Option Investor
Market Wrap

Chips, No Dip!

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      05-14-2002           High     Low     Volume Advance/Decline
DJIA    10298.14 +188.48 10304.44 10119.34 1.41 bln   2207/ 984
NASDAQ   1719.05 + 66.51  1722.26  1691.42 2.60 bln   2432/1119
S&P 100   545.42 + 11.84   545.89   534.66   Totals   4639/2103
S&P 500  1097.28 + 22.72  1097.71  1074.56             
RUS 2000  511.40 + 12.00   511.99   499.72
DJ TRANS 2767.70 + 64.73  2770.04  2702.12
VIX        21.89 -  1.62    22.90    20.81
VXN        44.34 -  1.78    46.61    44.01
TRIN        0.57 
PUT/CALL    0.57

Starting the day off in style Robertson Stevens upgraded INTC to a buy from market perform and the race was on. Yesterday as you remember AMAT was upgraded before the open and the markets reacted strongly as shorts covered early to avoid the rush. Today those remaining short wished they had covered on Monday as the news sent the Nasdaq to a almost a three week high at 1718. The SOX gained +6% today on top of a strong gain on Monday.

The RS upgrade of Intel stressed the fact that this could be the first quarter in over five years that Intel has failed to cut prices on its leading computer chip. Either demand has increased or AMD is no longer a viable competitor. This news prompted traders to cover short positions on anything PC related. Dell for instance gained +1.54, MSFT +2.30 and even IBM added +3.29 on the day before its bi-annual analyst conference. What is a bear to do?

The tech news was helped by good news from the retail sector where Wal-Mart announced record earnings, which increased nearly +20% on a +15% increase in sales. The $.37 cent profit beat the street by a penny with sales approaching $55 billion for the quarter. The guidance was less than stellar but decent. The company said the rate of improvement in the economic recovery was slowing but they should have an inline quarter. This cautious guidance did not keep WMT from adding +2.35 to its stock price.

Helping the Retail bullishness was the Retail Sales numbers which jumped +1.2% in April, the largest monthly gain since October. The retail sales numbers impressed upon traders that a) the recovery may actually be in progress and b) the consumer is spending their tax refunds at a record pace. Nearly 4.5 million more people have received their tax refunds than at this time last year. This money is being poured back into the economy at the retail level.

The Retail rally had plenty of chips to celebrate with and it was quite a party for everyone but WorldCom. WCOM was removed from the S&P-500 at the close and the volume nearly doubled the previous record for any single issue day on the Nasdaq. At 670 million shares it passed the 308 million record held by Intel, 281 million held by Cisco and 266 million held by SUNW. The next two places were already held by WCOM at 256 and 254 million respectively. Enron holds the NYSE record at 346 million shares. The 670 million shares represented nearly 25% of the 2.9 billion shares outstanding. WCOM accounted for 25% of the 2.6 billion shares traded on the Nasdaq today.

Brocade previewed its Wednesday earnings on a webcast today by mistake. Their complete earnings were not released but question and answer notes that related to guidance. The company indicated they expected to beat estimates and for 3Q revenue to rise to nearly $150 million from $116 million last year. This guidance along with the AMAT news continues to paint a positive tech picture. Analysts were only looking for $141.8 million. They also announced that their SilkWorm switch would be offered through an OEM agreement with IBM.

After the close AMAT followed through with optimistic expectations and beat the street by a penny but blew away estimates for new orders. The company was expected to announce $1.35 billion in new orders but they announced $1.69 billion instead. They said renewed demand for consumer electronics helped push orders up +51% and beating expectations. The company also predicted up to a +15% increase in orders for the 3Q. The company said they were seeing a moderate recovery, driven by "strong" consumer-related demand and a strengthening "wireless" market in Europe and Asia. WOW! Strong consumer and wireless? What next, fiber optics? (grin)

HWP (HPQ) in case anyone is interested also announced earnings after the close and met estimates on profits but missed revenue by a mile. This is the last time they will report earnings without including CPQ in their results. HPQ lost -$1.00 in after hours. HPQ warned that IT spending will remain weak with no real recovery until next year. They stressed that consumer spending was weak and corporate spending was showing no signs of improving. Ouch! Carly said, "a muted recovery for 2002 was still possible but don't count on any meaningful improvement until 2003." Is it just HWQ or is it everyone? Dell will offer their translation on Thursday.

