Market Update for 4/28/2002

I didn’t think it would ever happen to me. But finally, I just plain ran out of things to say about the market. But in two weeks’ time, I’m recharged and ready to go. I will keep this Market Update coming every TWO weeks instead of each week. This should help us to maintain our long-term focus on the market (and help me to avoid writer’s block). Now don't say I didn't warn you. We’ve been talking about a final wash and rinse cycle in the market for some time now. Maybe this is it. We are only eleven days into the historical spring crash period and all the major market indexes have done just that, crashed! Positive economic reports last week and lingering earnings announcements could not entice investors back into the market. Fears of a double dip recession are rising despite the GDP (Gross Domestic Product) news and even the Pres. got into the act by warning that the current bounce may not continue. Trend lines, moving averages and technical price support levels all failed on Friday when a short covering rally, that we had seen so many times before, failed to appear at the close of trading. So much news, so little space. The GDP numbers led the economic hit parade on Friday with a huge 5.8% growth rate for the first quarter. What recession? This was the fastest rate of growth since 4Q-1999--but the fly in the ointment was inventory liquidation. The super strong GDP could pressure the FED to raise rates preemptively and much sooner than expected. Also, the slowing consumption numbers caused concern that the economy could quickly dip back into recession during the summer. Granted, both of those scenarios would not happen at the same time--but either one would have a negative impact on the markets. Consumers continued to drive the GDP numbers with retail purchases and new home buying. Businesses continued to cut spending but the pace of the decline is slowing. Defense was the strongest sector with a +19.6% increase. There is a “Catch 22” here which should be obvious to everyone. If businesses are continuing to cut spending, layoff workers and delay expansion plans, then unemployment will continue to rise and raises will be hard to come by. This will put the consumers on a budget before summer is over--and without the consumer to provide support, the house of cards will collapse. Consumer sentiment numbers, which fell from 95.7 in March to 93 in April, may already be the leading indicator for this problem. The expectation component fell to 89.1 but could have been influenced by the stock market. New home sales have now fallen for two months in a row, which could also indicate a slowing of consumer demand. Stalwarts like General Mills, GE and Merrill Lynch are being killed on negative news. Adding to those headliners are the me too companies like Tyco, JDSU and VRSN, which were crushed by news, warnings and SEC investigations. Apologies by company executives don't cut it when the legal enforcement agencies come calling. The apology was only the first step as the Merrill Lynch CEO found out on Friday. That just laid the groundwork for civil lawsuits and a possible $2 billion fine/reimbursement for recommending stocks to the public that they were trashing internally. Dynegy was hit with another -4.81 loss on accounting concerns. Does this brain damage ever end? Debt ratings are dropping faster than hail in Kansas with Tyco, Dynegy, GIS and Merrill Lynch getting the call on Friday. This is just the tip of the iceberg and as Moodys, Fitch and S&P catch up on their backlog it will clearly result in another downgrade wave. Companies with huge debt are seeing their shares drop with every passing day. After the Enron, Global Crossing and Tyco problems, stocks with high debt are being seen as possible targets of wrongdoing. With the debt game more closely resembling a shell game nobody wants to be the last one holding stock in a heavily leveraged company. What is an investor to do? Focus on the trend and don't fight the tape. I got several emails last week asking if XYZ stock was a good buy as these depressed levels. If you want to hold GE for the next 10-20 years then $31.50 may be a good price. If you only want to hold it for two weeks to two years then $31.50 may not be a good price. Why everybody wants to buy stocks on the way down is beyond me. Just because GE looks cheap at $31.50 does not mean it can't get cheaper. Remember CSCO at $45, $30, $25, $20, $15? It looked cheap at every price point but Friday's close at $13.93 was a new six-month low. Is it cheap enough yet? With its current P/E at 55.5, it’s probably not finished yet. In two months, you can bet it will be lower. In 20 years, you can almost guarantee it will be higher. Remember Lucent at $13? Let's try not to catch the proverbial falling knife and simply follow the trend instead. CAUTION: Depressing Paragraph Follows. Either Read Quickly or Skip to the Next Paragraph. The Dow closed at 9910, a level not seen since Feb-22nd and well below the critical 10,000 benchmark. It even closed below its 200-Day Moving Average of 9956. There is no joy in Mudville tonight. The problem only compounds as we move into the broader markets. The NASDAQ has broken through anything resembling a moving average long ago but the last ditch price support levels have finally collapsed as well. Once below 1700 the index picked up speed and appears earthbound at meteoric speed. There is price support at 1650 but without some good news soon that level will be road kill as well. The S&P-500 resembles the NASDAQ in its rate of descent. Price support at 1100 is history, support at 1080 is toast and the index is clinging by its fingernails to the February lows at 1075. Should 1075 fail we could only be a day away from the October price support level at 1050. Do we dare imagine a triple digit S&P 500? I got a good laugh all week long as TV commentators kept revising their "critical price support levels." Every day a critical support level was given for whatever index was being discussed. As each day passed those "critical" levels were broken along with their premise. Each day there was no mention of the prior day’s critical level as though by not mentioning it the viewers would forget that it was different. These TV experts, who are supposed to report the news not make it, seem fixated at trying to pick the bottom. I know the feeling well since the majority of email I get does not ask, "how far are we going to drop" but "when should we buy." The answer would be the same but the context of the questions prove that most investors are just that, investors, and not traders. Those TV commentators are selling to the vast majority of their audience, buyers not sellers. When the market feeds them day after day of losses the temptation is too great to try and be a hero by calling the bottom with a forecasted "support" level. The NASDAQ should find support in the 1645-1650 area, which is only 15 points or so away. The S&P 500 could find buyers in the 1060 level only 16 points away. The Dow should get a transfusion around 9750-9850. The Dow could also see a lift on Monday from an article in Barons this weekend. They are profiling Boeing as lean, mean and oversold. A $2 takeoff by Boeing won't help however if Microsoft continues to accelerate to the downside. Speaking of downside another Dow component, Intel, is only 36 cents away from breaking the to a new six month low. This happened even after Intel made bullish statements last week. Apparently investors were not impressed with their continued cautious outlook. On a side note, the Semiconductor Index (SOX) closed below its 200-Day Moving Average and under price support despite a large increase in the book-to-bill numbers this week. If semiconductors can't find support on good news then........(fill in the blank). Day-Traders will be watching the 500 level for a tradable bounce but will aggressively sell short a break under that level. While the oversold conditions may be pointing to a bounce soon it may not have legs and could only be what I call a bear trap rally. I would look at any bounce as a new opportunity to sell shares short and not the beginning of a new bull market. My entry points for going long are so far out of range that they are not relative to this discussion. It is far too early to revise them downward since a short covering rally could occur very quickly and then die just as quickly. My entry points for going short were Dow 10000/S&P 500 1725/NASDAQ 1100--all of which have been penetrated substantially. This means you should already be short stocks. I will use those same levels as exit points. Should an oversold bounce occur then I will exit those shorts at 10000/1725/1100 OR BEFORE! Keep those seatbelts fastened and steer in the direction of the skid! Mark Pivan