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Market Wrap

It is now official. The July jinx is still alive and well

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        07-27-2000        High      Low     Volume Advance/Decline
DJIA    10586.10 + 69.60 10643.40 10516.80 1.16 bln   1389/1446
NASDAQ   3842.23 -145.49  3954.96  3841.62 1.79 bln   1108/2877
S&P 100   793.04 +  1.85   799.99   789.08   totals   2497/4323   
S&P 500  1449.62 -  2.80  1464.91  1445.33           36.6%/63.4%
RUS 2000  501.61 - 12.20   513.82   501.50
DJ TRANS 2799.75 -  0.59  2833.85  2791.67
VIX        22.33 -  0.42    22.99    21.82
Put/Call Ratio       .59

It is now official. The July jinx is still alive and well

For three weeks the market rallied with shouts of "summer rally" being heard from the roof tops. I warned you to take profits quickly and keep your stops close because late July had produced a -15% sell off in 1998 and 1999 and was likely to repeat for 2000. I got hateful emails from people telling me to wake up and join the rally choir before the Nasdaq hit a new high and my readers revolted. (and that was from my staff) Well, it is official. The Nasdaq, again in correction mode, has now dropped -10%, (-442 points) from the recent high set back on Monday of last week. Am I glad? Heck no but I do hope that our readers were at least prepared for the possibility that honeymoon might be over early. Those that took my advice were not caught holding calls worth a fraction of their original value and waiting for a bounce. Now lets put the sell off behind us and start looking for a new entry point.

The culprits today, and there always has to be some, were Nokia, Amazon.com and Worldcom. Throw in some stronger than expected economic reports and you have a prescription to move to the sidelines.

Nokia, NOK, was the most active stock on the NYSE today, trading 115 million shares, after they warned that earnings for the third quarter would slow. NOK dropped -$14 and put a drag on not only the telecom sector but semiconductors as well. If cell phones sales are slowing then the components, mostly chips, would slow also. The major semi stocks all took hits on top of the recent news that personal computers may also be reaching a saturation point. Just last week a noted semiconductor analyst had forecast another 18-24 months of profits from that sector. How quickly investor sentiment changes.

Amazon.com suffered from analyst revolt today after missing growth targets for the last quarter. Almost every analyst that tracks AMZN decided to lower estimates and recommendations on the money losing company. AMZN lost -$4.69 and closed at a 52 week low. Eventually AMZN will pull out of this hole with millions of satisfied customers and tens of thousands of products. Sales were up, profits were up, customers were up and earnings hit the estimates. The company is just not moving as fast as analysts would like.

Worldcom warned today that sales were slowing and that caused another ripple in the telecom sector. WCOM lost over -10% (-$5.50) on the news and was a major drag on the Nasdaq.

APCC warned after the bell that they would miss earnings and dropped over -$12 in after hours. This is just another in a long line of earnings warnings that are putting the excellent earnings from last week into the history books but out of investor memory.

The economic news was mixed with the Employment Cost Index Report coming in with a +1.0% gain as expected. This was down from the +1.4% gain in June. That was all the good news however as the Durable Goods Orders jumped an unexpected +10% when the estimate was for an unchanged or negative report. Adding fuel to the fire was a drop in jobless claims of -40,000, much lower than expected. Add to that the wages and benefits portion of the ECI report is climbing at the fastest rate in a decade and the soft landing everyone was expecting is turning out to be just a spring board for another jump.

Still all the news above is just filler. They are the daily excuses clung to by high profile analysts as reasons for the market drop. Now think about it. What was the reason in July 1999? July 1998? July 1997? It sure was not NOK, WCOM, AMZN. Sure there were other names and numbers but the key here is the SEASON, not the stocks.

Greenspan talks twice during this week each year. Companies warn in this season every year. They are flush with great earnings from the last three quarters but they are then faced with the summer quarter which is normally slower. If you are having trouble meeting increased expectations during good quarters then a slow quarter is a cause for confession. Since July begins the summer quarter in earnest and earnings for this quarter are reported in October you can see why historically the market has trouble in this period. Forecasts of summer earnings problems tank the market in July/August and then actual results, many less than expected, are reported in October. I don't need to tell you what happens in October.

If you are a long term investor (years) then this rise and fall is just cause for some irritability. However if you are a swing or momentum trader, and if you are reading this tonight you probably fall into that category, then these represent trading opportunities. Fund managers also recognize this trend and are trading it as well. As the Internet trading boom continues to accelerate the trends will become more pronounced as more and more investors become traders and learn the system.

