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MARKET > Commentary Sunday, April 22, 2001
by: S.P. Brown
Editor

Time Out

And who wouldn't need one after running like the equity markets have over the past 10 days? The Nasdaq, in particular, has been running like a doped-up East German marathoner (No offense to readers of German decent; I'm only referring to these monstrosities the former East Germany used to field in the Olympics during the 1970s). In fact, the Nasdaq Composite Index (COMPX) has run so far as to add 32 percent to its value since hitting its 52-week low of 1,620 back on April 4th, marking its best 10-day return in its 30-year history. Moreover, a third of these gains came after the Fed Reserve's surprise fed funds rate cut on Wednesday.

So, a time out seemed in order, not that the COMPX necessarily stopped for much of one. On Friday, the go-go index closed down a mere 18.73 points, or 0.86 percent, to 2,163.41. The brakes were applied by Sun Microsystems (Nasdaq:SUNW) and Ericsson (ERICY). Both companies reported worse-than-expected first quarter earnings late Thursday.

The Old Economy issues also opted for a sabbatical on Friday. The Dow Jones Industrial Average (INDU) dropped 113.96 points, or 1.06 percent, to 10,579.85. Much of the INDU's losses were attributable to Merck (NYSE:MRK), which tanked $4.66 to $73.61 after stating that it sees its second, third and fourth quarter growth rates below that of its first quarter rate of 13 percent.

Nevertheless, despite the last-day drop in many of its components, the blue-chip average closed the week with a 4.5 percent gain, driving its month-to-date return to 7 percent.

As for the broader market, the S&P 500 Index (SPX) slipped 10.71 points, or 0.85 percent, to 1,242.98. The SPX closed the week with a 5 percent gain, with its month-to-date return moving to 7.2 percent. With last week's advance, the SPX has recovered to a point where it is off 18.6 percent from its March 2000 peak of 1,527, which puts it below the 20 percent threshold many market watchers define as a bear market.

Much of last week's gains could be attributed to the Fed, but not all. The earnings picture also appears to be improving, particularly in the forlorn tech issues. Microsoft (Nasdaq:MSFT) and Apple Computer (AAPL) both beat quarterly earnings estimates while IBM (NSYE:IBM) matched estimates on higher than expected revenues. For the week, Microsoft gained $8.00, Apple added $3.24 and IBM surged $18.40.

This month's renaissance in equities has revived the split scene as well. Last week we announced no fewer than eight stock splits, which is something we haven't done in nearly two months. What's more, we anticipate another eight stocks to split this week (to see our complete list click on Expected Splits <http://www.splittrader.com/indexes/ExpectedSplits.asp>).

The revival of stocks in general, and splits in particular, has kept our Current Play list moving forward. We posted strong gains last week in Taro Pharmaceuticals (Nasdaq:TARO), Omnicom (NYSE:OMC) and Union Pacific (NYSE:UNP) (for a complete listing of our plays, click on Current Plays <http://www.splittrader.com/indexes/currentplays.asp>).

Equities haven't been the only capital market beneficiaries of rate cuts and earnings improvements. Treasuries have been advancing, too. More importantly, though, the yield curve has been reforming to a steeper (meaning more normal) shape. To that end, the 10-year Treasury note closed Friday up 5/32 to yield 5.28 percent while the 30-year government bond shed 2/32 to yield 5.785 percent.

As for economic news on Friday, there was little worth noting; however, that will change starting on Tuesday when the Consumer Confidence Index will be reported. The index, which measures consumer sentiment for the economy and personal finances over the next three-month period, is expected to fall to a reading of 113, off from 117 in March.

On Wednesday, we get durable goods orders and new and existing home sales data. Durable goods orders for March are expected to have risen 0.5 percent in March, up sharply from a 0.4 percent decrease in the previous month. New home sales are expected to have increased at a 910,000 annual pace in March, off slightly from February's 911,000 annual pace. Existing home sales are predicted to have increased at a 5.12 million annual pace in March, off from 5.18 million in February.

Friday closes out the week with the Gross Domestic Product (GDP) and the Michigan Confidence Index. GDP is expected to have risen 0.9 percent in its preliminary estimate for the first quarter, off slightly from its prior 1 percent showing. The U. of Michigan Confidence index (another gage of consumer sentiment) is expected to have risen slightly to 88.3 in its final April posting, up from its prior estimate of 87.8.

On the earnings front, the market will once again get hit with a slew of reports. Keep an eye on JDS Uniphase (Nasdaq:JDSU), Corning (NYSE:GLW), Compaq (NYSE:CPQ), Qualcomm (Nasdaq:QCOM), American Express (NYSE:AXP) and Chevron (NYSE:CHV).

Dot-coms will also be out in force trying to convince investors that they're in there for the long haul. Amazon.com (Nasdaq:AMZN), Ask Jeeves (Nasdaq:ASKJ), Beyond.com (Nasdaq:BYND) and Webvan (Nasdaq:WBVN) will all post first-quarter results this week. No one in this quartet is expected to show a profit, but they all need to show an improvement in their loss rate.

Speaking of loss rates, first-quarter profits for S&P 500 members have fallen 7.6 percent, according to First Call, with 47 percent of its companies reporting. For 2001, earnings are expected to fall 2.3 percent, down from the 9.2 percent gain analysts forecast at the beginning of the year and the 2 percent decline projected yesterday.

That's not to say, though, there's no chance for improvement, at least in the big-cap issues. Already 19 out of the 30 Dow components have posted quarterly reports, with all but two beating or matching forecasts.

Obviously, earnings will be the driving force behind the market this week (I think it's save to say we wouldn't see another interest rate cut). Admittedly, it's going to take some impressive numbers to incite the market into duplicating last week's impressive performance. One constructive sign is the fact that all three major averages closed above their respective 50- day moving averages.

Still, the technicals are overly bullish at this point. In fact, I think this week may favor the short sellers. According to the charts, the COMPX could run into serious resistance in the 2,250 to 2,300 range, which is only 111 points away. On the downside, the index doesn't find decent support until 1,850, though it could find mild support at its 50-dma of 2,077. Unless the COMPX closes above 2,300 Monday or Tuesday, I think it will likely finish flat to down for the week.

As for the Old Economy, I think there is a good chance that it, too, will likely trade the week flat to down, particularly in light of the INDU's MACD rolling negative on Friday. However, unlike the COMPX, I think the downside is more limited on the INDU. I see a first level of support being provided from the April trendline at 10,400, with stronger support being provided by the 10,300 level. In other words, I think trading on the INDU could be a wash.

With that said, I think it will be prudent to maintain a defensive posture this week. I don't think it safe to go hog- wild on the tech issues quite yet. I think they are ripe for more profit taking. A 32 percent move in any index over a 10-day trading span is a move that's gone too far too fast.

Finally, I'll again remind you to keep those stop losses tight. Don't let the gains you achieved last week get away from you. If you follow our Current Play regularly, you'll notice we religiously move up our stops to help lock in profits. At this point, the economy still isn't sufficiently strong to support a long-term up trend. Volatility will likely be the norm until the second half of 2001, so trade accordingly.

S.P. Brown
Editor
www.Splittrader.com

 


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