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Begin Part 2 of 2

THE MARKET

Will this turn of events be the catalyst needed to turn the indexes up from the test of the lows and start the recovery? That remains to be seen, but from our perspective this is pretty much the way things have always worked in history: rate hikes to avoid inflation that is not there, economic slowdown as a result, stocks sell off ahead of it, Fed realizes too late that it has once again shot the golden goose, cuts rates to revive it, economy continues to nose down anyway under the momentum, pessimism runs rampant, economy starts to improve, pessimism runs rampant, companies start to see things improve, economic news continues to improve, stocks price in better economic times.

We firmly believe that we are seeing it again right now despite ALL of those who say things are different this time. P/E ratios are higher, and that is often cited by critics of a turn around. P/E ratios are higher than in previous recoveries because profit outlooks and profits have fallen even after stocks sold off 90% in many cases. Stock prices are based on future expectations; if the economy is turning up, future earnings expectations rise and P/E's automatically drop. It is not different just as the new economy was no different from the old economy; it was more efficient, but it fell just as hard when the Fed slowed investment and dried up the supply side. No economy can withstand a determined Fed. Similarly, it is hard for an economy to stay down when it has massive liquidity being pumped in and a tax cut ready to hit the streets. Understand this: 'things' are ALWAYS different because the nature of the economy is always different. The underlying currents and relations, however, are NOT different.

The ORCL, MSFT, YHOO, and MOT news indicate that the tide is turning based on a historical analysis. Economic news continues to improve despite all of the analysts saying it won't improve; there is a disconnect there or at least denial. We are just going to continue looking at the numbers and ignoring the noise out there.

Overall market stats:

VIX: 26.98; +0.45. Hit 28.21 on its high before the S&P started to recover. That made it much more interesting, but still not painfully high.

VXN: 57.20; +1.00. Hit 60.36 on the high, and that too made this interesting. It is still not showing a lot of fear, but then again, are we in a time when we would have a lot of fear? It was starting to develop with the test of the lows, but that may be over now.

Put/Call ratio (CBOE): 0.87; -0.07. A bit of a drop in the put activity from Tuesday's selling, something that can be expected with a gain as we saw today. Still in the high range, and the index was in the mid-nineties twice this week.

NASDAQ:

Stats: Up 9.25 points (+0.5%) to close at 1972.04.
Volume: 1.771 billion shares (+6.5%). The index shrugged off bad news and fought back; that makes the final volume numbers a bit deceiving with down volume leading at 898 million versus 860 million upside shares. As has happened of late, some distribution on lighter volume followed by a higher volume gain.
A/D and Hi/Lo: Declining issues still led but at 1.4 to 1 versus 1.72 to 1 Tuesday. New highs fell to 59 (-24) as new lows jumped to 143 (+28).

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

The index had some bad news, tapped a low at 1935, and then rallied to the close. Overcoming bad news is positive as compared to the bearish action on Tuesday. Bad one day, good the other. What to do? Well, the markets are looking for a point to turn. The economic news is improving, and the market is waiting for some guidance from earnings that companies see things are better as well. That is confirmation of the economic numbers investors are too scared to accept at face value. It is close to starting in our view, and this type of action is consistent with our theory of the market. The Nasdaq held at no real point of support and then reversed for almost 35 points. A positive move, but there is resistance at 2000. As with support levels, however, the smaller resistance levels will be broken if investors get into the mindset of accumulation based on a belief that now the future is better. Then we just have to worry about points such as 2100 and 2250.

Dow/NYSE: The Dow had to reach down itself before a nice recovery and close right above support. It did it on a nice shot of volume to boot.

Stats: Up 65.38 points (+0.6%) to close at 10,241.02.
NYSE Volume: 1.378 billion shares (+10.5%). As with the Nasdaq, down volume led up volume 826 million to 539 million shares. Selling was the early, and it took some mid-day buying to turn it back positive. Again, some distribution followed by gains on stronger, above average volume. The buying, when it comes, is stronger.
A/D and Hi/Lo: NYSE decliners still led at 1.3 to 1, down from Tuesday's 1.53 to 1. New highs fell to 78 (-8) as new lows rose to 111 (+41).

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

The Dow tapped 10,120.89 on the low and reversed from there. The session was not simply down then up. There was a struggle as the bulls were ahead, gave in to the bears, and then managed to run to the high. The bears took another shot, however, before the index moved up 50 points in the last hour.

The index is now right at 10,250, a level that represents some resistance as it tried to hold there as support on the way down. Again, however, if the investor psychology is now changing based on the economic and recent company news (MSFT, MOT, YHOO), then this will be no impediment. We would then have to focus on the 10,600 level near the 200 day MVA. A very interesting day; kind of a reversal in disguise that may get a big boost from MSFT and INTC tomorrow.

