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+1050 Points in Four Days

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      10-15-2002           High     Low     Volume Advance/Decline
DJIA     9255.68 +378.30  8255.68  7883.23 2.19 bln   2418/ 834
NASDAQ   1282.42 + 61.90  1282.74  1259.87 1.89 bln   2568/ 860
S&P 100   447.26 + 21.72   447.26   425.54   Totals   4986/1694 
S&P 500   881.26 + 39.82   881.26   841.44 
RUS 2000  360.53 + 14.00   360.63   346.53 
DJ TRANS 2286.46 +147.70  2286.51  2139.53   
VIX        39.74 -  2.87    41.21    39.58   
VXN        56.37 -  2.71    58.29    55.33
Total Vol   4,341M
Total UpVol 3,841M
Total DnVol   457M
52wk Highs    75 
52wk Lows    277
TRIN        0.42
PUT/CALL    0.78

+1050 Points in Four Days
By Jim Brown

A monster rally prompted by bottom fishing last week and short covering this week. Surprise earnings gains by several Dow stocks and upgrades to others gave shorts a serious headache today. The huge gains are begging for profit taking and with the tech earnings after the close it looks like Wednesday will be the day.

Dow Chart

Nasdaq Chart

Kicking off the rally this morning was news from JNJ and Citigroup, both Dow components, that each had beaten earnings estimates by a penny. GM, also a Dow component, beat estimates by 21 cents. Suddenly the bear market and the possible double dip scenario was history and bulls bought as bears ran for cover. Positive comments about MSFT and IBM added to the explosion. The Dow gapped up over +200 points and never looked back. The Nasdaq gapped up over +50 points and then moved sideways the rest of the day until tech shorts covered before the close to avoid a positive Intel surprise.

They should have not worried as the surprise was negative not positive. Intel missed estimates of 13 cents by posting only 11 cents and guiding lower again. The trouble in PC land is simply no buyers, lots of inventory and no IT recovery in sight. Intel posted revenue that was only slightly below what was expected but earnings were much less. Intel blamed it on slower sales, higher inventory costs, excess capacity and unrealized manufacturing savings. They also said they were cutting back on capital expenditures and that tanked the equipment suppliers. They also said they were going to reduce spending by re-using some older equipment and older technologies that had been scheduled for replacement. They said margins would fall to 49% for the next quarter, which was down from 51%. Also, they expect revenue to be flat to up only slightly. Considering this is their strongest quarter that outlook is bleak. A 2% margin drop on $6.5 billion in revenue would be more than most companies make in total. They made $686 million this quarter and a -$130 million drop in margins for the 4Q puts their earnings in serious trouble. They said PC demand was coming in at the very low end of forecasts. This does not paint a very pretty picture.

NVLS beat analyst's lowered estimates by 2 cents but the stock got killed in after hours on the Intel news. After closing near $26 it traded in the $23.50 range in after hours. They said they were on track to post a higher profit for the 4Q despite an anticipated drop in sales. The CEO said there was a glimmer of hope in the industry for those with cash. Despite the lack of a recovery those with cash were gaining market share and restructuring to be more profitable when the recovery finally came. They said 4Q bookings could be 10% below the prior forecast.

Motorola hit estimates of 5 cents, which they had affirmed twice. The CEO backed off previous forecasts of a rebound in the chip sector for the last quarter and 2003. They did not warn but said the road ahead would be anything but smooth. He said the slow quarter-to-quarter upward growth was over and rougher times were ahead.

AMCC beat estimates by a penny and said they were focused on cutting costs and hoarding cash until a recovery appeared. They plan on continuing to invest in new product lines in an effort to stimulate sales that had dropped -27%.

Oracle made some comments today about earnings visibility being minimal. This depressed some of the software stocks and should make investors cautious before MSFT earnings on Thursday. However, I think Thursday is the least of our problems. The biggest problem in our outlook is IBM which reports on Wednesday after the close. IBM was down -2.50 after the close based on the Intel warning. There is a very good chance that IBM disappoints based on the Intel miss. IBM has the consulting business and a strong services business to help offset losses in the equipment division but how big are those losses? If Intel says there is no recovery, no seasonal 4Q buying surge and no IT recovery in sight then how can IBM weather the storm?

35% of the S&P announces earnings this week. Tomorrow there are numerous big caps including several Dow components. BA, AMR, HON, CAT, F, GD, JPM, MER, PFE, PGR, IBM are among the most watched. Tech stocks AMD, AKAM, ATI, AAPL, BRKT, CLS, CTSH, EFII, EXTR, IWOV, LSS, QLGC, RFMI, RSAS, SNDK, SYMC, TMTA, TXCC, UTEK are just some of the announcers. There is literally so much data that the markets will be in overload but the trend will be the key. If the trend tomorrow follows the trend tonight then the last weeks rally will be ancient history.

The biggest wild card here is the October bottom scenario. October has been the bottom and the end to so many bear markets that the trend to buy weakness in October is firmly entrenched. Yes, we will see some profit taking tomorrow. Yes, we are very likely to get more bad news than good this week. The key will be how much bad news is already priced into the current bear market. We all know if the bulls want to buy, all the bad fundamental news in the world will not slow them down. They will buy any dip and make up reasons for doing so. We also have the "best six-month" crowd that buys the October dips and sells the April highs. They are so ingrained into buying the dip and being strongly rewarded that we have almost no chance of ending October any lower than the Dow 7200 we saw last week.

As traders we need to be aware of the historical patterns and be prepared. That means any dip we see tomorrow could last one day or it could last a couple weeks but it should not last more than that. We need to be ready to buy a rebound from this dip and ride the wave. I am not saying that wave will carry into 2003. It will only last until the buyers run out of money. This may only last a couple weeks. Once the shorts cover and the bulls finish buying the fundamentals will once again become important. Economic reports will become key again. The strength of the holiday shopping season will assume serious importance and its impact on the 4Q GDP. With no pickup in IT spending and retail PC sales trending to the very low cost models the outlook is still grim. Unless this changes soon any October bounce will run smack dab into a November decline.

What is the difference between these two charts?

Dow Rallies Chart

The first rally was July of this year. The Dow rallied +1250 points off its lows in four days before dropping -750 points several days later as the earnings pictures became clear.

Dow Scenario Chart

If you take the current identical rally through Oct-15th and overlay the current chart calendar over the July history then it makes a very good representation of how October/November could play out. Even the numbers, with Dow 9000 being the top, all fit my possible profit taking, rebound and possible decline perfectly. Remember, this is just one of several possible scenarios but it will be very interesting to see if it plays out.

I would continue to expect some profit taking followed by another bounce but be wary of the market after that. A real end to this bear market will require a bounce and hold over Dow 9000 and there is significant resistance between today's close of 8250 and that level. With +1000 Dow points in four days we are walking on quicksand toward any continued rally. Without some base building over the next several days we will be hastening the markets demise.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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