Market Update for 3/10/2002

A Stellar Week! How can you complain about a week that produced strong gains across all the major indexes? It would be hard to find anything to gripe about unless you feel the bullishness is becoming excessive. The NASDAQ was the star of the show and gained +7% for the week but there were no slouches. The Dow has now posted gains for four weeks in a row totaling +828 points. Everything is coming up green but there may be something wrong with this picture. Worries impacting the market and keeping it from even higher levels continue to be the accounting concerns. GE was the latest victim. GE was unable to break through price resistance at $42 for the last two days due to concerns that their annual report filed on Friday shows some funny numbers (or excessive off sheet financing). The stock dropped -$1.25 at 2:30 when the report was made public but there appeared to be no smoking gun. The stock rebounded slightly but it will probably be Monday before the real impact is known. The report contained 30% more financial info which will take some time for analysts to sift through. IBM also was still feeling some selling pressure ahead of their SEC filing on Monday. The stock jumped nearly +4 intraday after the positive jobs report but gave back all but $1.38 as investors continued to be concerned about possible accounting surprises. The big loser of the week was Biogen, which dropped -4.75 on Friday alone on news that a competitor (SRA) received permission to market their MS drug in America. Serono, has the most market share outside the U.S. with a 38% share according to SRA. BGEN said it would review its 2003 earnings outlook in light of the new developments but after the Sepracor disaster on Thursday, they will probably be very careful how they word any new financial guidance. By far the most positive news for last week was the February Jobs Report. Instead of flat to mildly negative the report showed an increase of 66,000 jobs for February. The unemployment fell to 5.5% instead of rising as expected. Will economic wonders never cease! Do you suppose Mr. Greenspan had prior knowledge of this data before he was openly bullish in his testimony last week? I would not bet against it. This data supplied a concrete link between the positive manufacturing reports of the last two weeks and reality. Consumers, which have held up the economy even after the September attack, could become even bigger spenders if the job picture is improving. The positive data again caused a huge sell off in bonds and a skyrocketing of bond yields. This bond selling is very bullish for stocks but nothing comes without a price. The rapidly rising yields will put an end to the low mortgage rates and could clamp a lid on the booming housing market. Greenspan was so bullish (for him anyway) in his testimony last week that analysts are now worried about what will happen at the next FOMC (Fed) meeting. Considering it is coming soon (Mar-19th) this will become even a bigger concern next week. Nobody expects the Fed to raise rates on the 19th but we could easily see a change in the bias to neutral or even to tightening. How quickly the party could be over. With the stock market rebound in the U.S. being mirrored globally the Fed must be very careful about shooting themselves in the foot. If the global economy can be allowed to improve as we accelerate then future rate hikes will be less likely to put us back into a recession. It is a thin line and hopefully Greenspan can still walk the walk. All this bullish news is producing an environment where mutual funds are being scared back into the market. Most mutual fund managers would rather have waited several more weeks to look for an actual improvement in corporate earnings in the April reporting season but they are now worried that the train is already pulling away from the station. Many are looking at the +828 Dow points and hoping for another pullback to make their entry. With every positive close those hopes are becoming slimmer. Every broken price resistance level is creating an attitude that maybe the rally is for real and there will be no repeat of history. While the Dow led the charge initially the rest of the troops are gaining speed. The market breadth is improving daily and volume remains strong. On Friday for instance the new high/lows were strongly positive with the NYSE posting 216 new highs to 12 new lows. The NASDAQ posted 159 to 29. This strong imbalance is very bullish for the broader market. Advance/declines are also continuing to be positive with the NASDAQ approaching 2:1 on Friday. There were many floor traders commenting this week that it felt like the spring of 1999 all over again. We all know that 1999 had some serious advances but it also had several serious bouts of profit taking that lasted between 30-60 days each. The gain for the year for the Dow was +2316 points. Much of that gain was between March 1st, (Dow 9307) and May-14th (Dow 11106) when the historical spring sell off began. Because of the continued failure of the Dow to close over 10600 and the strong price resistance for the S&P at 1175 the commercial traders are increasing their short positions every time the markets reach those levels. They are shorting the rallies just like they did so successfully over the last year. Unfortunately, or fortunately for the bulls, they are getting run over on a daily basis. While the commercial short interest is growing the markets are continuing to rise. Somebody has got to be getting nervous over this. The positive jobs data and the strong market response on Friday will undoubtedly draw more cash into equities next week. Eventually there could be another short squeeze like we had a week ago and that squeeze could propel us past the current price ceilings. I especially liked the S&P and NASDAQ on Friday. The S&P edged a little closer to 1175 and held its ground. The NASDAQ posted a much stronger gain than the Dow (%) based on the affirmed guidance from INTC and SUNW. If the trend continues next week we should definitely plan on going for the ride. Just remember that after every big gain there is a retracement/consolidation period. I will begin to buy the dips since it is apparent that the mutual funds are using this tactic as well. Everyone with a charting system can see that stocks are very overbought but they can get more overbought before the trend fails. My decision for next week is to establish long positions if the market remains above Dow 10450, NASDAQ 1865 and 1145 for the S&P 500. I will close long positions should those levels fail and look to buy any REBOUND from any significant dip below them. Should the Dow fail and the others hold their ground I will hold long positions. The NASDAQ faces strong price resistance at 1950 and the S&P at 1175. Both indexes could test those levels on Monday. We will be optimistic but we will be cautious. Mark Pivan