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MARKET > Commentary Sunday, April 01, 2001
by: S.P. Brown
Editor

Prelude To A Rally?

Okay, so maybe I am jumping the gun, but for the second consecutive week, the three major indices closed a Friday in the black. Only a fortnight again such an event seemed as unlikely as a British cow avoiding a premature trip to the abattoir.

To be sure, the three major indices have performed miserably through the first quarter of 2001. The Nasdaq Composite Index (COMPX) fell 25.5 percent after falling for the last three quarters in 2000, marking the first time it has tanked for a full 12-month cycle since 1984.

Not that 2001 has been any kinder to blue-chip and broader markets, because it hasn't. The Dow Jones Industrial Average (INDU) finished the quarter down 8.4 percent, posting its worst quarter since 1978 and snapping a two-quarter winning streak that was sparked by traders' search for anything sans tech. Meanwhile, the S&P 500 Index (SPX) finished off 12 percent, posting, like the COMPX, its fourth-straight quarterly loss.

But if I may be so bold as to invoke a meaningless cliché or two, that was then and this is now and sunk costs are sunk. In other words, the future is what matters, and if we can say that the future began on Friday, then we can say that it's off to a respectable start (just don't say that the future began on Thursday or Wednesday or you'll ruin my segue).

To that end, the COMPX closed Friday with a gain of 19.69 points, or 1.08 percent, to 1,840.26. Leading the COMPX advance were four issues that couldn't catch a break to save their lives earlier in the week. Cisco Systems (Nasdaq:CSCO), Sun Microsystems (Nasdaq:SUNW), JDS Uniphase (Nasdaq:JDSU) and Oracle (Nasdaq:ORCL) all managed to post a modest gain.

Still, that wasn't enough to erase earlier losses. For the week, the COMPX jettisoned 4.6 percent of its value.

Despite tech's mounting losses, I'm becoming more bullish on the COMPX. For all of last week, the COMPX remained above its two- month long downtrend. What's more, the bottom line of a popular wedge formation suggests that 1,750 is the downside limit. Obviously, there is still risk, but with many big-cap tech issues trading at 60 to 70 percent discounts (including the aforementioned tech quartet) to their 52-week highs, I'm thinking that the risk/reward scenario on the COMPX is favoring long-side traders.

My bullish sentiment also applies to the Old Economy. On Friday, the INDU rose 79.72 points, or 0.81 percent, to 9,878.78, which means the average has now put 500 points between itself and the official bear market close of 9,378. The INDU was buoyed by American Express (NYSE:AXP), which gained $2.34 to $41.30 on speculation that Citigroup (NYSE:C) may be interested in making an offer for the company. Other notable winners included J.P. Morgan Chase (NYSE:JPM), Exxon Mobil (NYSE:XOM), International Paper (NYSE:IP) and Alcoa (NYSE:AA).

Moreover, for the week, the INDU posted a 3.9 percent gain.

Much ado has been made of the INDU obliterating its 50 percent retracement from its all-time high of 11,720. However, I think it's more noteworthy that the INDU broke through its bottom regression line, which could provide immediate resistance at 10,000. Should the INDU break this resistance (which I think could happen soon because of recent strong momentum), the next significant resistance level comes at 10,750, the top of the downward regression. This is in contrast to the 50-percent retracement at 10,500, which many technicians are pointing to as the next resistance level. I don't buy it, though. To me, 10,500 represents eventual support, not current resistance.

Of course, as many traders are aware, we can't get too gung-ho about this market until the official arbiter of bull and bear markets, the S&P 500 Index (SPX), recovers. On Friday, this broad-market index rose 12.38 percent, or 1.08 percent, to 1,160.33, meaning its now trading at 24 percent discount to its all-time closing high of 1,527.

However, I think the worst may be over for the SPX, particularly if it has caught support at its intermediate upward trendline, which, according to the chart, it appears it has.

As for stock news on Friday, more specifically Splittrader stock news, our Current Play list continues to hold its own. Our biggest winner this week was electronic game maker THQ Inc. (Nasdaq:THQI), which gained 10.1 percent for the week to close at $38.00. The second biggest gainer was mortgage insurer Radian Group (NYSE:RDN), which moved higher 9.5 percent to 67.75.

