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3/14/02 Stock Split Report
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Stock Split Report Subscribers:

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MARKET ALERT SERVICE

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SUMMARY:
- Indexes hold support and tighten trading ranges on low volume.
- Analysts remain gloomy, and ORCL gives them reason to be. Smaller names producing good results, however.
- Inventories rise, not fall. Manufacturing uptick is here, but are the buyers?
- Economic indicators mixed, but bond market says recovery is here.
- Market ready to spring, but ORCL, MSFT, EMLX, MU and other big names are holding it back.
- Team Trades

A quiet, more typical consolidation session.

The big Nasdaq names continue to act ominously, but the overall market is trying not to look or listen. After the gradual inching higher gave way to a larger blowdown on Wednesday, the indexes resumed their consolidation sequence with much more appropriate action.

The Nasdaq and S&P started the session close to near term support (1850 and 1150, respectively). That did not give them much room to maneuver on the session, and we were watching closely to see if they broke these levels and closed under them. They did neither but instead held in very narrow intraday ranges. This is precisely what we want to see when an index digests its gains. The indexes were getting too eager, edging higher (at least the Dow and S&P), and Wednesday they got their hands slapped. Thursday they were behaving.

Volume scaled way back on the session, the lowest of the year on the Nasdaq. Even the NYSE was substantially lower even with LU clogging the trading with another 125 million shares traded, 104 million more than average. Tighter trading range, significantly lower, below average volume. That is also what you want to see in a consolidation. Indeed, but for LU's 225 million share day Wednesday, there has been no hint of any share dumping after the rally.

The intraday action was also more positive than not. The Dow and S&P closed with doji's on the candlestick chart. The S&P closed right over support as did the Nasdaq. After selling, a doji on the candlestick chart indicates the potential for a move higher; the fact that it occurs right above support is also positive. What does this show? As the index approached support, the sellers that had been in the majority on the way down (it was selling, so sellers were ahead each day) have been matched by buyers that entered the market at support. The A/D lines show this today with both the NYSE and the Nasdaq lines positive even though the Nasdaq and S&P closed lower and the Dow's gain was chicken feed.

In sum, the indexes recovered nicely after Wednesday's action, tightening up and compressing on top of support. Many Nasdaq stocks, particularly semiconductor equipment, showed similar action (e.g., NVLS, AMAT, BRKS, PRIA). It appears the indexes are bracing for some type of bounce. Question is, will ORCL, MSFT, EMLX and others with poor action of late block any move? When ORCL announced it was not going to be able to match Larry Ellison's ego when he predicted stronger earnings a couple of months back it did not stop the move higher.

Analysts gloomy again.

ORCL is somewhat of a poster child for analyst concerns about earnings. This week analysts have been cutting estimates, downgrading, etc. Today was no different with CSFB at it again, lowering its PC unit forecast to 5% from 10%. Alex Brown predicted a drop in DRAM prices that would lead to a tech correction. More of the same from earlier in the week where we saw MSFT cut due to 2003 potential along with a host of valuation calls.

ORCL is going to be a rallying point for these analysts, and as far as big name technology, it is hard to argue that these stocks are going to have a tough go of it. They are no longer market leaders in the true sense as they don't have improving earnings or revenues, at least not anywhere near where we look for market leaders. Back in the late 1980's and early 1990's, CSCO, MSFT, DELL, INTC, ORCL, and other big tech names were the newer kids on the block, just hitting their stride. Their sales, earnings, margins, and revenues were shooting higher, and their stock prices were running up with them. They had the latest, greatest technology, and they used it to improve their efficiency as well as sold it for profit. They were the IPO's we talked about in Wednesday's report.

Now they have grown so big they will never see the 50%, 75%, 100%, 500% gains in sales, earnings and revenues that they formerly enjoyed when they were in their 'teen years' so to speak. They still control a lot of technical prowess and have sacks full of money, but look at them. DELL has taken PC's about as far as they can go with its business model. It is a lot like MMM: you can make a better Post-It Note, but that is not going to create a surge in demand. Dell can build a computer for you faster and at lower cost, but other than change the colors and put in a faster chip from INTC, it is not going to do anything that creates a surge in 'I gotta' have that' demand.

Thus, the Nasdaq is suffering because these are the largest cap technology stocks and they make up the index. Beyond ORCL tonight there were 8 upside surprises from smaller names. ADBE beat the street by 2 cents and guided in line with estimates. ELBO beat the street as well and guided higher for 2003. TEK beat the street by 3 cents and said its Q3 would be even better. The growth is going to be in the smaller issues that have the cutting edge technology, not the behemoths that led the way in the earlier technology boom. That means the overall Nasdaq suffers, and that is what is giving analysts pause. The big guys need to really see an improving economy, a really improving economy, to get their earnings moving up and thus the index. That will eventually happen as it did off of the September bottom, and we can indeed trade these stocks as they set up good moves. Our focus, however, will still be on the stocks that are leaders in earnings and sales and are setting up the good patterns. In a recovering economy, these can produce the biggest gains.

