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4/1/02 Stock Split Report Market Summary
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MARKET ALERT SERVICE

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SUMMARY:
- Slow start to new quarter, but reversal from lows adds some excitement.
- Nasdaq leads for second straight session, but no volume.
- Economic news continues to outperform expectations.
- Semiconductor revenue losses getting better (a.k.a., looking on the bright side).
- Team Trades

New quarter, but market cannot find a leader.

Turn on the tube this morning and it looks like more of the same old same old. Red arrows for the futures, pointing to the turmoil in the Middle East over the weekend and the implications on confidence, oil prices, and just distractions from focusing on the economic recovery in the U.S. and the fledgling looks at recovery around the world. Iraq says oil should be used as a weapon; prices climbed of course as airlines, chemical companies, and most energy intensive industries suffered.

On top of that analysts used Monday to air their general grievances with the market. Merrill Lynch pulled the plug on retailers, downgrading 14 names it felt were a bit overvalued, saying the big run was over. It hardly received any attention, but the report did say that the retailers should be higher by yearend. The reason Merrill does not like retailers now: April is retail's worst month of the year. WMT, TGT, FD and others were the named targets. USB Warburg jumped in with its own WMT cut. The analysts had some vindication: JCP warned that March sales were below plan.

Nasdaq and semiconductors lead intraday reversal, but no volume.

For the third time in seven sessions the Nasdaq turned out to be the leader. A trend developing? We would not complain. All indexes were down hard early, but an improved (hard to say good) semiconductor industry report helped pump life once again into this key tech sector. That helped set the stage for a rally that would not give up for the rest of the session.

It was good recovery action after what looked to be a grim morning with the S&P undercutting the 200 day MVA and the Dow plowing through the January high on an intraday basis. The Dow held at the 50 day MVA, however, and the S&P turned up at that point as well.

Volume was not there. After a very dull pre-holiday week, volume did not come back to the market. That was good and bad. The early selling did not spiral out of control, preventing a meltdown. The rally back up, however, did not pull in any more volume to the upside. The action was lighter than Thursday, a pre-holiday session, though that day was quarter end. No institutions were in on the action in a big way; there was some selective buying, but not across the board. Indeed, despite the intraday turn back up, the A/D line held negative all session. Instead of providing answers, the start of the new quarter brought comments of 'summer doldrums'.

THE ECONOMY

ISM (national manufacturing index) rallies again.
55.6 in March versus 54.7 in February and 54.8 consensus. The Chicago PMI was an accurate gauge once again as purchasing manager confidence rose for a third consecutive month, beating expectations. This has been the pattern for most of the recovery with expectations lower than actual numbers. We saw this as the economy turned lower: expectations would not take reality into consideration, i.e., that the economy was starting to fall. Expectations continually overshot actual results as economists felt there was just no way the 'white hot' economy could falter. Signs of erosion were called 'aberrations.'

The same is happening now, just on the other end of the spectrum. After economists finally changed their wardrobe and turned negative, they are having a hard time getting with the next fashion wave. They are falling into two camps: still negative and very positive. We are kind of in the middle. We saw a recovery starting in late summer 2001; with the upset of 9-11 it stalled a bit, but it is well on its way. We just don't think it can be a barn burner, and the market is more or less showing this with its two steps forward, 1.5 steps back action.

The numbers: 55.6 overall. New orders were huge at 65.3, up from 62.9 in February. There has not been a new orders reading over 65 since 1983. There is a lot of inventory building ongoing. Again, that does not automatically translate to great numbers on the bottom line across the economy. There has to be buyers for that inventory after it starts hitting the street. Manufacturing employment was up to 47 from 43; a solid rise, but still shows job loss. Basically, manufacturing is losing jobs at a slower pace. Prices paid spiked from 41 to 51. A 10 point jump is tossing some cold water on the three Fed statements last week that the Fed may not raise rates so fast. Prices paid by manufacturers can translate into higher consumer prices. CAN. Manufacturer prices all through the early 1990's never made it to the consumer side. Great for inflation and the consumer, bad for corporate profits as that scenario keeps pricing power weak.

February construction spending +1.1%.
Also beating expectations of +0.6%, February construction looked good. However, we see the overly aggressive seasonal adjustments made early in the year at work as the January number, originally at +1.5% was revised lower to a +0.6%. That always acts to mitigate the currently reported numbers as far as the market is concerned: if the prior numbers were that far off, are the current numbers that awry also? Even if they are slashed in half, however, February's numbers would still meet the expectations. A little positive lining, but the market did not see it that way.