Regrettably, there were losers. The biggest loser was low-end retailer Rent-A-Center (Nasdaq:RCII), which gave back 6.7 percent. Another notable loser was Smithfield Foods (NYSE:SFD). Smithfield had the misfortune of being associated with the Tyson Foods (NYSE:TSN) and IPB Inc. (NYSE:IBP) takeover fiasco.

In a move that humbled many an arbitrageur's portfolio, Tyson, the nation's largest poultry processor, recanted its $30-a-share takeover offer for IPB, the nation's largest meatpacker. With Tyson headed for the exits, IBP plunged $6.39 to $16.40 while Tyson rose $1.97 to $13.47.

Enter Smithfield, the nation's largest pork processor. Given its plunge, IBP is once again perceived to be an attractive takeover candidate, since it's now trading for roughly 10 times projected 2001 profits of $1.50 a share. This had many arbs thinking that Smithfield may make a bid for IBP.

In other words, they sold Smithfield on Friday. The company's shares tanked $5.25 to $32.50 on Friday. We were stopped out at $33.25 despite having a stop-loss set at $35.25 because of the stock's gap-down open. Still, we were able to exit with a small gain. However, had Tyson stuck to its guns, Smithfield would have been our biggest gainer for the week. Oh, well.

While we're on the subject of our Current Play list picks, here's an interesting tidbit. Over the past five months, the Splittrader portfolio of plays has lost 2 percent in value. Granted, losses are nothing to brag about; however, over the same time period the Dow Jones Industrial Average (INDU) has lost 9 percent, the Russell 2000 Index (RUT) has lost 9 percent, the S&P 500 Index (SPX) has lost 18 percent, the Wilshire 5000 Total Market Index (TMW) has lost 19 percent and Nasdaq Composite Index (COMPX) has lost 44 percent.

Keep in mind, too, that we employ a long-only strategy (enacted in October 2000). What's more, the majority of our picks are split run and split candidates, meaning there still is value to be created anticipating stocks that could split.

Here's another consideration: we don't cherry pick our plays to represent our gains. Many financial information sites will post their best picks on their start page, leading readers to believe that these picks are representative of overall portfolio performance. WE REFUSE TO DO THAT. In fact, since we switched to a long-only strategy, we've kept a detailed Excel spreadsheet of all our picks (November to the present), which I'll avail to any reader for the asking (e-mail steve@sungrp.com). And if you want to see all of our play results since our inception, just click on the "Play Results" section on the left-hand side of our homepage.

But enough of us, let's see what else happened on Friday.

In economic news, the University of Michigan consumer sentiment index improved modestly in March, coming in at 91.5 vs. February's 90.6 reading, snapping a three-month decline. Street analysts had predicted numbers from 90.2 to 91.0. The survey seemed to indicate that consumers aren't as depressed about the stock market's losses as the experts thought.

Also on Friday, the Chicago Purchasing Managers (CPM) fell to 35.0 percent in March, its lowest reading in 19 years. This (CPM) index is often an indicator of the National Association of Purchasing Management Index (NAPM), which is due next week and is traditionally the first reading on the economy of every month. This NAPM report could sway the Fed to consider an inter-FOMC meeting interest rate cut.

Speaking of NAPM, this index reading will kick off this week's slate of economic data releases on Monday. The NAPM index is forecasted to post at 42.5 this month, up from 41.9 in February. Still, a reading less than 50 is indicative of a contracting economy.

On Tuesday, factory orders for February are due for release and are predicted to have increased 0.2 percent, up sharply from a 3.8 percent decrease in January.

Finally, on Friday, we get the week's most anticipated economic data set with the unemployment report, which is expected to rise slightly to 4.3 percent this month, up from 4.2 percent last month. Moreover, average hourly earnings -- the gauge of wage inflation most closely watched by the Fed -- are expected to increase 0.3 percent this month, off from a 0.5 percent increase in the prior month. Overall, the U.S. economy is expected to have added 75,000 non-farm jobs in March, off from the 135,000 non-farm jobs added in February.