THE ECONOMY

Inventories rise, not fall. Increased manufacturing activity showing up.
After a year of declines, business inventories rose 0.2% in February (expected -0.4%). Was this good or bad? We have all cheered the inventory reduction of the past year; inventories are down 6% since January 2001. Huge drop. The tick higher is proof that manufacturers have been busier as the regional reports and ISM have shown. Great, recovery is on the way.

The big question is, will the demand be there to keep the inventories lean? Big issue. Consumers have been strong but retail sales are weakening a bit as we anticipated. The housing market is showing stress as well from a major rally for a year and now rising interest rates (applications for mortgages and refinancing plunged last week again). The business sector? ISM reports say new orders are up, but you would not know that talking to CEO's and CFO's. The stimulus package will help some with the 30% accelerated depreciation, but the overall dollar amount of $90 billion is really a drop in the bucket.

So, factories are busier and cranking out a few more goods, but buyers may be losing a bit of steam. Sounds like a recipe for more inventory problems if this recovery is indeed as anemic as Greenspan seems to believe it will be. Again, this will hurt the big tech names the most, particularly telecom where there is so much overcapacity they ought to try and market optical fiber as new age dental floss. The overall tech recovery will be tough. Select tech will do fine and will show itself in its earnings growth and stock patterns.

Jobless claims fall less than expected.
Weekly jobless claims fell 3K to 377K from a revised 380K the prior week. The 4-week moving average rose to 374,750 from 373,750 last week. After falling steadily, the downtrend is flattening out a bit. Continuing claims rose to 3.48M from a revised 3.38M last week. Now this can be misleading. With the improving economy, more people are hanging in there and looking for work instead of just giving up for now. We saw that in last week's employment report when the employee pool rose again as unemployment fell. Thus we cannot get too rattled about that. Employers will continue to hold off hiring new employees until convinced the recovery is for real. The unemployed are eager to get back to work; they are getting back in to the market as they see the economic reports and the Fed chairman saying the economic recovery is here.

Bond market tanking, commodities rising.
Bonds have been showing recovery for months. With the recent solid economic news and today's business inventories report, they really tanked. Long bond futures hit a 52-week low. Oil prices are rising as well. One reason is the idea of a recovering economy: recovery means more people driving around to enjoy life, businesses ramping up production, sales, etc. Basically, a strong economy needs more fuel. On top of that is the fear of a war with Iraq, talk of a terrorist nuclear deterrent- -typical war time concerns. So it is a mix of economic recovery sentiment and the war. It is not great news as gas and oil price increases are the same as a tax: they burn up disposable income.

THE MARKET

The indexes have continued their consolidations, righting themselves after the blowdown Wednesday after wedging higher (at least the Dow and the S&P) and asking for a round of harder selling. Today's action was constructive and it looks as if they are ready to bounce higher from here. The chart patterns are good on the Dow and S&P, and the A/D line reversed to positive on today's weak action. Not bad. The issue will be whether they can breakout over resistance again just as they have been doing on the move up after the test of the rally off the September bottom.

The problem, as noted above, is in the big tech names. Today MSFT, ORCL, MU, EMLX and others showed some breakdowns, and it is hard for the Nasdaq to move higher when several big names are heading lower. ORCL was down after hours, but it was not horrific. The QQQ sold back and bounced a bit. When ORCL first warned in early March it took a beating, but the Nasdaq turned back up that day and rallied to the recent March highs. Could be that ORCL is somewhat isolated. At least one analyst tonight wondered that after six quarters of warnings if the problem might be with how ORCL is being run as opposed to the economy. In short, we may not see much of an ORCL effect this time either, and the crouching Dow and S&P may be able to spring higher and drag the Nasdaq with it.

VIX: 22.02; +0.15. Still showing nothing and going nowhere. Of course, the S&P went nowhere as well. Some say the levels show the market under pressure. As we have pointed out, volatility has been at these levels for many weeks.

VXN: 42.33; -0.93. The Nasdaq falls and volatility falls as well. That is the opposite of how it is supposed to work, but it also shows that the action today was very quiet and that is a good thing for an index trying to recovery after low volume selling following a rally.

Put/Call Ratio (CBOE): 0.84; -0.06. Wednesday saw put buyers jump back into the fray with a reading of 0.90. The ratio remained strong today. While not the close over 1.0 we look for when the market is selling off in a correction, this level has triggered rallies on milder selling bouts just as what we have seen of late. Still a positive.

Nasdaq

Very sluggish action as MSFT, ORCL, MU and others blunted any upside attempts. The range, however, was tight, volume was low, and advancers led decliners. Those smaller issues were doing okay. Still slow bleeding, but holding at support. Looks like an interim bounce, but it may be dragged along by the Dow and S&P more than the index springing higher on its own.

Stats: -7.89 (-0.4%) to close at 1854.14.
Volume: 1.492 billion (-10%). Volume was lower again, the lightest of the year. If you have selling, you want lower volume if you are a bull. It is still indicating there is no massive dumping. There is selling, but not out and out running from stocks.

