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Nasdaq Extends Losing String to Five Days!

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       8-9-2001          High      Low     Volume Advance/Decline
DJIA    10298.56 +  5.06 10312.19 10205.56 1.10 bln   1725/1358	
NASDAQ   1963.32 -  3.04  1971.61  1941.24 1.43 bln   1680/1985
S&P 100   607.83 +  0.30   608.74   602.76   Totals   3405/3343
S&P 500  1183.43 -  0.10  1184.71  1174.68             
RUS 2000  474.17 +  1.55   474.17   469.50 
DJ TRANS 2834.63 - 47.41  2885.96  2830.64 
VIX        23.64 -  0.72    25.01    23.42 
Put/Call Ratio      0.76

While the Nasdaq traded in a very narrow 30 point range again, closing within eight points of the high of the day, it still managed to lose ground for the fifth day in a row. The Dow moved in a 107 point range and came within two points of its July 24th low before recovering to close positive on a short covering rally. The news today? Gold rose the dollar fell, unemployment was up and retail sales gained slightly on the first wave of tax checks. Yawn! Is summer over yet?

It was one of those days. Boring! The markets whipsawed back and forth giving investors a migraine in place of profits. The Nasdaq rose and fell from positive or near positive territory four times during the trading day. The upside limits were not the material factor but the lows of the day were critical. The low of 1941 was two points above the July-24th low of 1939 and seven points above the July 11th low of 1934. This is very critical since it is technically bullish for it to hold above those lows. More on this later.

The main worry that the Nasdaq had to overcome today was the news on Wednesday that Gateway was pulling out of Europe and could also pull out of Asia. While the news was more company specific to Gateway it showed that global PC sales were simply nonexistent. Companies the size of Gateway do not simply abandon huge investments in multiple countries on a whim. A better choice of direction would have been to sell their European assets to a competitor but the implications here are that nobody wanted them. Dell, HWP and CPQ may have been taking market share from them in those markets but you would have thought one of those companies would have been interested in what little share Gateway did have. They could have got it cheap! Also local PC companies could have bid on the business but didn't. Dell, HWP and Compaq all lost ground in the markets as investors reading between the Gateway lines saw weak sales for everyone else as well. This real life "rubber meets the road" event brought home the severity of the recent generic "global weakness" comments by others.

The Gateway news came after the Beige Book knocked the bottom out of the market with a "no growth" picture. A 1-2 combination punch that blew out the 2000 support level and followed on with another drop today. The economic news did not change with Jobless Claims rising again to 385,000 and showing that companies are still cutting their workforce to cope with the economic slowdown. Auto and textile industries distort the numbers in August as plants are retooled for the new designs. We cannot draw any serious conclusions from the jobs data but on the surface it appeared the drop from the prior three weeks is over.

The Import/Export picture improved in July when import prices contracted more than export prices. Shrinking global demand is causing worldwide disinflation. Dropping oil prices are helping while North American economies are holding their own against Europe and Asia. In the U.S. retail sales accelerated slightly with a boost from the first wave of tax loan/advance/rebate checks. Sales rose +3.4% at chain stores with Wal-Mart accounting for 1/3 of the gain. Still retail prices continued to slide which was good for consumers with sales on sales prompting them to buy but bad for retailers as margins shrink. Many tax checks will not even see a personal bank account with retailers starting a "cash it here" promotion in hopes they will spend the money while in the store. This short term cash inflow will expire at the end of August when the tax payments will be completed. The back to school season will then be on its own. There is an increasing debate on what the checks are actually from. Bush used the word "rebate" on TV but the official language is more like an advance payment. Some say the checks are simply a credit against what you may owe for 2001 and the economy will implode in the first quarter when taxpayers expecting a $1000 refund only get $700 after their check is factored in. Regardless, the concept of the payment was to jump start the economy now and we will not know until after the August data if that actually happened.

About the only brand names reporting earnings today were Pixar, which beat the street by four cents and raised guidance. WebMD (HTLH) met the street but warned that the next two quarters could be light. They also said 2002 estimates were conservative so investors could pick and choose what they wanted to hear. Iomega, yes there are still investors in Iomega, said declining sales of Jaz and Zip drives would force it to cut -38% of its work force or about 1250 workers. They said they would take a charge of about $65 million for restructuring in order to bring their business back to a point of "break even" in the short term and a return to profitability in 2002.

Back to the critical Dow/Nasdaq levels I mentioned earlier. The Nasdaq screeched to a dead stop only a handful of points above the two prior July lows. This is critical. Should the 1934 level fail it is entirely possible that the April lows near 1600 could be tested again. The Dow did exactly the same thing. The low for Thursday was 10205 which was only two points above the July 24th low. It is very critical that it holds this low. Both indexes are now in oversold territory and could see a bounce at the open. There was a bounce at the close on short covering caused by the rebound off the bottom. Do not confuse this with a rally or investors buying the dip. It was purely short covering.

We should not expect any help from economic reports on Friday since the PPI is mainly an inflation indicator and inflation is near zero. We are totally on our own and Friday is likely the day that market direction for the rest of August will be determined. August appears to be living up to its reputation as a very bad month for the markets even in good economic times. Should investor lethargy allow the markets to meltdown below those levels mentioned above then the heat wave and energy shortage on the East Coast will be only a side bar to next weeks news reporters.

Don't get me wrong. I really wanted to buy this dip today. We had several serious discussions around the office on whether it would hold or this was simply an oversold bounce. Here are the points I see. Bonds were being bought with abandon. Money is being taken out of stocks or at least out of the cash on the sidelines available for stocks. $3 billion went into the Lucent and Nortel convertible bonds as well. Volume has actually increased slightly over the last couple days and higher volume on down days is not a good sign. Japan will likely report on Friday that the economy is falling back into the dumps as evidenced by the biggest drop in the Nikkei in three months on Thursday. Argentina is far from out of trouble. Tensions are escalating in the Middle East to all out warfare. The trading patterns on today's charts showed ONLY short covering not investor interest. The Beige book simply showed that there was no recovery in progress. The tax check windfall is already factored into the economy. The majority of prior interest rate cuts have already been discounted into the markets. The odds of further aggressive rate cuts by the Fed on August-21st are slim. One article compared the markets to being alone in the woods at midnight without a light. Every sound is magnified and even the smallest noises are imagined to have horrible causes. Investors are afraid of being blindsided in the markets today by something they have not yet seen or factored in. Add all of this to a historically negative month and the markets have a huge wall of worry to climb.

Guess what? Markets tend to thrive in those conditions. Investors know all of those details and typically buy stocks in advance of the recovery by six months or more. New highs are still beating new lows and total advancers beat total decliners. The markets are very oversold, especially the Nasdaq after five days down. Sounds like a recipe for a rally but there is still a big problem. Investors are on vacation. They are simply not paying attention and after being burned by buying the dip multiple times in the last 12 months there is simply no rush to buy. Until enough investors decide that they should come in out of the heat and put money back to work, the markets are at risk. Dow 10400 and Nasdaq 2000 failed showing there are no sacred support levels. There are sixteen trading days left in August. Are we having fun yet?

Enter passively, exit aggressively!

Jim Brown
Editor

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