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Market Wrap

Dead Stop!

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       7-31-2001          High      Low     Volume Advance/Decline
DJIA    10522.81 +121.09 10595.05 10402.97 1.13 bln   1893/1221	
NASDAQ   2027.12 +  9.28  2057.10  2014.06 1.58 bln   1935/1813
S&P 100   622.16 +  3.27   628.90   618.89   Totals   3828/3034
S&P 500  1211.23 +  6.71  1222.74  1205.32             
RUS 2000  484.78 +  0.07   489.15   483.07 
DJ TRANS 2906.18 -  6.04  2924.63  2891.92 
VIX        23.87 -  0.16    25.02    23.43 
Put/Call Ratio      0.60

10595, Resistance with a capital R. The Dow rallied on mixed economic news and jumped +194 points only to give back almost half after hitting strong resistance. There was never any doubt that 10600 would be a serious challenge when the Dow returned to that level but we still had to go through the exercise. The Nasdaq came within three points of its own down trend resistance level at 2060 and closed -30 points off the high of the day. A dead stop at resistance for each index.

The economic reports this morning provided a mixed picture and were definitely nothing to power the markets to a nearly +200 point gain. The Consumer Confidence numbers fell more than consensus estimates to 116.5 in July from 118.9 in June. Estimates were for a drop to only 118.5. Current results and expectations both eroded. The only bright side was a strong bounce in consumer plans to buy in the next six months. Ironically consumers felt worse about the economy but planned to spend more. Is it the tax rebate that is causing them to plan on buying a new car and new house? I doubt it but if we can figure out how to buy a house on a $300 tax rebate I think we can make a killing with an infomercial on late night TV.

The drop in confidence came after two months of gains and could be the first signs of the continued deterioration in the job market taking a toll on consumers. The percentage of consumers that believe jobs are plentiful fell to 36% but is still a long way from the 5% felt during the 1991 recession. Some analysts speculate that severance pay and termination packages have provided consumers with excess cash during the summer months and until that cash evaporates with no immediate new job the consumers will continue to feel safe. The Personal Income/Spending Report also showed an increase in income of +0.3% and was slightly higher than expected. Personal spending also rose +0.4% and continued to confound analysts who do not understand how soaring layoffs and higher income can occur at the same time. The bright side here is limited to the expectations that the Fed will be forced to continue cutting rates for several more months until conditions improve. Also as long as consumers keep spending more than they make a recession also appears unlikely.

The Chicago Purchasing Managers index fell to 38% in July and marked the tenth consecutive month below 50. Order backlog fell to 30.2% suggesting that there is no relief yet in sight. Gains from last month were completely erased. This shows that manufacturing has yet to manage any improvement and an economic rebound has yet to appear.

Market moving events today included a downgrade on Dell by Merrill Lynch. Citing continued erosion of European demand the analyst cut estimates for 2002 and 2003. The move helped put a top on the Nasdaq as chip and software stocks sold off. Dell fell below $27 on the news.

Microsoft and AOL are going back to war. Just days after the kindlier gentler Microsoft said they were relaxing rules about icons on the desktop, Microsoft has reneged. Moving back into bully mode Microsoft has said that there are rules that must be followed to prevent anyone from gaining unfair advantage over MSN. Who would have thought anyone could get an advantage? Do you think it had anything to do with Microsoft moving to block the AOL/AT&T cable deal? There are numerous issues on the table here including credit card security programs (MSFT - Passport), Hotmail, RealNetworks, Media Player, etc. With AOL becoming more of a monopoly with every acquisition, Microsoft is forced to deal with an 800 pound gorilla of their own and this ape is not afraid of the courthouse. Both stocks closed well off their highs and only fractionally higher.

After the bell KLAC announced earnings that beat the street by three cents and beat even their own revenue forecasts. They said they had cut their workforce to appropriate levels and therefore were riding out the downturn without serious problems. KLAC makes equipment for testing chips and therefore is not directly impacted by retail supply and demand. Manufacturers typically use slow periods to upgrade equipment which helps manufacturers like KLAC as long as the dip is only temporary.

In the "can it get any worse" department, Lucent filed to raise $1 billion from a private sale of redeemable preferred stock convertible into Lucent shares. Traders already ticked about the sub $7 price saw their shares fall to $6.07 in after hours on fears of dilution. Let's see...is dilution better than bankruptcy? It is in my book. Quit complaining. If they are still in Lucent they should be glad somebody will invest $1 billion in the company! Makes you wonder however how a company that "had all the money it needed" two weeks ago suddenly needs another billion.

Priceline rises from the ashes! After the close PCLN announced real earnings for the first time, beating analyst estimates and raising guidance for the next quarter. Did I miss something? I thought the airlines were pulling support, users were flocking to other services for better deals and analysts had written them off as another WebVan. Somebody obviously did something right! An Internet revival? Not hardly but PCLN owners are thrilled to see their stock trading over $9 after spending way too much time near $1. Before you rush out and buy this Internet recovery you should remember that at $9 PCLN is trading at a PE of 300 depending on which earnings estimate you use. If they were very successful over the next five years and actually made a quarter profit they would still be extremely overpriced by historical standards. Maybe there is hope for Amazon after all!

It is official! July 2001 was the worst July on record for the Nasdaq and the fourth July in a row to post a drop. This is news to anybody? We should be grateful it was not any worse. June closed at 2160 only 133 points above the July close. That is only a heartbeat in last years terms but it seems like an eternity today. -133 points from the June close but still +93 points off the July lows. (you have to grab these straws when you can) Since mid-April the Nasdaq has been trading in a narrower range each month and the trend is continuing. Support is now 2000 and resistance at 2060-2100. Something has to give soon or tech traders will be looking for something more exciting to do during the day like checkers or hearts!

We should not complain about this narrow trading range. It is building a base to launch the eventual rally. Putting July behind us we are wading deeper into a historically negative period. August has been the second worst month behind September for the Dow and S&P over the last 50 years. For the last 15 years August has been the worst month. This was in years that the Nasdaq has soared from 300 to 5000. Now that the Nasdaq is down -60% from its highs and trading at 1998 levels it may be the time for that August/September jinx to be broken. Can the economic news get any worse? Sure but will SUNW trade much lower than $15? No! I used SUNW as an example but the big cap Nasdaq stocks have put in bottoms and are just marking time until better economic times arrive. Thus the narrow trading range. There is a hoard of cash still on the sidelines and every day that ticks off on the calendar brings us closer to a long term rally. Will it be in August? Who knows for sure but with lower highs and higher lows something has to give soon. The bad news is already priced in so the alternative is a good news event. What that will be we don't know yet but traders are holding on to 2000 for dear life and hoping the news comes soon. Was it KLAC or PCLN tonight? I doubt it but there is an event in our future that will trigger the next long term rally. It needs to hurry!

The sell off from the intraday highs on Tuesday was frustrating and professional traders were not happy. This sets the markets up for a down day tomorrow and the Nasdaq does not have that much room to move. I would not like to see support tested this early in August. I would not be a call buyer here. Wait for a close over 2100.

Enter passively, exit aggressively!

Jim Brown
Editor

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