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MARKET > Commentary Sunday, March 25, 2001
by: S.P. Brown

Everybody Up

Finally, traders and investors had a reason to tip a few back on a Friday evening. It was a long time coming, but for the first time in 2001, the three major market indices closed a Friday in the black.

Analysts offered the standard cliché for some folks wanting to go long into the weekend: short covering and sector rotation. I think the reason was less obvious, if not more pragmatic: traders had an itch to bargain hunt and had the scratch lying around to satisfy it.

Of course, these same analysts were pooh-poohing Friday's rally as a mere aberration -- unsustainable at best, a bear-market trap at worst. The usual culprits were paraded forth: insufficient volume, mild put/call readings and a too staid Volatility Index (VIX). In other words, we still haven't seen the in-your-face capitulation that is supposedly a prerequisite for a market bottom.

But here's a little secret that they are keeping to themselves: we may never see it.

With so many market watchers expecting one resounding flush to clear the air, I suspect the market will just start quietly inching ahead, leaving many a trader bewildered as he realizes that the major indices have advanced 15 percent and he's been sitting on the sidelines. After all, that's the way these things work. When everyone expects one thing, the opposite usually occurs.

Anyway, that's the distant and always opaque future. I've heard that it's best to live in the present (at least sometimes). If that's true, then Friday was a day to rejoice, for the Nasdaq Composite Index (COMPX) finished its first winning week in eight, climbing 30.98 points, or 1.63 percent, to close at 1,928.68. What's more, the tech-laden index jumped 2 percent for the week, snapping a seven-week losing streak, its longest since 1980.

Breadth was positive for the entire session and closed right about where it started, with advancers leading decliners by a 2- to-1 margin. Volume on the Nasdaq was also strong, as more than 2.27 billion shares were traded. Still, volume was not as strong as many technicians would have liked for what many considered to be follow through day. Then again, you can't have everything you want.

With Friday's advance, the COMPX has once again broken free of its intermediate down trendline dating back to late January. I wouldn't bet the farm, but I think the COMPX may have enough support this week to continue trading above this line.

Helping the New Economy cause on Friday was Gemstar-TV Guide International (Nasdaq:GMST), which rose $6.25 to $35.19 after signing a 20-year agreement with Comcast Corp. (NYSE:CCZ) under which Comcast's cable unit will use Gemstar's guides in the majority of homes that receive Comcast Cable.

Also contributing to the cause was Tibco Software (Nasdaq:TIBX), which gained $2.41 to $10.44. The company, whose software helps computer systems communicate, said its first-quarter earnings, before certain expenses, were $0.06 a share a share, doubling the First Call estimate for $0.03.

As for the Old Economy, it had an interesting week to say the least. On Friday, the Dow Jones Industrial Average (INDU) climbed 115.30 points, or 1.23 percent, to 9,504.78, putting more distance between itself and the bear market it flirted with earlier in the week.

At its low on Thursday, the INDU was off more than 20 percent from its January 2000 record of 11,720, sinking to 9,106. The blue-chip average was the last of the three major market gauges to cross the threshold that some analysts say defines a bear market. However, the INDU erased most of those losses going into the close, ending Thursday off 97.5 points to 9,389.48, or 19.9 percent below its all-time high.

The INDU was able to build on Thursday's last hour gains, as traders poured into its financial and tech components on Friday to lift the average back above 9,500. Citigroup (NYSE:C), American Express (NYSE:AXP), J.P. Morgan Chase (NYSE:JPM) and Microsoft (Nasdaq:MSFT) all added more than $2.00 to their share price while International Business Machines (NYSE:IBM) added more than $4.00 a share.

As with the Nasdaq, NYSE volume was solid and breadth was positive. Advancers topped decliners 1,982 to 1,043 on 1.36 billion shares.

Technically, though, the INDU still looks anemic. The average is approaching strong resistance at 9,650. Given the waning enthusiasm for the Old Economy issues towards the close of Friday's session, I'm not sure that the INDU has the momentum to break through this resistance this week.

As for the broad-market barometer, the S&P 500 Index (SPX) gained 22.25 points, or 1.99 percent, to close at 1,139.83. But for the week, the SPX finished down 0.9 percent. At its current print, the SPX is trading at a 25 percent discount to its March 2000 closing high of 1,527.

In sector news, the semiconductors continued to advance on Friday after putting in a blockbuster performance on Thursday. Top computer chip maker Intel Corp. (Nasdaq:INTC) edged up $0.13 to $28.81 after soaring $3.14 on Thursday. For the week, the PHLX Semiconductor surged ahead 18 percent thanks to an impressive outing by National Semiconductor (NYSE:NSM), LSI Logic (NYSE:LSI), Advanced Micro Devices (NYSE:AMD) and Texas Instruments (NYSE:TXN), all of which added over 24 percent to their share value. Many traders are looking to the semis to lead us of the doldrums, and this just may be the wake up call they've been waiting for.

