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Upside limited in our opinion

(February 24, 2002)

Another stunning reversal last Friday as the Dow shot up 133 points while the Nasdaq managed to eke out an 8-point gain. The rally was unimpressive, however, as the rally more or less fizzled towards the close (the Dow had been up more than 160 points and the Nasdaq more than 20 points earlier). Coupled with the following chart, the picture is even more bearish.

DJIA Price and NYSE Volume Information (November 1, 2001 to February 22, 2002)

As one can see, volume remains pathetic during the latest rally. What has been keeping this latest rally intact is the lack of selling, not the volume of buying from the "bargain hunters." Confidence of the mom and pop holders remains intact (and only in the Dow) but one of these days (and we believe it could come as soon as this week or next week if window-dressing comes out in force) this whole thing is going to fall apart. We maintain Friday's rally was due to panicky short-covering.

All around the Dow, other indices have been making new lows. Take the Nasdaq and S&P 500, for example. The former hasn't been this low since late October and the latter about the same time. We believe what little money out there is being funneled into the Dow. As a safe-haven so to speak.

The latest stock to fall from grace on Friday was JP Morgan Chase. The world's premier gambling den with a notional value of derivative holdings of more than $40 trillion. An integral part of the Dow-leaving literally only 15 stocks to support the Dow. They are: MMM, HD, WMT, BA, AA, JNJ, GM, PG, HON, CAT, UTX, DD, MO, DIS and XOM. All the other components have literally broken down or are making new lows as we speak.

The question is: Which stocks will be next? We honestly have no clue but one thing we do know is that Home Depot is reporting earnings Tuesday after the close. Its counterpart, Lowe's (LOW) reports Monday morning before the market open. Both are expecting strong earnings and we believe guidance will also be good going forward. The question is "how good?" Will investors be satisfied? Will there be more buyers to drive the price up? The story will be revealed during trading tomorrow for LOW (and consequently, HD as well). However, let's take a look at LOW's latest chart:

Closing Price of LOW and Volume Information (October 1, 2001 to February 22, 2002)

Not unlike the Dow, the volume that sustained the latest rally in LOW has been pretty pathetic. We wonder where the additional buyers will come from? After all, all the people who have bailed out of technology and financial stocks have already bought stocks like LOW, HD, and a selected batch of Dow components as a safe-haven. To find more buyers from this pool would mean the inverse relationship of the Dow and the Nasdaq has to hold going forward. Dow 10,300 and Nasdaq 1,600? We do not believe so. Either the Dow has to decline or the Nasdaq will rise from here, and you know which direction we are betting on.

What we believe we are seeing is an exhaustion of buyers. The only reason the Dow hasn't declined yet has been the lack of sellers and the manipulation of certain big interests. Half of the Dow component has broken down. Could we see one more Dow component break down in the next few days? Time will tell.

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