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Surprise Earnings, Surprise Rally

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      04-22-2003           High     Low     Volume Advance/Decline
DJIA     8484.99 +156.10  8487.51  8263.98 2.00 bln   2403/ 865
NASDAQ   1451.36 + 27.00  1452.34  1414.40 1.55 bln   2143/1049
S&P 100   463.08 + 10.02   463.29   450.35   Totals   4546/1914
S&P 500   911.37 + 19.36   911.74   886.70 
W5000    8633.17 +173.50  8636.52  8412.87
RUS 2000  391.16 +  5.86   391.53   383.42 
DJ TRANS 2351.96 + 54.10  2352.65  2291.79   
VIX        23.51 -  0.76    25.14    23.21   
VXN        33.65 -  1.84    35.51    33.60 
Total Volume 3,772M
Total UpVol  3,103M
Total DnVol    633M
52wk Highs  406
52wk Lows    69
TRIN       0.53
PUT/CALL   0.88

Surprise Earnings, Surprise Rally
By Jim Brown
Click here to email Jim

The earnings continued to flow and to everyone's surprise there have been no disasters. There are no dire predictions and the majority of companies are beating the lowered estimates. On the surface it appears the worst is over and traders are celebrating with a bullish bias. The $64 question is "How far?"

Dow Chart - Daily

Nasdaq Chart - Daily

The Chain Store Sales this morning started traders off on the right foot in the pre-market but then some conflicting earnings reports then produced a gap down open. Those Chain Store Sales were up +1.9% and is was the second consecutive weekly gain. The Easter shoppers came out in force and helped push most retailers back into their plan for the week. This does not mean the retail slump is over. This just means the seasonal Easter buying finally appeared but traders were ready to celebrate any good economic news. Helping with the dollar volume was the release of the second Harry Potter video on April 11th. Amazing what several million $20 videos can do weak numbers. Future retail sales are still expected to be weak. This was the only economic report out on Tuesday.

The lack of negative economic news and the flood of earnings provided a strong boost to the markets. The morning started off with Everest RE, which beat estimates by a mile and raised guidance for 2003 and 2004. They reported $2.02 per share when analysts were only expecting $1.35. This monster win and strong guidance raise to $8.25 from $6.92 (2003) and up to $10.50 from $8.03 for 2004 caused analysts and traders to rethink their outlook. RE said they had not seen any new catastrophes and premium pricing in anticipation of problems had been strong. As a result the insurer was awash in cash and the sector benefited. Financials in general benefited from this news as evidence that the worst was over.

Adding to the financial bliss was news from COF that earnings beat estimates and loan losses were less than expected. COF added to the positive results from C and JPM and this excitement was fueled by the RE news. The $NFX.X rose +13 to 541 and is nearing the strong resistance at 543. It is up over +50 points since April 1st. When financials rise the markets listen.

Drug companies also added to the rally with strong showings by PFE, LLY and FRX among others. PFE reported 76 cents with net income soaring +138%. Without one time gains for sales of units the income fell to 45 cents but still beat the street by a penny. LLY posted income below the same period last year but still beat the street by +3 cents. FRX missed estimates by a penny but said earnings growth for the next year to be "at least +20%." These drug earnings added to the positive sentiment about the sector and the BTK rose +10 to 346. After the close AMGN beat the street by +3 cents and raised guidance for the year. The company said they were seeing significant strength in every product in every geography. Pretty strong words.

After the bell EBAY reported 36 cents a share, which beat estimates but that is not the real number. There was a jump of +13% in shares during the quarter, which held down the earnings. EBAY actually reported revenue that was up +94% to $476 million. They posted record results and raised guidance for the quarter and the year. The stock jumped +$3 in after hours to $92. This news when added to the YHOO earnings have given the entire Internet sector to new gains.

About the only weak earnings after the close came from PSFT which beat the street by a penny. The company said the recovery that began in Q4 was fragile and ended with additional economic concerns and geopolitical tensions. Revenue fell slightly with license fees down -39%. If you remember the warnings season there were more than 15 software companies warning for this quarter. This sector seems to be the weakest of the techs with even MSFT warning last week.

A few other earnings highlights included GLW which beat by three cents and raised guidance. HTCH missed estimates slightly but raised guidance substantially going forward. AFCI beat the street by +3 cents. RFMD missed by a penny but showed a revenue gain of +37%. SIAL beat by 7 cents and raised guidance for the year. CYMI blew away estimates by +11 cents but revenue was light. They guided inline for the current quarter. STK beat by two cents and MXO by +4 cents. PIXL beat by +2 cents, INVN beat by +26 cents on revenues up +397%. Chip stocks LSCC and VTSS matched or missed slightly and said revenues would be flat.

