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Market Wrap

Financials Pointing the Way?

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      06-13-2002           High     Low     Volume Advance/Decline
DJIA     9502.80 -114.90  9625.40  9491.86 1.36 bln   1059/1895
NASDAQ   1496.86 - 22.30  1526.41  1495.64 1.54 bln   1282/2172
S&P 100   501.16 -  4.86   509.26   501.41   Totals   2341/4067
S&P 500  1009.56 - 10.70  1023.47  1008.12             
RUS 2000  455.98 -  7.01   463.90   455.78
DJ TRANS 2704.82 -  1.90  2731.44  2702.78
VIX        28.73 +  1.72    28.81    27.08
VXN        54.30 +  1.44    55.81    53.51
TRIN        1.14
PUT/CALL    0.84

Late in the session financial stocks began a fierce drop that could be pointing to our future direction. They have been trending down since the market decline began in mid-May but the rate of descent accelerated as we neared the close. The Dow transports, which had been holding their own on falling oil prices, also were showing weakness at the close. This could be a defining moment in the markets as all the major indicators and corresponding indexes appear to be lining up in the same direction.

The day started off strange after futures had been up strongly all night only to crash on the Retail Sales numbers falling -0.9% in May. This was the biggest drop in six months and something Greenspan and analysts had been worried about all year. The consumer has held up the economy in the absence of corporate spending and a boycott now could be disastrous. Despite high unemployment consumers have been buying cars, houses and big ticket items like there was a constant blue light special. If these consumer trends are changing then the "soft spot" Greenspan described last week could turn rotten in a hurry.

This concern for a possible shrinking economy overweighed positive news from MCHP and MOT that they could meet or beat expectations. The futures fell to negative territory and the markets opened down. The Dow fell to triple digit losses at 9510 and stopped. Bargain hunters seeing the second pause in the 9500 area in a week started nibbling at stocks and the indexes moved back up to trade in positive territory again. Considering the negative sentiment this was a very positive event. Unfortunately this bargain hunting ran out of steam when the supply of buyers was exhausted.

According to TrimTabs.com the week ended on Wednesday showed outflows of cash from equity funds of $5.2 billion. This compares to last weeks outflow of -$6.8 billion. This cash drain is even more depressing when you consider retail investors usually rush in when the market is perceived to be at a bottom. Obviously the perception is still a much lower low ahead. If you thought 9500 was the bottom you would not be taking cash out now. Contrarians would be quick to point out that the herd is usually wrong and the heavy outflow of cash is signaling capitulation. I agree to some extent but I think it has to get worse before it can get better. I talk to many investors every day and for the most part they are still hanging in for the bounce.

The various factors for this cash drain is the constant barrage of negative stock news. I am not talking about earnings! The IMCL hearings droned on all day with mind numbing questions and responses. Doesn't congress have any real work to do? Add to that the grandstand play of arresting the ex-CEO in his pajamas this week and investor confidence already shaken by Enronitis is taken to the cleaners again. The recent OMC spanking by the media is another example. On a side note, OMC fired its auditor, Arthur Anderson, today and retained KPMG. Guess they thought the AA name had too many negative connotations. (grin) The AA jury is still deadlocked but questions from the jury room suggest they may decide in the governments favor.

Lehman decided to change its rating system today to buy, sell, hold to conform with the SEC inspired changes at Merrill Lynch. Based on the current market there was a discussion to change the ratings to "reduce", "sell" and "get the hell out of the way". Just kidding! Lehman also downgraded the enterprise software sector today saying IT spending was not improving and maintaining earnings estimates could be difficult. On that thought the CFO at ITWO said the slump in IT spending had deepened in the 2Q instead of showing any gains. This echoed the comments from the SEBL CEO Tuesday that this quarter was just as bad or worse than the first. Now, just where is that rebound?

Lucent warned yet again today on the revenue side. They said revenue would be -10% to -15% below the estimates from the prior warning. LU closed the day at $2.77. Their main competitor, Nortel, also lost ground and closed at $1.60. At these prices you can buy stock at the price of options. The only concern is whether they will be around several years from now. I can't imagine these companies would go under but stranger things have happened.

Microsoft gave back some of its gains from yesterday after the rumor about a pre-announcement of better than expected earnings did not come to pass. Also, comments from the judge in the trial indicated she may be leaning toward the nine states contesting the settlement. This would be very negative and could keep a cap on MSFT stocks for another year or two. Adobe released earnings after the close today and beat the street by two cents but lowered guidance going forward. GNSS warned after the close that revenue could fall -30% below prior estimates due to excess inventory in the pipeline. Sales of LCD monitors have nearly stopped with no corporate IT spending for these high ticket items. SANM warned that earnings would come in at the low end of the prior estimates. Does this sound like an environment for a market rally?

The close for the Dow was the lowest since November 5th and has set the stage for a new leg down. The Friday economic reports could push it off the cliff. We get another Consumer Sentiment number in the morning and any decrease could be a disaster after the drop in Retail Sales. We also have Business Inventories, Industrial Production and Capacity Utilization. The market consensus for the sentiment is 97 compared to 96 last time. Give us a 96 or below and we are in serious trouble. Considering that consumer sentiment is tied in some extent to the markets could the cash outflow be our leading indicator?

There is no reason to detail all the support/resistance levels of the major indexes tonight. They are all at their last ditch support levels and everything above us is resistance. I know that sound very bearish but every bounce fails at a lower level as the market ceiling continues to drop. There is a chance that positive economic numbers could produce another opening bounce on Friday because the indexes are backed up to the edge and any good news could provide temporary relief. I would view any rebound as just temporary. Use it as a chance to buy puts again.

If you have not tried the intraday Market Monitor here is the link to a recap of today's activity.

http://www.OptionInvestor.com/itrader/archive/marketmonitor.asp

Enter Very Passively, Exit Aggressively!

Jim Brown Editor

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