What's going on?

Over the course of the last several days and weeks, you keep hearing about volatility. Forget volatility. Volatility seems much too organized and tame for what's occurring now. Try outright confusion for the driving force behind what's happening in the markets now. What else would explain market swings in the major indices that before now were entirely unprecedented. Up to several hundred points in some instances. Used to be that you would measure a good year in the Dow in terms of a 10%-15% gain. Now, you see days that are up or down well over 1%, approaching 2%. That on an index that many are starting to consider too conservative for their money. Take a trip over to the Nasdaq and you are looking routinely at days where that index gains or loses 3, 4, even 5% in a day. Just look at the last week. Traders closed out the day on a decidedly negative note two Friday's ago, only to drive that index to a record close 5 trading days later. More remarkable is the fact that they actually provided the unabridged buying enthusiasm to propel the index to its largest one-week gain ever. By the way, they did it in the week when the Fed put their foot down, issuing a rate hike and a stern warning regarding the REAL and rising concerns over the overheating economy.

For the year, the Nasdaq has now officially corrected twice. Twice. Volatility doesn't explain two corrections in one month. The markets have always been volatile, but no major index has corrected twice in a month, let alone finished it out by setting a new record. Corrections are supposed to last months on the way down and longer on the way back up. Now, we have 3-day corrections, followed by a new record several days later. No folks, this isn't volatility-this is outright confusion. It is brought on by the changes occurring in the marketplace-the fundamental type changes we have written about recently. As we've said previously, it is hard to scare investors out nowadays. On top of that, you have more people investing more money than ever before. No one wants to miss the opportunities, so investors refuse to keep buying. The problem with this change is that we have no model or precedent to look back on for insight into what happens or what to do next. It's enough to make anybody that's been in the market for more than the last couple years scratch their head and ask, "what's going on"?

It's not just the average Joe either. The institutional managers are running across changes that are challenging them as well. Take for example the current bond situation. Institutional investors are waking to the fact that with the government's initiative to buy down the national debt and issue fewer long-term debt instruments, they are going to have to look other places for some sort of a hedging instrument for their portfolios. Some talking heads went so far this week to claim that they could see a scenario where the Fed would no longer issue the 30-Year Treasury in the future, opting for debt instruments with shorter maturities yielding considerably less. Although the government and politicians have long talked about reducing the national debt, no one took them serious, especially the big money managers who count on the bond and the national debt. You can bet that more than one of these guys are scratching their heads right now and asking, "What's going on".

As for trading on Friday, the blue chip index suffered a down day due mainly to a late day sell off, occurring in the last hour of trading. In the end, the Dow lost -49.64 to close at 10,963.80. The index actually started the day in good shape, trading up early to test the 11,100 mark, hitting a high of 11,089.45. From there, the index retraced to trade in a 50-point range between 11,000 and 11,050 for most of the course of the day. The last hour of trading was marked by heavy, broad-based profit taking which pushed the Dow to the low of the day at 10,943.02. The index managed to finish just slightly off the low. Volume was heavy in early and late day trading. For the day, overall volume finished heavy at 1.04 billion. Declining issues edged out the advancers 8 to 7. The up/down volume and new highs/new lows indicators came in neutral.

Banks, drugs, cyclicals, utilities, oil, metals and building materials/homebuilding were the sectors largely responsible for the slip in the index for the day. Among the notables weighing down the Dow; AA -1.75, JPM, -3.63, WMT -2.06, XOM -1.50, PG -3.06, MMM -2.63 and C -1.56.

On the upside, techs and gold led the way, with the price of gold gaining +23.10 to close at $312.50/oz. This was definitely an offshoot of the trouble in the bond market (continuing yield curve inversion) and the rising inflationary fears brought on by the just past Fed meeting. Gold hasn't hit this level since the run last fall. In the end though, it was the techs once again ruling the day. Among the notables; INTC +0.56, MSFT +2.94, HWP +4.50 and MOT +3.25.

For the week, the Dow managed to recover from what looked to be a precarious situation just 7 days ago. At that time, the index had closed below the 200-dma for the first time since last October's meltdown in the markets. We told you that a continued decline might see the index fall to the next level of support at 10,700, which did in fact occur on this past Monday. Luckily, traders perceived the drop as an opportunity to take new positions and bought the index back up over 200 points to close that day back above the 200-dma. From there, the index managed to close back above the 11,000 mark each day until Friday. Attempts to breach resistance at 11,100 were made each day, but in each case were repelled.

