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MARKET > Commentary Thursday, March 22, 2001
by: Craig Seidler
Assistant Editor

Taming Of The Bear

The bears will have to wait another day before the DOW succumbs to their grasp. The old-economy average, after being down over 300 points, managed an impressive late day rally to finish 11 points above the official bear market level of 9378.

But let's face it. Although the DOW has not yet officially slipped into bear territory, all the other elements are in place for a bear market and looking around, you might as well be on a river in Alaska during the salmon run. The bears are everywhere.

They are on the front cover of just about every financial magazine, in the papers and on television. Bears are supposed to be mean and scary, but this time around, investors are about as scared of this bear as they are of those big fury creatures in Yellowstone National Park that eat out right of your hand.

Evidence of this comes in the fact that call option volume is up, signifying that folks are actually trying to time the turnaround. In addition, at the height of today's sell off, the Volatility Index (VIX.X) didn't get much over 35 and the Gold Index (XAU.X) was actually down. Remember that the VIX rose above 60 at the market bottom in 1998 (sign of fear and put option buying) and since gold stocks usually rise in panicky times, the fact that they were down today signifies still more investor complacency.

I bring this up because I still believe we have at least one more leg down before things get better. Today's rally was not a bounce off a "capitulation" bottom. In fact, it stunk of short covering. Short covering is a snowball occurrence; often producing quick and violent moves to the upside.

Serving to also put pressure on stocks recently were the record redemptions out of mutual funds in the last week of February. The mutual fund tracking company, Trim Tabs, reported that outflows from mutual funds totaled over $5 billion for the week, a new record since the firm started tracking this data in 1998. While this does not constitute a large amount of capital when compared to what is now held in mutuals, this type of pressure is enough to prompt funds to start liquidating positions.

Put it this way, as a mutual fund manager, would you rather choose when and how to sell your winners, or be forced to sell them after they have already tanked, due to a flood of redemption requests? I think that is exactly what we have been seeing in widely held stocks like Pfizer (NYSE:PFE), down $0.31 to $35.67 and Microsoft (NASDAQ:MSFT), up $3.94 to $54.00 today. When mutual funds decide to sell, they do it in bulk, which tends to break down charts and serves to raise red flags for the retail investor.

Today's Markets

Tech was finally in the drivers seat today, as the NASDAQ (COMPX) was largely responsible for coaxing the DOW (INDU) out of the midday doldrums. Moreover, looking back over the past few sessions in the NASDAQ compared to the DOW, one can see that money has been slowly rotating back to tech. It appears as if the selling may be at least starting to dry up over in the NASDAQ.

The tech heavy NASDAQ put in a stellar session, especially considering it had a strong current to fight against for most of the day. NASDAQ added 67.47, or 3.69%, to 1897.70. Volume was heavy at 2.5 billion shares but declining issues still outnumbered advancers 2287 to 1507.

The DOW powered higher in the last hour to finish down by only 97.52 after having been down over 300 points. While the tech components in the DOW certainly helped, program trading and short covering were the catalysts on the day.

Stocks and Sectors on the Move

It was the semiconductor sector (SOX.X) that stole the show today. The SOX.X bounced 68.37 to 626.39 on positive comments out of Micron Technologies (NYSE:MU). MU delayed the release of its earnings, which were due out yesterday, but did mention that it booked $1.05 billion in sales for its second quarter. Those numbers were ahead of most analysts' expectations and along with news that inventories have come back down, kicked off a good ol' down home rally in the weary chips.

With visions of a turnaround dancing in their heads, investors bid up shares of Micron by $4.69, or 11.16%, sending MU shares up to $46.70. Joining the party were shares of Texas Instruments (NYSE:TXN), which was lit up by $3.85 to $37.87, Intel (NASDAQ:INTC), which recovered by $3.13 to $28.69 and Advanced Micro Devices (NYSE:AMD), which added $3.16 to $26.45.

Of course, lest you get the impression that chip stocks are the next safe haven, most of this buying was probably again just more short covering, in addition to optimism over baked in bad news. This is opposed to genuine conviction of a recovery. Remember chips have grabbed our attention in the recent past, only to turn around on a dime and plunge lower.

On the downside, Charles Schwab (NYSE:SCH) announced that it would be cutting up to 3,400 jobs due to a slowdown in its trading activity and the slowing economy. The stock closed down $0.70 to $15.20. This comes just a day after three other heavyweight brokers reported falling profits.

In another sign of the times, consumer giant Proctor and Gamble (NYSE:PG) indicated that it too would be laying off workers in a further effort to cut costs. PG is cutting 9,600 jobs, or 9% of its workforce to keep its bottom line attractive to investors. PG fell $0.45 to $62.75.

In today's analyst action, Sanford Bernstein talked down Sun Microsystems (NASDAQ:SUNW), cutting the server company's fiscal year 2001 earnings estimate down to $0.47/share from $0.53/share. Sanford's reasoning behind the downward revision was a general sense that demand has fallen and that the launch of Sun's US-3 product is in jeopardy. To this I say we must be close to a bottom. When the last of the small Wall Street firms jump on the bandwagon and downgrade stocks after all the big boys lopped earnings long ago, we are getting there.

Looking Forward, Always Forward

No big economic news for Friday, but remember, no Friday yet this year has been an up day. Investors are still very hesitant to hold into the weekends for fear of some kind of foreign economic catastrophe.

Today's stellar run into the close probably will set us up for higher stock prices in the morning. Although this will also be a prime set up for a slow fade into the close. On the other hand, if we see any strength going into Friday's close, I would take it as a very bullish sign going into next week.

Right now, the shorts are facing less of a risk/reward scenario by continuing to short at current levels. Most stocks that have been good shorts up to now are so far off their highs that any real buying that takes stocks higher may serve to provoke another wave of short covering.

Also, keep an eye on the semiconductors. If they can eke out a few more good sessions, it may be a sign that at least the NASDAQ is ready for a short-term rally.

As a side note, we have been having technical difficulties with our charting software, so we apologize for the lack of charts recently. The problem should be fixed soon.

Look Both Ways, and Have A Nice Weekend

Craig Seidler
Assistant Editor


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