The Losing Streak Finally Ends

Hallelujah, all of the major market indices finished the week in the black -- a feat not accomplished since September 1. What makes this little exploit even more noteworthy, though, is what the indices had to go through to do that.

If you'll remember, a titanic flush generated by IBM (IBM) and J.P. Morgan (JPM) on Wednesday nearly swept away all hope of a long-anticipated market rally. Earnings warnings from IBM and Morgan's parent-to-be, Chase Manhattan (CMB), helped to scrub 435 points off the Dow Jones Industrial Average (INDU) within the first 15 minute of Wednesday's session, meaning the venerable market barometer was trading at 9,654, a level not seen in six months.

But like Lazarus (Marv Albert, John Travolta, or anyone else who has returned from the dead), the INDU staged a remarkable recovery over the ensuing 19 hours of trading to close the week up 33 points at 10,226.59. The revival came courtesy of a positive earnings report from Microsoft (MSFT) and takeover speculation surrounding Honeywell (HON).

On Thursday, the software giant reported fiscal first-quarter earnings of $2.58 billion, or $0.46 a share, which handily beat the First Call estimate for $0.41 a share. Fortunately, no one was in the mood to analyze Microsoft's financial statements or someone would have realized that of the $2.58 billion the company earned, nearly half ($1.13 billion) was due to investment gains. Without this investment income, which was a 100 percent improvement over the investment income generated in the same year-ago period, Microsoft would have reported lower year-over-year quarterly earnings. But what the heck, the company beat the First Call estimate, and that's all that counts. Anyway, Microsoft's good fortune, which added nearly $16 to its stock price this week, contributed mightily to the INDU's nearly 200-point gain on Thursday.

Then on Friday, electronic controls maker Honeywell helped boost the INDU another 82 points after stating it was considering a takeover proposal. People close to Honeywell said fellow INDU component United Technologies (UTX) was close to buying the company for $40 billion, or $50 a share. But United Technologies later reported that merger talks had ended and that Honeywell had another suitor. After the market closed on Friday, it was reported that the other suitor is General Electric (GE). For the day, Honeywell added $10.13 to $46.00, while General Electric lost $3.50 to $52.13 and United Technologies lost $6.75 to $61.25.

As for the other major market barometer, the Nasdaq Composite Index (COMPX) gained 64.54 points on Friday, or 1.89 percent, to close at 3,483.14. Like the INDU, the COMPX was also circling the drain early Wednesday, trading down 200 points to 3,000. But like the INDU, the COMPX made a comeback thanks again to Microsoft. But the index's two largest components, Intel (INTC) and Cisco Systems (CSCO), also helped the cause by finishing the week in the black. With this week's gains, the COMPX is once again trading above both its 10-day and 20- day moving averages, as well as its 20-month trendline.

In the broader and small-cap markets, the S&P 500 (SPX) closed Friday up 8.16 points, or 0.59 percent, to 1,396.92. For the week, the broad-based index rose 1.6 percent, which helped cut its month-to-date loss to 2.8 percent. Meanwhile, the small- cap Russell 2000 Index (RUT) added 6.15 points, or 1.28 percent, to 487.45. For the week, the RUT added less than 1 percent to its value.

For those traders with a long-term perspective, year-to-date the COMPX is down 16 percent, the INDU is down 11.8 percent, the SPX is down 5.5 percent and the RUT is down 4.6 percent.

In stock news on Friday, positive earning reports continue to build momentum. SDL Inc. (SDLI) soared $49.89 to $339.02 after the company reported earnings of $0.45 a share late Thursday, beating the First Call estimate of $0.38. SDL's earnings increase also helped its future owner's share price. JDS Uniphase (JDSU) rose $12.44 to $102.38.

Commerce One (CMRCE) gained $6.13 to $70. The company, which helps create online marketplaces, said its third-quarter sales soared more than tenfold, easily blistering the consensus estimate. Excluding non-operating charges for amortization of deferred stock compensation and amortization of goodwill and other intangible assets, Commerce One lost $14.7 million, or $0.09 a share, compared to an estimated for a loss of $0.12 a share.

Merck (MRK) rose $4.31 to $81.88. The drug maker posted third- quarter earnings of $0.78 a share, beating the First Call estimate of $0.73 and improving on the $0.64 posted in the year-ago period. Better-than-expected sales of painkiller Vioxx boosted results.

Internet software provider E.piphany (EPNY) jumped $25.13 to $89.88. The company's $0.17 quarterly loss was narrower than the $0.32 loss analysts had expected. What's more, revenue grew to $39.1 million in the period from $5.3 million a year ago.

