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       WE 04-09        WE 04-02        WE 03-26        WE 03-19 
DOW    10442.03 - 28.56 10470.6 +257.62 10212.9 + 26.37 - 53.48  
Nasdaq  2052.86 -  4.31 2057.17 + 97.15 1960.02 + 19.55 - 44.26 
S&P-100  556.12 -  1.98  558.10 + 14.58  543.52 -  0.16 -  6.24 
S&P-500 1139.33 -  2.48 1141.81 + 33.75 1108.06 -  1.68 - 10.83 
W5000  11166.06 - 36.36 11202.4 +362.24 10840.2 - 12.80 -115.20  
SOX      511.78 -  2.08  513.86 + 34.61  479.25 + 15.90 - 21.75 
RUT      597.88 -  5.57  603.45 + 30.53  572.92 +  2.18 - 12.10 
TRAN    2926.88 - 39.78 2966.66 +130.76 2835.90 + 49.07 - 76.26 
VIX       16.34 +   .69   15.64 -  1.69   17.33 -  1.82 +  0.85 
VXO       15.83 +   .27   15.56 -  1.65   17.21 -  1.95 +  0.44 
VXN       21.38 +   .03   21.35 -  1.69   23.04 -  2.95 +  0.69 
TRIN       0.82            0.52            0.89            1.93   
Put/Call   0.74            0.68            0.77            1.03    

The earnings blowout by Yahoo had traders in Internet stocks yelling Yahoo! on Friday but they we about the only traders with any real excitement. YHOO gained +7.86 to $56.20 and a three year high. Unfortunately the broader markets were down across the board on weekend event fears. Only the Nasdaq and the SOX were able to close in positive territory thanks mostly to YHOO and Dell.

Dow Chart - Daily

Nasdaq Chart - Daily

S&P Chart - Daily

Thursday morning opened with a bang and the S&P rallied right to the 1150 resistance level on strong earnings. The gap open failed to hold once shorts covered on the stocks impacted and the trend for the day immediately turned down. It was not due to a lack of positive earnings news but more of an abundance of terror news. We had hostages in Iraq, bomb scares in Paris, refineries exploding in the US and the 9/11 testimony to provide unrest before the holidays.

The economic news in the US was good with Chain Store Sales for March rising +7.0% and stretching the string of months over 6% to three. This was above expectations and suggests the consumer is not as concerned about conditions as the February sentiment reports suggested. Gains were broad based and were up +12.6% year over year. 61% of retailers beat expectations. Forecasters did predict a drop to only +5.5% growth in April due to the early Easter this year. Only +5.5% growth? Retailers would gladly take it.

Jobless claims fell to 328,000 and the lowest level since Jan-2001. This is very good news and suggests employment is increasing and the April jobs report will show strong gains. This is one of those good news-bad news numbers. If we do see back to back blowout Jobs numbers the Fed would feel it necessary to start the rate hike process.

More good news came from the Manufacturers Alliance Survey which set a new record high at 78 for 2004-Q1. The majority of the components rose with the exception of the investment index which fell to 69 from 81. The MAPI is showing strong correspondence to the ISM and the ISM has been above 60 for the last five months. This is the longest string since 1983.

The Wholesale Trade numbers showed a big jump to +1.3% compared to estimates of only +0.5%. The inventory component jumped +1.2% and was twice the level expected by analysts. Wholesale sales also jumped +1.3%. Despite this bounce in sales the inventory to sale ratio remained at record low levels of 1.17. This is very positive as we move forward and suggests we will see even further gains in manufacturing to keep up with the pace of sales. This is however old data for the February period but the trend was definitely up and we saw nothing to change the trend in March.

The good economic news is being helped by positive earnings and today was a good preview of next week. Yahoo blew out estimates Thursday night and jumped to a three year high. The Internet business is good and the survivors are doing very well. All the current players soared on the news but it was likely more of a Yahoo specific event. As Yahoo expands its reach with things like its acquisition of HotJobs.com, Inktomi, Overture and others it is becoming a broad based cash generator and not just an Internet portal. While ASKJ, CNET, INSP, FWHT, LOOK, AQNT, DCLK and SINA may have jumped to new levels on the news none of them have the breadth and depth of Yahoo. YHOO also announced a 2:1 split.

Adding to the positive outlook for techs was the guidance upgrade from Dell. The company raised its guidance by +$200 million for the quarter and increased a planned stock buyback. While that was positive news the real excitement came from Dell's longer term comments. They said shipments of PCs and other Dell products were growing so quickly they would likely exceed their $60 billion sales goal for 2007. Last year they booked only $41 billion. This is strong statements from the computer manufacturer. They also said the long awaited IT replacement cycle had begun and corporations were finally replacing aging systems. Dell's CFO said they were seeing better than expected demand and they were hitting targets across every business category. He expects revenue to increase +25% in Q1. Dell rose to $35.60 on the news and close to a three month high.

