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Market Wrap

Ford Crashes Into the Dell at the Gap!

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        WE 8-17          WE 8-10           WE 8-3          WE 7-27
DOW    10240.78 -175.47 10416.25 - 96.53 10512.78 + 96.11  -159.98
Nasdaq  1867.01 - 89.24  1956.47 -109.86  2066.33 + 36.60  +   .36
S&P-100  593.87 - 17.54   611.41 - 12.24   623.65 +  3.39  -  5.33
S&P-500 1161.97 - 28.19  1190.16 - 24.19  1214.35 +  8.42  -  4.92
W5000  10760.09 -234.36 10994.45 -248.49 11242.94 + 76.94  - 46.37
RUT      475.65 +   .13   475.52 - 11.63   487.15 +  2.13  -  2.91
TRAN    2824.65 - 36.12  2860.77 - 53.25  2914.02 +  4.14  - 55.78
VIX       26.74 +  3.93    22.81 +   .42    22.39 -  2.34  -   .24
VXN       52.02 +  3.50    48.52
TRIN       2.67 +  1.64     1.03
TICK        201
Put/Call   1.07              .72              .76              .47 

That was a really bad play on words but then so was the trading week. I tried to get "burnt Ciena" in there as well but could not make it work. Obviously these symbols were the top stories as the week ended and each portrayed another sector in crash and burn mode. Ford was the biggest negative factor for the markets on Friday with a massive earnings warning but Ciena, Dell, The Gap and others had already set the tone. Ford was simply the spark that set off the explosion and Microsoft fueled the fire.

Ugly, very ugly. There is just no other way to paint this picture. We all know about the close of earnings season this week with Dell, Ciena and the Gap leading the list of losers. Bad news on top of bad news interspersed with only snippets of barely optimistic hope. Friday the headliner was Ford which said they would take almost a $1 billion charge to layoff another 5000 workers and miss earnings estimates by a mile for the year. Another layoff would not be such exciting news but the underlying reasons were lower sales due to a continuing decline in the economy. What, you mean the consumer is not buying cars on cheap interest? OOPS! Has the consumer finally reached into their wallet and come up empty?

With Ford following The Gap's news that same store sales in each of their four major divisions fell below prior levels due to slowing retail buyers, investors finally decided that maybe the economy was not rebounding yet. Investors are always optimistic until the end and refuse to accept bad news until it blows up in their face. Almost every major sector rolled over this week and appeared headed for a retest of previous lows. About the only sectors showing even minimal strength were the drugs and consumer stocks like Proctor & Gamble and Gillette. Purely defensive moves by investors who refuse to bail out of the market completely.

Suddenly bonds have taken center stage as the market starts breaking critical support levels and the previously invincible dollar began crumbling on world markets. With treasuries hitting new highs and the Fed meeting next week there was still no real reason to buy stocks given the current market weakness.

Bonds are rocketing to new highs as the markets head for old lows but that is not the entire story. Argentina has come back into the spotlight and some analysts said they could self destruct as soon as Monday and throw the world capital markets into turmoil. Country risk factors soared on Friday as the IMF made a clear statement that new aid for Argentina was not imminent. The IMF said new funds were under discussion and it was inconceivable that there would not be a new deal in the next few weeks. "Weeks!" Argentine traders had hoped for an announcement before trade is resumed on Tuesday since their market is closed on Monday for a holiday. U.S. Treasury Secretary Paul O'Neill said "Argentina is now in a very slippery position". Great news for a shaky U.S. market!

Add to the market scenario I described above was a negative ruling on one of the biggest stocks in the Nasdaq and the Dow and you have a recipe for a Friday thunderstorm in August. A federal appeals court rejected Microsoft's bid to delay the penalty proceedings until after the Supreme Court decides to take or reject the case. This clears the way for a judge to be picked by a random computer selection process within the next week. With the appeals court ruling against any delays in the penalty phase it is entirely possible there could be another decision before the Windows XP release. Very bad news for Microsoft and the stock dropped -2.74 and fell below its 200 DMA. There is another round of bundling of previously separate products in the XP release and the Justice Dept is sure to bring this up in the penalty phase as a lesson not yet learned and a reason to exact more than a pound of flesh from the giant.

