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Market Wrap

Market Wrap

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  2/8/2005   High Low Volume Adv/Dcl
DJIA 10724.63 8.9 10744.51 10695.96 1.80 bln 1716/1384
NASDAQ 2086.68 4.7 2095.64 2080.42 1.93 bln 1621/1456
S&P 100 576.34 1.07 577.51 574.84 Totals 3337/2840
S&P 500 1202.3 0.58 1205.11 1200.16  
SOX 427.49 9.2 428.82 418.23  
RUS 2000 638.72 2.1 638.97 635.89  
DJ TRANS 3609.87 7.7 3611.87 3589.04  
VIX 11.6 -0.13 11.67 11.45  
VXO (VIX-O) 11.22 0.01 11.57 11.08  
VXN 17.6 0.04 17.73 17.13  
Total Volume 3,955M          
Total UpVol 2,189M          
Total DnVol 1,713M          
Total Adv 3788        
Total Dcl 3203        
52wk Highs 454
52wk Lows 46
TRIN 1.12

Rally Wheels Starting to Wobble?

After a very strong rebound off the January lows the last two days have been frustrating. For those bulls riding the rally racer the forward motion has slowed and the vibration is building. Are the wheels about to come off this rally or are we just experiencing some turbulence at speed?

Dow Chart - Weekly

Nasdaq Chart - Weekly

All the major problems in our path are only miniscule compared to those in our recent past but the bulls are suddenly unsure of how to proceed. Without a wall of worry to climb the bulls should be sprinting ahead to greener pastures but confusion reigns. After being penned up in the event risk corral for months they are staring at the wide-open gate with disbelief. While they can see the greener pastures just outside the corral they have seen many fellow brethren hauled away to the slaughterhouse once they moved outside that gate. Is it just fear of the unknown for the bulls or is it just a pause to catch their breath before charging ahead?

There were no material economic reports today with weekly Chain Store Sales the only release. Sales did jump +2.2% compared to a -1.9% drop the prior week. Better weather and a later Superbowl date helped the retailers attract a few more shoppers. Boring! Tomorrow won't be much better with only Mortgage Applications, Wholesale Trade and Labor Turnover. These are not normally market movers.

The challenge for Wednesday will be the Cisco earnings rather than economics or current events. After the bell today Cisco announced earnings that were inline with street estimates at 22 cents but missed the whisper number at 24 cents. Cisco also guided flat to only +2% growth for the current quarter. Margins fell and inventories rose +$45 million instead of an expected -$150 million drop.

The markets wandered listlessly late in the afternoon as they awaited the Cisco numbers. There was a significant amount of worry by some over the last month that Cisco would miss their numbers and the stock retreated to $17.50 and a level not seen since August 2003. Others felt they would have a blowout quarter and bury their skeptics in a frenzy of short covering. The conflicting views and the worries over guidance kept traders on the sidelines for the past two days and actual earnings tonight may have left a lot to be desired but were not as bad as the nay sayers had expected.

There was some very strong selling on the announcement but it was short and saw no follow through. The guidance from the conference call did not come until nearly 5:30 and the after hours response was muted. Considering the pre earnings analyst tug of war it is entirely possible Cisco split the point spread with exactly the right number to avoid any material upset while the lukewarm guidance will also fail to inspire buying. In short Wednesday could be a tie for techs and the bulls will still be undecided on safety outside the gate.

If the bulls don't charge out of the corral soon and take possession of the pasture Toll Brothers will build houses on it. TOL jumped +$3.47 today to yet another new all time high after saying that contracts had increased +60% and backlog +66%. Toll said it currently had an all time high backlog of homes under contract to build at 7,292 homes. This is nearly $5 billion in back orders compared to less than $3 billion for the same period in the prior year. Toll said the demand for luxury homes was still expanding with revenue growth in the Northeast at +92%, Southwest +90% and the West Coast at +69%. Chairman Robert Toll said they were on track to grow earnings +40% for 2005. Every time I see another jump in the builder stocks I think there has to be a profit taking dip soon. Trouble is I have been thinking that for a long time. For TOL a dip is -$2 so be ready for the next one. With a PE of only 16 it is still not overpriced.


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TASR shocked traders again today with an earnings miss of -2 cents and all kinds of complications. TASR hesitated to give guidance for 2005 despite previous guidance of very strong growth. Storm clouds have been attracted to TASR of late with numerous problems appearing. The SEC is investigating questionable sales and marketing practices while competitors are starting to gain traction with less expensive products. Suits continue to mount from relatives of those who died after being shot with a Taser. Allegations of questionable accounting practices and insider trading along with increased marketing costs continue to weigh on the stock price. TASR fell -11% today to within a few cents of a five-month low.

