rd. It is below support and is currently in danger of a significant drop. Any tech bounce would stall this fall but without stronger profits there is nothing to power a sustained rally. The Dow is resting near support at 9810 and a drop below that level would put us at risk to 9750. 10000-10100 is still strong resistance.

Obviously the outlook is still very cloudy. Techs "could" bounce on the Cisco spin on Wednesday. How long that bounce may last is anybody's guess. I would not suggest buying any bounce here. Wait patiently for a real trend to appear. Once we see where the bounce ends we will have a very good idea where our entry points should be going forward. The morning rebound from the -198 Monday loss leveled the oversold conditions, which could mute any tech gains tomorrow. Wednesday should be an interesting day!

Enter Very Passively, Exit Aggressively!

Jim Brown
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