MASTERING
THE TRADE
ORIGINAL, INTERACTIVE SEMINAR ON TRADING USING
TECHNICAL ANALYSIS 

 SEC FILINGS

The averages turned to the plus side by 10 A.M., and meandered listlessly through the rest of the morning.  It took a FDX led rally in the Transports, surging financial stocks, and continued strength in the oil sector to finally convince the Dow and the S&P500 that the only way to go was up.  When the day came to a close, the S&P 500 was sitting 18.73 points higher at a new record close of 1316.55.  The Dow Industrials ended the day up 118.21 and within striking distance of 10,000.  The day's close ensured that today's session would include another guest appearance by the media circus all-stars, and that most dangerous of beasts: the excited, exuberant trader.

The excited trader has already made an appearance in the Asian markets today. Japan's Finance Minister spurred the troops on when he predicted an economic recovery by May.  News that another round of public works projects would soon begin, and rumors of a relaxing of credit for home buyers added fuel to the hoping-for-an-economic-recovery-fire.  The Nikkei surged 4.2% on the day to 16379 and the Hang Seng added 3.97%. 

Overshadowed by Tokyo and Hong Kong,  Seoul gained 4.36% and closed over the 600 mark.  South Korea remains our favorite way to play a recovery in the Asian economies.  The market remains undervalued, and offers a number of stocks with solid upside potential including: SK Telecom (SKM, 11.06) and Pohang Iron & Steel (PKX, 16.38).

European markets, led by financial stocks with heavy Asian exposure, are up accross the board on hopes that Asia is ready to bounce back.

The U.S. market is likely to open higher on continued momentum from yesterday's close.  The financial sector will lead the rally after rumors of a Chase/Merrill Lynch combo resurfaced.  Better than expected earnings from Adobe and Nike, and a bullish outlook from Georgia Pacific will be further incentives for the market to rally when trading begins.

The question on most people's minds is whether the Dow can sustain the rally until the close and end the day above 10,000.  The key question on our minds today is whether the Transports can sustain yesterday's rally and close above resistance at 3461.  A close above the 3461 level would increase the chances that the Transports will be able to make a run at new highs.  As we've said many times before, the Dow's current move to new highs is still unconfirmed by either the  Dow Transportation Average or the Dow Utilities   Yes, once again we've returned to one of our favorite topics: lack of breadth.

Today is shaping up as another down day.  Traders in Tokyo temporarily ran out of reasons to send the Nikkei higher overnight.  The Nikkei had its worst day in 5 months as a combination of profit taking and worries that the U.S. market has seen its highs sent shares tumbling 3.38%.  The index closed just above the 15713 support level at 15718.  Japanese exporters were hit hard on fears that a sudden drop in the U.S. stock market would curtail U.S. consumer spending.

Markets in Hong Kong and Europe were sharply lower this morning in reaction to Tokyo's decline and the U.S. futures markets have taken their cue from the declining overseas markets.  The S&P futures are down 7 points and NASDAQ futures are down 28. 

Tuesday we said that either the oils or the transports had to give, and at the moment it appears it will be the transports that break down.  The Transports will likely lead today's decline on the backs of rising oil prices and an earnings warning from AMR.  The failure of the transports to move above the 3461 resistance level during their recent rally  is a strong negative for the U.S. market and increases the chances that we have seen the highs for the time being.

With neither the Transports nor the Utilities able to confirm the Industrial's record breaking performance, and with the advance/decline line continuing its downward push, the technical picture is anything but pretty at the moment.   Equally disturbing, and adding to the list of technical woes is that on Tuesday the Dow hit an important resistance level and failed to break through it.  The Dow touched the Gann 2x1 resistance angle which had stopped previous rallies in November and January (see today's market chart).

The question on everyone's minds now, from the trader on the floor to the talking head on the television, is: "what happens next?".  Overseas markets will give scant help in answering this riddle this morning.  The Nikkei surged to a 7 month high and broke strongly above the 16141 resistance level.  In Europe, however, it is a different story at the moment.  European markets are down across the board on the backs of a profits warning from Dutch telecom KPN and renewed economic worries.

With Overseas markets giving us no guidance to the future direction of the Dow, we decided to get out our slide rules and crunch a few numbers to see where we stood in comparison to previous market tops.

