Option Investor
Market Wrap

Was It Really Friday The Thirteenth?

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        WE 7-13          WE 7-06          WE 6-29          WE 6-22
DOW    10539.06 +286.38 10252.68 -249.72 10502.40 -102.19  - 19.05
Nasdaq  2084.79 + 80.63  2004.16 -156.38  2160.54 +125.72  +  6.39
S&P-100  626.85 + 13.90   612.95 - 19.07   632.02 -  4.13  +  9.52
S&P-500 1215.68 + 25.09  1190.59 - 33.79  1224.38 -   .97  + 10.99
W5000  11271.92 +212.36 11059.56 -347.59 11407.15 + 94.70  + 74.45
RUT      490.71 +  7.45   483.26 - 29.38   512.64 + 23.99  -  6.48
TRAN    2940.35 +191.43  2748.92 - 81.04  2829.96 +153.47  - 17.13
VIX       23.87 -  1.10    24.97 +  3.34    21.63 -   .87  -  3.83
Put/Call    .65              .90              .58              .69

No black cats in the form of monster earnings warnings crossed our path on Friday but the major markets jumped with every news story. Still there were no surprises and the summer Friday passed into the history books without incident. Argentina is still there, Bejing's got games and there is still no inflation in sight. Yawn! Throw a couple steaks on the barbecue and grab a cold drink to ward off the summer heat.

In case you can't tell Friday was a slow news day. Traders held their breath all day as the Nasdaq traded on both sides of positive several times and the Dow bumped against resistance at 10550 all afternoon. Other than a strong dip slightly after the open the feared sell off never came. Large blocks of puts were being bought all afternoon but the drop never came. The Dow closed out its first winning week in two months with a +286 point gain, about one third of the prior four weeks losses. Apparently the gains from Thursday are going to stick. The bulls only gave passing notice to the Latin American problem and instead focused on positive statements from JNPR and AMD.

Surprise! The economy in the second quarter was bad. Surely that is no longer a surprise to anyone and the glimmer of hope in the guidance from AMD, JNPR and GE is energizing investors again. If you liked last weeks trickle of earnings then the coming week will really light your fire. There are almost 850 companies actually reporting earnings next week and 181 of those are S&P-500 companies. We should get a very good picture of what business for the 3Q will look like. There will be no shortage of good news and of course bad news. We all know about the 2Q bad news so investors will be looking for the silver lining in each announcement.

Economic reports on Friday were mixed and showed that the economy was still inflation free but also growth free. The ECRI Weekly Leading Index declined for the third week in a row and the recent skid is accelerating. Since it is a leading indicator it tends to point to conditions six months in our future. This would indicate that the 4Q recovery everyone is hoping for is not yet a sure thing. Retail Sales grew slower than expected at .2% and stretched the slide to three months. Excluding vehicle sales, retail sales actually fell -.2% during the last month. Analysts hope the tax rebate in the mail shortly will help inject some cash into the retail sector as well as lower interest rates. The Fed is banking on this to prevent them from having to cut rates again.

The biggest report on Friday was the fall in the PPI for June of -0.4%, substantially more than the consensus estimate of -0.1%. This was largely a result of lower energy prices and without energy the core rate actually grew +0.1%. Inflation is virtually zero and falling energy prices will take the pressure off profits for heavy energy dependent manufacturers. With zero inflation the Fed is free to continue to cut rates if needed without fear of stagflation. Currently the Fed fund futures are pricing in a 100% chance of another 25 point rate cut in August. There is only a 6% chance of a 50 point cut at this time.

Next week we have a light week of economic reports highlighted by CPI on Wednesday. More importantly we get to listen to several hours of what used to be called Humphrey Hawkins testimony by Alan Greenspan on Wednesday. Our elected officials get to grill him on anything they want related to the economy and his plans to deal with it. Greenspan on the other hand gets to practice his careful control of the English language and say "I don't know" or "you would not understand" in as many ways possible in the time allowed. Still fireworks have been known to occur and the markets will be watching carefully.

Get used to hearing the up to the minute Microsoft/DOJ results as reporters strain to sift every possible story from any mention by the parties. With the settlement by New Mexico the pressure is on the DOJ to settle before the coalition self destructs. On Friday the DOJ requested "fast track" status for the case and MSFT sold off slightly on the news and profit taking. MSFT reports earnings on Thursday.

So, with over 850 companies reporting earnings next week we should be off to the races with positive guidance pouring from every tech stock. If you feel that way I hope you are right. I was very encouraged by the lack of a sell off on Friday with Argentina a weekend wildcard. Historically the latter part of July has not been kind to investors as shown by the graphic below. This is a snapshot of July for the last four years. Ugly!

Granted this July is starting from an entirely different basis than any of the last four years. There has not been a rise into earnings and we are nearly -800 points below the May highs on the Dow. There is a feeling that the bad news is priced in and the worst of the selling is behind us. This is our only saving grace. Cash has piled up on the sidelines for months while institutions waited for the dog days of summer to make their purchases. Are those days in front of us or behind us? Even if they are still in front of us does that mean we will retest 10,000 again. I doubt that scares anybody at this point. The greater risk is not being in the market if the dip last week was the successful retest of the April lows.

With investors seizing the very small scraps of hope from each companies guidance there will be the possibility to positively "pig out" from the smorgasbord of earnings next week. Traders will be able to ignore those that are negative as "not relative" and hype those that are positive as previews of things to come. Everybody, well almost everybody, wants to be bullish. Even shorts like to play the long side in a bull market. That chance will come next week. If ever we had a chance of NOT REPEATING the July sell off from the last four years, it would be next week. We have already sold off! The news would have to be so bad that Bill Fleckenstein would cringe before the bulls would move to the sidelines again. They want to buy! They want to bet on the 4Q recovery even if it comes a couple quarters later.

This creates the problem we have all seen in the past. Excessive bullishness. Most market declines occur when market sentiment is at its highest. Note that each July decline in the graphic above occurred ot a high point. We want to believe that the worst is over even if it is wrong. Investors want to hit play with the Nasdaq 5000 history tape in the VCR and feel the thrill of victory all over again. All we need is a little help from earnings and we are good to go. IBM will be the key for the week on Wednesday. ANY positive guidance from them and the lid could come off. Microsoft has already announced a positive surprise on the revenue side to set the tone for the market. INTC does have a chance to kill the whole thing on Tuesday if they say something negative but with AMD saying positive things about the future Intel would be shooting itself in the foot by giving negative guidance even if they need to. With 850 earnings announcements we are sure to have our share of winners and losers. Hopefully the winners will swamp the losers and worries about a repeat of the summer slump will evaporate into thin air. Nasdaq 2140 is the next resistance point and Dow 10550 was pretty convincing as a ceiling on Friday. A breakout above either of those numbers on Monday would be buyable but you should close the positions if the indexes fall back below those levels. The markets could be very volatile with news popping like firecrackers on the fourth.

Definitely, enter passively, exit aggressively!

Jim Brown
Editor

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