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Downtrend confirmed

(April 3, 2002)

The Dow closed down 115 points today, for a new low at 10,198.  The VIX also spiked up 0.96 to 21.64.  Recall that in our commentary on Sunday evening, we mentioned that for the decline to accelerate from here, the VIX needs to close above 20.5.  We certainly got that yesterday and today.

The Dow Transports is also confirming the downtrend-even as crude prices made a slight pullback.  The S&P 500 closed below its 200-day MA yesterday, with further confirmation today.

The situation in the Middle East remains grave, with tensions actually escalating over the last few days.  The technical situation of the market makes the market very vulnerable to a huge decline from here, so any external adverse event would not be welcomed.  We believe the downtrend of the market has been confirmed.

The only argument against the bear case is the high P/C ratio experienced today (0.88).  Whether this would translate into a slight bounce or a more sustainable one, we don't know.  However, we do know that in recent weeks, the P/C ratios have been consistently low, and during the January and February declines, days with P/C ratios of over 0.90 were very common.  Therefore, we believe the bull case here is pretty muted.

After the bell, Dell raised its first-quarter revenue guidance (even as earnings were flat) and stock futures rallied after the bell.  Nasdaq-100 futures are now 15 points over fair value.  We believe the Dell guidance will certainly help the market work off its oversold situation, but by no means is this a new leg up.  If people are looking for a repeat of last year (when Dell reiterated earnings on April 4, 2001 and the Nasdaq proceeded to rally from approximately 1,600 to over 2,300 in a couple of months) then we think they will be sorely disappointed.  The downtrend has been confirmed and we think it still has room to go.

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