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Market Wrap

What is the Definition of Support?

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        WE 5-18          WE 5-11           WE 5-4          WE 4-27
DOW    11005.37 -296.37 11301.74 +480.43 10821.31 -129.93  +141.19
Nasdaq  2251.03 + 52.15  2198.88 + 91.45  2107.43 - 84.10  +115.85
S&P-100  658.29 - 10.09   668.38 + 22.95   645.43 - 13.31  +  9.63
S&P-500 1277.89 - 14.07  1291.96 + 46.29  1245.67 - 20.94  + 13.56
W5000  11849.89 - 73.63 11923.52 +432.18 11491.34 -195.93  +178.43
RUT      508.62 +  2.34   506.28 + 18.92   487.36 -  5.53  +  8.92
TRAN    2929.20 - 49.75  2978.95 + 99.39  2879.56 + 10.37  +  6.82
VIX       23.15 -  1.11    24.26 -  3.22    27.48 -   .24  -   .05
Put/Call    .62              .47              .63              .67

Answer: Friday's close on the Dow and Nasdaq! Each closed within a whisker of being exactly on critical support levels. The Nasdaq closed at 2251, a mere one point above critical support at 2250. The Dow also snugged in close to 11000 at 11005. The S&P remains about 10 points above support. With a blessing from Greenspan on Thursday the light is green for a post holiday rally if the bulls can muster up the courage to attend.

Thank you grandpa! You could not tell it from the major indexes on Friday but Greenspan gave the economy and the markets his blessing in the Economic Club of New York speech on Thursday. He warned that the manufacturing correction is not yet over, (old news) but that the Fed was monitoring the problem and they would not be bashful should it require a policy response. (further rate cuts) He said "this period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy response" but there was no sign of inflation and productivity was still growing. Count on interest rates going lower and count on the economy recovering in the last half of the year. That was the bottom line of the wordy message. He did suggest that the five previous rate cuts would provide needed support and the Fed may be toning down its aggressive posture.

The economic reports out Friday did not project a picture of glowing economic health. The first quarter GDP was revised downward to +1.3% from the previously reported 2.0%. Things are not as rosy as previously projected. Couple that with Greenspan's "not out of the woods" speech and traders were a little cautious. Also existing home sales fell an incredible -4.2% showing that not only new homes are staying on the market longer but all homes. It appears that consumer confidence, which came in Friday at .92 as expected, may be about to take a turn for the worst as evidenced by home sales. If they are not buying houses then they are not buying appliances to go in those houses. Durable Goods came in with a -5.0% drop which was much more than expected. What we have here is light at the end of the tunnel with the Greenspan comments, but the tunnel just got longer, much longer. This was the main culprit for holding back the markets on Friday.

It also did not help that a major analyst was talking GE down as well. Saying that short cycle products were still declining in May and there was evidence that Jack Welch's comments, "ugly and getting worse" may still be true. Long cycle products like aircraft engines were still in a growth mode of about 20% for GE but consumer type items were dragging them down. GE and HON both fell on the news as well as UTX and MMM in sympathy. GE also fell on the news that they, along with Goldman Sachs, would provide $7 billion to rescue Finova, FNV. Pocket change, right?

The Nasdaq fell despite an upgrade of the semiconductor sector. The culprits Friday were ADCT and DITC whose earnings problems tanked the communications/networking sectors and overpowered the semiconductors. Even JNPR, which was rumored to have won a contract over CSCO, dropped -2.41. Lehman made a very public call saying the second half of the year may be more challenging than previously expected. There were no winners in anything Nasdaq with profit built in over the last two weeks. With so much uncertainty in the U.S. a well as overseas, the urge to go into the long weekend flat was just too strong. Still volume was still VERY light. The Nasdaq just squeaked out a second lightest day of the year award with 1.38 billion while the NYSE posted the lowest volume day of the year at only 818 million.

Remember the almost 30,000 volume on the Microsoft leaps on Thursday? There was another 15,000 of the Jan-02-120 calls on Friday. Merrill Lynch analyst, Henry Blodget, came out Friday pounding the table on Microsoft. That was just a coincidence, right? You don't think Merrill Lynch would take a 45,000 leap position just before their golden boy went bullish on the stock? It did not do Blodget any good because MSFT lost -.81 for the day. That was also surprising since MSFT and AOL are now kissing cousins again. The feud between MSFT and AOL, which bought Netscape, appears over and they are reportedly going to announce a deal where MSFT will bundle AOL software with the new Windows XP. Could this be a condition for a pending settlement with the Justice Dept? If MSFT and AOL do get together again it could be trouble for RealNetworks. RNWK has refused to slim down its software for AOL and their agreement is ending. AOL could easily go with Windows Media Player instead and I am sure MSFT would love to grab 28 million more users away from RNWK. (Note: I was talking to one of the other editors late Friday night and I went back to show him the volume on the MSFT leaps and all the daily volume was gone as well as the open interest on the CBOE. I mention this in case it was all a data problem at the CBOE but it was there at 4:PM!)

Next week could be a challenge. Since both major averages have dropped back to basically a goal line stand on their previous breakout points, trading could be tricky on Tuesday. After the Friday morning dip and recovery the Nasdaq held 2250 the rest of the day. The Dow only dipped below 11000 once to 10993 and quickly rebounded. However, the Dow does not look as healthy as the Nasdaq and with a -117 close you can see why. It is trending down rather steadily and not far from the low of the day. Just profit taking? Maybe, but the line was drawn in the sand at 11000 by a beaten and battered defender not a bull with just a bloody nose.

The VIX was behaving strangely on Friday. With both major indexes falling the VIX was heading DOWN for a 23.15 close. This is a number not seen since September of last year. The saying "when the VIX is low its time to go" has always worked in the past but how low is low? Last August the low was near 18. This was just before the Dow rolled over at 11250 and fell to 9656. What is strange about this is the market was falling triple digits on Friday which normally pushes the VIX up as traders buy puts. Is everyone so bullish they are not even considering puts? Do we have a disaster waiting to happen here? If so, the conditions are setting up so quietly that many may get caught by surprise. This is something traders really need to watch next week.

With summer officially upon us and Tuesday likely to be a very low volume day as well, it may be Wednesday before we can confirm direction. The battle may be fought in minor skirmishes Tuesday and as yet unknown news headlines will control our fate. The first economic reports to worry about are the Personal Income and Spending on Tuesday, Chicago PMI on Thursday and the biggie, Nonfarm Payrolls on Friday. The midweek reports are noise but the Payroll report could be trouble. With the economy possibly weaker than expected by the Fed's own admission, falling payrolls could trigger more uneasiness. Put worry about the payrolls together with very low volume and we could see a volatility spike and support levels tested again. On the other hand, investors, not traders, have pretty much accepted the fact that the patient will not die and the antibiotic has already been administered. Next week it will be up to the true believers to hold the line. Would the true believers please stand up! We are behind you all the way, at least until the Nasdaq falls below 2250 and then you are on your own!

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Enter passively, exit aggressively!

Jim Brown

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