Where am I going with this? It is not NOK, WCOM and AMZN. It is not Greenspan talking. It is purely seasonal. Sure there are things that accelerate the market moves. I went back to the summer of 1998 and re-read some of the market wraps and then it was the Russian default and Japan and the Fed and some earnings warnings and so on. There will always be excuses but it is a tradable event. Analysts get so caught up in the daily ebb and flow of stock news that they try to micro manage their analysis. It is simpler than that. It just looks complicated. Here is the answer. Earnings are over, vacations are in progress, cash is safe. Got it? Earnings warnings just push investors off the fence and force them to decide if they want to be invested or in cash while they are away from their computers.

Do you doubt my analysis? What does Mary Redmond say, "follow the money." According to TrimTabs.com equity funds had redemptions of $1.1 billion for the three days ended July-20th for a monthly rate of -$8.4 billion. Aggressive growth funds still saw a small inflow but tech funds had their largest outflow for any period during the last six weeks. TrimTabs said it is becoming "cautiously bearish" due to slowing inflows as well as pressure from a large backlog of new offerings. The IPO calendar is chock full with billions of dollars of new stocks coming to market. These new stocks take liquidity out of the market as people lighten up on holdings to make room for their new sexy IPO additions.

Ok, so we sold off. Now when do we get back in? The Nasdaq tried to rally into the close five of the last six days to only crater again. The bulls are still out there and they are still trying to buy the dips but they are buying losses instead. The volume is very strong with the Nasdaq trading 1.78 billion shares and the NYSE traded 1.15 billion. Strong volume for the Nasdaq on a very bad day shows that it is not just a sector thing but a market event. The Dow is rebounding on sector rotation out of techs and into defensive issues like Drugs, Oil and believe it or not Financials. No big gains there but still positive.

Stock investors just don't have any reason to buy stocks in any quantity and those are the guys who drive the market. Earnings are over for all practical purposes and both major indexes have fallen below their 200 day moving averages. There is no momentum and no excitement. About the only thing analysts agree on is the need to get past the August FOMC meeting and see if Greenspan has one more rate hike up his sleeve. Then comes the September economic data a week later to confirm the Fed's decision. That pretty well knocks out August as a meaningful rally possibility. Without the Fed a mid August rebound would be a possibility. Last year the rebound started on August 10th. In 1998 it began on Sept 1st. With the Fed ahead on August 22nd the market is more likely to trade sideways. As more economic data comes available that could change.

As always a relief rally could break out at any moment. Nothing moves in a straight line and a -442 point drop from last weeks intraday high looks like a buying opportunity for some. The Nasdaq broke through first level support today and came to rest eight points from the next support level of 3850 I mentioned on Tuesday. There is pretty decent support here but it closed almost at the low of the day. If we break down again then 3700 is the next support level and another day like today would put us below that. The best scenario in my book would be a complete break down to a retest of 3200-3300 and form a serious double bottom from which the mother of all rallies would follow. Granted, we are at 3842 and a drop to 3300 may not even be possible with the amount of cash still sitting on the sidelines. I would love to see it. This would clear out all the weak holders and give us a text book formation for a significant rally to new highs in the fall. The bears would have their wish and the bulls would feel free to come back into the market at a drastically reduced level.

Back to reality! Regardless of how far we drop or if we just hold here at 3850, the prospect of anything meaningful before the Fed meeting is slim. The Dow is benefiting from the rotation out of techs but that is temporary. If the summer doldrums really kick in then 10350 is the next serious support level. 10600 is currently resistance and support and Friday will determine which is stronger.

The most troubling factor for me is the volume. Summer volume is typically light. The almost 1.8 billion shares on the Nasdaq today could mean a more serious undertow than normal. Of course the bullish view would be that buyers were snapping up shares at the fire sale prices as fast as sellers could place their orders. The Dow intraday pattern looked bullish from 12:00 on but traders sold the rally with a vengeance in the last 30 minutes.

The end result is serious volatility and a directionless market. Without a trend in place it would be foolish to try and trade unless you are an accomplished day trader. Preserve your capital and wait for the markets to settle. Now is the time to be researching stocks and deciding which one you want to own when the real rally appears. There is always another turning point in our future. Let's wait for the real one to show up!

Don't fight the tape.

Good luck and sell too soon.

Jim Brown

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