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Market Wrap

I hate it when this happens!

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        WE 8-4           WE 7-28          WE 7-21          WE 7-14
DOW    10767.75 +256.58 10511.17 -222.39 10733.56 - 79.19  +176.77
Nasdaq  3787.36 +124.36  3663.00 -430.86  4093.86 -152.32  +222.98
S&P-100  795.85 + 19.67   776.18 - 28.37   804.55 - 10.97  + 12.52
S&P-500 1462.93 + 43.04  1419.89 - 60.30  1480.19 - 29.79  + 31.08
RUT      503.63 + 13.41   490.22 - 32.48   522.70 - 19.93  + 14.41
TRAN    2886.81 +117.28  2769.53 - 38.89  2808.42 -110.62  +134.40
VIX       21.54 -  2.76    24.30 +  2.83    21.47 -  1.14  +   .79
Put/Call    .41              .59              .38              .48      

I hate it when this happens!

It was a great open for the Nasdaq but it turned into a classic gap and crap as the gains burned off before 11:00. Euphoria to boredom in 60 minutes flat. The Dow turned a positive jobs report into a negative result in less than 30 minutes. What happened to the trend of the post announcement rally? Was there a component in the jobs report that you needed a decoder ring to decipher? For whatever the reason the markets traded flat to down all day until the Dow started to sprint just before the close. After falling back below 3800 after the open the Nasdaq made two attempts to get back to that level and both failed. Still the positive momentum at the close had analysts saying good things about the outlook for next week.

Just when you think everything is finally going right, the wildcard pops up and ruins your entire day. Maybe I am just being too cautious. Maybe I am trying to hope a rally into existence before its time. I had supper Friday with Austin Passamonte and his wife Wendy. We were comparing notes on the market, good trades, bad trades and trading psychology in general. When the market closed I was ready to write about an impending rally but the more we talked something kept nagging me about the facts. We talked about trades we should not have made. We talked about charts that said one thing and yet we believed another. We talked about expectation and mindset getting in the way of fact. One of the biggest things that ruins traders is ignoring the facts and trading when we shouldn't. We laughed about these stupid errors as though we would never commit them again. (Now that IS stupid!)

While I wanted to believe that the markets are going to rally from here the facts kept gnawing at my subconscious. Yes, the jobs report was benign at -108,000 jobs. However after factoring out those pesky 290,000 census workers the government laid off in July the number of new jobs created soared to +182,000. Yes, the Fed is probably on hold until after the elections. According to the bond futures there is only an 18% chance of a rate increase at the August FOMC meeting. Yes, the financials went into vertical mode on the expectations of no more rate increases with the S&P Financial Index hitting an all time high. Yes, the Dow Jones, rate sensitive, market leading, Utility Average has broken out into a new all time high. Yes, Elaine Garzarelli has proclaimed a bottom in tech stocks. Yes, we retested support just above 3500 that we last saw on June 1st and it generated a +265 point rebound. Yes, the Thursday rebound was on huge volume of 1.8 billion shares. So why do I still feel like I am the last bull in the trailer and I don't want to follow my buddies down that narrow chute into that noisy building?

Why didn't advancers beat decliners on Thursday? (17:22) Why were there 197 new 52 week lows compared to only 39 new 52 week highs? That was a really good jobs report on Friday but why didn't the markets celebrate? What are we missing? What important piece of information are we overlooking? Maybe I am just making a mountain out of a molehill when we just had a little profit taking on a summer Friday. After all both the Nasdaq and the Dow closed up nicely after trading in the negative column during the day. It just bothers me when the markets don't react like they should at significant events. They have rallied on recent jobs reports when the data was much worse. Why not rally when you have good data and the market is over sold? Maybe we are not done yet? I went back yet again and looked at prior Augusts. In 1999 the August rally began on the 10th, in 1998 Sept 1st, 1997 on August 18th. Now I realize every year is different, every market move is punctuated by news and earnings events specific to that year, but the trend is definitely weighted toward a recovery later in the month. Maybe I was jumping the gun in calling the 3521 bottom on Thursday a bottom.

