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Market Wrap

The Week Ends Where It Started!

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        WE 3-29          WE 3-22          WE 3-15          WE 3-08
DOW    10403.94 - 23.73 10427.67 -179.56 10607.23 + 34.74  +203.63
Nasdaq  1845.35 -  6.04  1851.39 - 16.91  1868.30 - 61.37  +126.93
S&P-100  577.87 -  2.22   580.09 - 11.04   591.13 +  1.29  + 13.68
S&P-500 1147.39 -  1.31  1148.70 - 17.46  1166.16 +  1.85  + 32.53
W5000  10775.74 -  1.12 10776.86 -127.83 10904.69 + 14.02  +330.66
RUT      506.46 +  4.07   502.39 +  3.27   499.12 -   .73  + 21.51
TRAN    2917.96 + 40.69  2877.27 - 74.27  2951.54 - 58.70  +113.11
VIX       19.32 -  0.30    19.62 -  1.15    20.77 -  0.84  -  0.52
VXN       36.28 -  1.28    37.56 -  2.70    40.26 -  1.36  -  0.32
TRIN       0.84             1.12             0.56             0.73
TICK       +793             +647             +855             +927  
Put/Call    .79              .66              .64              .62   

Only two major indexes ended the week with gains. The Russell-2000 gained +4.07 and the Dow Transports added +40.69. However things were not as bad as that first sentence may have indicated. The Dow only lost -23 points and as you can see by the table above the other major averages finished with losses of only a handful of points. Considering the significant drop on Monday any recovery to break even for the week should be considered positive.

Unfortunately the recovery may have been artificial. There was a lingering hint of end of quarter window dressing added to significant short covering in the chip stocks on Friday. The news that moved the chip sector came from Taiwan Semiconductor which said they were raising their capital expenditures for this year by $1 billion dollars to $2.6 billion. A Goldman Sachs analyst said the market was only expecting a $350 to $500 million increase. Chip equipment manufacturers jumped at the open with AMAT adding +2.30, KLAC +2.18 and NVLS +2.03.

Solectron gave the contract manufacturers a boost after announcing that it had entered into a deal with Lucent to build as much as $2 billion in optical networking equipment. It was a three-year deal which could be the leading edge of a new wave of manufacturing. SLR gained +11%, it was only a $7 stock, TER +1.43, JBL, CLS and SANM also gained but stopped at resistance.

Surprisingly the network sector finished in the green despite the warning by Juniper on Wednesday night. Juniper said that not only JNPR but their rival CSCO was continuing to see weak demand from Internet service providers and telecommunications carriers. The Juniper CEO said they were seeing projects pushed out even further but at least they were not going away. Wells Fargo Securities said conditions could change in the next nine months IF traffic on the Internet continued to rise. This helped power the networkers and fiber optic companies to minor gains. CIEN +.93, JNPR +.70, HLIT +.61, CSCO +.59 cents. I only list these because it was surprising to see them positive after the warning.

Economic reports surprised investors again with the Q4 GDP revision beating estimates slightly. At +1.7% growth compared to estimates of +1.4% it was not an explosion to the upside but once again stronger than expected. An improving balance of trade was given as the reason for the increase. Consumer spending held up better than expected but business spending was still anemic. Remember, this is the 4Q numbers we are talking about. The 1Q numbers will likely show a weaker consumer number now that zero percent financing is over and the holiday spending is history. Still the inventory correction cycle could push the 1Q growth back into the 4%-5% area which would make the Fed rethink the speed of future rate hikes.

The Chicago PMI also rose more than expected to 55.7 and was the second month of positive growth. This continues to suggest that a manufacturing expansion is underway. New orders continued to grow, backlogs remained positive and inventories are shrinking at a slower pace. However, jobless claims rose to 394,000 for the last week which was a gain of +18,000. Continuing claims, people still out of work and drawing unemployment, rose to 3,526,000 and the highest level since January-5th.

The final consumer confidence reading for March was revised upward slightly to 95.7 which was almost exactly where it was this time last year before the recession occurred. The strong gains in confidence could suffer if gas prices and interest rates continue to rise. The dramatic drop in gas prices amounted to an undeclared pay increase for most consumers and the +$.30 cent hike over the past few weeks amounts to an additional $50 a month expense for two car families. SUV owners would suffer even more. Mortgage rates rose to an eight month high of 7.18% last week and will go higher as the prime home buying season approaches along with almost certain rate hikes by the Fed in June if not in May. This may make many buyers rethink their plans.

What does all of this mean to us as traders? Several problems lay in our path. The April earnings cycle kicks off with the first Dow component to report, AA, on Friday April 5th. However the rush does not begin until the week of the 15th when the trickle turns into a flood of hundreds of announcements. Still, next week should provide several more earning warnings now that the quarter is officially over. Those events could color investor sentiment going forward.

With Thursday being the end of the quarter we are now open to exposure from portfolio stripping. What I mean is that the portfolio window dressing over the last two weeks may turn into undressing as fund managers dump those same stocks to prepare for the summer doldrums. With the market setting up for a possible fall these managers will be looking at buying these stocks back cheaper in the future.

According to TrimTabs.com there was another inflow of cash into stock funds in the week ended Wednesday of $2.8 billion. This makes three weeks of substantial positive cash flow and the markets have not been able to breakout of the current trading range. Beginning next week we will start seeing money leave the markets and head towards the IRS coffers. With tax day only 19 days away there could be a steady outflow of cash to pay the taxman. Many traders, optimists all, wait until the last minute to close positions in the hopes of profits to help defer the tax payments.

Depressing to most traders was the -100 point drop on the Dow from the highs of the day to close negative. The Nasdaq closed near its highs of the day but that is not saying much since the range for the entire day was only 19 points. It was pretty much a chip led rally but many sectors participated. Advancers beat decliners on the Nasdaq 4:3 but considering the very weak volume on both the NYSE and Nasdaq you can draw no conclusions.

The lack of a rally at the close could be a bad omen for Monday. Typically, traders buy the close on the Thursday before Easter and then sell those positions after any pop on Mon/Tue. Thursday showed zero interest in buying at the close other than some short covering on the Nasdaq.

The talking heads on CNBC kept repeating the fact that 77% of the S&P-600 was over its 50 DMA and the majority were over their 200 DMA as well. This has only happened five times since 1996 and each time it ended with a dramatic slide.

Couple all of this together with the VIX hitting a new 52-week low on Friday of 18.87 and I think you would agree there could be problems ahead. The break under 19 is a clear warning indicator. If you recall my research on Tuesday regarding the last four 52-week VIX lows I would be very hesitant about opening new long positions at this time. My entry points remain 10500/1875/1155 respectively. The Dow broke 10500 by a whopping two points and and for an eternity of two minutes on Friday before dropping -100 points to close back near 10400. The S&P came within .55 cents of hitting 1155 before falling back at the close. The Nasdaq did not even get close to the 1875 entry point. I think you can see by these numbers EXACTLY where resistance is and where any rally on Monday could fail. Don't get me wrong. If an upside explosion occurs we want to be on it at those levels since the shorts will be in shock. Until that happens I would remain flat or short below S&P-1140 and Nasdaq 1825. Have a great weekend!

Enter Passively, Exit Aggressively!

Jim Brown

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