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Market Wrap

Rally Stumbles Over Jobs Report and Crash Rumors!

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        WE 8-3           WE 7-27          WE 7-20          WE 7-13
DOW    10512.78 + 96.11 10416.67 -159.98 10576.65 + 37.59  +286.38
Nasdaq  2066.33 + 36.60  2029.73 +   .36  2029.37 - 55.42  + 80.63
S&P-100  623.65 +  3.39   620.26 -  5.33   625.59 -  1.26  + 13.90
S&P-500 1214.35 +  8.42  1205.93 -  4.92  1210.85 -  4.83  + 25.09
W5000  11242.94 + 76.94 11166.00 - 46.37 11212.37 - 59.55  +212.36
RUT      487.15 +  2.13   485.02 -  2.91   487.93 -  2.78  +  7.45
TRAN    2914.02 +  4.14  2909.88 - 55.78  2965.66 + 25.31  +191.43
VIX       22.39 -  2.34    24.73 -   .24    24.97 +  1.10  -  1.10
Put/Call    .76              .47              .82              .65

An August Friday with the lightest Nasdaq volume of the year saw the markets trip over the Jobs Report as traders took profits from the six day rally. So close but yet so far! Just when the stars were aligning for a breakout the Jobs Report surprised everyone with better than expected employment. Employment fell by 42,000 jobs in July which was less than half the decline in June. The unemployment rate held at 4.5% instead of the 4.7% which analysts expected. When is good news bad? When it throws doubt on future Fed rate cuts. That doubt came roaring back on Friday morning and traders decided to take profits and start over again next week. Rumors of a pending crash kept bargain hunters from buying the dip.

So close but fate stepped in stomped the rally flat. With the Nasdaq closing only 13 points away from breaking strong resistance the bullish sentiment was running rampant. Clearly after being up five of the last six days the market was ripe for some profit taking and the Jobs Report was simply the first excuse.

Stocks that moved the market on Friday included Motorola which was downgraded by Sanford Bernstein on valuation concerns. MOT traded near $10 in March and had neared their profit target of $23. They said they did not see the communication sector recovering as fast as some other analysts and thought chips for cell phones had gotten a little ahead of expectations. MOT dropped about seventy-five cents on the news but the action also impacted QCOM, NOK and ERICY.

Cisco dipped at the open after analysts said that maybe their earnings and guidance due out on Tuesday were not going to be as good as their recent +25% gains in the stock price would indicate. CSCO did recover all but about twenty cents before day's end but investors moved out of networkers in advance of their actual earnings next week. While nobody expects CSCO to say anything positive but there are some who still expect gloom and doom. Based on results and guidance from other tech stocks recently it is more likely that CSCO will announce inline with lowered estimates and say the sector has stopped falling but stop short of saying a recovery is underway. This is all that will be needed to spur the sector onward in anticipation of a future recovery. The worry here is Cisco's dependence on the telecom sector which has yet to see daylight. Other networkers like Juniper and Extreme are more network oriented and less phone company dependent. This is the wildcard analysts are worried about. Personally I think we could be surprised by CSCO. Remember the last two quarters when John Chambers was throwing out sound bites all over the world about how bad business was? He has been very quiet this quarter. Actually I watched an interview two weeks ago where he was borderline optimistic. He is scheduled to be on CNBC after earnings on Tuesday and I doubt he would make the appearance if they were going to miss earnings or warn about the future. He would send his CFO to be sacrificed instead. Just my opinion.

Chambers may want to steal some spotlight from Intel which captured all the glory when Craig Barrett went public with his bullish comments last week. Intel gained about +10% from the weeks lows and powered the semiconductor sector to a near two month high. After the Merrill comments and the Intel comments the sector was on a roll and many analysts warned that it was too far too fast. The Motorola downgrade only succeeded in knocking -20 points off the SOX.X at midday but it was rising at the close. Clearly there is a desire to buy and nobody wants to be left at the station when the train leaves.

One stock that disappointed traders on Friday was EMC. They said they were going to be more aggressive on price cutting in order to maintain share and when the 800LB gorilla speaks the rest of the sector shivered. EMLX, QLGC, BRCD and NTAP fell on worries that they would also have to aggressively cut prices to avoid losing market share. EMC refused to give guidance but said they were still feeling the effects of a global slowdown. Thanks for that cheerful piece of news!

The stock news next week, other than Cisco, is probably not going to be material. The economic calendar starts with the Productivity Report on Tuesday. This report was the topic of a rumor on Friday that could have kept the Dow from rebounding at the open. The rumor said a German bank with a brokerage arm (later identified as Dresdner Bank) was expecting a -20% drop in the U.S. markets as a result of a sharp decline in productivity rates in the Tuesday report. This was a major factor in keeping traders from buying the dip. Uncertainty is a powerful rally killer. What did they know? Did some information leak out? Could this really happen? Dresdner said in a note to clients that U.S. productivity revisions on Tuesday would shatter the belief in the "new paradigm" economy where strong growth could live with low inflation. They theorized this could trigger a U.S. market crash. They said "revisions to productivity next week will undoubtedly leave Mr Greenspan looking very foolish". "Make a date in your diary! The U.S. new paradigm will then be officially revised away! The risks of an equity crash are high". Lehman and Goldman both made comments to the contrary but Goldman did say that their estimate of 2.25% productivity, which is below consensus of 2.5%, may still be too high. Other analysts dismissed the entire scenario as total bull even if the revisions were greater than expected. Story link:

http://biz.yahoo.com/rb/010803/business_markets_crash_dresdner_dc_3.html

Wow! Just what we needed another bolt out of the blue to knock the legs out from under our potential rally. Fortunately after the close on Friday the IMF said it was prepared to accelerate a fast track loan of $1.2 billion for Argentina and from out of nowhere a $15 billion "emergency" loan for Brazil. OOPS! Was Brazil in danger and nobody knew? Either way the two bailout packages should take any pressure off South America for the next several weeks. Investors may actually have more to fear from the European markets which are dropping fast and nearing April lows. Should those lows fail the U.S. markets could suffer in sympathy.

Like I said, stock news may be the least of our worries next week. After the Productivity report on Tuesday, which will obviously be watched VERY closely, we get Wholesale Inventories on Wednesday, Import/Export Prices on Thursday and CPI/PPI on Friday. A very full week!

Since we never broke 2100 on Friday you should still be flat if you are following my suggestions. The bullishness I expressed on Thursday night is still there but remember the qualification was "OVER 2100" which has been strong resistance for some time. In spite of all the rumors and economic news above I was very encouraged that the markets came back from a -118 decline for the Dow and -40 on the Nasdaq. I will gladly take -40 points of profit taking after a six day run right to resistance. It simply gives us a better start for any gains next week. I do admit the negative global news coupled with a flurry of economic reports could blunt any positive sentiment. This is very frustrating for traders. We suffered through earnings and low volume and prospered. Now concerns suddenly rise from Germany and Brazil where none existed before. A new entry point?

Could be another opportunity for good relative strength stocks to stand out from the crowd regardless of what happens to the broader market. I am still bullish, over 2100, and I think you should be also. Aggressive traders that bought the dip on Friday may be rethinking their trades on Monday. Play it safe and wait for the breakout. Many bullish traders are becoming frustrated by the constant positive/negative swings in the market. Don't give up! Investing can be easy or hard. It is your choice!

Definitely, enter passively, exit aggressively!

Jim Brown
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