The earnings have been nothing short of amazing. Amazing of course if you remember that 57% of companies warned for this quarter. It appears the majority of companies "over warned" due to the impending war and now they are beating those lowered estimates. Of the 142 companies reporting so far this week 85 have beaten the estimates, 28 announced inline and only 29 missed estimates. In any normal market in any normal economic environment this would be an incredible showing. What it is showing us today is simply the result of being overly cautious heading into the war. It appears investors are ignoring the economics and the conditions that preceded this earnings cycle and are celebrating the earnings surprises by purchasing stocks.

This rally appears to be fueled by cooling geopolitical tensions as well. The war in Iraq is over. Talks with North Korea begin tomorrow and world events are turning back to trade instead of the potential for some new war. Still the rumor that Saddam had been captured did result in a +100 point Dow bounce at 10:20 this morning. The consensus is the economy has been bumping along the bottom for six months as the potential for war grew and now that the war is over there is nothing to prevent the recovery. It is obviously only a sentiment change at this point but sentiment has to change before the economy can change. We will get to see that sentiment number again on Friday.

The Fed meets on May 6th and the Fed head underwent an operation on his prostate this morning. The results were said to have been successful and he is expected to be back at work next week. That work could be longer than previously thought. At age 77 Greenspan was given the nod by President Bush today for another term as the Fed head. It is unclear if Greenspan will accept it as there were rumors of a pending resignation soon. However, with Alan making repeated trips to the White House over the last several weeks I am sure Bush would not have given him the nod without knowing in advance if he would accept the assignment. Either way there is little chance (15%) the Fed will cut rates on the 6th. I expect another "risks balanced" statement until the Fed sees if the current expectations come to pass or dim with time.

Today was a benchmark day in the markets. The Nasdaq closed WELL ABOVE strong resistance at 1425. This is a strong statement and very positive in terms of generating continued bullish sentiment. The S&P closed above 905 and set a new high for April of 911 at the close. This was the first time since March of 2002 that the S&P closed over the 200 EMA. This is very bullish. Finally the Dow closed over the 200 EMA for the first time since May 2002. Granted it was only ONE POINT but it was a close. The positive futures tonight and the potential for overseas trading to add to our gains could push us even higher at the open. The key will be holding these impressive gains. The Dow has only one more major resistance area at 8520 before mounting an attack on 9000 again. The potential exist for a banner week!

Not to dwell on the negatives but they do exist. The VIX closed at 23.51 and nearing its historical reversal lows around 20. The VXN closed at an all time low of 33.65. These two indicators are showing an almost total lack of fear in the markets. Yes, they can go lower but they are flashing a yellow alert which will soon turn red. When markets turn completely bullish they can run for days while these indicators go even deeper into warning territory but they will eventually come back to haunt us. Until then the other internals continue to build hope. The 52-week high/lows hit levels not seen in months with 406 new highs compared to only 69 new lows. The advance/decline ratio was better than 2:1 in favor of advancers. This is a broad based rally with buying pressure building. The closer we get to a breakout the more investors are lured back into stocks. Nasdaq moving over 1425 convincingly was the first key to the sentiment puzzle. The S&P closing over 905 was the second. If the Dow can close over 8520 on Wednesday the bulls could be turned loose to romp. If this happens you should keep an eye on the gate. If this turns out to be yet another bear trap there may not be much warning.

There are many historical precedents that the bottom can fall out of an earnings rally just when things look the most bullish. You only need to look back as far as January 15th for an example. There was a two-week rally into earnings with a prolonged drop after the excitement waned. There were extenuating circumstances like the weak 4Q and the impending war but there is always something coming out of left field that traders use as an excuse to take profits. With SARS up to 4000 cases now and 230 deaths and still climbing rapidly that is something to keep on your radar. Will it take 10,000 cases, 20,000 or ?? before the global economy shuts down? I am not saying it will happen but keep your eyes open. There were two false alarms of envelopes with an unknown powder on Tuesday. The market handled it well which indicates a disconnect from negative news and that is very bullish. I said on Sunday to beware of 8500. That warning still exists. That could be the finish line for this leg of the race. If we pass it with a higher goal in sight then enjoy the view. If we stumble at that level then be prepared to watch from the sidelines.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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