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Market Wrap

Weakness Right On Schedule

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       11-15-2001           High     Low    Volume Advance/Decline
DJIA     9872.39 + 48.78  9903.04  9808.25  1.4 bln   1492/1644
NASDAQ   1900.57 -  2.62  1922.12  1882.84  2.0 bln   1721/1917
S&P 100   590.44 +  1.28   592.36   585.86   Totals   3213/3561
S&P 500  1142.24 +  1.03  1146.46  1135.06
RUS 2000  449.39 -  3.43   453.04   449.39
DJ TRANS 2454.00 + 61.03  2458.48  2389.71
VIX        27.78 -  0.82    29.10    27.45
VXN        57.45 +  1.07    59.84    56.64
TRIN        0.95
Put/Call Ratio       .71

Each of the last two days the Nasdaq slammed to a dead stop just below 1925 resistance at 1922. The Dow struggled to another gain but is looking tired and ready to roll over at 9900. After a great week and a +465 point rebound off Monday's lows we should not complain if the Dow needs a day or two to rest. That rest is likely to be soon and traders everywhere should expect it.

We are definitely not complaining about a break even day for the Nasdaq after cautious comments by AMAT on Wednesday night. AMAT said that the recovery in the chip sector had been postponed due to lack of confidence by their customers to make commitments going forward. AMAT missed estimates by a penny and they projected weaker revenues ahead. This depressed many of the semi stocks and slowed the Nasdaq to a crawl.

The HWP earnings cheered the street but not enough to power techs to another strong gain. Much of the drag was traders waiting to see what damage Dell might do with their earnings after the close today. They beat the street by a penny but that was the extent of the good news. They said server sales fell -18% and felt that the corporate market would remain week. The CFO said a mid-2002 PC recovery was still "possible" but the tone was not positive. Dell said they were going to maintain an aggressive pricing strategy which could squeeze earnings by all the box makers. Not a cheerful outlook but Dell was trading flat in after hours on their growing market share. They did lower guidance on the conference call and while analysts still like Dell they are cautious on the lack of substantial gains going forward.

Echoing the slower recovery comments from Dell was Agilent which said they would cut 4,000 jobs, twice what they previously announced, and noted that orders were falling for semiconductors. CEO Ned Barnholt said "the recovery will be delayed and more gradual than we expected." It will not take many more of these comments to take the wind out of the market's sails.

The economic picture improved again but only slightly with a drop in the new unemployment claims by -8,000 to 444,000 for last week. This was a small victory since continuing claims, those still out of work from prior weeks, rose to an eighteen year high of 3,826,000. This is the highest unemployment since February 1983. The jobless claims could continue to cause a drag on the markets due to their impact on consumer confidence. The market is factoring in a recovery over the next couple quarter but rising unemployment is not showing it to be happening. Citigroup announced another -7,800 job cuts and American Express also said they would cut more than the previously announced -6,100 jobs. The inventory correction cycle suffered a setback with a -0.5% drop in business inventories in September. The inventory to sales ratio rose to 1.45 showing that the correction had slowed and even lost ground.

Oil stocks fell as a group again after OPEC said they were not going to cut production unless non-OPEC countries did also. Mexico and Norway indicated that they might go along but Russia, who needs money by the tanker full, was reluctant to follow suit. OPEC said that if they could not get a agreement on production cuts they would be willing to let oil fall to as low as $10 a bbl to force an agreement. The prospect of $10 oil hammered oil stocks of all types. Oil that cheap prevents new drilling and exploration as not profitable and would have a prolonged impact on the sector. Eventually OPEC will win but until then travelers will benefit from the lowest gas prices in over two years. Oil dropped almost $2 on the news to close at $18.06 per barrel.

So what now? Traders should be very careful about opening new positions on Friday. I warned readers earlier in the week that the Nasdaq would likely suffer profit taking at 1925 and that appears to be coming to pass. The Dow is having trouble at 9900 and even though Thursday was a decent +48 point gain the rate of gains is slowing. The rebound off the Nov-1st low at 9014 and the 9409 low from Monday has produced some serious profits for investors. Many of them are hearing the "slowing recovery" comments this week and will be anxious to take those profits off the table soon.

Economic reports on Friday are a toss up. CPI, Capacity Utilization and Industrial Production. This could easily influence investors to throw money at the markets or cash out depending on the results. Economy slowing or recovering, tomorrow could give us a clue.

The possibility of a down day on Friday is good. Traders need to tighten up stops and be prepared to move to the sidelines. There is growing uncertainty about the recent gains and the news from Afghanistan is about over. With the Taliban banished to the hills and caves the intensity of the "good" news will slow. This surprise rout is now already priced into the market and we will be back to trading on fundamentals again. Look for a "gap and trap" should we open higher and raise your stops on any big gains at the open. The more likely scenario is a down open and a weak day. I do not expect a major sell off but more of a consolidation at a slightly lower level before another attack on the highs. The S&P has support at 1130 and the Dow looks better than any of the major indexes and could hold above the 9750 level. The Nasdaq could easily pull back to just above 1860. None of these levels represent a major change in the bullish sentiment but a consolidation level on profit taking.

I would be hard pressed to buy any dips on Friday. I would like to wait until Monday and see what the markets give us. Thanksgiving week is normally bullish but we have already had a strong November. I think caution is the key word on Friday and traders should tighten stops and plan to sit the weekend out if those stops are triggered.

Take profits on weakness and wait patiently!

Jim Brown
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