Is the Worst Finally Over?

So much for superstition. Friday the 13th proved to be anything but unlucky for a battered and bruised stock market thanks to a confluence of positive events that lifted investor and trader optimism throughout the day.

Getting everyone off on the right foot was a pre-opening report showing retail sales advanced 0.9 percent in September, well above expectations. The strong sales pace was influenced by September's robust sales at auto dealers, as well as higher gasoline prices.

Then Goldman Sachs' oft-quoted stock guru Abby Joseph Cohen came out with a report stating the recent stock market sell- off hasn't changed important market fundamentals and that the S&P 500 (SPX) is undervalued by 15 percent. Cohen went on to reiterated her year-end SPX target of 1,575.

Once trading began, third-quarter earnings reports took center stage, and unlike recent earnings report, the market liked what was reported on Friday. Internet chip designer PMC- Sierra (PMCS) soared $32.00 to $190.44 after reporting third- quarter profits of $0.31 per share, beating the First Call estimate by 19 percent.

Also reporting on Friday was Internet-router maker Juniper Networks (JNPR), which surged $28.88 to $228.50. The company reported third-quarter earnings of $0.17 per share, nearly twice the First Call estimate for $0.09.

Many older Internet backbone issues felt the good vibes generated from these two Internet backbone newbies. Cisco Systems (CSCO), Sun Microsystems (SUNW) and Oracle (ORCL) all gained more than 10 percent on the day.

Needless to say, the strong demand for technology was reflected in the Nasdaq Composite Index (COMPX). After falling to its lowest level of the year on Thursday, the tech- heavy index posted its third-largest point gain and its second-largest percent increase on Friday. The COMPX gapped 20 points higher at the open and never looked back, soaring 242.09 points, or 7.87 percent, to 3,316.77.

Fortunately, the technological love-fest wasn't limited to the newer issues. The Dow Jones Industrial Average (INDU) advanced 157.60, or 1.57 percent, to 10,192.18 (after being ravaged for 380 points on Thursday) thanks to strong buying in Hewlett-Packard (HWP) and International Business Machines (IBM), both of whom added more than $5.00 to their value on Friday.

The broader and smaller markets also participated in Friday's rally. The S&P 500 Index (SPX) soared 44.39 points, or 3.34 percent, to 1,374.17, while the small-cap Russell 2000 Index (RUT) added 17.42 points, or 3.76 percent, to 480.39, giving the RUT the distinction of being the only one of the four major market indices to overtake its 20-month moving average.

As for market breadth, it finally turned positive. On the Nasdaq, advancers crushed decliners by a four to one margin, while on the NYSE, advancers beat decliners by a four to three margin. Volume on both exchanges was heavy, meaning institutions were responsible for much of the demand. On the NYSE, 1.23 billion shares were exchanged, while 2.04 billion shares were exchanged on the Nasdaq.

To keep things in perspective, though, while Friday's rally narrowed the week's earlier losses, the four major indices still finished in the red for a sixth consecutive week, posting their longest weekly losing streak in 10 years.

Equities gains on Friday were Treasurys' losses. The 10-year Treasury note shed 2/32 to yield 5.725 percent while the 30- year bond lost 10/32 to yield 5.835 percent. Despite Friday's fractional lost, the 10-year bond is enjoying a rebound in prices as investors seek a safer haven for their dollars. Yields on the new credit bellwether reached their lowest levels since November 1999.

In the currency arena, the dollar rose to a three-week high Friday against the euro. The euro closed U.S. trading at $.8565, off from $.8629 late Thursday, and below the $.87 level where many central banks had purchased the ailing currency on September 22. The principal reason the euro keeps falling against the dollar is that the European economy just isn't as strong as the U.S economy. What's more, it's not likely to be as strong anytime soon. If I've said it once, I've said it a thousand times, Europe has too much regulation, taxes and socialism to compete with the U.S., and as long the European economy can't compete with the U.S. economy, it's collective currency won't be able to compete against the dollar.

