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Market Wrap

Trend Change?

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        WE 8-09          WE 8-02          WE 7-26          WE 7-19
DOW     8745.45 +432.32  8313.13 + 48.74  8264.39 +245.13  -665.27
Nasdaq  1306.12 + 58.20  1247.92 - 14.20  1262.12 - 57.03  - 54.35
S&P-100  458.82 + 24.77   434.05 +  7.12   426.93 +  3.83  - 35.81
S&P-500  908.64 + 44.40   864.24 + 11.40   852.84 +  5.09  - 73.64
W5000   8571.87 +385.31  8186.56 + 94.93  8091.63 +  8.63  -628.50
RUT      388.45 + 12.00   376.45 -  5.81   382.26 -  3.94  - 27.08
TRAN    2351.65 +149.62  2202.03 - 52.76  2254.79 - 77.39  -147.96
VIX       39.36 -  6.03    45.39 +  4.95    40.44 -  3.01  +  5.12
VXN       58.70 -  6.74    65.44 -  3.58    69.02 +  7.85  -  4.83
TRIN       0.90             1.47             1.21             1.44
Put/Call   0.69             0.93             0.70             1.14

The Dow made it three in a row. Three weeks of positive gains for +725 points. Sounds very bullish if you don't count the -930, +1070, -730 and +765 swings on the way to those gains. The Nasdaq has not fared so well but posted its first positive week in the last five. However, any good news is still good news. The bulls have their hopes up and those hopes are based on the Fed cutting rates and the concept that the bottom is behind us. Three positive weeks are a nice improvement but did the trend really change?

Leading the economic hit parade on Friday was the Productivity Report. The productivity growth came in at +1.1% and surprised analysts who were expecting only +0.6% growth. While the number may have surprised analysts expecting the worst it was still significantly down from the +8.6% growth in the first quarter. Obviously you can see the dramatic rate of drop but this was still bullish for the economy. Productivity soared in the manufacturing industry with a +4.9% gain with output up +4.1% while hours worked dropped by -0.8%. This is exactly what the Fed will be looking at to gauge the need for another rate cut. According to the productivity report the economy is doing fine, slow but fine.

The ECRI Weekly Leading Indicator posted a small gain at 121.7 compared to 120.0 last week. This was the first gain after three weeks of losses but the six month projected economic growth rate fell to 2.6% from 3.3% last week. This indicator was projecting a 6.0% growth rate as recently as July-12th. This is the slowest growth projection since March. The slight blip in the headline number was due to the gains in the S&P and drop in the Jobless claims.

Stocks continued to be the highlight with Emulex getting a -32% haircut to $15.36 after warning that their full year sales would fall below analyst's estimates. This took the entire sector for a ride to lower ranges. New comments from Banc America about the chip sector stopped the SOX rebound off five year lows dead in its tracks. They said it was too early to pick a bottom in chips as demand was still falling creating much more excess capacity. Intel lost ground on rumors they were going to cut capital expenditure spending and outsource more manufacturing when a recovery appears. While this makes business sense it caused a drag on chips due to demand implications. Ironically, coincidentally or on purpose, Intel did not update or provide guidance for capex spending on their July 16th conference call. BAC thought Intel could announce capex of only $4 billion, down from estimates of $5-$5.3 billion.

The common thread among most of the analysts is that 2003 sales estimates are too high and actual growth could be flat to low single digits in 2003. This is substantially below the current expectations. In Barrons this weekend their headline story recommends selling Intel and Applied Materials due to excessive valuations and falling sales and budgets. Intel and AMD both gave indications that the typical back to school buying season was not seeing a surge in orders. There is a strong sense of urgency to make something happen quickly and slashing prices soon is expected. Hewlett-Packard-Compaq is said to have a backlog of chips exceeding a six week supply when normal is only two weeks. Bottom line, computers are not selling and this will be evident in the coming earnings.

Financials have been making decent gains even when more bad news hit the wires about Citigroup and Merrill. Investigators are now hot on the trail of possible IPO favoritism for clients. House Committee Chairman Oxley said he was going to subpoena documents from Citigroup about shares of IPOs that were bought and sold by WCOM executives. They want to know if Jack Grubman traded favors with WCOM execs in exchange for hiring SSB to provide investment banking services. Originally Citigroup refused to turn over the documents claiming privacy protection. With a subpoena they will be forced to disclose the records. According to Citigroup they had identified 800 accounts which would fall into the category under question. The committee has requested info on about 170 companies Citigroup handled and Citigroup said the numbers of accounts could run into the tens of thousands.

On Friday stocks were up, bonds were up and gold was up. What's up? We were in the twilight zone of indecision. Gold bugs are still seeing inflation, war, financial collapse behind every bush. Bond buyers are betting on interest rates falling again before year end with possibly a strong Fed cut. Stock buyers are convinced the bottom is behind them and Alan won't let them down. Even oil was up Friday. It appears the indecision is complete. Everyone is convinced their scenario is the right one and are voting with their cash.

