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Market Wrap

Bulls Will Not Be Denied

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       WE 10-18        WE 10-11         WE 10-4         WE 9-27 
DOW     8322.40 +472.11 7850.29 +321.89 7528.40 - 63.58 -284.57 
Nasdaq  1287.86 + 77.39 1210.47 +774.16  436.31 -  9.13 - 22.00 
S&P-100  449.02 + 26.34  422.68 + 19.46  403.22 -  4.03 - 10.68 
S&P-500  884.39 + 49.07  835.32 + 35.04  800.28 - 14.70 - 18.03 
W5000   8323.78 +450.75 7873.03 +274.41 7598.62 -175.00 -150.63 
RUT      363.37 + 18.44  344.93 -  3.05  347.98 - 14.29 -  5.51 
TRAN    2279.09 +124.42 2154.67 + 16.99 2137.68 - 13.39 +  1.15 
VIX       39.82 -  3.62   43.44 -  2.84   46.28 +  3.14 -  1.41 
VXN       55.33 -  3.54   58.87 -  1.41   60.28 +  2.42 -  1.22 
TRIN       0.80            0.41            1.98            2.09 
Put/Call   0.68            0.93            0.97            0.90 

Bulls Will Not Be Denied
by Jim Brown

Bad news in all flavors failed to hold the markets back and the markets finished with big gains for the week. For traders this was the week from hell. It did not make a difference which side you were on as there was plenty of movement in the opposite direction. We are three weeks deep into October and with only two weeks to go the bulls are convinced the bottom is behind us.

Dow Chart

Nasdaq Chart

Friday started off bad despite the good news from Microsoft. The fact that the earnings were a one time event and they lowered guidance for the 4Q kept them from rocketing like IBM earlier in the week. MSFT added +2.37 on Friday but IBM was still climbing with another +2.05 at 74.25. One of the factors influencing IBM was short covering by traders that had refused to believe the market reaction and just "knew" IBM would sell off by the weekend. Instead the pain just intensified.

The October rally is firmly underway. I know this due to the total disregard for the fundamentals. I reported on the massive drop in the book-to-bill ratio for semiconductor orders on Thursday night. The headline dropped to .84 and the lowest number in a year and -30% lower than the average of the last five months. http://www.semi.org/web/wpress.nsf/url/booktobill This is VERY bad news for the tech sector and semiconductor stocks especially. You would have expected a bad day for semi stocks on Friday. Instead the SOX closed at the high of the day and on the verge of a breakout. Business is getting significantly worse but nobody seems to care.

Semiconductor Index Chart

Book-To-Bill Chart from Economy.com

Economically there were a couple of negative events on Friday. The ECRI Leading Indicators almost doubled the decent from the prior week which was twice as bad as the prior month. The 6-month Growth Rate dropped -3.4% for the week ended Oct-11th and is the lowest level since November 2001. Hello, George McFly, there is no recovery! The Trade Deficit rose to a record -$38.5 billion for August. Money is flowing out of the U.S. at a record rate.

I give up trying to analyze the psychology of the markets in October. Fundamentals don't matter. Money is flowing into equities with estimates of $100 billion from pension funds alone over the four week period beginning last week. It appears the "fix" is in and the markets not only climbing the wall of worry but hopping from gap to gap. The Dow closed at 8331 and ever closer to the significant resistance of 8400-8600. The Nasdaq also moved closer to the magic 1300 level. We are far from out of the woods despite the comments above.

If you think trading this market is hard for retail investors your right. Shucks, if you could just hire the best traders you could find and round up about $1 billion in trading capital you would be set, right? Don't kid yourself. Beacon Hill Asset Management, one of the biggest hedge-fund managers in the business, announced that it was closing its biggest hedge funds and selling its remaining positions. After losing more than 50% or more than $400 million over the last couple months it was suspending redemptions for six months until the funds could be liquidated. Beacon Hill was heavy in the bond market.

There was a rumor Friday night that Bank One (ONE) was going to buy JPM. This may only be a rumor OR there is a deal to take JPM out because of an impending failure. There has been a rumor that JPM has a massive derivative problem that could be taking them under. Having a white knight with cash show up could help solve some of those problems while giving the knight a sweet deal in the process.

Monday we have earnings from MMM before the bell. 3M is the largest weighted stock on the Dow and any move in MMM is greatly exaggerated in the Dow. There are many conflicting opinions on the MMM earnings outlook. 3M has made a point of saying that they are cutting costs aggressively which, while it may help them hit their estimates, does not always influence investors. The strongest rumors are that they will hit estimates but then attempt to talk down the outlook and claim very low visibility. IBM successfully spun its report this week and 3M will also try on Monday. How that news would normally be critical but with fundamentals being ignored we cannot be sure. Other well known names announcing on Monday are ALTR, ANAD, CD, JDAS, LXK, VRTS, VTSS.

The focus will be on earnings almost exclusively next week. The economic calendar is very light with the only material reports being the Beige book on Wednesday and Durable Good and Sentiment and Home Sales again on Friday. As I stated above the actual earnings do not appear to be of interest to the October bulls. The estimates have been lowered so many times that even Enron could probably beat earnings this quarter. As I showed you on Thursday the PE ratios are skyrocketing and stocks are trading at higher multiples now than during the bubble in October 2000. Investors are simply tired of the bear market and they want the October 10th low of 7197 to be the low. Period.

I have to caution you. Even though I am planning to go long on Monday morning, market willing, it is usually times when the most traders are bullish that the market suddenly tanks. You might disagree with me about traders being bullish but you only need to look at the gains in KLAC, NVLS or MXIM from last week and compare them to the book-to-bill report. If that is not irrational exuberance I don't know what is. One third of the S&P have announced earnings for the quarter with mediocre results. Alan Abelson, from Barron's, once noted that companies which announce early tend to post better results than those who announce later. We will see if he was right and more importantly if anyone cares.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

"In this game, the market has to keep pitching, but you don't have to swing. You can stand there with the bat on your shoulder for six months until you get a fat pitch. " - Warren Buffett

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