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Market Wrap


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      06-17-2002          High     Low     Volume Advance/Decline
DJIA     9687.42 +213.21  9687.77  9476.50  1.23 bln   2400/ 821
NASDAQ   1553.29 + 48.55  1555.07  1519.26  1.59 bln   2332/1138
S&P 100   516.18 + 14.42   516.18   501.76   Totals    4732/1959
S&P 500  1036.17 + 28.90  1036.17  1007.27             
RUS 2000  470.74 + 11.67   470.75   459.07
DJ TRANS 2729.93 + 56.79  2735.24  2672.85
VIX        27.62 -  2.31    29.12    27.00
VXN        54.98 -  0.69   55.33     53.30
TRIN        0.35
PUT/CALL    0.75

By Buzz Lynn
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Sometimes I struggle for new words to express the same idea. How is it possible for a prairie cowboy to write in his diary that he ate cornbread and beans again today while keeping it interesting? What he wouldn't give for the opportunity to write "steak and potato chips" for once!

I see that the markets are up triple digits on any given day and the only words I hear coming from the lips of investors and the dominant financial press are, "Is this the bottom? Screaming buys?" Or, "Encouraging - is the rebound 'finally' here?" Sorry, this cowboy can only report, "legumes and baked maize meal." The S&P is selling at 40.8 times earnings while yielding 1.59%. So my emphatic answer is, "No!" This is all blather in a primary bear market, where long-term, "buy and hold" strategies cease to produce returns for those interested in preserving, let alone growing their nest eggs.

Now for traders, it's a whole different story. Just knowing that history repeats thanks to the ebbs and flows of human psychology through the rivers of time is the basis for making profits. In economic terms, it always boils down to supply and demand. Demand can be gauged for the most part by volume. By that measure, there isn't enough to raise prices across the board. That just makes sense given the foreign owners can take their money home and receive a better return for it there. And as locals (U.S.), we've collectively speculated enough and are much more hesitant to send our $$$ out into the cruel market unless the prospect of improved profits are there. Anybody seen that lately? Me either. And the big picture doesn't appear as though it's going to change overnight.

But the little picture is subject to headline exposure and chart oscillators. Oscillators are oversold, which could mean a temporary rally isn't far off. More on that in a minute. Just remember as we see equity prices rise, many attempts to rationalize it will sound like, "Well, profits are going to improve in the second half of the year. Therefore, now is the time to back up the truck for all you can afford. Why will profits improve? Because the markets are rising and everyone knows that prices follow earnings." Current market bear, Bill Fleckenstein notes that, "If this isn't a case of a cat chasing its tail, I don't know what is." I agree. But as the shorts cover near the oscillator bottom, triple-witching week works its magic on keeping volatility high, the hopeful pitch their eyes toward ORCL earnings tomorrow, and the semiconductor book-to-bill ratio is released, equity prices are position for a rebound if only for a short while. Speaking of which. . .

Fables, Book-to-Bill, and Urban Legends. This one always gets me. Over the last year, people high on semi-dust are quick to point out that the book to bill ratio is increasing and now back over 1. Well sort of. The emphasis is always on the increased booking with assumption is that billing (Remember, that's the part where manufacturers get paid.) is rising but not as fast as booking. By golly, the rising ratio must mean the whole sector is on fire, and thus there are abundant "compelling values" throughout the whole sector. Reality check: flat billings can produce the same results. Check this out from the ISI.

ISI Book to Bill Table:

Note that billings have remained relatively flat over the last six months. Analyst suffering from truth decay should call this by its rightful name, flat revenue. This only looks good if we accept the premise that billings will catch up to bookings and that bookings will keep rising. I've heard of some beautiful swampland and a particular bridge that happen to be for sale too. Count me among the skeptics.

Nacchio Cheese. Another one bites the dust. . .a high-profile, corporate CEO, that is. Over the weekend, Joe Nacchio was removed from his post as CEO of Qwest Communications. Phillip Anschutz, Q's largest shareholder and previous supporter of Nacchio, finally voted with the board over the weekend for the ousting. Times are definitely tough in the telecom industry and Q becomes another company, along with T, GX, WCOM, WCG, etc., to fall on hard times. Nacchio leaves Q having issued over $25 bln in debt to buy out other competitors, including its biggest acquisition, former baby bell, U.S. West. The former head of Tellabs (TLAB), Richard Notebaert, who was also the head of Ameritech (another baby bell that merged with SBC) may have got the new job based on his ability to clean up a company and package it for sale. With over $25 bln in debt, that's quite an undertaking for the incoming Notebaert.