Google fought off fears of the massive 187 million share lockup coming next week and rallied to gain +2.61 ahead of its analyst meeting tomorrow. GOOG has fallen nearly -$20 since last weeks earnings bounce. I suspect today's bounce was due more to short covering ahead of the event rather than traders hoping for another rebound on good news. Shorts have been shredded so many times in GOOG that exiting before any news event has become common practice.

KKD announced after the close that they would be cutting 25% of its workers in an effort to stop the profit bleed. They will save about $7.4 million from the cuts but take a charge in the current quarter. According to KKD "Cash from operations continues to be impacted adversely by previously disclosed unfavorable sales trends, and by the substantial costs and expenses associated with ongoing litigation, regulatory and restructuring matters." KKD has until March 25th to deliver current financials or be in default on their debt. Unfortunately KKD said it will need additional funding in March and said it was going to sell assets to raise cash. The corporate plane went on the chopping block as well. The company added this note to the release: "There can be no assurance that the Company will be able to reach any agreement with the banks or that funding will be available when and in the amounts needed." When it rains it pours and in this case KKD is circling the wagons in an effort to fight off the indians until help arrives. I believe Custer also failed in this strategy. My prediction is still a repeat of Boston Chicken and shareholders are going to end up scalped.

Microsoft fired another shot in the software wars today with acquisition of anti-virus firm Sybari Software. Sybari has software that protects corporate networks form email borne threats. Microsoft said it would sell a product based on the Sybari technology as soon as the deal closed. Amazing that a company who makes a living on operating system software and earns billions in free cash each year could not devote enough assets to fixing its own products to be virus proof. Instead they had to buy something from outside the company to protect their own email products. This was the third anti-virus company Microsoft has purchased since 2003 in an effort to produce a comprehensive AV product and tap into the subscription fee based AV market. GeCAD and Giant were the other two companies. The major players in this market, SYMC and MFE both took a hit on the news. With the Symantec acquisition of Veritas they have less exposure and far more upside than McAfee and saw less selling. MSFT remained flat on the news with SYMC -1.51, MFE -2.14.

Oil continues to drift lower as the demand for heating oil slows and this should be a positive for equities. Bond yields also fell to new three-month lows, which should also be good for stocks. Still, we failed to move measurably higher. I believe some of it was Cisco fear but the majority was just calm consolidation of last weeks gains. According to TrimTabs $5.8 billion has flowed into funds over the last eight days although flows have slowed this week. The Dow raced from 10400 to 10740 over five days in February and has held those gains at just over the 10700 level. Just holding here at 10700 is very positive. We are consolidating without a material bout of profit taking. It demonstrates that although the buyers are not rushing in at these levels there are no sellers either. In fact it appeared we were wedging up at the 10740 level in preparation for a post Cisco breakout. Granted the +8 gain today is not earth shaking but it was a gain on top of previous strong gains and the intraday dip was eagerly bought. The next material resistance is 10850 and a breakout there would produce very strong buying. This was the December highs and multiyear highs. As such it represents significant and very high profile resistance.

The Nasdaq seems a lot more reluctant to retest the 2100-2110 resistance from January and although it posted a +4 point gain today it was just treading water until the Cisco earning event passed. The after hours futures are showing no adverse impact from Cisco and have recovered into slightly positive territory. This suggests the Nasdaq has lost one more anchor retarding its upside efforts. The 2100 resistance will be the key. Helping build a stronger base is the SOX, which has exploded over the last four days to close at 427 tonight. This represents a +11% gain over the January lows. The SMH sold off slightly after the Cisco earnings but only very slightly. It is due for some profit taking after the big gains and strong resistance at 435 is just ahead. There is still some room to run but like the Nasdaq the January resistance highs should be solid resistance.

SOX Chart - Weekly

This is the last major week for earnings but after scanning the more than 180 companies reporting on Wednesday there were less than a handful immediately recognizable. The pace picks up slightly with a closing blast of over 200 companies on Thursday headed by DELL. The pace begins to slow next week with over 80% of the S&P already reported. This poses our next problem. With the positive earnings news now priced into the market and the forward guidance less than exciting what will the market use for motive power? The Fed is behind us and earnings will be receding in our rear view mirror. There are no material economics next week although there is a heavy calendar of reports. We are rapidly reaching the point where the timeless question begins to appear in traders minds. I am of course not talking about "To be or not to be?" but one more relative to us. Why buy? What is the overriding reason to plunk down your hard earned cash with the markets treading water just under their multiyear highs? If we could manage to move over those highs over the next several days then a case could be made for a continued rally into April earnings. Should we fail to breakout soon the odds of another flat to down, range bound market begin to increase. Most traders would rather go toe to toe with Mike Tyson than endure another nine months like the first nine months of 2004. It is time to get out the electric cattle prods and see if we can get the bulls moving again or it is going to be a long hot summer. I wonder if Taser makes those as well. Could be a whole new market for them and they do have plenty of experience with other kinds of bull.

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