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Bulls Send Bears Into Hibernation

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      11-21-2002           High     Low     Volume Advance/Decline
DJIA     8845.36 +222.40  8856.57  8625.48 2.44 bln   2166/1033
NASDAQ   1467.41 + 48.10  1468.72  1430.08 2.35 bln   2272/1130
S&P 100   477.88 + 10.89   478.44   466.99   Totals   4438/2163 
S&P 500   933.79 + 19.64   935.13   914.15 
RUS 2000  397.70 +  9.11   397.89   388.59 
DJ TRANS 2328.78 + 47.40  2342.76  2281.91   
VIX        27.37 -  1.29    28.87    27.21   
VXN        44.70 -  0.12    45.85    42.16
Total Vol   5,047M
Total UpVol 4,302M
Total DnVol   708M
52wk Highs   170
52wk Lows    119
TRIN        0.53
PUT/CALL    0.74

Bulls Send Bears Into Hibernation
By Jim Brown

On a day that the stock with the third largest market cap warned of lower growth and earnings for this year and next the market broke out of its recent trading range and through strong resistance. GE warns, BA cuts 5,000 jobs, MWD cuts -2,200 and the drooling bears are run over by excited bulls.

Dow Chart - Daily

Nasdaq Chart - Daily

The bad news was obviously already priced into the market that GE had fallen out of the ranks of the double-digit earnings growers. GE said it would take a $1.4 billion charge, less than analysts had expected, to bolster reserves at its reinsurance unit. GE said it suffered huge losses from the 9/11 attack and was taking the action to cover future risk. GE also said it was going to add $4.5 billion in capital to GE Capital to reduce its debt ratios and maintain the AAA credit rating. GE closed up +2.05 on the news because analysts expected a much worse forecast.

Morgan Stanley also announced they would cut -2,200 jobs in a move to cut costs and battle slumping financial markets. This follows -67,000 job cuts already made in the sector since 2000. Boeing said it would cut -5,000 in its commercial division due to the continued slump in the airline sector.

The good news came in the form of an earnings win by HPQ last night and an affirmation of their current quarter as well. This powered tech stocks over the critical Nasdaq 1425 level and once over that resistance the short covering began. Chip stocks roared and consumer cyclicals fell as money rotated out of defensive stocks and into techs.

Helping fuel the fire was a lower than expected Jobless Claims number at 376,000 instead of 390,000. Traders ignored the fact that last weeks numbers were revised up to 401,000. They also ignored the fact that this was for a four day work week due to the Veteran's Day holiday. Look for this number to rise next week.

The Philadelphia Fed Survey soared to 6.1 when estimates were for a -3.0 number. This indicates a slowly expanding manufacturing sector but far from a strong indication. Inventories are still dropping as well as prices but new orders rose slightly. There was a strong bounce in the capital expenditure component from 14.5 to 25.5 which indicates business investment is starting to rise. Also bullish was the flat Index of Leading Indicators which has been negative for four consecutive months. Six of the ten components improved in October. This does not paint a picture of a growing economy but it does indicate the drop into a second recessionary dip is less likely.

Offsetting the positive reports was a negative Chicago Fed National Activity Index. The number came in at -.81 and the biggest drop in the last seven months. This reflects the overall softness in October and weak employment. Production fell by -0.8% and well below consensus expectations. This was the third monthly decline. Of the 85 indicators 61 were below average and only 37 showed improvement from September. This index indicates that the economy has an increased risk of sliding back into recession when compared to prior recessions and double dips. Evidently traders elected to ignore this report.

Positive comments from several automakers helped boost sentiment with hopes that sales would not slow as expected. Ford's chief analyst said he was sticking with his forecast from the beginning of the month that November sales would be better than October. GM CFO said sales would slow next year but they would not fall off the table as expected. Analysts had speculated that incentives would run their course and buyers would lose interest after a year of special deals. Evidently the consumer has not given up on new wheels completely and the competition between brands has provided some amazing deals. In Denver several unique promotions have surfaced like a six month job, $1500 monthly income and $195 in cash gets you a new Kia with no credit check. A ford dealer is running a buy one get one free special. Buy an explorer and get a ford focus free. These unique marketing offers are making buyers rethink their need to trade in the current oil burner and go on the hook for big payments. It helped the stocks of auto companies as well with GM adding +3.20.