Historically, the market's P/E ratio at a market top has been 21.  Today the Dow trades at a P/E ratio of 25.4 and the S&P500 trades at 34.3 times earnings.  If the Dow were to decline 1720 points to 8210 and the S&P declined 506 points to 800, the two averages would still be trading at levels that historically have marked market tops.  To put it another way, if the S&P 500 declined 39% from its current price it would still be trading at a valuation level that historically has coincided with a market top.

A rather frightening prospect when one considers that a decline of this magnitude would still leave the averages at levels that historically have signaled the end of bull markets and the beginning of market declines.  We'll let you do the math yourself on the following figures: at prior market tops market cap to GDP was 75%, today it is 138%.

Now to be fair, market leadership did broaden yesterday with the Dow Transports gaining over 4%. We wouldn't get too exited over the transports joining the party just yet, however. UAL's forecast was partly based on the low fuel prices the industry is currently enjoying, and the recent price hikes in airline tickets have been partly in response to rising oil prices. Eventually something will have to give, and that something will be either the airline stocks or the market's new found love for oil stocks. We look for that something to happen after OPEC's meeting next week.

This week though, the two groups will rise in tandem and provide the push needed for the Industrials to surpass 10,000.  That push is largely unneeded at this point however.  After a few days of waving goodbye to partygoers who had set their watches to 9900-9950 in an effort to avoid the crowd, the market will today hit the 10,000 mark and begin its next round of good-byes--this time to the media circus which has surrounded the event.

After hitting the 10,000 mark the focus will turn to what happens next. The new methods of determining a stock's fair value that have developed during this bull market have shown no signs of being replaced by a return to historically accepted valuation methods. Five years ago a member of the S&P 500 that traded at a P/E ratio of 31 would have been considered outlandishly expensive. Today S&P member AOL trades at a Price/Sales ratio of 31.  Bullish extremes in analyst sentiment also show no sign of abating, as witnessed by  Market Guru Ralph Acampora's belief that the Dow can hit 11,500 by July or August.

Perhaps we should look to, Brussels, the city where Acampora made his latest prediction for clues to what happens when Bullish sentiment has reached its zenith.   It was only three months ago that Euro-phoria ruled the hearts and minds of citizens of that fair city.  Predictions that the Euro would overtake the dollar as the currency of choice abounded, and talk of a new era of European economic growth filled the air.  Today  the exuberant sentiment bubble has vanished  without a trace, and the path down the other side of the sentiment curve has taken far less time than was required to climb it. Dreams of a new era of European growth have been replaced by fears of a broken and weak Euro, and by the reality of stagnating economic growth in much of the land, and outright economic contraction in Germany.

The race to add a fifth digit to the Dow's price will continue this week.  Overseas markets were mixed overnight and for today, at least, will not factor into the "will this be the day" equation.  Asian markets (with the exception of Indonesia which fell on arbitrage activity) finished on the plus side led by a 1.88% gain in the Nikkei, while Europe is down on profit taking following Friday's surge. 

A trio of mergers today and an Internet industry gabfest could be just the ticket the Dow is looking for in its bid to become the third major average in the past two weeks to hit 10,000 (the Hang Seng and Spain's IBEX beat the Dow to the punch last week). Two of the industry groups that have led the market recently, the energy/oil sector and the financial sector, will be given a boost today as consolidation chatter heats up following the Fleet Financial/BankBoston and El Paso/Sonat deals.  The market has become increasingly forgetful of late, and these 2 deals, along with the DuPont/Pioneer Hi-Bred merger will likely help traders to temporarily forget the earnings fear that gripped them on Friday.  NASDAQ will likely be a positive influence on the Dow today as .Com stocks move on "news" from Paine Webber's annual Internet conference.

If the Dow fails in its bid today, the going will not be as easy later in the week.  The markets must digest Industrial Capacity and Utilization figures tomorrow, and the Consumer Price Index on Thursday.  Sandwiched between the two economic reports will be the release of the Fed's Beige Book on Wednesday.   We expect the release of these reports to be uneventful, and the reports will be largely ignored by many newer market players who will be more focused on a trio of high profile Internet I.P.O.'s expected this week.