S&P 500: The big cap index showed the most interesting pattern of the day, reaching all the way down to 1168.46 on the low before deciding it was time to buy. It rallied hard, but never did regain the session high (1184.93) before it topped and had to recover 6 points in the last hour. That kept the index in negative territory; we like to see reversal days end positive, but that is not always the case. In addition, we had the Dow and Nasdaq close the session positive on stronger volume. Indeed, the solid increase in NYSE volume lends credence to the reversal. The index will be helped by MSFT, MOT, and fellow big caps that will be on the move tomorrow based on the earnings news after hours. 1200 still represents some resistance that must be topped, but that just gets the index to the real overhead. Nonetheless, looking at past bear market patterns, they sell off, rally, test the bottom, reverse from that test, and then make their way higher. With the economic news we see and now the company news we are getting, this only affirms our belief.

Stats: Down 1.34 points (-0.1%) to close at 1972.04.
Volume: NYSE volume jumped to 1.378 billion shares (+10.5%).

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

TOMORROW

Jobless claims are out before the open. We expect them to be lower, but again, this is a lagging indicator; companies need to see business improving before they start hiring. We see improvement in the form of MSFT, YHOO, and MOT. There will be more to come in our estimation. Yes there will be bad earnings, but again, the focus is not on the history of Q2, but what companies are saying about the future. MOT sees its handset business bottoming and MSFT sees great things ahead. YHOO has affirmed its earnings and revenues for the year. We are going to start getting back to the future pretty quick.

Futures are up huge tonight on the positive news. We will see a gap higher in the morning. The bears will try to enter at some point. Be patient. Let the stocks hit the buy point on breakouts. On momentum plays, let the initial surge pass, get tested, and then move in. The Market Alerts will be popping tomorrow; we are going to try and let that initial surge pass, but there will be some plays that will be breaking out and ready to go. That is okay with us.

What we are going to do is stick for the most part with stocks in good patterns as those will provide continued good action. Tomorrow there will be a rush to technology; does that mean the sector has bottomed and that we should just run in and buy any tech? No. Stocks, in bad patterns will still have problems at each pullback. We have many solid techs in good patterns that are on the report and that are being put on the report tonight. Those are going to be our focus as they have solid accumulation and can run far for us. In addition, the stocks that lead economic recoveries will continue to forge ahead even as the tech mania fades as the news becomes old. They may suffer a bit tomorrow with a rush to technology stocks, but they lead economic recoveries so we won't abandon them outright. It is a matter of investing in them while they continue to move up while also picking up the other sectors that start to perform well.

Support and Resistance Levels

Nasdaq: Closed at 1972.04.
Resistance: 1990 to 2000. 2160 to 2200. Then 2250.
Support: 1935 was the low today, but no real support there. Again, nothing clear at this point. The low is 1619.58.

S&P 500: Closed at 1180.18.
Resistance: 1200. Then 1240 to 1250.
Support: 1150 has tried to hold in the past, but as with the Nasdaq, there is no clear cut level. The low is 1081.19.

Dow: Closed at 10,241.02.
Resistance: 10,250. Then 10,400. 10,583.25 is the 200 day MVA.
Support: 10,000 to 9992, the middle of its double bottom pattern. After that is a jumble. The low is 9106.54.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

7-9-01
Consumer Credit, May (15:00): $9.4B versus $13.9B prior.

7-10-01
Wholesale Inventories, May (10:00): +0.2% actual versus 0.0% expected and 0.3% prior.

7-12-01
Initial Claims, 7/7 (8:30): 391K versus 399K prior.
Export Prices ex-ag., June (8:30): -0.3% versus -0.3% prior.
Import Prices ex-oil, June (8:30): -0.2% versus -0.2% prior.

7-13-01
PPI, June (8:30): -0.1% versus 0.1% prior.
Core PPI, June (8:30): 0.1% versus 0.2% prior.
Retail Sales, June (8:30): 0.2% versus 0.1% prior.
Retail Sales ex-auto, June (8:30): 0.2% versus 0.3% prior.
Michigan Sentiment-Prel., July (9:45): 93.0 versus 92.6 prior.

TEAM TRADES

ELN: We had been looking for ELN to bounce back after its big breakout attempt pulled back. Well, today it tapped the 18 day MVA on its low and then started higher. It did not high our buy point until just before 2:00, but by that time it was showing great volume, and an Alert went out on those reports following this stock. We really liked the volume and then the sharp move higher when it broke resistance. A good company in a sector that has continued to perform, so we wanted to get in on the move. The stock shot up to 62.40, but we know that stocks just don't shoot higher without coming back to test. It came back to 62.05 at around 2:30, then started back up. That is where we made the move and were able to get in at 62.10.

HMA: HMA blew out of the blocks and hit our buy point in the first 10 minutes. An Alert was sent on the Daily and we tried to buy right at the breakout, but the stock ran up to 21.80 on that first run. It then tested, however, coming back to the 21.50 level at 9:30. From there it gapped up, and that was what we were looking for. The ask jumped to 21.65, but we were able to sneak a trade in. The stock ran up to 22.10 and we were feeling good. Then it sold back and closed at 21.45. Disappointing on a huge volume breakout. We still like the position and the high volume breakout.

Good Investing!
Jon L. Johnson and The Stock Split Report Staff

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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