As for the Nasdaq, not surprisingly it managed a positive close. The index closed up +33.17, finishing the day at a new record high of 4244.15. The Nasdaq actually traded much higher throughout the day, gapping to open and trading up steadily throughout the day. The index hit its high of 4294.84 late in the day before succumbing to the same profit taking that beset the Dow in the last hour. The high for the day just missed the 4300 mark, falling just over 8 points shy of the all time intraday record high for the index. Volume was heavy at 1.75 billion. Up volume was almost twice that of down volume. The advance decline line stayed positive, finishing with advancers on top 22 to 20. The number of companies hitting highs was impressive, with 275 issues setting new record 52-week marks.

Leading the way? You guessed it, the techs once again, although buying was broad-based across numerous sectors as well as market caps. The networking, telecom equipment and software stocks headed up the pack. Notable leaders; MFST, ORCL +1.13, CSCO +3.31, TQNT +13.35, AETH +26.75, PMCS +17.63, JNPR +15.06, MUSE +14.25, SDLI +13.44, eBay +3.25, LVLT +7.81, SNDK +6.94, RBAK +6.38, NTAP +13.31, DITC +13 and CNXT +10.06. As we said, broad-based and covering small and large companies alike.

As was the case for the Dow, the Nasdaq ended the previous week in precarious fashion with what looked to be a tough week in front of it. As we told you last weekend, the index looked like it was ready to retrace even more from that Friday's sell off. At that time, we told you the next real level of support was sitting back at the 50-dma right around 3750. A drop to that level would represent over a 2% decline from the previous close but was easily within 1 to 2 days of trading if the bias remained negative. Indeed, the index went out on Monday and promptly proved us right, trading down to the 50-dma by late morning. Never underestimate the Nasdaq! From there, the index bounced strongly and went on to close up for the day slightly under 4000. Since then, the Nasdaq has managed to easily surpass the significant 4000 level, finishing the week with its best ever one-week gain. For the week, the index managed to add over 350 points, representing a gain of over 9%.

Reflecting the weakness in the blue chips, the S&P 500 closed off for the day. The index finished down slightly, -0.6 at 1424.37. The Russell 2000 faired better, closing up +3.89 at 525.52. The CRB index finished up +2.95 at 213.18, due largely to the gain in gold prices. As for the index that is the leader for all of 2000, the SOX took a breather, closing down -2.44 at 868.02. Despite Friday's drop, the semiconductor index has still managed a year to date gain of 22%.

On the bond front, the 30-Year closed down -40/32's to finish with the bond yielding 6.23%. The drop in price was largely attributed to the morning release of the employment report by the Labor Dept. as well as Thursday's buying spree, which left traders looking to lock in some profits. Regarding the employment report, Nonfarm Payrolls increased to 387 thousand for January, well above the consensus expectation of 270 thousand. This figure was 316 thousand for December, representing an increase of over 71 thousand new jobs. The actual Unemployment Rate dropped from December by 0.1%, coming in inline with expectations at 4%. Hourly Earnings increased 0.4%, just above expectations of a 0.3% increase. The Average Workweek rose 0.1 to 34.6 hours.

There is one other thing we want to address concerning the treasury market. We told you a week ago that the yield curve inversion would probably be a problem for a bond market that already had more than enough problems and worries. This was definitely proven to be true this week, as now both the 2 and 10 Year Treasuries are yielding more than the 30-Year. Rates are unlikely to stay down at this level after traders rectify the inversion (which should occur this week) and move on to get refocused on inflation and the next likely Fed rate move. But, in the long run, the bond market is going to have to deal with the problem regarding supply from the government in addition to the possibility of less demand as the institutional managers look to other instruments for their purposes of portfolio hedging.

On the news front, the biggest story regarded what had been an ugly merger situation. No, not Pfizer and Warner Lambert, that was Thursday's ugly merger story. In this case, Vodafone Airtouch Plc had been seeking to merge business with Germany's Mannesmann AG for the last 2 1/2 months in what had become an embittered battle between the management for both Company's. In the end, both sides were able to come to a friendly agreement regarding the merger. Shareholders of Mannesmann will receive almost twice what Vodafone originally offered, with each shareholder receiving 58.96 VOD shares for each of theirs, representing a 49.5 percent stake in the new company. This represents a deal in the $180 billion range, one of the largest in international corporate merger history. It also makes the new company the largest mobile phone operator in the world, with over 48 million customers in 26 countries. Despite the announcement, VOD traded down -3.94 to close at $57.81. Mannesmann lost over 1% in trading on the DAX in Germany.

IPO's were big news for the first time this year, as a number of new issues starting trading on Friday. Several benefited from huge first day price runups. The biggest gain came in shares of Avanex Corp (AVNX) which IPO'd at $36, but closed the day up +136 at $172. Also posting big opening days were Firepond (FIRE-priced at $22, up +78.25 at $100.25) and Antigenics (AGEN-priced at $18, up +43.38 at $61.38). One IPO that got left out in the cold was Mediacom (MCCC) which priced at $19, but managed to close unchanged for the day-not what they were probably hoping for on their debut day.

