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Market Wrap

Cautious Bears Circling the Picnic.

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        WE 9-13          WE 9-06          WE 8-30          WE 8-23  
DOW     8312.69 -124.51  8437.20 -236.30  8663.50 -209.46  + 94.90  
Nasdaq  1291.36 -  3.94  1295.30 - 19.76  1315.06 - 65.51  + 19.56  
S&P-100  444.24 -  2.43   446.67 - 14.13   460.80 - 13.70  +  6.06  
S&P-500  889.80 -  4.12   893.92 - 22.16   916.08 - 24.78  + 12.09  
W5000   8440.88 - 40.32  8481.20 -172.84  8654.04 -222.85  +106.61  
RUT      389.98 - 40.32   391.57 +   .61   390.96 -  9.17  +  4.16  
TRAN    2246.87 - 10.20  2257.07 -  8.56  2265.63 -128.69  + 54.92  
VIX       39.31 -   .73    40.04 +  4.24    35.80 +  2.99  -  0.01  
VXN       55.85 -   .69    56.54 +  1.56    54.98 +  7.36  -  3.03  
TRIN       1.53             0.93             1.20             2.87  
Put/Call   0.89             0.79             0.84             0.80   

Honeywell pulled the plug on the Dow for Friday and Adobe helped float the Nasdaq. Everybody else ended the week flat and failed to recoup Thursday's losses. Bears were out and about and every bounce was met with selling but there was no concentrated effort to press their luck. With a three day weekend ahead for many traders there was no urge to open new positions on Friday.

Economically Friday was not a good day. The PPI was flat and less than the +0.2% expected. Excluding energy and food the number fell -0.1% while prices for core goods rose +0.4%. There is a hint of inflation starting to appear even though the rise in gasoline and electricity failed to carry forward into the headline number. Falling food prices offset the hikes in energy prices. It continues to show that the recovery is very tentative and the minor inflation increase will not deter the Fed from further rate cuts. This is not a significant possibility (cuts) anyway so the PPI was basically a non-event.

Retail Sales came in stronger than expected at +0.8% but only half that rate, +0.4%, without the strong auto sector. However electronics and appliances fell -0.4%. Clothing and accessories fell -0.3% with the biggest gains in furniture at +1.7% and auto parts +1.9%. It appears the nesting consumer is feathering their nest and fixing up their cars. Back to school sales fell at department and apparel stores which when coupled with the slow electronics sales is still bad news for the PC sector. Consumers appear to be taking money out of the markets to buy houses at once in a lifetime interest rates and cars at zero percent down.

The ECRI Weekly Index dropped slightly to 120.5 from 120.7 and remained near the lows of the year. The drop was attributed to the spike in Jobless Claims to 426,000 from 407,000. This is signaling that the rebound is faltering. It would be much worse if not for the strong mortgage application rate. With any tick up in interest rates those applications will come to a screeching halt.

The biggest report of the day was the Michigan Consumer Sentiment and if fell from 87.6 in August to 86.2 in September. The current conditions component showed the biggest drop of -2.6 points. This was the fourth consecutive decline and the lowest level since last November. The University said respondents were commenting on their drop in wealth more than any other time in the history of the survey. It appears the only thing holding up the current expectations component is the zero percent autos and low mortgage interest. Do you see the trend here. Once the auto buying spree fades as it is expected to do in the 4Q and the mortgage interest rates start climbing this indicator should fall quickly.

The Dow was the biggest loser of the day after HON warned that for the quarter and the year. HON fell -17% to $23.56. Only 13 of the 30 Dow stocks fell and four of them were aerospace related. UTX dropped -5% to $58, GE dropped a dollar to $27 and Boeing dropped -$1 to $35 on the news as well as the strike vote. Another major NYSE loser was LU which traded 107 million shares to close -20% lower at $1.32. Lucent warned that sales for this quarter would be -25% less than expected and guaranteed the ninth straight quarterly loss. They now expect to lose -.45 cents, nearly three times the -.16 cent loss expected by analysts. Two major rating services downgraded Lucent debt again. Lehman said they were redefining what "worst case scenario" in the telecom sector meant. Lucent said the baby bells were cutting spending again and delaying major purchases. They also are taking charges for significant customer financing defaults. I guess not selling equipment is bad but selling it and then not getting paid is worse.