I will be brief on the Fed story since you are probably numb to it already. The WSJ and Washington Post both had headline stories that rejected the concept of a rate cut. Both have been known to be a pipeline to the Fed and one way the Fed can telegraph intentions ahead of meetings to avoid announcement shock. I was going to mention the lack of any indications from the Fed in my wrap on Thursday but overlooked the notes. Normally the Fed will telegraph for several weeks in advance their intentions to make a change. They do this with carefully worded references in speeches and carefully placed articles. There had been no telegraphing of any intent to cut rates. Poole said last Sunday that the economy was on track and recovering on schedule and the odds of it falling back into a double dip recession were "very, very small". "Markets are going through a period of fundamental adjustment that is not related to monetary policy and not something monetary policy can fix." This was a clear effort to squash rumors. The Fed watches many things but most key to the overall economy are auto sales, housing and jobless claims. All are doing well and showing no signs of implosion. Shrinking margins in auto sales will slow profits for car companies but every industry that feeds off autos will do well. Bottom line, no rate cut in my opinion.

Despite the fact that I went short in the market monitor at the close on Friday I actually think the bottom may be closer than I recently thought. I would not now be surprised if the lows were not behind us. What heresy is this? The market is a living organism with millions of cells. Quite a few of those cells have decided to call it a bottom and buy stocks. Not in volume but they are still buying. These are long-term buyers not traders. They are looking at the market 2-5 years from now and saying these are levels today I can live with despite the possibility of another dip. I personally don't feel the economy is recovering yet based on my PC comments above but I don't think it will be much worse. The 9/11 anniversary problem is something we cannot avoid but after that I think the consumer will start spending again. Sorry, I strayed.

The market has put in what I have been hearing as a parabolic bottom. It is simply another term for "it went down for a long time, bounced twice and is taking off again". Not very scientific but you get the picture.

Chart of the Dow

I would be glad to buy it as long as everybody else did also. My challenge with this is the PC correction in progress, the August 14th certifications, the 9/11 slowdown and the fact that the last four days of rally was solely on the prospects of the Fed rate cut. I could easily agree that manufacturing has run its course. I could agree that low interest rates with another Fed cut in Sept. will spark another wave of refinancing with much of the equity money being poured into the consumer market and even the stock market. I just see some major potholes in the immediate future and wonder how the market will deal with them.

Maybe, the August certifications are going to be a nonevent. With only three days to go there are 584 companies that have not filed the certification. While it would amaze me if there were not going to be some skeletons appear it also amazes me that WCOM could hide $8 billion. So, maybe there are no big guys left to confess and the WCOM, GLBX, Q, ENE scams are the only shell games in action. I just find it hard to believe. I also find it hard to believe the economy is not going to seriously suffer over the next 30 days with consumers afraid to venture outside their block until after 9/11. Maybe the numerous patriotic efforts to overcome that concern will make it a nonevent also. I find it hard to believe that Brazil is over. The two most market friendly candidates in their October elections sank in the polls this week and candidate Lula of the leftist Workers Party is leading with 33% of the vote. The Brazilian market dropped -330 points Friday on fears that Lula would win and he would adopt unorthodox policies and default on the existing $350 billion in debt. The second place candidate is critical of the IMF and would likely not commit to the deals of the IMF loan and institute capital controls if elected, which would doom the country. Sounds exciting and I doubt we have heard the last of Brazil.

While I would like to believe the market is looking forward to climbing this wall of worry there is another way to look at the Dow chart.

Dow Chart

As in any chart pattern the analysis is in the eye of the beholder. If you look at any symbol/index long enough you can likely find a timeframe and setup that fits your interpretation of the market. I will leave it up to the readers to decide it this glass is half full or half empty.

Dow Chart

Anyone watching the market intently on Thursday and Friday afternoon saw some serious resistance battles taking place. Dow 8750 as you can see above, OEX 459 and SPX 911 proved too strong for several repeated attempts to break. We have to give the bulls credit, they tried really hard. Unfortunately the bears just kept selling into the rally and try as they might the bulls just could not breakout. It may have just been lack of volume on the buy side on a Friday afternoon. Just as interesting was the lack of aggressive selling by the bears. They kept the lid on but they did not press the advantage and try to go for the kill. They were content to hold the line. To me this means the bears have lost conviction. They look at the chart above and see a possible breakout ahead on a surprise move by the Fed and they don't want to get caught holding big short positions.

This sets up for an interesting week. With the market dead on strong resistance we have a Fed meeting on Tuesday along with Retail Sales. Corporate certifications on Wednesday and Industrial Production, Philly Fed and June FOMC minutes on Thursday. Friday is the killer with the Consumer Sentiment again, Housing starts and the CPI. Ironically, Monday, the day most analysts expect accounting problems to appear if there are any, has no major reports. To top it all off this is options expiration week. Are we having fun yet?

I can't tell you which way the market is going to go but as a betting man I am betting against the Fed cutting rates and that there is at least one more corporate confessor in the wings. The good news is that the market has been ignoring bad news. We sure had a busy week for negative events but the Dow gained +432 points. This represents a real trend change but that trend has hit a wall. Whether it is a brick wall or wall of worry remains to be seen. This week will be the key.

For a list of the 534 companies that have to certify their financials by Wednesday click here:

http://www.OptionInvestor.com/CEO_Certification.asp

The winning entry on the Guess the Dow contest was 8745.85. They missed it by .40 cents. I do not have a name but the email address was tlent3192@..... Don't hesitate to click below and enter the contest for next week.

Click here: http://www.OptionInvestor.com/game/dowtarget.asp

The prize is a $150 dual monitor video card and very handy for setting up your trading system across two monitors on one PC. This is the last week and your last chance to win. The average guess was 8237.20 and over 500 points below the Dow's close. Obviously there was a lot of negative sentiment going into this week.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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