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MARKET > Commentary Sunday, May 06, 2001
by: S.P. Brown

Markets Survive And Then Thrive

A bear-market trap or the beginning of a bull-market? No one really knows. But for many traders, the month-long rally has been a welcomed respite from a year of decaying stock portfolios.

Since the market bottomed on April 4, the Nasdaq Composite Index (COMPX) has soared 35 percent, the Dow Jones Industrial Average (INDU) has surged 17 percent and the S&P 500 Index (SPX) has gained 15 percent. Not a bad little rally, if I do say so. (Of course, the COMPX was off 65 percent, the INDU was off 20 percent and the SPX was off 30 percent from their respective all-time highs, but who's counting?)

Further proof that the market is once again embracing the bull is trader and investor response to Friday's employment report, which was downright bearish to us folks who actually have to produce something in order to survive. According to the Labor Department, the U.S. economy lost more jobs in April than at any time over the past decade. Payrolls plunged 223,000 after declining 53,000 in March. Analysts had expected a jobless rate of 4.4 percent in April and an increase of 20,000 jobs.

Paradoxically, average hourly earnings rose a nickel to $14.22, a 0.4 percent gain. Analysts were expecting earnings to grow 0.3 percent.

Yes, the unexpectedly poor April employment report made the prospect of a recession even more likely this year, but no one seemed to care, at least not for very long. The INDU fell 123 points and the COMPX tanked 57 points in the first hour of trading, but that was just a case of neophyte jitters. Soon after, the market regained its footing and resumed its accession.

For the day, the COMPX climbed 45.33 points, or 2.11 percent, to 2,191.53 thanks to a strong outing by the Triplets. Microsoft (Nasdaq) added $2.22 to $70.75, its highest closing level since November 9, Cisco Systems (Nasdaq:CSCO) climbed $0.98 to $19.64 and Intel (Nasdaq:INTC) inched ahead $0.48 to $30.88. Since hitting their April 4 lows, all three are up more than 35 percent, which, not so coincidently, is why the COMPX is up just as much.

For the week, the COMPX increased its value by 2 percent, as it enjoyed its third consecutive weekly close above its 50-dma. Moreover, the index is now perched atop its 62 percent retracement from its 2001 high. At this point, I think it's safe to say that the COMPX has strong support at 2,000.

Unfortunately, it also has strong resistance overhead, particularly at 2,250, which coincides with the March and 50- percent retracment levels. Above that, additional resistance could be provided by the 38 percent retracement line near 2,400.

As for the Old Economy, the INDU rose 154.59 points, or 1.43 percent, to close the week at 10,951.24. The action was decidedly bullish, as 25 of the average's 30 components finished the day in the black. INDU frontrunners included American Express (NYSE:AMEX), General Electric (NYSE:GE), Honeywell (NYSE:HON), Alcoa (NYSE:AA) and J.P. Morgan Chase (NYSE:JPM).

I would be remiss if I didn't mention long-time Splittrader favorite Philip Morris (NYSE:MO), which also closed Friday in the black to hit a new 52-week high. The tobacco king is fast approaching its all-time high of $59.50 set back in November 1998. At the beginning of the year, I said that I seriously doubted that Philip Morris would repeat last year's feat of being the INDU's best performer. The way Big MO has been performing lately, though, I might have to eat my words.

Thanks to Philip Morris et al. the INDU is once again challenging resistance at 11,000, which I think it could breach this week since it breached resistance at 10,900 with relative ease.

As for the broader market, the SPX gained 18.03 points, or 1.44 percent, to close at 1,266.61, putting the index above its 100- dma for the first time since mid-September.

All in all, the markets are looking bullish technically, which might be confusing to a few tyro traders in light of Friday's weak unemployment report. Keep in mind that most economic reports, like the unemployment report, are lagging indicators, which means they do a poor job of foreshadowing the economy. In fact, the best leading indicator is the stock market, which is definitely not foreshadowing a recession. Following the last recession in 1991, the jobless rate did not peak until June 1992, over a year after the recession ended. In the meantime, the SPX gained nearly 10 percent and the COMPX gained soared over 20 percent.

The point is that a recession is by no means a foregone conclusion, despite the nearly decade-long expansion. If the Federal Reserve continues to loosen the purse strings, which most traders believe it will do, it's entirely possible we could forego a recession altogether. To that end, the fed funds futures rate is priced expecting another 50 basis point cut at the next FOMC meeting on May 15.

What's more, the other significant capital market barometer, the Treasury market, is also priced for recovery (or at least for inflation, which often accompanies an expanding economy). On Friday the 2-year note was the day's biggest gainer in the fixed- income arena, gaining 4/32 to yield 4.14 percent. Meanwhile, the 10-year Treasury note rose 2/32 to yield 5.21 percent while the 30-year government bond shed 11/32 to yield 5.66 percent. Taken in aggregate, the Treasury instruments form a decidedly bullish yield curve.

Of course, how this week pans out will depend on the week's economic and earnings reports.

On Monday U.S. consumer credit for March is slated for release. Consumer credit is expected to have contracted to $9.8 billion for the month, off from $13.5 billion in February.

On Tuesday non-farm productivity is expected to have risen 1.1 percent during the quarter, off from its prior increase of 2.2 percent. Unit labor costs are expected to hold steady at 4.3 percent in their first quarter estimate, unchanged from their prior showing. As long as productivity keeps increasing, wage inflation won't be a problem.

Ending this week's economic news will be the Producer Price Index (PPI), core PPI (PPI sans food and energy) and the University of Michigan's Confidence Index. Market consensus is calling for PPI to have risen 0.3 percent in April, up sharply from a 0.1 decline in March. Core PPI is expected to have increased 0.1 percent for the month, unchanged from its March showing. Meanwhile, Michigan's Confidence Index - a gauge of consumer sentiment on the economy and personal finances - is expected to post an index reading of 88.5 in its first estimate for this month, which is little changed from its final April reading of 88.4.

As for earnings, technology again takes center stage, with Cisco Systems as its star. On Tuesday the Internet router king is expected to post earnings of $0.02 a share on revenue of $4.69 billion, according to the consensus estimate compiled by First Call. During the same quarter last year, Cisco reported earnings of $0.14 a share on revenue of $4.92 billion. At that time Cisco was priced to out performer the SPX for the next nine years.

There's a lesson to be learned here, folks. When a company has nothing but good news priced into its stock (meaning it's usually sporting a triple-digit P/E ratio), it's time to sell.

As for trading this week, Cisco will probably set the pace in the early going. But since no one is expecting much out of the company, any excessively bad or good news will likely have a fleeting impact on trader psyche.

The fact is, sentiment is once again bullish, at least according to money flows. Trim Tabs estimated that all equity funds got a $14.9 billion inflow in the week ended May 2, compared with inflows of $100 million during the prior week. Don't be surprised if the inflow figure swells over the subsequent weeks. There is nearly $2 trillion stashed in money market funds that's waiting to be put to work. Moreover, pension and mutual funds are sitting on historically high levels cash.

Finally, according to the Stock Trader's Almanac, the first two weeks of May often produce the biggest gains in the late- spring/early-summer trading season, which means if past is indeed prologue, we could be looking at INDU 11,000 and COMPX 2,300 before the week is through.

S.P. Brown


Copyright 2001

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