Former hoax sufferer and fiber channel host adapter Emulex (EMLX) gained $12.25 to $160.25 after reporting earnings of $0.33 a share for its fiscal first quarter, beating the First Call estimate for $0.26. Revenues for the company soared 92 percent to $55.5 million. Immediately following the report, a slew of brokerage firms upgraded their ratings on the stock.

However, not everyone moved north on earnings reports. Exodus Communications (EXDS) tanked $4.50 to $33.56 after reporting a quarterly loss of $0.17 a share, which was a penny less than anticipated, while Ericcson Telephone (ERICY) fell $2.31 to $11.69 after dropping its fourth-quarter operating profit expectations from 10 percent to 7 percent.

So far, more than half the S&P 500 companies have reported third-quarter earnings (190 reported this week alone), which have risen an average 16.4 percent from the year-ago period, according to the folks at First Call. When it's all said and done for the third quarter, analysts expect earnings growth of 16 percent, down from the 17.2 percent they forecast at the beginning of September. Looking to the fourth quarter, analysts are projecting a 13.9 increase in earnings from the year-ago period.

In other news, the euro closed near its all-time low against the dollar on Friday, falling to $0.8388 from $0.8435 late Thursday, before recovering to its closing level of $0.8407. The euro fell amid speculation that there is little chance the European Central Bank will move to support its beleaguered 22- month old currency. One can only wonder how far the euro can fall and how much damage it will inflict on fourth-quarter earnings reports.

On the economic front, there wasn't anything to note on Friday, and there really isn't much to note for the coming week. On Wednesday, we'll get existing home sales. The market consensus is for these sales to have fallen to 5.10 million in September, off from 5.27 million the prior month. Then on Friday, Gross Domestic Product (GDP) will be released. GDP is forecast to show a 3.4 percent increase in its first estimate of the third quarter, off from a 5.6 percent increase in the second quarter. Neither of these data sets should have much influence on trading this week.

What will influence trading, though, is the next wave of earnings reports. High-tech companies Amazon (AMZN), Lucent (LU), Nortel (NT), Compaq (CPQ), Qwest (Q) and WorldCom (WCOM) will give further guidance on the extent of the high-tech slowdown, if there actually is one. Also pay attention to the pharmaceutical and energy stalwarts that will report this week because these issues are often favored in volatile markets. Notable names in this group include Schering-Plough (SHR), Chevron (CHV) and Texaco (TX).

Over the past two weeks, I've been preaching that we had to be near a bottom. I'm convinced that we finally hit it last week, particularly after the severe panic that took place on Wednesday in both the COMPX and the INDU. Traders and investors were so bearish that day that the put/call ratio soared to 1.01 (normally it's around 0.50). Any fence sitters were pushed off. This also means that there was plenty of worry to incite a rally. While pessimism is still the order of the day (which is good), optimists are returning.

Two other reasons why I believe the market has bottomed is that Halloween generally marks the end of the fiscal year for many fund managers, who have exacerbated recent selling pressure by dumping their stock for tax purposes or to pad results. Moreover, corporate profits have not been all bad, with Microsoft and Sun Microsystems (SUNW) doing particularly well (Granted, Microsoft is becoming more like an investment company than a software developer, but since no one seems to care, why should we?) There is a growing sense among analysts and investors that the market may be overreacting to neutral or bad news, just as it overreacted to good news earlier this year.

I also like the market's technicals. The COMPX bounced hard off a double-bottom formed over the past six trading sessions. In fact, it rallied more than 500 points off the second bottom. Moreover, the tech-heavy index has been trading at a discount to its 200-dma not seen since 1990 and 1998. Both times the index rallied strong from this discount, having to overcome war and the possibility of a worldwide financial meltdown. There is nothing so severe standing in its way this time around.

As for the INDU, its plunge to 9,650 was just an anomaly on panic selling. The average has regained its bearings and has resumed support at 10,000. Now, if it can just puncture 10,250, last week's resistance, a move back to 10,500 is entirely plausible because there is no logical resistance before that level.

The only wildcard I see that could derail a rally is an earning warning from Cisco, which will report earnings on November 6. Barring that unlikely event, I see the markets at least holding their current levels, if not advancing, over the next two weeks, which is one reason we've adopted a mostly long posture in our play selection.

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Here is the list you have been waiting for. The guest speakers and the course outline for the October Workshop Expo. The list of guest speakers is outstanding. Here they are:

Steve Nison - Steve Nison is not only the world's foremost expert on Candlestick Charting techniques, he's the author of the two top selling, definitive books on the topic:

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Gregory Spear - Author of the Spear Report. Gregory developed a unique "consensus" concept for picking stocks in the early 90's while trying to make sense of the myriad of financial newsletters in his mailbox. His unique "consensus" system has developed an average gain of 100% for his recommendations over the normal holding period which is about six months. The Spear Report is quoted or featured in dozens of financial publications and Greg's financial workshops are "standing room only."