Two large cap big name tech stocks hit all time highs intraday on Friday. Cisco (CSCO) was the recipient of a glowing report from CS First Boston as well as a Buy reiteration from Warburg Dillon Read. The latter raised their price target on the stock to $140 from $100. Both brokerages expect the second quarter for the Company to exceed expectations, currently looking for $0.23 per share on sales of $4 billion. In addition, CSFB pegged the likelihood of a stock split announcement out of the Company at better than 50/50. Cisco is set to report on the 8th after the market. The other Company setting a new intraday mark was Intel (INTC). The Company announced the acquisition of two companies, integrated circuit maker Ambient Technologies and ThinKit Technologies, a chip designer for networking and telecom products such as switches and routers. For the day, shares of INTC traded to an all time high of $108.25, but sold off to close up +0.56 at $104.75.

On the economic front for the coming week, the economic calendar takes on a little less significance than this past week. The Productivity and Retail Sales reports are the ones to be most closely watched. Gains in productivity in the US workplace are due to high tech advances and have been one of the largest factors in keeping inflation in check in this economic expansion. On the flip side, Retail Sales are a barometer of consumer spending and ebt, issues largely responsible for the current inflationary fears. The Productivity report for the fourth quarter is due out on Tuesday (8th) with expectations of 4% growth, down from 4.9% in the third quarter. The Retail Sales figure for January is due out on Friday (11th) and analysts expect to see a figure in the area of a 0.5% increase, down from December's 1.2%. In addition, Consumer Credit is set to be reported on Monday (December figure-expectation of $8B vs. previous of $15.6B) followed on Wednesday by the Wholesale Inventory Numbers. Analysts expect the December numbers to come in at 0.7% versus 1.1% for the previous period.

Despite the fact that the earnings season is starting to wind down, there are still many Companies set to report this week. There are numerous S&P 500 issues as well a several Dow components slated to report throughout the week. As we have done the last several weeks, we are going to caution readers to take time to make themselves aware of the companies set to report earnings. As has already been evidenced during this earnings season, volatility rules the day for any company reporting, as well as industry partners and competitors. In addition to checking out an earnings calendar, we suggest that you take time to view our events calendar (located on the site and in the newsletter) as there are a number of important conferences and analyst meetings scheduled that may very well influence trading in certain sectors.

As for the coming week, it promises to once again be CONFUSING / VOLATILE. The issues confronting the bond market will once again come into play. Until we get a better idea on how that situation will play out, as well as a better feel for the number of rate hikes we are looking at, trading will probably continue to be dictated by technicals. Unlike the close of last week, when the volatility index (VIX) showed an oversold market, this time around it is sitting in an area that indicates the market could go either direction. Despite the slowdown in the number of companies reporting this week, earnings related volatility will again be an issue. These factors will probably keep the Dow and Nasdaq in check in terms of setting a clear and convincing trend. Translated, this probably means we are looking at trading ranges for both indices. That equates to technical trading, something many investors are unfamiliar with, as they have become used to markets rising in a seldom-uninterrupted fashion.

For the Dow, the index is sitting just under the 5 and 10-dma's and now has a little breathing room above the 100 and 200-dma's that are sitting just under 10,900. Keep in mind that both moving averages were tested in Thursday's trading and as we said last week, the Dow is more than able to break back down and through those significant levels in a day. If it does, it may not stop at the 10,700 support this time as the earnings season is officially starting to wind down and we have fewer catalysts for buying. The next level for support after that level will be the 10,500 mark, which as we said a week ago is very significant. Having covered the downside, we must talk about the upside, which may very well come into play if investors refuse to be shaken out of the market. The Dow will have to close back above the 11,000 barrier before anyone is convinced that things are going to improve for the blue chip index. From there, further challenges of the record are a possibility, although the resistance at 11,100 will be a challenge, as proven this week.

For the Nasdaq, the 5, 10 and 20-dma's are now firmly over the 4000 mark, indicating it will take a significant downturn and loss of buying enthusiasm to break though that level of support. Investors can expect support above that level at 4150, which may further embolden the bulls. At the same time, 4300 has now twice proven itself to be a tough level of resistance, so buyers risk buying the top at this point.

Once again, investors find themselves in a "damned if they don't, damned if they do" position. The buying enthusiasm, as previously mentioned, is most likely due to the fear of missing out on the next rally. At the same time, we have now had two official corrections on the Nasdaq in the course of just over a month. The Dow continues to look weak, weighed down with many stocks that few investors seem all that interested in anymore. These points seem to highlight what we talked about earlier. The fundamental underlying changes occurring in the market today. What happens next is anyone's guess, but investor can expect one thing for sure going forward-more confusion!

Good Luck!

Louis Horkan
-Chief Editor