Taken together, the week's economic reports should help investors anticipate whether the economy is approaching a V-shaped (quick), U-shaped (slow-but-sure) or L-shaped (not in the cards) recovery.

As for the Federal Reserve, it will likely remain at the back of the bus, at least through this week, leaving the driving to corporate earnings, which, so far this year, have driven the bus like Mr. Magoo. So far, 984 companies have issued comments about their earnings and 682 have been earnings warnings. In the year- ago period, 272 companies issued comments and only 122 were negative. Keep in mind, the confessional season begins in earnest next week.

This week's earnings will bring announcements from major electronics retailers Circuit City (NYSE:AA) and Best Buy (NYSE:BBY), as well as blue-chip manufacturing bellwether Alcoa (NYSE:AA).

Don't expect this trio to knock your socks off. According to analysts surveyed by First Call, S&P 500 companies' earnings will drop 8 percent this quarter and 6 percent in the second quarter.

Despite the continued dearth of positive earnings news, I still think you have good reason to turn that frown upside down. Like I've said in the past, I think the worst is over. Everything we currently know about earnings, the economy and the Fed is priced into today's security prices.

The fact is, with everyone expecting the worst, it's not going to take much good news to get this market moving in the right direction again.

S.P. Brown
Editor
www.Splittrader.com

Editors Note:

If you have not yet reserved a seat at the April Trading Expo in Denver this week, then you are missing out on the opportunity of a lifetime. This group of speakers will never be offered again. Over a million investors have read their books and newsletters and heard them speak individually. Next weekend you can hear them all in one place with over 50 hours of in-depth options and stock trading education. Take a couple days off from the markets and learn how to win more and lose less.


TOPICS and SPEAKERS
3rd Annual Trading Expo
April 5th-9th, Denver Colorado

OptionInvestor is proud to announce our third annual Spring option workshop in Denver Colorado. This power packed five-day event is structured to fully educate you on advanced option strategies and will make you a better and more profitable trader.


Jeff Bailey, Editor, PremierMarkets.com
Learn the basics of Point and Figure Charting while analyzing how supply and demand on an institutional level affects the markets and the stocks you want to trade.

Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES
The Global Economy and its Impact on Us. Learn from a professional economist who turns his understanding of economics into highly valuable investing advice.

Harry Browne, Author of Fail-Safe Investing
Sixteen Golden Rules of Failsafe Investing. A powerful session that translates the essence of the book into guiding principles.

Jim Brown, Founder, OptionInvestor.com
Austin Passamonte, Editor, IndexSkybox.com
Jeff Bailey, Editor, PremierMarkets.com
Preparing for Battle. This is a very popular session where multiple speakers team together offering insights on: planning your trades and the combination of research, market factors, and choosing your hot list.

Tom DeMark, Author of three books on DayTrading Options
Day Trading Options. An extremely popular subject taught by one of the world's foremost authorities on chart analysis. Tom wrote the book on day trading options, literally.

Steve Nison, Author, Japanese Candlestick Charting Techniques
Candlestick Charting. Is that a doji or an evening star formation? How can this benefit your trading success? Candlestick chart analysis is another hot topic that traders are always eager to learn. Nison is internationally recognized as the "Father of Candlesticks" and has written two books on the subject.

Austin Passamonte, Editor, IndexSkybox.com
Buzz Lynn, Contributing Editor, IndexSkybox.com
Beating the Market with Indexes. This is another tag team event where you'll hear from two of our staff from IndexSkybox.com as they discuss topics like: Don't Pick Stocks, Pick Markets; and Market Timing Equals Sector Profits.

Rance Masheck, President, SpreadTrader.com
Calendar Spreads & Bull Call Spreads. Some of the first strategies a beginner will encounter in spread trading are these two spreads. Both simple and effective they continue to draw experienced traders over and over again.

Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES
Scrooge Investing - The Best Bargains in Beaten Down Stocks for 2001. This is a great topic and Mark's background as an economist really offers some new insight into the challenge of choosing your investments.