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Dick Arms - Richard Arms is the inventor of the Arms Index, otherwise known as the TRIN. He has been analyzing the market for over 35 years and is a constant visitor to CNBC as a market commentator. His work in technical analysis is older than most of the brokers now trading with his tools. His newest invention is the Equivolume charting system, the first new charting system since the 1930s.

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Stan Kim - Stan has a MBA from UCLA and worked for IBM for many years. He realized he did not want to work for anybody else and did not want anybody working for him. He has been a full time trader ever since. He is the founder of the Snail Trader system of trading and is currently working on a new book. Stan consults and mentors traders and investment firms.

His topic will be, "How to Trade for a Living When You Are Not a Stock Guru."

Jim Crimmins - Jim is president of TradersAccounting.com and a noted authority on tax issues for traders. Jim is an expert on gaining Trader Status and puts on seminars on "Tax Free Trading" around the country. If you have been to a money show you have probably seen Jim with flocks of people around him.

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The current roster of staff instructors includes:

Ryan Nelson - Managing Editor, OptionInvestor.com
Chris Verhaegh - Options 101/102 Writer and Option Strategist
Steve Rhoads - Technical Analysis Instructor
Molly Evans - OIN Staff writer
Lee Lowell - OIN Staff writer
Austin Passamonte - Editor IS, Staff Writer
Buzz Lynn - Editor, Sector Trader, Staff Writer
Mark Phillips - Leaps Editor, OIN
Vince Dowd - Spreads Specialist
Louis Horkan - Managing Editor, Premier Investor
Steve Pekarek - Editor, SplitTrader.com
Jeff Bailey - Editor, Premier Markets
Matt Russ - Editor, OptionInvestor.com
Jim Brown - Head Option guy

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The workshop is scheduled for the last weekend in October. Four days of intense, power packed option education.

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If you have not been to one of our Denver Expo seminars before here are some comments from previous attendees:

The words herein are totally inadequate to express what I am feeling about you and all the OptionInvestor organization. But this medium is all I have. Thank you more than these few simple words can say.

Wow, what a seminar! In my 25 years of investing I have attended many instructional conferences, but I have never, never experienced one like your Options Expo. The instructors were absolutely tops. Subjects, generally were on target. Especially for me, the Skybox, index funds/options and the early morning strategies and trading were particularly great. The attention to the many details and nuances were especially evident, and I guess most of the credit that area goes to your great support team.

Now, the real challenge is to apply and implement the powerful knowledge I was exposed to.

Sincerely and warmly,
Kevin Hughes, Denver

GREAT JOB TO EVERYONE!
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Allan O'Neill

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For more info:

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The San Francisco seminar is October 19/21st. Here is your chance to learn from the pros. The three day Technical Analysis Stock and Option Fall Seminar Series. Three days of in-depth education. Don't miss it!

Some comments from recent attendees:

I want to thank Chris, Steve and Scott for the excellent workshop held in Detroit last week. Having been to the Expo in Denver in March (which was fabulous), I was ready for a smaller, hands-on approach to hone my less-than-perfect skills. I was not disappointed. One can never get too much education in options investing, and Chris and Steve offer terrific, unique approaches. Laurie

Chris & Steve, I would like to thank both of you for a great experience at the Atlanta Workshop. I learned more in the three days of the workshop about investing and trading than all of my undergraduate and graduate courses combined. It was a lot of information in a short time and I hope to put it to use very soon. Mike

I attended the Atlanta seminar and wanted to forward my positive comments. The seminar "really lit my fire". I have been a trader for 20 years and often go to seminars and this was the first one that really taught me the most. Dr Lloyd

Jim, I had the good fortune of attending the meeting in Orlando. Like your newsletter, it was a CLASS ACT. Chris and the others did a great job. Chris was by far the best performer but the gentlemen beside me was an option trader with several seminars under his belt and almost freaked out when Chris finished his Index Presentation. JC

I am writing this note to compliment you and your staff on the great job they did in Atlanta. But more importantly I would like to single out Steve Rhoades as one of the finest speaker/teacher on technical analysis that I have ever had the pleasure of hearing. I am doing my best to persuade other members of the two investment clubs that I belong to, to attend the Detroit seminar. Sincerely, ML

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Date     City

Oct 19-21 San Francisco
Nov 02-04 Phoenix
Nov 09-11 Miami FL
Dec 07-09 Philadelphia
Dec 14-16 San Antonio

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