Lets look at the hard facts and then decide. The VIX at 21.58 is only .14 away from a five month low. Yes, I know the VIX is based on the OEX and that is not a Nasdaq indicator but it is a broad market indicator. It can also change in a heartbeat with the market as well. It could be 25 by lunch on Monday but you would not want to see that happen if you are long since it would mean the Dow/OEX tanked pretty drastically. Another indicator is the put/call ratio which at .41 is only .03 higher than it was on July 20th when the Dow posted a two month intraday high of 10874. The Dow is less than 75 points away from upper resistance at 10825. The Nasdaq gapped open to break above 3800 but then fell back to trade in a very narrow range all day Friday just slightly above previous resistance at 3750. Am I being too optimistic in thinking that it was just profit taking that held us back on Friday?

The good news is still a positive Nasdaq holding over 3750 with no divergence on the Dow. Both indexes positive on a summer Friday cannot be a bad thing. The broadest representation of the market health is the Wilshire Total Market Index (TMW.X) which rebounded nicely from the Thursday lows. A nice trend there since the July 28th low and with the Friday move is now back over its 200 DMA at 13,428. The 200 DMA on the Dow and Nasdaq are not so positive. The Dow closed only 6 points under its average but the Nasdaq is still fighting to reach its average at 3901. Even the Russell-2000 closed only .6 below its 200 DMA. Why is this important? The 200 DMA normally provides significant support or resistance for each average. Many institutions have rules that require positions to be liquidated if a 200 DMA is breached. Conversely they will buy again when the stock/index moves back above the 200 DMA. I think the Dow and Nasdaq may have some trouble getting over those moving averages but once over they would provide good support.

I think the markets on Friday looked under the headline numbers on the Jobs Report and even though the three month jobs average showed the slowest rate of growth since 1992, there is still strong growth. They remember the 5% GDP number and they may be listening to rumors that there would be more jobs except there are no qualified employees. They know within reason that the Fed will not raise again in August but with the very high GDP Greenspan will act strongly again after the elections. There are persistent rumors that an entire new SERIES of rate increases will begin in November. If this comes to pass then profit estimates may be too high for companies going forward. I don't think this will keep us from having a rally soon but with storm clouds building on the long term horizon the rally may be subdued. The term we have grown to hate worse than "correction" is "range bound" and we may be headed for that until the long term Fed policy is understood.

Our challenges on the economic front next week will be the Productivity report on Tuesday, Wholesale Inventories on Wednesday, Import/Export Prices on Thursday followed by super Friday with Retail Sales and the Producer Price Index. CSCO will announce earnings on Tuesday and Dell on Wednesday. There will be lots of tech apprehension in advance of those announcements. Rumors abound that Dell may not hit their estimates but analysts feel they will post a good quarter.

I am going into this week cautiously optimistic. I want to believe a rally is forth coming. The VIX and the put/call ratios are saying otherwise but remember the VIX is weighted toward the Dow not the Nasdaq. With the heavyweight economic reports at the end of the week any up moves should be early but the bounce on Thr/Fri has taken much of the oversold condition out of the market. Traders will be watching to see if the 200 DMAs will hold and if volume holds as well. With 1.4 billion shares on the Nasdaq on Friday it was decent but not great. Remember the NDX.X and the QQQ holders both closed in negative territory on Friday despite the Nasdaq gains. With the VIX/PC ratios moving into extreme conditions the likely hood of another dip is strong. If it comes and does not break the 3521 from last week then it could be seen as a successful retest and a definite bottom. Have I confused you yet? The key point here is let's don't let our "hope" for a rally cause us to trade when the "facts" are warning us to wait and watch. Let's obey the warning signs and wait for confirmation of the Thursday rally.

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Trade smart, sell too soon.

Jim Brown

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