The chip sector just keeps taking hit after hit. AMD announced today it was delaying the release of its Hammer chip, their answer to Intel's high performance P4. They also said they were delaying the new version of the Athlon chip. No reason was given but AMD had repeatedly tied its future to the Hammer chip. If it can't bring it to market until the 1Q or 2Q of 2003 then the Intel lead will skyrocket. Intel is going to release a 3GHZ P4 next month. An entire product cycle will be lost to AMD as Intel is expected to release a 4GHZ P4 in the 1Q of 2003. This is the competition the Hammer will face. AMD fell to $7.21 on the news. Intel gained +.33 to $16.00.

In other chip news ESST warned that slow sales of its DVD chips would sharply lower earnings for the second half of the year. Competitors to ESST, CRUS and ZRAN also lost on the news. GNSS gains to $9.30 however after being upgraded and after raising guidance for the quarter.

While the Dow finished the week in the negative due to the HON warning the other major indexes recovered from negative territory at the close as possible terrorist news stories were resolved. The three men in Florida were released after convincing police they were just pulling a joke on the waitress. The Liberian cargo ship was called no risk to the publics health and safety by the FBI who said the radiation was from some Spanish tile. A terrorist who bragged on TV just last week that he helped organize the 9/11 attack was finally arrested in Karachi. Police in New York arrested five men of Yemeni descent on suspicions of operating a terrorist cell in the U.S. They were discovered by an increase in communications traffic with a terrorist location overseas and some evidence at a training camp linked to Osama. The authorities said there was no evidence on an immediate attack plan in progress. All this positive terrorist news helped to strengthen the bulls and worry the bears.

Still the bulls could not make any major moves off Thursday's close. Even a couple of short covering rallies failed to post decent gains. Money is flowing out of mutual funds again after there was no post 9/11 rally. Volume was very low again with less the three billion shares trading across all markets. It was a dead heat with 1.5B up volume and 1.4B down volume. The volatility continued to be a factor with the OEX/SPX trading on both sides of positive several times during the day. The Nasdaq riding on the back of Adobe and Intel was the strongest index by far and it only closed up +11 for the day but still negative for the week. Adding to the 9/11 anniversary week volatility was the triple witch option expiration week ahead of us.

Traders planning to be out for Yom Kippur on Monday were either squaring positions on Friday or out of the market all together. Next week in addition to the options expiration we have a flood of economic reports. Business Inventories on Monday, Industrial Production on Tuesday, CPI on Wednesday, Building Permits and Housing Starts and Phily Fed on Thursday. The following week leads with Consumer Confidence and a Fed meeting. Needless to say there will be plenty of challenges. Many of those challenges will come in the form of earnings warnings. The Q3 season will shift into full swing next week and the Q3 season is the worst of the year, even in good economic times. Expect dozens of warnings with some coming from high profile companies.

Bulls keep talking about the coming rally. Can you have a real rally without banks, drugs, manufacturing, telecoms, aerospace and techs? Can you have a rally on the backs of the already extended housing sector and defense sectors? If you are planning a rally on the basis of ADBE and GNSS then I suspect it is going to be very narrow. Even the oil sector will be negative if Bush gets a coalition going. Maybe it is just the cool weather here in Denver and the fact that my bear skin coat feels so comfy this weekend but my outlook has changed drastically since the post 9/11 relief rally was DOA. The Dow closed Friday resting on 8300 and has now posted three negative weeks in a row. If 8250 breaks next week the get out your parachute because 7500 is right around the corner again. Before I depress you totally there are still those that think next week will be the start of the relief rally. They point to the 9/11 stress and the numerous terrorist news stories as reasons it did not appear this week. If they are right then Tuesday should be the day. With many traders off Monday for Yom Kippur there is not likely to be enough bullish volume on Monday to make it stick. Just keep your focus on 8250. If that level fails then all the bullish rally talk was just that, talk.

We added a new section to OptionInvestor beginning this Sunday. We added stock picks for investors with retirement accounts that may or not have options capability. The link to these picks is listed in the "Strategy" section on the left side of the website. We only started with three stocks this week since our outlook is negative for the next month. For the stocks we list there we will provide options strategies as well to limit the risk of going long stocks. If you have an IRA account that does not allow options then buy the stock in your IRA and buy the option in your trading account. You will still be hedged just not in the same account. The outlook for these stocks will be from three to 24 months but nothing prevents you from holding longer. In the future we will try to focus on lower priced stocks to minimize entry cost and maximize gains on successful plays. We will try to structure the plays to limit risk to $1 or less per share. We would appreciate your input and questions on this section.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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