SIA (Semiconductor Industry Association) reports year over year improvement.
Semiconductor revenues fell 27% year over year. Not a pretty picture, but as with most numbers, context means everything. January year over year numbers were down 40%. Thus, the 27% drop looks a bit better. The biggest winners were in some communications chips designed for DVD players and the like. That gave PMCS and AMCC just a faint pulse today. Once upon a time these stocks would have raced ahead on the news. They are truly beaten down former leaders.

Oil hits a 6-month high.

Middle East violence and more sane, well-reasoned comments from Saddam Hussein ("Use oil as a weapon") sent oil, gasoline, heating oil, and pretty much every petroleum distillate higher. That of course hurt stocks using energy: tires, airlines, chemicals, trucking. These had been benefiting from an improved economy AND low energy prices. Oil prices were creeping higher, but the increased tension in the oil producing states cracked the lid open a bit wider.

This is not the posturing we saw back in 2000; this is some real pressure on oil that will cool a bit as the crisis mentality backs off, but for now oil has two pressures: conflict and improving economics. OPEC was not hesitant to talk about production cuts when the world economies were tumbling into recession. Now it is emboldened some by signs of an improving economy. That improvement, however, is in part based on reasonable oil prices. Those prices allow companies to produce with low costs (the ISM prices paid spiked on the oil price increases) AND provide consumers with more disposable income. Increasing prices acts as a tax on the consumer and the manufacturer, and as we know, taxes inhibit production and economic output. It is kind of like the circle of life on the Lion King. Not really, but it is circular.

THE MARKET

The broken record continued today: weak volume, no real buying, no real selling, unable to break resistance, blah, blah, blah. The Nasdaq, particularly the Nasdaq 100, drew the short straw and had to lead the rally attempt. Semiconductors led the percentage gain, but the big techs were in second even with their weak patterns. The overall Nasdaq was third. The SOX is the only one that made a definitive break of sorts, clearing 600. As for the other indexes, the large caps, small caps, and mid caps all reversed from deep session lows and rallied back to flat. For its part, the Dow had similar action, reversing off of some support at 10,250 (50 day MVA). Reversals are good. There was just no power behind this one with lower volume and weak breadth. We still have no definitive read on where the big money wants to take the market.

Put/Call Ratio (CBOE): 0.73; -0.06. Small drop in put activity on the close after being somewhat active earlier in the session. When the indexes turned up off of their lows, the put activity dropped. Still comfortably in the high end of the range after it readily spiked higher Thursday, holding onto the high end even on a recovery in techs.

Nasdaq

While semiconductors as usual boasted the largest tech gain, big cap techs, poor patterns and all, provided a rare leadership role with a 1.8% gain. Overall volume was not there, but there were strong issues, e.g., ZRAN, hitting our target on strong volume. As noted in the alerts, we took some money off the table, but let the remainder run on the good volume. We took more than a few issues in techs that were making the breaks. Now they need institutions to come in and buy with more volume.

Stats: +17.27 (+0.9%) to close at 1862.62.
Volume: 1.551 billion (-6.5%). The early selling was not on heavy volume nor was the later buying. Volume did increase slightly as the afternoon buying came in (the Nasdaq was not on track to even hit 1.5 billion while the early selling was underway). The institutions did not come in even with the new quarter. Again, it could have been worse if they had been in the game and selling on the early downdraft.

Up volume: 1.007 billion (-92 million)
Down volume: 520 million (+4 million)

A/D and Hi/Lo: Decliners took back the lead at 1.24 to 1 (advancers led 1.31 to 1 Thursday). No leadership.

New highs: 158 (-52)
New lows: 47 (+4)

The Chart: http://www.investmenthouse.com/cd/$compq.html

No breakout today by the Nasdaq, but there were some positive developments though they are measured in inches these days (so it seems). Namely the index sold down again, but did not breach 1800, a level it has held above since the March high. On the upside it did close back over modest resistance at 1850 and the simple and exponential 50 day MVA (1852.08; 1859.72). The simple 50 day was one of the MVA's that stalled the attempts to move higher after the March high. Again, it was not a major move, but it did show promise with the test lower and move through some potential resistance levels. It will have to get some volume, however, for its date with the 200 day MVA (1878.92) and the November trading range that runs from 1875 to 1941 where the March high lurks.

Dow/NYSE

Tested the January top on the session low and managed a substantial rebound at least clean the pattern up. It remains locked in the lower half of the March trading range for now.

