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Short-covering ends

(March 13, 2002)

After making a closing high yesterday at 10,632, the Dow abruptly reversed today and sank more than 130 points to close at 10,501.

DJIA Price and NYSE Volume Information (November 1, 2001 to March 13, 2002)

Obviously, the "good" jobs number (never mind the non seasonally-adjusted unemployment rate was 6.1% on unusually warm weather) last Friday and the short-covering of IBM wasn't enough to carry the Dow today, and momentum has been virtually non-existent since Monday. More ominously, the low volume of the last three days suggests there is still a lack of interest on the buy side, and the rally of the last two weeks have just been huge short-covering.

At the time of our last commentary, we believed we were near a top as suggested by the McClellan Oscillator (it is now at +13 and any close below 0 would suggest that the majority of stocks are now declining), the huge imbalances in the COT report, the low put/call ratios, and the memo from Goldman Sachs telling its clients to go long on a short squeeze a couple of months ago. We also maintained the latest rally have mainly been short-covering. Judging from the action of the last few days, we believe that is still the case. There is a good chance the beginning of the next down leg of this bear market has already started, and all speculative longs here should be closed immediately or with a tight stop loss.

Going forward, we would not be surprised to see a rally going into expiration, but any rally here should be short-lived.

We will seek to short-sell $20,000 of HD and $20,000 of QQQ (direct short-selling, not through put options) on any strength in the markets tomorrow.

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