The biggest news was provided by investors themselves. Once the good HPQ news and better than expected GE warning pushed stocks over initial resistance at the open the buyers piled on. The key ranges were Dow 8650, Nasdaq 1425 and SPX 925. These were key levels of resistance dating back to June in come cases and once broken the short covering began. TV commentators were stumbling over themselves with bullish comments. Guest analysts could not draw broken resistance lines fast enough in the allotted air time because there were so many breakouts. The key here is the difference between breakout and fakeout. On the surface it appears to be a valid breakout based on "hope" that the bottom is behind us.

That hope may be called into question on Friday based on the semi book-to-bill report on Thursday night. New orders fell by -7.9% in October making it four consecutive monthly declines. It would have been even steeper but they revised downward the number from September to 0.80 from 0.84. Using the original number from last month of .84 and the headline number for October of .73 that would have been a -13% drop instead of the revised -7.9% drop. It is amazing how the magic numbers keep getting revised with each succeeding period. BTB, Jobless Claims, Nonfarm Payrolls. It almost looks like a conspiracy to let us down slowly by managing the numbers. That would be illegal so I am sure it is just a coincidence. At .73 this is the lowest ratio in nearly a year. Every month the order inflow drops it pushes the tech recovery a month farther into the future. With a six-month lead time from order to delivery this means any possible recovery is well into 2003 "IF" orders picked up next month. Typically the holiday season is a low spot for manufacturers with forced holidays and mandatory plant closings to save money until orders arrive in the 1Q. This puts any recovery off until 3Q of 2003 at the earliest if historical trends continue.

The key SPX 925 level has been seen as the magic number to confirm a new rally. This was above the 9/11/02 high of 924.02 and the 925.66 high from Nov-6th. Today's close of 933.76 is the first new major relative closing high since August. The next confirmation would be a close over the August closing high of 962. However, we have to get past Friday first. Futures are down slightly on the BTB news and the very over bought conditions. Much talk was made of the desire to see the market higher by year end to avoid the historic occurrence of three down years, something not seen since the depression. The Dow would have to clear 10021 in the next five weeks to prevent that label from sticking. Today's close for the Dow put us at a +21.4% bounce off the October closing low of 7286.

Bullish talk is not going to help the economic conditions but it may convince retail investors to come back to the market. Volume today was very heavy with over five billion shares traded and over two billion each on the NYSE and Nasdaq. The internals were lopsided with a 6:1 ratio of up volume to down volume. Most of that volume was institutions with large block orders being the norm rather than the exception. The extreme bullishness pushed the VIX back down to more historic levels at 27.37. That is still high but well off the recent extreme numbers. If today's action can attract some follow through tomorrow then bullish comments in the weekend newspapers should entice retail investors home for the holidays next week to be become buyers. With a record $80 billion going into money market funds last week there is plenty of cash available to fuel a further rally if the situation warranted it.

Does the situation warrant it? That depends on your time frame. While I think everyone expects the markets to go up from here, they may not have much further to run based on real economics. The Dow has even stronger resistance ahead at 9050 and again at 9200. Many and I stress MANY technical analysts are predicting that any rally will run out of steam at those levels without an increase in real earnings to drive prices. Since 4Q earnings warning season will start in earnest the week after Thanksgiving we will get to see if those earnings are going to appear of if the 4Q is going to dip back into an earnings recession and sink stocks prices as well.

Retail sales are predicted to rise at most +0.4% and many feel this is only wishful thinking. One survey reported on Thursday showed that 65% of consumers were planning on spending less this year due to the negative wealth effect from jobs and the market. Nearly 50% surveyed were going to spend more than 45% less than last year. Obviously retailers have their work cut out for them and any terrorist event will make that goal even harder. If your timeframe for investing is years then buying now and riding out any further volatility probably will not hurt. If your time frame is months then going long over Dow 9000 could be risky.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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