A Love Affair With Five Digits

What is it about 10,000 that makes traders swoon? It really is just a number. One cannot ignore the truth that huge swings occur on both sides of this number. Perhaps our feeble brains need nice round numbers to affect our decisions. Look at the past two day's of trading. Whoops!, below 10,000 so lets take it down an extra 100 points. Whoopee!, over 10,000, lets take it up an extra 100 points. But it's not just the Dow that trades this way. Look at the charts of some of your favorite high-flyers. Many of them trade with major pivot points at nice "easy to remember" numbers. $150 gets you $200. Or, going down, $250 gets you $200. In this highly unpredictable market where greed turns into fear very quickly and vice versa, people like to try and keep things as simple as they can. There is a fundamental reason why stocks and indices trade this way. If many people believe that a stock is going to move much higher once it crosses $100, then you will probably see a whole bunch of "buy stops" just above that price, which causes more buying and the race is on. It is a self- fulfilling prophecy. Money flow is king. Sometimes, it really is that simple.

While watching CNBC, I felt really sorry for one particular guest, who shall remain nameless. This poor son-of-a-gun is a portfolio manager for a large cap value fund. Are these guys really still in business? 10 years is an awfully long time to be wrong. Nevertheless, you cannot help but be interested in stocks that have huge assets, huge earnings, steady growth and low PE's. The problem is, except for the occasional bounce, these stocks would underperform money markets if it weren't for the dividends they pay. We began the market today with a nice bounce in these value stocks. Finally, these value managers are right! Everybody selling their overvalued high tech stocks with no earnings and buying "old steady big asset companies". At one point in the early going, the Dow was up over 100 and the NASDAQ was down nearly 100. At last the divergence is being closed! Too bad it did not last very long. Odds are, based upon similar action earlier this year, this is probably a one or two day event.

The Dow Industrials finished up 176.53, nearly recouping all of its losses from Friday. Intraday, the Dow topped out at a gain of 294 before getting a little agrophobic. Strangely, advancers and decliners on the NYSE finished in a dead heat after decliners had the lead for most of the day. Big movers included retail stocks such as Wal-Mart and Sears, oil stocks like Chevron and Exxon- Mobil and financials like American Express and Citigroup. By staying above Friday's low and staying below Friday's high, the Dow experienced an inside day. Unfortunately, the Dow is still in a decided downtrend but today offered hope that perhaps we may be entering a consolidation phase. If the Dow breaks below today's support of 9850, it could drop all the way to 9650. On the upside, a follow through rally above 10,200 could get the Dow up to resistance at 10,450. The most likely scenario is a little sideways action around 10,000.

Despite a very impressive comeback that saw the NASDAQ behave under the realization, "Are you kidding me, how far are we behind the Dow?", the index did suffer a little technical damage. The comeback sectors included the SOX, up 34.42 after being down all morning and the Biotech's, down only 1.66 after being down over 20 points. The biggies of the NASDAQ, CSCO, INTC, MSFT, DELL and SUNW, had a decidedly uninspiring day, finishing mostly down to unchanged. The Index dropped below the previous two day's lows and needs to make a new high soon or else it is likely the Compx will continue to pull back a bit. A drop below support of 4550 could take the Index down to support at 4480 or perhaps even lower to 4415. Resistance is still the old high at 4663. A break through there could be good for 100 to 200 points over the next several days.

Takeover Monday was a bit of a bust, with CEO's enjoying the fine weather back east instead of huddling around their muffins on Sunday, hammering out deals with their Investment Bankers. One curious rumor, later dispelled, had Ebay taking over Sotheby's. Talk about a merger of the old economy and the new economy. After opening higher on the "news", Ebay dropped off more than $5 into the close. The only substantial merger to occur was one between NiSource and Columbia Energy Group. The two companies will be combining about $8.5 billion in assets.

All in all, it was an extremely slow news day for the markets. E- Trade received some positive comments from Chase H&Q helping it to rally a point. Despite the fact that the very popular CEO of Citigroup, John Reed, will step down, Morgan Stanley nevertheless raised their rating on the financial concern to a Strong Buy. AOL was also a beneficiary of some positive press, this time from Robertson Stephens, which reiterated a Strong Buy rating and maintained a $115 target price. Economic numbers released today saw January personal income rise 0.7%, an upside surprise of 0.1%. Personal consumption expenditures increased by an expected 0.5%. These numbers only had a very minor, if any, affect on the markets.

In our favored tech world, the biggest news item was perhaps the announcement that Qualcomm and Microsoft have formed a wireless multimedia device pact. QCOM finished the day up just under $10. CNXT suffered quite a bit of profit taking as SG Cowen cut the stock to Buy from Strong Buy. Conexant was down over $18, closing below $100. Tech traders will be watching the Robertson Stephens Technology Conference this week. Based out of San Francisco, Robertson Stephens is perhaps the single most influential brokerage, investment banker and analyst of the tech sector. Over 300 companies will be presenting their stories to institutional investors this week. B2B stocks are sure to be a highlight of this conference. If you see your favorite Internet stock suddenly shoot up in the middle of the day, it will probably be due to a solidly upbeat presentation. Keep an eye out for it. One big presenter this evening will be Juniper Networks (NASDAQ:JNPR). A gap up is entirely possible.

The rest of the week is likely to be characterized by a lot of continued volatility without any real progress as traders' position themselves for the very critical employment numbers coming out on Friday. Another highlight this week will be the widely anticipated IPO of 3-Com's Palm Division. It should be successful and provide a little push for the techs in general. There will definitely be a lot of action in the stocks of companies presenting at the Robertson Stephens conference. Unfortunately, a schedule of the presentations is not available to the public, or analysts at Splittrader.com as a friendly representative of Robertson Stephens so kindly informed me. If you want to trade these opportunities, you will have to pay very close attention to the news wires for "leaks" and listen closely to CNBC. As I mentioned before, if you see some strange intraday movement in one of your technology stocks, there is a good chance that they just presented.

If you agree that the market will mostly exhibit neutral action, then it would be wise to sell rallies and buy dips. There should be some pretty good tradable swings, especially around key number pivot points. As always, if you are unsure of what move to make, why not just sit on cash? Cash is king and there will probably be a lot of it on the sidelines before Friday's employment report. If for some reason the NASDAQ does breakout to a new high, there may be some quick momentum buying. Find your favorite stock, ride it and take a quick profit. You may also see some more whipsaw action like we saw today. It can get really ugly when those stops are hit, but the snapbacks can be equally impressive. Look for some of those quick hits in this directionless market. Above all else, trade what you know and always stay within your risk tolerance parameters. See you next week when hopefully there will be some great trading opportunities. May all of your trades be winning ones.

Jim Booth
Research