Up volume: 556 million
Down volume: 904 million. Sellers still in charge of the day, but weakened.

A/D and Hi/Lo: Advancing issues took the lead at 1.25 to 1 (decliners led 1.34 to 1 Wednesday). Not a great margin, but it was a down day. That makes it a very good sign.

New highs: 130 (+34). Good surge higher on a down session.
New lows: 31 (0). No new lows on a down session after turning higher for one session Wednesday. Not bad.

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

Even more negative analyst news and the dearth of positives did not tank the market. It twice tested a support level at 1850 (low at 1851.38) and bounced each time. It closed in the lower half of the trading range, not an overly bullish pattern intraday, but the hold over support, the narrow 22 point trading range, and the lower volume are good signals. It may not be ready to lead, but it could follow back up to try 1941 again. Does it clear that level? It does not have leadership from the big cap names, and that makes it difficult. Some techs look ready for bounce plays to the upside if the rest of the market acts on its decent patterns. If that happens we will look at some of these names with options to take in some faster gains with a better percentage gain using options.

Dow/NYSE

After Wednesday's selling that was necessary after the creeping consolidation, today's action was better: went really nowhere on no volume. It continues its consolidation of the two rally weeks where it ran almost 1,000 points. This is an extended consolidation and it is getting ready to move back up.

Stats: +15.29 (+0.1%) to close at 10,517.14.
NYSE Volume: 1.196 billion (-10%). NYSE volume matched the Nasdaq's volume drop, turning in a below average volume session even with another big 124 million share session by LU. Very nice lower volume session that held a narrow range. Quiet action in a consolidation is what you want to see.

Up volume: 497 million
Down volume: 608 million. Up volume held roughly steady while down volume lost over 300 million shares.

A/D and Hi/Lo: NYSE advancers returned to the lead at 1.25 to 1 (decliners led 1.27 to 1 Wednesday). Decliners never got vicious on the selling, indicating that overall the NYSE was holding up well.

New highs: 138 (+30)
New lows: 20 (+1). Continued good action on the new lows; hardly budging.

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

Today returned to the calmer action that preceded Wednesday's selling. The Dow traded in a 80 point range, quite narrow. On the low (10,474.72) it tapped close to the 10 day MVA and moved up slightly for the close. The candlestick pattern is a loose doji near the bottom of the consolidation range etched out the past eight sessions. This recovery was very positive, though we did not view Wednesday's action as overly ominous; today's quiet trade just affirmed that the consolidation was still in decent shape. From here it looks as if it can move higher to challenge the top of the resistance at 10,600 (10,670 intraday). What it needs to do there is break over that point on strong volume. If it cannot do it, we have to start looking for a landing spot near 10,300 first.

S&P 500:

The S&P traded in a narrow 7 point range tapping support at 1150 on the low (1151.08) two times and holding both times. That is a point of previous price highs and lows, and the 200 day MVA (1147.56) is right below. The 200 day MVA is an important level for any stock or index, and that is the point we want to see hold on the 25 point consolidation of the prior 100 point move. The signs look promising with a tight doji on the candlestick chart right above support, and NYSE volume that backed way down on the action; no churning (high volume turnover) and no dumping. Big names such as ORCL might be a drag early, but we think the S&P is ready to make another run at the December and January twin tops at 1173 and 1176.

Stats: -1.05 (-0.1%) to close at 1153.04.
Volume: NYSE volume dropped 10% to 1.196 billion shares.

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

TOMORROW

The PPI is out before the open. It measures producer prices (wholesale prices of goods used to make the products we buy) and gives us some insight as to whether producers are paying more for materials. Now commodities have been rising, e.g., oil and energy. The 0.1% gain anticipated might be a bit light. If it is much higher, there will be more talk of inflation and sooner Fed rate hikes. Today one former Fed member was saying the Fed would raise rates in June. That is what the Fed Funds Futures contract is saying, but it is also way, way out from that meeting and it loses its efficacy so far in advance. The next meeting is March 19, next Tuesday, and there won't be a rate hike there. Greenspan has been telling us things were getting better, a prelude to a bias change. That might come Tuesday, though most would agree, there are still major downside risks for the economy. That may give the market pause, but it is another sign of a recovery on the way, and we feel the market will absorb it.

Michigan sentiment comes out 15 minutes after the open. After consumers gave the market pause with the last reading, with the market moving higher, solid economic reports, and Greenspan giving the thumbs up, it is expected that sentiment will be significantly higher. We agree and look for that to give the bounce that is ready to occur a bit of a push.

Friday is also options expiration, but most positions have long been squared (e.g., Wednesday), and we do not see that contributing to a lot of volatility. We believe the Dow and S&P are ready to make an attempt at the recent resistance. There are Nasdaq stocks set to bounce we can make some money on if we are quick. And there continue to be good stocks in good patterns that are just waiting for the overall market to start back up. Might happen tomorrow, might wait until early next week with the Fed meeting. We think there will be some anticipatory upside action, and that is what we are getting ready for.

End Part 1 of 3

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