The very optimistic outlook from Dell helped power the SOX to a gain for the day despite the negative market action. Intel rose strongly at the open but closed negative because of lingering fears that the STX notebook warning this week was going to impact Intel's earnings next week. Also hitting Intel was news that Japan's FTC raided three Intel offices in an antitrust probe. AMD has complained in Europe and Asia that Intel has been competing unfairly by selling chips cheaper to push AMD out of the market. Antitrust rules overseas are seen as stricter than in the US and this is an example of the trouble AMD has caused. AMD also claims Intel threatened to halt shipments of chips to manufacturers that also sold computers made with AMD chips.

Another major earnings release on Thursday came from GE which reported $3.2 billion in profit for the quarter. This amazing performance was inline with expectations and GE said nine of its 11 businesses had double-digit growth. Among its 11 divisions, profit rose 53 percent in its equipment and other services operation, 40 percent in advanced materials and 20 percent in its infrastructure business. Profits fell 28 percent in the energy division and 20 percent in insurance. They are continuing to grow with almost monthly acquisitions. They recently completed their acquisition of Amersham and have deals in the works to acquire INVN and Vivendi among others. Overall Jeff Immelt said business was booming with the broadest growth since early 2000. He said industrial orders had jumped +20% and sales in its growth business had jumped +29% for the quarter. Sounds like a pretty strong projection of the current economy.

What all of this means for next week is that earnings are going to be strong for most companies. There are some weak spots like Seagate and SunMicro but overall the economy and earnings appear to be growing strongly. The question is will this translate into higher stock prices. The rally over the last two weeks has been on expectations of strong earnings. How much higher can it go? Will strong earnings from +300 companies next week push us higher in the face of continued terror threats and rising violence in Iraq or will traders call it a day, pocket profits and head to the safety of the sidelines?

There is historical evidence that in presidential election years markets tend to decline after the April earnings peak until after the Democratic convention. That event is in late July. I think broad historical trends are just that, broadly historical and may not be specific to any single election year. The trend comes from the non-incumbent party using the economy as a club against the incumbent party and the negative sentiment created depresses the markets. Traders hate uncertainty and there will be uncertainty until the convention is over. Once all the issues have been dissected, the VP candidate named and the final race begins investors will decide how to place their bets. The other convention begins August 30th but is not deemed as important to traders. In theory the attacking party has to storm the castle with every weapon it can find and the incumbent party defends from a position of strength.

This week was clearly a profit-taking week. The markets opened strong and concluded a two week rally on Tuesday. The flurry of earnings warnings headlined by NOK/STX put a cloud on techs and the sudden increase in violence in Iraq added rain to that cloud. Reports of bomb threats and the 9/11 inquisition focused traders thoughts on the long weekend event risk. It could not have been scripted any better. The markets needed to rest after a +563 point Dow romp. They used the multiple excuses above to take profits and reposition themselves for the coming week. In my opinion next week will start off with a bang assuming we have no explosions over the weekend.

The Dow is very well positioned after the -130 point two day drop and the Nasdaq is in even better shape only -23 points off the highs for the week. Even better off is the Russell, which closed only -2 points from resistance at 600. The selling on Friday was light as was the volume and there was buying at the close as bargain hunters jumped in front of an expected Monday bounce. I am sure there were plenty of shorts covering as well but that also is bullish. It means they were also expecting a Monday bounce.

If we do bounce next week there is still strong resistance in the Dow 10600-10650 range and it will be tough to break. The Nasdaq has strong resistance at 2090-2100. Both indexes have room to run but they will quickly run into a steep uphill climb. While I personally think we will start the week positive it will be much more difficult to end the week at a higher level.

Should we move down on Monday the Dow has two retracement levels in the 10300-10350 range that should hold any selling. The Nasdaq has a little more risk with a large unfilled gap from April 2nd at 2013 and no strong support until 1980-2000. This would not be a major step backwards for either index but it would be a major black eye for April earnings sentiment and a potential resumption of the January down trend.

For the week to be successful and for the April earnings run to be successful we must move higher on Monday/Tuesday. If we do not move higher early then the premise for any remaining April gains will be seriously in question. The challenge remains in the expectations. If the coming earnings reports contain guidance similar to Dell and YHOO then a case could be built for another quarter of strong growth. If these reports end up with a proliferation of only inline guidance then we could be in trouble. We have discussed before that comparisons for the rest of the year will become progressively harder.

For Monday I would gladly join in any opening rally and ride it as far as it goes. I would also not hesitate to jump off the train should the momentum appear to slow as we near resistance. Despite the strong earnings potential sentiment is weakening. Whether from terror news, Iraq news, election concerns or just simply from a tired year long tech rally we don't know. We really should not care. Many investors have gone bust trading their beliefs instead of the market. Enjoy any rally we get next week but keep your stops in place in case it fails.

Enter Very Passively, Exit Very Aggressively!

Jim Brown



 
 



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