Financial stocks also moved higher on Friday thanks to Goldman Sachs, which stated that the Fed could lower interest rates as much as two full percentage points from current levels (that translates to a 3.00 percent fed funds rate) by the end of the summer to try and revive consumer confidence and a moribund U.S. economy. In response, the NYSE Financial Index (NF) moved higher 3.2 percent on strong gains in Merrill Lynch (NYSE:MER), Banc of America (NYSE:BAC), Bank of New York (NYSE:BK) and Goldman Sachs (NYSE:GS).

Unfortunately, Goldman's interest rate call did little to help the bond market. Treasurys slipped across maturities as investors moved money from fixed income instruments and back into stocks. The benchmark 10-year Treasury note fell 11/32 at 101 20/32 to yield 4.79 percent while the 30-year government bond dropped 6/32 reaching 101 14/32 to yield 5.28 percent. In the front end, the 2-year note declined 2/32 to yield 4.24 percent while the 5-year Treasury note fell 5/32 to yield 4.48 percent.

On the economic front, there was little to report on Friday. The ECRI Weekly Leading Index, a weighted average of seven key economic data series designed to predict economic conditions over the near term, declined last week from 121.8 to 121.3 and is approaching the lows reached at the end of 2000.

Looking ahead, this week's economic releases could provide some impetus for the Fed to lower the fed funds rate before its FOMC in mid-May.

On Monday, February sales of new homes are expected to have decreased slightly to an annual rate of 920,000, from 921,000 in January. Existing home sales are also due to be reported and are expected to have declined to an annual pace of 5.02 million in February, off from a 5.13 million annual pace in the previous month.

On Tuesday, the Conference Board will release its consumer confidence report for March. The index is expected to edge lower for the due to the palpable deterioration in business and employment conditions lately. Recent stock market losses will also undoubtedly dampen the confidence of consumers who have seen portfolio values plunge over the past six months.

Finally, personal income and spending, the University of Michigan Confidence Index and the Chicago Purchasing Management's Index (CPM) close out the week's major economic data on Friday. Personal incomes are forecasted to have increased 0.4 percent in February, off from 0.6 percent in January, outpacing personal spending, which is expected to have increased 0.3 percent during the month. The Michigan index of consumer sentiment is expected to have decreased to 91 in its final March posting, off slightly from its prior estimate of 91.8. The CPM index is expected o have risen to 44 this month, up from 43.2 in February. An index posting of below 50 is an indication of contracting business conditions in the Mid-West.

As for earnings this week, there isn't much in the offering that will likely roil the markets. Palm (Nasdaq:PALM) will be one of the few companies to watch this week because it is viewed as the pacesetter for the handheld computer market, which continues to grow while the PC and mobile-phone markets contract. Palm is expected to post earnings of a penny a share on Tuesday.

Earnings for the first quarter of 2001 probably won't be much improved over earnings for the fourth quarter of 2000. According to First Call, analysts expect S&P 500 companies' earnings growth to slow to about 1.5 percent this year, down from 16.2 percent in 2000. What's more, earnings for companies in the CBOE Technology Index (TXX) are expected to plunge 18 percent.

On a more positive note, stocks are cheaper relative to earnings. The S&P 500 is now priced at 23 times recent earnings, down from 32 a year ago, while the Dow Industrials are priced at 18, down from a peak of 27. Then again, lower market P/Es should surprise no one. The market's plunge has lopped $5 trillion off the value of U.S. equities over the past year as measured by the Wilshire Total Market Index (TMW).

As for trading the market this week, I think that the worst of the selling is over (so long might be the way to go). In fact, the stock market is once again showing signs of life after many traders and investors, disappointed by the Fed's conservative interest rate cut last Tuesday, had left it for dead.

Indeed, the Fed's latest 50 basis-point rate cut caused much consternation on Wall Street last past week even though it, combined with the 100 basis points in cuts administered in January, almost completely erased an 11-month series of increases that began in June 1999.

At this point, I think the Fed is becoming less of a pivot point in the eventual turnaround, anyway. I think traders and investors are beginning to realize that the economy hinges on more than liquidity. In other words, earnings will again step to the fore.

On that end, I again think the worst is over. Most companies that warned for the year warned during the first quarter, so I don't see the torrent of earnings disappointments for the second quarter that flooded the first. In fact, traders and investors are already discounting the worst, so any positive news could have a greater positive impact than it likely would have this time last year. For example, Lucent (NYSE:LU) jumped 20 percent last week on news that it had secured a $5 billion contract to supply telecom equipment to Verizon (NYSE:VZ). Can you think of any company that has stubbed its toe more times over the past year than Lucent?

With that said, don't be surprised if the momentum section of our Current Play list becomes over-weighted with more big-cap tech issues as they begin to stir from their slumber, while our split run and split candidates sections become over-weighted with defensive issues, stocks that have already had their run. I know I won't be.

S.P. Brown


Copyright 2001

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