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Market Wrap

The short holiday week ahead is filled with minefields

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        WE 3-26          WE 3-19          WE 3-12           WE 3-5
DOW     9822.24 - 81.31  9903.55 + 27.20  9876.35 +140.27  +429.50 
Nasdaq  2419.17 -  2.10  2421.27 + 39.74  2381.53 + 44.42  + 49.08 
S&P-100  643.68 -  6.43   650.11 +  1.84   648.27 +  9.28  + 20.57 
S&P-500 1282.80 - 16.49  1299.29 +  4.70  1294.59 + 19.12  + 37.14 
RUT      393.92 -  2.66   396.58 -  1.80   398.38 +   .37  +  5.75 
TRAN    3260.11 - 78.37  3338.48 + 70.97  3267.51 - 45.28  +105.36 
VIX       25.83            25.84            25.81            25.12
Put/Call    .50              .53              .60              .61

The short holiday week ahead is filled with minefields

The markets will only be open for four days this week with the Good Friday holiday giving traders a rest. This week is loaded with major economic events and a war that is not going well. Check out the weekly calendar section of the newsletter for a complete list of events.

The major stumbling blocks economically start off with the new home sales numbers on Monday, and the all important FOMC meeting on Tuesday. The FOMC meeting is expected to be uneventful and Greenspan is expected to leave interest rates unchanged. Still, traders are not likely to want to bet heavily before the meeting outcome is known. Wednesday the GDP for the fourth quarter will be announced along with February factory orders. Thursday will feature Personal Income and Spending and Construction Spending. Traders are likely to lighten up here. With the March non-farm payrolls due out Friday and the market closed Friday, they could feel a serious need to go into the long weekend flat. This means Thursday afternoon could be weak.

If you look at the stats above you will see that we finished down for the week in all areas even after the big midweek rally. During the week the advance/decline line set a new low. A low that even surpassed the low of the Oct-98 correction when the Dow was at 7732. The divergence between the advancers/decliners has not been this bad since August 1929. Ouch!

So how can we only be only 178 points from Dow 10,000 and the internals be this bad? The main reason given is the move to blue chip safety. The blue chips are the ones leading the indexes higher and they are the most liquid. With the small caps and the broader market slipping steadily downward managers are moving out of smaller stocks and sticking to the big names. They are as worried as the retail investors but can't afford to miss the boat if the D10K rally fires back up again. They want to be invested but capable of selling quickly if the need arises.

Another factor for the down market last week is cash flow. The first two weeks of March were very strong in terms of cash moving into stock funds. Over $16 billion was transferred. This was the pre-D10k period. Most of this cash did not get invested because managers wanted to see confirmation of a move over 10K before sticking their necks out again. Last week Trim Tabs reported an outflow from these same stock funds of over $4 billion. Failure to close and maintain the rally over 10K put investors back into caution mode. Many funds are simply holding the money and waiting for some confirmation. The weak internals are not giving them confidence. I reported last week that 38 of the last 44 days had more new lows than new highs which is another bearish indicator.

I feel like I keep repeating myself over and over but we need to be aware that all is not well in the markets. Appearances can be deceiving. The Dow, Nasdaq and S&P are still moving up when by all indications they should be moving down. Noted analyst Barton Biggs expressed his consternation on Friday. He said, "I am totally befuddled, all the indicators are negative but the market just keeps climbing". "The 30-50 stocks that continue to lead the indexes higher are obscenely overvalued."

The war in Europe is not going well. A U.S. F117 Stealth Bomber was shot down on Saturday. In the last eight years the Iraq forces have not been able to accomplish what only took four days in Kosovo. The American public, which was evenly divided about the war to start with, (44% for, 40% against and 16% undecided), will definitely turn against it as more planes are lost. Rumblings in Washington are now mentioning the possibility of ground forces which will also be very unpopular. Surgical air strikes give the appearance of a quick, painless method of penalizing someone for doing bad things. Ground troops mean long drawn out fighting with many more casualties. Typically, the market goes down as we prepare for a battle but then goes up as the fight starts. That was the pattern last week also. If it appears, we could be headed for an expansion the market could trend down.

We are also in the middle of the earnings warning period. Next week could see many new warnings from multiple sectors.

Now that I have pointed out the bearish side let me also point out the bullish view. Typically the last week of a quarter is "window dressing" week. This is when managers try to put as much cash as possible into big name stocks to dress up their portfolios for the quarterly reports. This would normally push up prices. Also the last two trading days of a month and the first five of the next month are typically positive days. This is caused by regular monthly retirement account deposits being put to work. And believe it or not, the two trading days prior to a market holiday are normally positive days. All of these positive trends can of course be nullified by global events, interest rate increases (Tue) or earnings warning disasters. These historical trends of course do not take into account fed meetings, wars and non-farm payrolls on a holiday.

Do you see why market forecasters are pulling their hair out?

Nobody knows what will happen in advance and anybody that says they do is lying. This is why we have to play the cards the market gives us. If we don't like the hand dealt then we fold and wait for the next hand. Our advice for the week, don't fight the tape. Determine direction before starting new plays. Anticipate problems and react accordingly. Looks like a good week for taking a quick profit and jumping out again. The longer you are invested the better chance of having a bomb drop that costs you money.

Good Luck

Jim Brown
Editor

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