The next two giants to rule our fate this week are IBM and Dell. IBM will hold its biannual analyst meeting on Wednesday and after two strong days of gains almost anything good they may say is already priced into the stock. This sets up a lose/lose situation. Good news is priced in, stock drops. Bad news is not priced in, stock drops. Of course IBM investors could be so disillusioned that any excuse for a rally will be met with open arms, but remember they are rumored to be planning another -10% cut of their workforce. It does not look like a positive outlook in their future.

Dell will announce earnings after the close on Thursday and they are expected to show sequential drops in sales and earnings. This will probably be overlooked with Michael Dell expected to be very happy about the HWP/CPQ merger and his chances for gaining market share while those two porcupines attempt to mate. I suspect IBM will be the bigger problem of the week.

It was interesting that the transports gained ground today even as oil hit new highs at $29.54 a barrel. Could it be that the Dow theory is alive and well despite the prospects of even lower earnings by airlines due to rising fuel costs? That idea may be tested again tomorrow because oil data released after the close showed an unexpected drop of over seven million barrels in current oil supplies. Looks like $30 could be in our future.

All dressed up and nowhere to go? The markets have put together two days of strong gains that remind traders of the tech bubble days. The Dow came to a dead stop just under strong resistance at 10300 with the next level of 10400 liable to limit any gains for the rest of the week. Are investors ready to buy stocks on principle and hold them despite the short term volatility? I doubt it. Visions of increasing earnings are there to see but even with the better than expected AMAT results there was still caution in the guidance.

The Nasdaq also stopped right under resistance at 1725 but if that is broken the next strong resistance is not until 1825. These are numbers that were unthinkable just a week ago when it was threatening the low 1500 range. Old habits die hard and just like dip buyers persisted for a year after the crash began the rally sellers may continue to pressure us for some time.

The S&P stopped right under resistance at 1100, (getting the picture I hope), with next strong resistance at 1130. Every major index is right below resistance. This is great if we have the power to break it tomorrow but the futures are actually down as I write this. If we can't break through at the open then the all the gains from the past two days will be called into question. We all know that the buying from the last two days was mainly short covering of tech stocks prior to the AMAT earnings. Those earnings are now record and as we have seen in the past they could end up roadkill for the "buy the rumor, sell the news" crowd.

Everyone would like to wake up in the morning to another triple digit open but you can only have so many of those days in a row before the house of cards collapses. The VIX has died and has sunk to a low of 20.81 on Tuesday. The TRIN is at a miserable .57 as well as the put/call ratio. Any market technician will tell you that is a recipe for a drop. That drop could be just a severe profit taking dip intraday or several days of retreat like we had last week. Remember that +300 point gain that evaporated before the week was out?

I am not advocating that everyone buy puts at the open. We don't need to try and correct the put/call ratio by ourselves. I just want everyone to be aware that what goes up quickly sometimes comes down just as fast. I do believe the evidence of the economic recovery is becoming too strong to ignore by even the staunchest bears. For every hundred points the Dow and Nasdaq add there are several thousand more investors who have been on the sidelines that decide to venture back into the market. This is building some upward pressure as you can see by the strength of these short covering rallies. The sellers are not as strong and the buyers are nibbling. While it may be a little early to start calling for the beginning of the next bull market (sorry Jeff/Leigh) we are getting close to that magic day. However, nobody will be able to point to it until long after it has passed and we still have the summer doldrums ahead of us.

I do think it is time to start rounding that extra cash and start sending it to your broker. Spring is here and garage sales are in the air. Sell the rest on EBAY and get ready to turn that idle money into some real dough. The 3Q earnings estimates appear to be improving and that is the real key. The bulls will have their day again and the bears will be forced back into hibernation. Until then, keep those stops tight on your longs and let's see just how the rest of the week goes. Before we can breakout to new highs there is a lot of resistance to be broken and that can be a painful experience as we all know.

There are still economic hurdles to be overcome this week as well. The CPI and Industrial Production on Wednesday, Housing Starts on Thursday and the ever-present Consumer Sentiment on Friday. They can either be potholes on our path or kindling for the next advance but they should not be ignored.

Enter Very Passively, Exit Aggressively!

Jim Brown


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