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Market Wrap

Surprising Strength

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      06-27-2002           High     Low     Volume Advance/Decline
DJIA     9269.92 +149.80  9269.92  9034.96 1.74 bln   1909/1078
NASDAQ   1459.20 + 29.90  1459.41  1412.96 2.03 bln   2150/1306
S&P 100   491.61 +  9.04   491.62   476.53   Totals   4059/2584
S&P 500   990.64 + 17.11   990.67   963.74             
RUS 2000  458.72 +  5.75   458.74   449.75
DJ TRANS 2692.55 + 54.90  2697.37  2637.60
VIX        30.02 -  2.31    33.60    30.02
VXN        63.13 -  1.01    66.14    63.13
TRIN        1.02
PUT/CALL     .76

The markets posted a decent day after a head fake at the open left the markets trading in negative territory for a couple hours. Buying began around 1:30 in the big caps as mutual funds stashed cash in high dollar, highly liquid stocks for their quarter end window dressing. The buying spread out to some mid caps and even some Russell stocks by the day's end. There was evidence of some short covering but it was limited since most bears expect lower levels next week.

Chart of the Nasdaq

Chart of the Dow

The day started out well with the final GDP for the 1Q coming in at 6.1% growth. This was revised upward from 5.6%. Unfortunately the estimates for the 2Q are more in the 2.5% range. Spending on homes was still up +14.6% which we already knew. Business spending declined less dropping only -6.2% compared to -13.8% in the last quarter of 2001. The keyword here is "declined". There was no increase and spending is still declining. Still the report was bullish for the market. The jobless claims fell to 388,000 and traders were trying to spin this into a positive claiming the four-week moving average has now fallen for the ninth consecutive week. A small straw for investors to grasp.

Helping the market the most today were positive comments about the semiconductor sector by two different brokers. Lehman Brothers analyst Dan Niles said investors were beginning to understand that demand will not pick up until sometime in 2003 but values on the equipment makers were beginning to reach compelling valuations. He was not so compelled on INTC, HWP and IBM. He cut estimates on those companies saying the excess PC inventories and the weakening European demand would cause them to guide lower. BAC said the sales of chips could grow by 20% during the next six months and the bottom was behind us. Bear Stearns recommended investors aggressively buy AMKR and MTSN due to valuations.

WCOM announced they would cut 17,000 jobs or 20% of their work force and slash capex spending by half. The race is on to raise cash to avoid serious hurdles ahead. The main players in the fraud story were subpoenaed to appear before congress and offer explanations. There was a rumor after the close that WCOM and the SEC were on the verge of a settlement in the case. Now that is fast! According to sources WCOM needs to settle fast in order to pay severance to the 17,000 employees. I guess it is pay the SEC or pay the employees and guess who will get precedence. It is in their best interests to settle quickly before it gets so blown out of proportion in the media that settlement becomes impossible. The first number is always the smallest number when dealing with the government. Arthur Anderson would have been much better off closing a high dollar settlement long before any conviction put them out of business.

Volume today was decent with the NYSE trading 1.74 billion shares and 2.0 billion on the Nasdaq. Combined up volume beat down by 2:1 with advancers nearly beating decliners 2:1. Good but not great. Not great for a bounce off the bottom. Helping improve the internals was the institutional buying for end of quarter statements and finally some Russell buying appeared. Friday at the close is when the Russell 1000,2000,3000 changes take effect. Fund managers who track the Russell will dump the drops and load up on the additions at the close if not before. This along with the end of quarter window dressing should make Friday pretty volatile.

Resistance for the major indexes is still just above us. For the OEX it is 502, Dow 9420, S&P 1007, Nasdaq 1475-1485. This gives the averages plenty of room to run on the buying mentioned above as well as short covering on any WCOM settlement. While I am not predicting Nasdaq 800 or the end of the markets as we know them anytime soon, I still believe there are lower numbers in our future. If you are a trader then you know what to do. If you are thinking about buying some long term calls here I would caution you that waiting until after the July-4th holiday or even after the July earnings might make more sense. There are still some big name companies that could warn and the summer months are not shaping up well economically. This could drag on stock prices for another couple of months. Fortunately the history of the markets back to the depression show that 2-3 year bear markets tend to rally in double digits for three years after. We just have to be patient.

Patience is not what many investors are showing today. TrimTabs.com said there were a whopping -$9.2 billion outflow from equity funds in the week ended Wednesday. That is a lot of money when you consider the average daily turnover on the NYSE is only about $40 billion. The $9 billion last week follows a string of outflows averaging over $4 billion a week. The rapid escalation could be pointing to the eventual capitulation event. When outflows more than double it does not take a rocket scientist to see the trend accelerating to the downside. Makes you wonder how much cash funds have available to dress up portfolios. It also proves the need to sell those same stocks next week to meet the next wave of liquidations.

I would like to welcome back John Seckinger to Option Investor. John was the editor of NetBulls.com, our Internet stock site during the bubble days. We believe he was solely responsible for the Nasdaq crash by making short recommendations on Internet stocks. (grin) He was a member of the CBOT at 27, handling institutional accounts. He founded a daily newsletter sent to over 70 institutions. He has a BA in economics, MBA in finance and accounting. He specializes in both fundamental and technical analysis. He is a cross between Abbey Cohen, Barton Biggs and Arch Crawford. (BIG GRIN) Seriously, we welcome him back and look forward to his contributions to the Market Monitor beginning on Friday.

Despite the creeping return to positive territory, Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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