Stats: -41.24 (-0.4%) to close at 10,362.70.
NYSE Volume: 1.044 billion (-9.6%). Volume shrank on the start of the quarter to one of the lowest sessions for the year. Okay given the selling, but it cannot make any serious headway without buy side volume with conviction. On the other hand, it is not selling off hard either. Hedge funds don't necessarily like this action.

Up volume: 438 million (-223 million)
Down volume: 531 million (+94 million). Down volume creeping higher the past two sessions, but not running away.

A/D and Hi/Lo: NYSE decliners took the lead at 1.17 to 1 (advancers led 1.23 to 1 Thursday and 2.04 to 1 Wednesday).

New highs: 138 (-62)
New lows: 36 (+3)

The Chart: http://www.investmenthouse.com/cd/$indu.html

Was not pretty early on, dropping to 10,263.68, undercutting the intraday January high at 10,300, but then holding above the January closing high (10,259.74). That point is slightly above the exponential 50 day MVA (10,227.41) as well, providing some extra support for the rally back. The March trading range has been divided into two portions: 10,400 to 10,679, and 10,400 to 10,250. It continues to hold above the breakout over the January high on solid price/volume action; that remains its strength and keeps alive an upside breakout scenario as institutions are not dumping shares. Today's action did not wipe away the slightly negative look from last week, however, and we will still have to see where the volume takes the index. Oil increases have an impact on some of the old economy stocks where energy is a significant cost of doing business either in manufacturing or in the use of the products they produce.

S&P 500:

Very similar action to the other big three indexes and the S&P 400 and 600 as well: a fade early toward support levels and then a rally back to finish flat. The big caps tested support at 1125 (price consolidations and the simple 50 day MVA at 1127.84) on the intraday low and then rallied almost 14 points to close flat. The move broke below the 200 day MVA (1140.93) and then rallied back over it. It has not take out the next resistance level at 1150, the stepping stone to the major resistance at 1175, the point that marks the two double tops from late 2001 and then March 2002. We can put all other upside levels off to the side until the S&P can take out these levels, and do it on above average volume. Much as with the Dow, it has a bifurcated consolidation range right now, with the current range from 1125 to 1150, and the upper range at 1150 to 1175. Price/volume action still shows no real share dumping, but the retailers are a concern. They have been part of the lead and could face some selling after the downgrades (WMT broke its 50 day MVA on massive volume). The big question is whether they can recover, OR if some new sector can pick up whatever money comes out of retailers.

Stats: -0.85 (-0.1%) to close at 1146.54.
Volume: NYSE volume edged lower again to 1.044 billion shares (-9.6%). There was no dumping on the selling, but no real accumulation on the upside later in the session.

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

Before the open some important retailers report earnings: BBY and CC. These electronics retailers will give a pretty good pulse of the consumer appetite for a key consumer sector. They sold a lot of DVD players, HD televisions, and home theater systems in Q4, and it will important to see how the sales carried over to the traditionally slower Q1. These reports could be some important further nails in the retail coffin, or it could provide some life after many were roughed up today. Remember, however, Merrill was talking about April in Q2 being weak, not Q1. Thus what BBY says about Q2 sales will be significant but may not have enough data to give investors much comfort.

THC (hospitals) also reports before the open. It is a key leader in the sector, trading to an all-time today on the close. Half an hour into Tuesday February factory orders are set for release. As with the ISM, they are anticipated to be lower than January (> 50% less). An upside surprise might not prompt a big rally, but it could mitigate fears on escalating overseas violence that is acting as a catalyst for higher energy prices and a general nervous feeling in the market.

Today did not bring in the volume that will help define where the market goes after the month-long consolidation on very low volume. As we said with the discussion of the Dow over the weekend, it could take a few days to get the real flow going. Many schools tried something new this year by giving students the Monday following Easter off. It might be that the volume kicks in tomorrow, but we will have to see.

In the interim, we were not really shy about taking positions Thursday or today as we saw many semiconductors making the moves we wanted to see, some on strong volume and some on so-so volume. We also had great moves on defense (RTN, DRS, EASI), auto parts, storage (QLGC), videos - - it was pretty broad when you look at stocks in good patterns. As noted, even as overall volume was tepid, several of these made their moves on decisively higher volume. Always a good sign as that shows you are on the right issues. Again, the positioning was good for an increase in buying volume this week. Now we see if the buying shows up for the market as a whole.

End part 1 of 2

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