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Market Wrap

What is the difference between the jobs report and Y2K?

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       	 WE 6-4          WE 5-28          WE 5-21          WE 5-14
DOW    10799.84 +240.10 10559.74 -269.54 10829.28 - 84.04  -118.27  
Nasdaq  2478.34 +  7.82  2470.52 - 49.62  2520.14 -  7.72  + 24.24  
S&P-100  672.42 + 13.76   658.66 - 13.10   671.76 -  1.81  -  8.17  
S&P-500 1327.75 + 25.91  1301.84 - 28.45  1330.29 -  7.51  -  7.30  
RUT      442.33 +  3.65   438.68 - 10.46   449.14 +  6.01  +  7.02  
TRAN    3462.73 + 47.03  3415.70 -135.56  3551.26 -115.08  - 76.49  
VIX       23.45            26.38            25.36            29.66
Put/Call    .56              .54              .64              .71

What is the difference between the jobs report and Y2K?

None we hope. The much dreaded May non-farm payroll report on Friday was expected by most analysts to be a blowout with new jobs soaring over the expected 225,000 estimate. Instead the much hyped report almost showed a negative number with only 11,000 new jobs added in May. Almost a depression as far as the Goldilocks economy is concerned. So instead, the Dow added several hundred points in a whirlwind buying spree, right? Wrong! The brief flurry of activity at the open was quickly subdued by the deeper internal numbers. The April jobs number was revised upward to 343,000 jobs from 234,000, a huge boost. Also the unemployment rate dropped to 4.2%, the lowest rate in 29 years. The average hourly wage rose by a stronger than expected +$.05 to $13.19. This could be a preview of Y2K. All panic, no fact.

The stronger internals caused the conspiracy theorists to start shouting inflation again. Instead of rejoicing in the much weaker than expected 11,000 number they started all sorts of new possibilities in motion. One explanation offered for the 11,000 number was that all qualified employees were already hired in April and there were none left in May thus starting a bidding war for the remaining trained personnel. This they said would be borne out in the June jobs report by higher wages still. Give me a break! Give those "glass half empty" analysts something else to do.

None the less the Dow wallowed in the +60 range all day as the analyst tug of war on CNBC kept investors on the sideline for the most part. The spike in the averages came in the last hour and much of it was due to a court ruling in Oregon against AT&T. In simplified terms the ruling said that AT&T must allow other ISPs access to their cable networks. Many Internet companies soared on the ruling. AOL +12.14, ELNK +8.06, MSPG +14 etc. Other non-ISP companies tacked on big gains as well, QCOM +7.88, YHOO +12.06, PCLN +6.19, DCLK +8.13, EBAY +7.19. All the gains came after 3:PM when the ruling was announced. The entire Internet and Telecom and Communications sectors soared. ATHM of course dropped -10.75 as a direct result of the ruling. The spike caused by the ruling pushed the Nasdaq to it's fifth largest point gain ever of 75.02.

In reality the market continued to move sideways due to interest rate worries. It is almost a given now that the Fed will raise rates at the Jun-29th meeting. The official odds as indicated by the bond futures are at 88%. Many think the market has already factored in one increase and we should move slowly up from here. An interesting point came out on Friday. A Fed watcher and Greenspan associate said that Greenspan was worried about the Y2K impact on the market and he would not do anything to torpedo it in the last six months. Since it takes six to eight months for an interest rate change to be felt in the economy, this Fed watcher felt very positive that a change in June would be the only one this year. As a pre-emptive strike it would be the equivalent to getting your hand slapped as you tried to take cookies out of the jar. Just a warning that the Fed was watching and would take harsher action if needed. Just a firm restatement of the rules.

Unfortunately, the jobs report did not give anybody a clear picture of the economy. On the Fed both hawks (pro rate increase) and doves (pro growth), got just enough positive information to keep their case alive. This of course has market timers and technicians pulling their hair out. Up, down? Fast, slow? Retest highs or lows? What this will cause is simply continued volatility. Triple digit swings. The good news is the blunting of the strong bullish sentiment. Too many bulls spells defeat. You must have enough uncertainty in the market to provide both buyers and sellers in order for the market to move. If everybody is holding stock and nobody is selling the market will go down. If everybody is selling and nobody is buying the market goes down. (you knew that) It takes a mixture to make a market rally. We definitely have a mix of bulls and bears this week!

The retail sector blew out on Friday. On top of strong same store sales on Thursday several stores said positive things about current trends. Circuit City released a positive earnings warning that they would substantially beat earnings this quarter. This on top of a 54% sales increase last quarter. All the retail stocks spiked multiple dollars in sympathy. Eli Lilly also prewarned that they were comfortable with estimates, and that sales and revenue growth were strong. The drug sector, not to be left out of the retail sectors glory, was also strong for the day. Intel was upgraded Friday. You know, downgraded on odd days and upgraded on even days. After trading down for three days it will probably trade up for three days while we wait for the next analyst to climb on the publicity bandwagon.

Unfortunately all the warnings were not positive. UAL, United Airlines, prewarned a drastic earnings shortfall. Estimates had been for $3.10 and UAL said they were guiding analysts in the $2.40-$2.80 range. A very big range and a significant drop. They cited reduced load factors as the cause. Just what analysts wanted to hear. Quickly AWA, America West, did a me too warning hoping to be ignored with the focus on UAL. AWA also cited a reduced load factor but qualified it. They said the addition of many new routes had resulted in higher seat sales but the addition of the new routes had also impacted the load factor averages.

The airline warnings Friday and Quantum's warning on Thursday just reminded traders that earnings warning season is in full bloom and they can expect more daily. And as if you needed to be reminded, the next PPI report is due out next Friday and the CPI on Jun-16th. Greenspan speaks to the joint economic committee, by request, the day after the CPI. The FOMC meeting is on Jun-29-30th. Never a dull moment. Sorry Toto, this is not Kansas, but the beginning of the summer doldrums on Wall Street. The volume is slowly dwindling as traders thin out for vacations and long weekends at the beach. Friday only produced a 694 million share day on the NYSE and an anemic 885 mln shares on the Nasdaq. It is down hill from here until the end of June and the start of the next earnings cycle.

But wait! Is that a ski jump forming on the Dow chart? Sure looks like we have managed to turn the tide on both the A/D line and the average. The wild card here now is the fickle consumer who has been transferring money out of mutual funds by the truck load. If John Q. Public sees the market turning around, how long will it be before they reverse that decision and plough that money back into stocks. You know, everyone wants to bet on a winner and no one wants to be left behind on the way to 12,000. Even the Y2K wary may decide they got out too soon and try for one more earnings cycle before putting their cash away for that "year end" rainy day.

Even the Nasdaq is starting to ease back up in spite of the two weeks of Internet fire sales. We broke out of the 2450 resistance Friday but it still remains to be seen if we can hold it.

While I may have sounded bearish above, my forecast is actually for the market to trend upward this week. The closer we get to the PPI, CPI, FOMC, the more unstable this recovery will become. But for now the trading light is green. Resistance should start around 11,000 (+200 from here). As always, confirm a positive market, positive ticks and positve A/D before starting a new call position. There were a lot of spikes on Friday that may give back some on Monday.

Good Luck, wait for an entry point, sell too soon

Jim Brown

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