As for Nacchio Joe (not to be confused with Tokyo Joe), who had a penchant for talking up his favorite stock (Q) in front of media cameras, he managed to unload $345 mln in shares in the last two years in what looks like terrific timing on his part (big wink of the eye) and will receive roughly two years of salary and bonus at roughly $10 mln per year as he says, "Cheese!" for the camera at his exit interview.

Anderson's non-Fairytale Ending. Not to be outdone, the jury finally returned a "guilty" verdict in Arthur Anderson's obstruction of justice trial. Surprisingly, AA's lawyers say they plan to appeal. Buy why? To what end? I can't imagine ANY company wanting to keep them as an auditor or consultant. Their remaining customers are worth something to another firm that may want to buy them. But I would question the integrity of any management that would want to keep AA on the job. That said, AA's customers that haven't already defected in droves ought to be doing so now. And if you are a firm that used to compete with AA, the new customers will come to you now without you having to pay AA for the privilege. Why pay AA for the business that will otherwise cost nothing following verdict? No reason to now. An appeal accomplished nothing for the firm. Poof! The End for AA.

Piece Dividends. CNBC notes that dividends are making a comeback. No kidding! As we noted last week, corporate leaders had foregone dividends on the theory that that their ten best business ideas could produce a better return than investors' first best business idea known as dividends. CNBC points out that even while profits are down, dividends are on the rise - a sort of "peace" offering to keep investors interested in the company stock. It may not be so far fetched that corporate brass is shifting to the belief that shareholders demand for a real return IS a better idea than managements' previous ten best. However, a dividend doesn't mean a company is safe from financial storms. Some managements have actually cut dividends causing investors to label them a peace of a different kind - a piece of . . .well, never mind. NT, F, Q, and T are all examples of companies that have eliminated or cut dividends in the past few month. T, the original widows' and orphans' favorite, pioneered the territory by eliminating their dividend nearly two years ago. That's the Piece Dividend. I would not be surprised to see EK cut theirs in the future too.

Let's go to the charts.

Dow Industrial chart - INDU (weekly/daily/60):

Here we are at resistance on the daily and 60-min charts. Sure the daily chart emerged from oversold in May, but that didn't keep the markets from falling. Will it be different with this long green candle from today? Possible, but history repeats and to think of today's rally in any other terms than a one-day wonder is to defy the odds. The overbought 60-min stochastic coupled with the 60-min candles seem to suggest that the next move is down. That said, it is quite possible that we get a few extended days of bullishness to correct for the predominantly down days we seen over the last month, but no without a 60-min chart entering oversold again first. I would not be surprised to see 9500 again on the downside with 9750 acting as resistance. If I were a trader, I'd be praying for a gap up on the heels of today to somewhere over 9700, then take puts as the 60-min stochastic rolls down. Expecting then that we see a bounce from the oversold condition, I'd look to book profits and re-consider calls then.

Just an aside for the Dow only. . .I note above that the 50-dma (magenta) is falling rapidly toward the 200-dma at 9850 (gray). Both of those will provide big resistance, and if the 50 should cross down under the 200, there is virtually no chance that this rally is "for real". Remember, the Dow has been the star performer and strong man ahead of the NASDAQ and the SPX. If the strongest of the major indexes is to fail at that juncture, I'll be a bearish trader across the board, especially on NASDAQ stocks.

NASDAQ Composite chart - COMPX (weekly/daily/60):

For the NASDAQ, I'd take the same approach. Note that daily stochastics are on the rise, but candles are at a reasonable point of resistance. While the 60-min stochastic painted nicely for bulls today, the candles are at resistance and the stochastic looks like it wants to roll over. Pray for the pop and drop to trade calls then look to be long at a higher low.

S&P 500 chart - SPX (weekly/daily/60):

Compared the Dow, the granddaddy index (SPX) sure isn't leading the charge like it used to. Here's yet another chart that has a rising daily stochastic with the 60 in overbought, and at resistance to boot. Same story here. . .Ideally, a pop and drop creates a quick put opportunity with support coming in around 1020, which sets up a reasonable risk for going long. Again, this is a fantasy, with a probable chance of success from what I see on the charts. Big resistance at 1100 and 1077 too from the 200 and 50 dma's respectively.

Tying this all together, this is a bear market with spurts in the bulls' favor. That will keep it rangebound for years to come in my opinion. Accounting Fraud, CEO's in Jail, insider sales scandals, fallen former corporate heroes (Oh, and did I mention falling equity prices?) are not part of a bull market. They are part of a bear market and will not just go away because we had an "encouraging" day in the market. Sure is good for a couple of trades though!

There. . .we shook up the format a little, but in the end, we have beans and cornbread.

See you at the bell.

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