Oil should also continue to influence world and domestic markets. On Friday, oil prices stabilized, as fears of oil- supply interruptions diminished despite Thursday's bombing of a U.S. Navy ship and Friday's bombing of the British embassy in the Yemeni capital of Sana. November crude, which surged $2.81 to $36.06 Thursday, dropped $0.71 cents to $35.35 a barrel Friday. Nevertheless, oil prices remain near ten-year highs not only because conflict grips the Middle East, but also because of concerns over a petroleum workers strike in Venezuela could intensify.

This week's cache of economic news will likely be overshadowed by the deluge of earnings reports scheduled to hit the markets. Nevertheless, here's what's on the docket for this week: On Monday, the Census Bureau is expected to report a slight increase in business inventories for August. Inventories are expected to have risen to 0.3 percent for the month, up from 0.2 percent in July. On Tuesday, industrial production and capacity utilization rates are due for release. The market consensus is for industrial production to have fallen to 0.1 percent in September from 0.3 percent in August. Meanwhile, capacity utilization is expected to be little changed at 82.1 percent for September, off slightly from 82.3 percent in August.

The week's most significant economic data release is scheduled for Wednesday. The Consumer Price Index (CPI) is expected to have risen sharply to 0.4 percent for September (thank you, OPEC), up from a 0.1 percent decline in August, while the core CPI (CPI sans food and energy) is expected to remain unchanged from its prior month's posting of 0.2 percent.

On the earnings front, literally hundreds of companies are scheduled to report this week. Some of the bigger movers and shakers include chip-making giant Intel (INTC), which is expected to post earnings of $0.39 per share on Tuesday. On Wednesday, automaker Ford Motor Company (F) and software king Microsoft are expected to report. Look for $0.50 per share for Ford and $0.41 per share for Microsoft. On Thursday, Web- based business-to-business enterprise supplier Commerce One (CMRC) will announce its third quarter earnings. Commerce One is expected to post $0.12 per share.

Referring back to the title of this vignette, "Is the worst finally over?" I think it is. Last week I said the market was due for a bounce; little did I realize it wouldn't occur until the end of the week. This week, I wouldn't be surprised if the major market indices continue to reclaim ground lost over the past six week. Market sentiment is sufficiently negative at this point to provide the "wall of worry" needed to lift us out of this rut. The put/call ratio averaged .82 this week, which is historically high, and market sentiment measured by Investors Intelligence has been growing more bearish. What's more, stock splits and IPOs have been reduced to a mere trickle. Now that's worry!

Additionally, according to Trim Tabs, equity funds investing primarily in U.S. stocks experienced outflows of $1.1 billion versus outflows of $2.5 billion in the previous week. This slowdown (and I expect a reversal to inflows soon) will remove some of the selling pressure in the market. Interestingly, many professional traders will scour a mutual fund's prospectus for its largest holding. When these traders know that the fund will likely have net redemptions for the week, they will short the fund's largest holdings, believing these issues will likely be liquidated first to meet the redemptions.

As for the market's technicals, I am beginning to like what I see, particularly in the INDU. Both the RSI and stochastics are showing the blue-chip average to be way oversold. What's more, I like the way the INDU was able to catch support at last October's low of 10,000. This support should hold as long as there aren't any negative earnings surprises from any of its components next week. I don't think there will be because most companies purged themselves of their negative earnings over the past few weeks.

I'll admit to being less bullish on the new economy issues. I think they've got the most to loss and the most to gain this week. On Friday, the COMPX caught support at 3,042 and rallied nearly 300 points. Nevertheless, I'm a little concerned that the index might meet resistance at 3,400, which is part of a downward sloping trendline dating back to early September. However, if the COMPX can get through 3,400, I can see it capturing support at its 62 percent retracement of 3,440 from its March high of 5,128.

On the other hand, if the COMPX is unable to build on Friday's gains, I see it again challenging support at 3,042. If that doesn't hold, then I see 2,900. My gut feeling, though, is the COMPX will hold 3,300 and build on Friday's gains.

With any luck, the worst is behind us and the markets can rally through the fourth-quarter, which is usually one of the stronger quarters of he year. Let's hope it is.

S.P. Brown
Editor

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Austin Passamonte - Editor IS, Staff Writer
Buzz Lynn - Editor, Sector Trader, Staff Writer
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