Put Away the White Flag, For Now

The retail sector poked the market in the side this morning, to remind it that it's the time of year that the market is supposed to be rallying. Funny that it took a nudging from a sector that everyone has been trying to avoid, to remind people that all is not lost. Never mind the catalyst, we'll take it. We needed a strong up day like today to keep the hopes of a holiday rally alive and burning.

News out of the retail front was mixed today. Home Depot (HD) and Wal-Mart (WMT) kicked things off this morning by announcing that they both met earnings estimates. Home Depot, however, cautioned that its earnings growth would likely slow (certainly not because of me). In addition, the Retail Sales Report indicated that sales are indeed slowing, with the October sales figure up only 0.1%. Investors are ponying up to the checkout counter to buy these beaten down retail shares on hopes that sales growth will pick up next year. This, they say, should be because of a kinder interest rate environment. Home Depot finished the day up $2.13, or 5.69%, to $39.50. Wal-Mart closed up $1.69, or 3.72%, to $47.00.

Tech stocks also got into the holiday spirit today, with many of the big cap names adding onto the rally that started yesterday afternoon. Sun Microsystems (SUNW) rocketed $8.69, or 10.18%, to finish at $94.00. Intel (INTL) lifted $2.75, or 7.20%, to $40.94. EMC made up for some of its recent losses, roaring $7.75, or 9.83%, to finish at $86.63.

It was a very good day for the techs, but most of them have broken down chart patterns in serious need of repair. Many tech charts are now filled with gaps that act as resistance when these techs try to rally higher. We have seen many valiant rally attempts lately and would welcome some sign of holding power in the NASDAQ.

Another note on the day, one of the biggest Bulls on Wall Street, Goldman Sachs' Abbey Joseph Cohen, again trumpeted her views that stocks are currently "reasonably" valued. She says that many stocks have dropped to levels that represent good buys and that we should expect low inflation combined with growth that still comes in, "at or above trend rates" going forward.

Tuesday's Happenings:

As mentioned, we had a solid day on all the indicies. Analysts are coming out of the woodwork to support this market at these levels and cash is still sitting on the sidelines. It doesn't take a professional to realize that there are matches being flicked at a powder keg. There are many issues that could ignite that powder keg (to the upside). These issues include a settlement as to who will be our next president, a favorable FOMC meeting tomorrow, an end to earnings season, seasonal factors (year end bonuses and the end of tax selling) and lower energy prices.

Turning to the NASDAQ (COMPX), we saw a broad move in most tech sectors as the COMPX moved up 171.55, or 5.78%, to close at 3138.27. Bargain hunters were out in force. Advancers beat decliners 2581 to 1378 on volume of 1.8 billion shares. The only fault in today's action was the lack of strong volume. Although 1.8 billion shares is not bad, we would like to see volume in excess of 2 billion in any subsequent big moves.

Today's move in the DOW (INDU) was equally impressive. The INDU gained 163.81, or 1.56%, to close at 10681.06. The DOW has almost made it back into its previous base (defined on its lower end by the 10700 level). Advancers beat decliners on the NYSE 1838 to 972. Volume at 1.1 billion was again healthy, but shy of impressive.

The broader market also experienced a healthy rally, with the S&P 500 (SPX.X) finishing the day up 31.68, or 2.34%, to 1382.94. On a weekly basis, the index has bounced nicely off support established back in February at the 1325 level.

In the treasuries arena, the long-end of the yield curve recovered nicely after a day spent in the red. As can be expected, treasuries wilted under the strength in the equities market. However, buyers appeared and bought treasuries late in the day to boost the 30-year bond up 12/32, to yield 5.82%. The benchmark 10-year note closed up 3/32, its yield unchanged at 5.76%. The 2-year note, however, was off 3/32 to yield 5.72%.

Stocks and Sectors On the Move:

Oracle (ORCL), after a rough 2 months, today announced a strategic alliance with Citigroup (CI) that lifted ORCL shares $3.63, or 14.65%, to $28.38. The alliance will integrate Citigroup's payment and settlement capabilities with Oracle's market exchange, bolstering the exchange's capabilities to truly integrate supply systems. In addition, CI will use Oracle's Internet procurement software internally and will market the software to clients worldwide.

Tech stocks stole the spotlight today, with the fiber optic group taking up most of space on the stage. The group that was once thought to be insulated from tech pressures, again showed it has what it takes to be a market leader. Ciena (CIEN) jumped $13.19, or 14.52%, to close at $104. Corning (GLW) sped higher by $7.50, or 12.71%, to finish at $66.50. JDS Uniphase (JDSU) had a strong session, up $7.69 or 11.31% to close at $75.69.

Among the techs, semiconductors (SOX.X) also recovered nicely. Worries about higher inventories that had permeated the sector, eased today. Investors are starting to see these supply issues as more temporary. Where analysts were talking of supply issues lasting for years, they are now talking about months. The big debate is whether we are truly at the end of the semiconductor cycle. Of course, where we are in the cycle will remain a mystery for a while, but for now, these stocks are at low enough valuations to warrant some buying. Intel (INTC) saw its shares rise $2.75, or 7.20%, to $40.93. Xilinx (XLNX) was lifted $3.75, or 5.92%, to $67.13. Finally, ahead of earnings, Advanced Micro Devices (ADI) picked up $7.31, or 15.18%, to $55.50.

A boost to the sector might come tomorrow morning, after ADI indicated after the bell that that earnings came in at $0.54/ share, beating estimates of $0.50/ share. ADI reported that sales almost doubled, profits almost tripled and instead of the almost ritualistic lowering of guidance going forward, ADI gave a rosy outlook for 2001.

Looking Forward, Always Forward:

Wednesday brings with it the Federal Open Market Committee meeting. Nobody believes that they will elect to lower rates, however, there is growing hope that they will alter their bias. Currently, the bias is towards tightening interest rates and towards keeping an eye on inflation. Although the chance is slim, they might go to a neutral bias, letting the previous 6 rate increases work their stifling magic upon the economy.

If the Fed were to go to a neutral bias, stand back. This would be the match that touches off the explosion to higher prices. Cover your shorts and buy tech and financials right away. This, however, is exactly why the Feds will probably not go to a neutral bias. They like the fact that the market is down and that the "wealth effect" is taken out of the equation. Watch and listen for any comments that come out of the meeting that lean towards the neutral direction, however, as they would be enough to start another rally.

Turning to the charts, the COMPX is right back into the consolidation range that was broken on Monday. The strong reversal off the 2850 level yesterday was a good sign. We will look for the old support level of 3026 to offer better support this time around and for the old trend line to be near term resistance.

The INDU may be up against a tough foe, the 200-dma. It battled with the psychological level for almost 3 weeks in a row back in late September, early October. Some consolidation at the 200-dma would not be horrible, as long as the range does not widen.

If it sounds like I am as bullish as ever, I am. I did a quick pros and cons list at my desk today and the pros list (backing up a rally) was at least twice as long as the cons list. There is just too much out there that could move this market higher through the end of the year. This is not to say that something couldn't come out of the woodwork and blindside us. The market is definitely in a vulnerable state. We need a rally to stick before the white flag can be neatly folded and put away. Keep that watch list close at hand and only buy the stocks that are breaking out of base patterns or held their trend lines through the recent turmoil.

Trade Smart!