Jeff Bailey, Editor, PremierMarkets.com
Calculating the Bullish Percent. Applying your new knowledge in Point and Figure charting to decipher how many stocks in a sector are showing buy signals.

Jim Brown, Founder, OptionInvestor.com
Austin Passamonte, Editor, IndexSkybox.com
Pre-Market Analysis. A very popular session where multiple speakers team together offering insights on: Pulling the Trigger, Amateur Hour, and Market Hype.

Dick Arms, Inventor of the Arms Index, Founder, ArmsInsider.com
Increase your profit potential with Equivolume Charting, volume adjusted moving averages and the TRIN

Derek Baltimore, Co-Editor, IntradayTrader.com
Risk Management in a declining Market

Buzz Lynn, Contributing Editor, IndexSkybox.com
Sector Trading with IShares. You may know of DIAMONDS for the Dow Jones, SPDRs for the S&P 500, and the QQQs for the NASDAQ but there is a growing list of IShares and HOLDRS that offer great trading potential.

Jon Najarian, Founder, Mercury Trading, Floor-Trader CBOE
Successful Option Trading. "Doctor J" is the name and options is the game. Jon has twenty years of experience as a professional option trader. His firm makes markets in over 90 high-tech and biotech stocks and trades up to 40,000 options per day.

Matt Russ, Editor, OptionInvestor.com
How to Profit from Option Pricing, Market Making and Volatility

Rance Masheck, President, SpreadTrader.com
Straddles. An excellent strategy for today's markets. Traders should be very familiar with the proper execution of a straddle to benefit from expected volatility.

Jeff Wright, Preferred Trade
Understanding Option Basics and the roll of an options floor trader.

Buzz Lynn, Contributing Editor, IndexSkybox.com
Slump Busting. Are you on a losing streak? Learn what you need to do to BUST out and break the pattern.

Jim Brown, Founder, OptionInvestor.com
Big Cap Strategies, Naked Puts, Zero Risk Trading, Making Dollars not Dimes.

Jim Crimmins, President, TraderAccounting.com
Tax Strategies for the Active Trader. It's that time of year again and Uncle Sam wants a cut of your trading profits. Let Jim offer some advice on how traders should handle such taxing issues.

Molly Evans, Writer/Trader, IndexSkybox & OptionInvestor.com
The Organized Trader.

Rance Masheck, President, SpreadTrader.com
Five Point Star Trader System. Learn what you need to know about a stock before making a decision to trade.

Austin Passamonte, Editor, IndexSkybox.com
Swing Trading & Day Trading Index Options. Many consider Index option trading to be the pinnacle of equity options. Learn more about the do's and don'ts for Index Option trading.

Eric Utley, OptionInvestor.com & IntradayTrader.com
Psychology of trading and the Importance of the top down approach to trading.

Buzz Lynn, Contributing Editor, IndexSkybox.com
Trading with Qcharts. Learn how to properly set up, use, and deploy the best features and techniques.

Derek Baltimore, Co-Editor, IntradayTrader.com
Exit Strategies, knowing when to quit

Tim Taylor - Preferred Trade
Using Direct Access Trading Platforms

Each topic will be covered in 1-2 hr general sessions taught by one or more OptionInvestor staff and presented on three giant screens. In the evening we will offer five of our popular chalk talk sessions for that personal question and answer interaction.

Unlike other seminars with only two or three instructors, you will get in-depth knowledge from many different instructors who are experts in their field.

The cost for the four-day workshop, April 6th to 9th is only $2995 (spouse only $1495). This includes breakfast, lunch and supper each day. All course materials, a CD of all the presentations and a professional video package of the entire seminar so you can review the material at home in the comfort of your living room. There is also a $500 discount if you have attended a prior OIN seminar.

This is not a prepackaged presentation that gets repeated over and over with stale information. This is a one-time production and everything is fresh, live and as current as we can make it. The videos will have your real time questions and answers and not some from a prior class. Where else can you get intensive yet personalized options education like this?

Do not delay as seating is very limited.
We guarantee you will not be disappointed!

You can pay for your education one bad trade at a time or you can invest less money one time to learn how to do it right.

Click here for more info:

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