The market internals were understandably weak. Volume was not strong on Friday but was more than traders wanted to see on a down day. The NYSE managed just a shade under one billion and the Nasdaq logged 1.28 billion for the fifth slowest day of the year. Art Cashin said about the volume, "ships can sink in quiet seas and it appears that sellers are more motivated than buyers." Advancers beat decliners more than 2:1 for most of the day and only the short covering bounce at the close improved those numbers slightly. On the bright side the VIX has started to rise, closing at 26.74 on Friday. Far from the March/April highs of over 40 but still an indication that investors are starting to worry again. The put/call ratios have climbed significantly and closed at 1.07 on Friday indicating significantly more put activity. The Arms Index or TRIN soared to a high of 3.87 on Friday, levels not seen since the March/April lows.

The point I am trying to make here is that summer complacency is rapidly giving way to fear as different political and economic factors fuel the continuing drop in the markets. The broker/analyst hype about a bottoming economy with a rebound in the 3Q/4Q quarter is quickly being dismissed as earnings warnings for the third quarter are approaching record numbers. As of Friday 326 companies have warned compared with only 55 for this time last year. Analysts are now starting to discount Intel's "optimistic" outlook for a seasonal bounce. Consumers are simply not buying computer equipment and the current price wars are hurting margins on what few computers are actually being sold. Replicate this same story in the retail sector, autos, consumers, etc. Prices are falling as companies compete for the few dollars being spent and once the prices stop falling the consumer will have no further reason to part with what little cash they are hoarding.

That brings us to the Fed meeting next Tuesday. You are not going to believe this but when asked the majority of analysts said the best outcome on Tuesday would be "no cut". This would mean that the Fed had data that showed the economy was really showing signs of recovery and they saw no need to cut again. While this is contrary to conventional wisdom it shows the fear that analysts have that the slowdown may still be worsening. If the Fed cut 50 points, which is only a 15% possibility as evidenced by the Fed funds futures, it could actually be a disaster. Institutional traders could worry that Alan and company saw things coming that analysts had not yet seen and those things were bad. The markets could actually tank on a strong cut. Talk about a quandary. Futures say there is a 100% chance of a 25 point cut. Even if the Fed wanted to cut more to jump start the economy they have their hands tied to some extent.

For next week we need to keep looking over our shoulders for the implosion in Argentina, expect a 25 point cut from the Fed and try not to get burned on the beach or in the markets. There is a flood of retail earnings next week and traders will get to see if there are signs of strength or weakness in the consumer sector. ANY signs of weakness and we will be headed lower. ANY signs of strength and we should at least slow the rate of drop if not rebound slightly. Both major indexes are in oversold territory. The Nasdaq has broken below support but the Dow rebounded from a -200 dip to close over support at 10200. Each could fall more on any further bad news. I said on Thursday that a Nasdaq close under 1900 could be a serious problem and that came to pass. There is only the thinnest support for the Nasdaq at 1865 dating back to April 17th and any slight hiccup could take that out. The economic calendar for next week is a wasteland with no serious problems other than the Tuesday FOMC meeting and the FOMC minutes from the last meeting on Thursday.

The good news? The third quarter earnings warning season does not start officially for two more weeks! That is actually the good news! It means summer will be over and traders and volume will return. Yes, it is a good news/bad news joke that they will return just as warning season begins but who could possibly warn that would surprise anybody? GM, Citicorp, IBM, Krispy Kreme Donuts? Never mind, forget I even posed that question. Let me be the first to welcome you back to Fall trading. You remember how to trade Fall, right? You know, September, the worst month of the year and October, known for the biggest drops. Hey, if trading was easy everybody would make money. You know, like in 1999! Welcome to reality and a return to "value" investing!

Several new speakers for the November Stock and Option Trading Expo joined the team this week. Leading the list is Sherman McClellan, developer of the McClellan Oscillator and Summation Index. He has ranked in the top 10 list of market timers more than 15 times since 1995. He will be speaking on using market cycles to determine entry points for both short and long term traders. We are pleased to add Sherman to our distinguished list of instructors. Bring those laptops as WE WILL ALSO HAVE INTERNET ACCESS AVAILABLE FOR ALL ATTENDEES so you can follow our speakers and trades as well as trade yourselves. If you have not yet registered click here to reserve your seat:

http://www.premierinvestorseminars.com/expos/oi_fall01.asp

Definitely, enter passively, exit aggressively!

Jim Brown
Editor

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