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MARKET > Commentary Monday, March 19, 2001
by: Jim Booth
Research Analyst

Waking up the Bull

Only hindsight will tell us for sure when the market finally reached a bottom. That said, there is growing evidence that we are near the much-anticipated end to the slide in equity values.

Here are four events that may be signaling a bottom:

1. The past couple of Monday's have seen dismal market performances following Friday declines, caused, in part, by nervous traders unwilling to hold positions over the weekend. The market broke that trend today.

2. Generally speaking, individual investors, even those with the deepest pockets, are throwing in the towel by allowing margin- based liquidations instead of throwing "good money after bad." The final pain threshold may have been met.

3. One of the greatest media-based market trend indicators has appeared. Time Magazine has placed a bear on its cover. Since the Depression, Time Magazine has had an uncanny ability of predicting market tops and bottoms when their esteemed editors decide to run a cover story about the stock market. Stories that cover huge bull moves usually pick tops and stories about stampeding bears usually foretell market bottoms.

4. Another event that lends credence to the possibility that a bottom is near is the fact that Corning (NYSE:GLW) rallied after releasing bad news. The leading manufacturer of fiber optic cable and one of the biggest winners during the bull market warned that profit expectations for 2001 are diminishing and this year's earnings may even fall below last year's profits of $1.23 a share. Corning, which had already announced 825 job cuts from a global workforce of 40,000, further stated that it will investigate the need for even more job cuts.

GLW closed at $25.20, which was a gain of $2.02 on the day. A rally following bad news from an industry leader is a good indication that the overall market is approaching an important bottom.

I do not want to go so far as to say that we have definitely put in a bottom. Some of today's rally can be attributed to the pattern of market strength the day before anticipated rate cuts. We have seen rallies just before the last few rate cuts only to watch those gains dissipate during the following trading sessions. There were rumors running through the Street that the Fed will cut rates 75 basis points. No one knows for sure how much those rumors helped the market today but it will be critical to see if the market can hold the bulk of today's gains if the Fed only cuts interest rates by the expected 50-basis points tomorrow.

It is also important to note that today's move can also be attributed to the fact that the market was very oversold after last week's monster declines. It is entirely possible that today's rally had more to do with short covering profit taking than a bona fide awakening of bulls.

For the record, the Dow Jones Industrials (INDU) moved up 135.70 points to a close of 9,959.11. There was not enough strength to drive the index above the critical 10,000 resistance as trading crested just below this level before pulling back.

The NYSE was led by gains from Merrill Lynch (NYSE:MER), up $3.70 to $58.50, Teradyne (NYSE:TER), up $3.52 to $34.94, St. Jude Medical (NYSE:STJ), up $3.46 to $50.63, Best Buy (NYSE:BBY) up $3.03 to $44.00 and Micron Technologies (NYSE:MU) gained $3.01 to $43.06. It was very encouraging to see a leader board contain stocks from such a diverse group of industries.

The NASDAQ (COMPX) rallied a healthy 60.28 points and closed at 1951.19. The COMPX closed near its high print of the day.

The NASDAQ point gain leaders included Qualcomm (NASDAQ:QCOM), which gained $7.88 to $58.19, Juniper Networks (NASDAQ:JNPR), up $5.38 to $58.44, Millennium Pharmaceuticals (NASDAQ:MLNM), up $5.44 to $28.94 and Ebay (NASDAQ:EBAY), which picked up $4.56 to $37.06.

Volume on the NYSE came in at 1.1 billion, while NASDAQ volume was a healthy 1.75 billion. Both markets enjoyed positive breadth. There were 20 winners for every 11 losers on the NYSE while the NASDAQ saw a ratio of 22 winners for every 15 losers.

Some of the better performers on the current Splittrader.com Play List were CEC Entertainment (NYSE:CEC), which picked up $1.60 to $42.00, Radian Group (NYSE:RDN), which gained $0.30 to $61.30, Universal Health Services (NYSE:UHS), which moved up $0.55 to $84.92 and Mattel (NYSE:MAT), which was up $0.59 to $18.29.

There was some more good news that shows at least one major research firm willing to explore the possibility that the stock market is near a bottom. Banc of America Securities raised the equity portion of their model portfolio to 65% from 60%. The recommendation is in response to the outperformance of the bond portion of their model portfolio and the belief that the worst of the stock market is starting to appear in the rear view mirror.

Lucent Technologies (NYSE:LU), the widely held and severely pummeled telecommunications leader, finally received some good news today. Lucent won a three-year contract worth $5 billion from wireless telephone company Verizon (NYSE:VZ). The deal calls for Lucent to supply Verizon with 65% of the Company's wireless network equipment. LU gained $2.01 to $12.00. Verizon Communications, which runs the Verizon Wireless business in partnership with Britain's Vodafone Group (NYSE:VOD), rallied $1.55 to $48.88.

Leading electronics component manufacturer Solectron (NYSE:SLR) is active in after hours trading. The Company hit second quarter estimates of 30 cents a share and posted revenue of $5.4 billion. Nevertheless, the stock is down two points since closing the regular trading session at $21.49. Solectron said that it will take a restructuring charge of $300 to $400 million that will cover the cost of slashing 10% of its workforce.

Obviously the big news tomorrow will be the result from the FOMC meeting. However, before the market opens there will be a couple of key earnings reports that may help to guide the early trading. A.G. Edwards (NYSE:AGE) is expected to post profits of $0.65. Fellow brokerage concern and investment banking leader Goldman Sachs (NYSE:GS) is expected to post profits of $1.32.

After the market closes, technology investors will be watching the earnings results from electronic components leader Jabil Circuits (NYSE:JBL). JBL is expected to post profits of $0.21.

Going forward it is critical that the Dow Jones Industrials holds the support offered by Friday's low 9720. A drop below this support could occur if market participants are disappointed by a rate cut of only 50-basis. To be honest, current economic data suggests that a 75-basis point cut is probably unjustified. It will be interesting to see if Greenspan has been influenced by the argument that a recession could be severely exacerbated by declining equity prices.

If we do get a 75-basis point cut tomorrow, we could see a rally above the 10,000 resistance that could quickly shoot to 10,250. The strongest argument for a continued bounce is the fact that the INDU is very oversold according to the Relative Strength Index. Whether a bounce can turn into a more significant rally remains to be seen.

NASDAQ (COMPX) resistance can be found at 2,030. Just like the INDU, the COMPX is still extremely oversold on an RSI basis. This fact leads one to believe that a short term bounce is quite likely. A 75-basis rate cut could push the COMPX to the 2250 resistance by the end of the week. I am also happy to report that a nice positive move tomorrow could trigger a buy signal according to the MACD. This indicator has been very good in predicting intermediate term trends. These trends tend to last for four to six weeks.

It is difficult to recommend an aggressive move into stocks. That said, at the very least, the market looks ripe for some selective stock picking that could lead to some decent profits over the next couple of weeks. It is entirely possible that a significant bottom has been put in that should at least result in a consolidation that will eventually test the previously mentioned resistance levels.

Good Luck! And may all of your trades be winning ones!

Jim Booth
Research Analyst

 


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