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Market Wrap

Highest Close In A Month

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      08-15-2002           High     Low     Volume Advance/Decline
DJIA     8818.14 + 74.80  8854.21  8687.92 1.72 bln   1921/1234
NASDAQ   1345.01 + 10.70  1350.92  1322.11 1.71 bln   1732/1621
S&P 100   469.78 +  5.34   471.64   463.76   Totals   3653/2855
S&P 500   930.25 + 10.63   933.29   918.17 
RUS 2000  390.73 +  1.32   392.37   388.65 
DJ TRANS 2319.97 + 13.90  2328.77  2278.28   
VIX        33.07 -  3.29    36.57    33.07   
VXN        51.24 -  2.04    54.24    51.10 
Total Vol   3,665M
Total UpVol 2,376M
Total DnVol 1,230M
52wk Highs   99
52wk Lows   277
TRIN        0.62
PUT/CALL     .63

The Dow rallied back from a severely negative Philadelphia Fed Survey to close positive for the second day in a row and the highest close since July 10th. Could it be the trend have been broken? It may be too soon to tell but the outlook is promising. Whenever markets rise on bad news the future is definitely looking up.

Chart of the Dow

Chart of the Nasdaq

The Philadelphia Fed Survey fell to a dramatic low and a continuation of a six month slide. The -3.1 headline number was the first negative number since December and down from a high of 22 as recently as June. The August estimate was +7.6. This is the first real evidence of a contraction of the manufacturing sector while most other indicators have been hovering just on the brink of turning negative. New orders fell from 6.6 to -2.7 in August and the labor component fell to -13.4 from 6.8 in July. Both new orders and shipments fell as demand weakened. The six month outlook also worsened and capital expenditures for that period dropped to 5.1 from 24.4. This was by far the worst economic report yet and although it is region specific it is assumed the other regions are seeing the same results.

Contrasting the Fed survey was the Industrial Production number which came in slightly better than expected at +0.2%. Growth was weaker than June but still growth! It does indicate that the drop in July was not as severe as previously thought. Jobless claims rose slightly to 388,000 but well within the current trend. The number from last week was revised upward from a drop of -15,000 to only -9,000. Continuing claims did rise +73,000 from the prior week. When you factor in the 16,000 job cuts at IBM, 7,000 at AMR, 1,700 at PLAB among dozens of layoffs announced this week you can see that the longer term picture is not improving.

The earnings after the close were positive with Dell announcing inline with estimates, beating revenue estimates and predicting a 5% increase in sales for this quarter. They bordered on raising guidance saying they were looking for $.20 to $.21 cents for next quarter when analysts were only looking for $.20. They claimed their business was good despite the down sector and they were gaining share from competitors. Their inventory depth was only four days when HPQ is sitting on 49 days of inventory. They said they were seeing an increase in server sales although they did not see business spending increasing on the whole. They attributed this to gaining share in a flat market. Dell was trading up in after hours.

Retailer Kohls is exploding if you can believe their earnings. They beat the street by two cents and increased sales +27%, earnings +44% and same store sales +10%. While this may be incredible performance it was less than they had originally projected and they said if back to school buying doesn't appear soon they may have to lower guidance. This was the same story from Target who said earnings for the quarter could be at risk if slowing sales trends continue. They said it was still too soon to make the earnings call but the trend was definitely slowing. Other retailers posting strong gains included Nordstrom which beat the street by +5 cents and ANN posted $.38 cents from estimates of 29 cents. This followed wins by FD and WMT yesterday. Federated also warned that estimates for this and next quarter are too high compared to current slowing sales. Are you noticing a trend here?

The certification period passed its initial hurdle with barely a whimper. There were a few last minute restatements but mostly from companies that were under suspicion already. There was no smoking gun or major corporation going down in flames. This no doubt contributed to the bullish sentiment we saw in the last two days. The passing of this date does not in any way win us a get out of jail free card.

The problems still abound and the largest of which is the coming 9/11 anniversary. Everyone in the travel, lodging, retail and even the restaurant business has started warning of slower sales and we are still three weeks away from the 11th. The struggling economy has to weather this storm for another four weeks and then we should start ramping into the holiday season using all that pent up cash. This cloud has been overhanging the back to school sales and restricting business and vacation travel over the next three weeks. I don't expect anything to happen because the terrorists only want to strike when we least expect it. They will not try to overcome substantially increased security and risk an increased chance of failure. Still the public will see this as a potential disaster of unknown scale and stay home until the anniversary passes.

The other continuing problem is still Brazil. The questionable candidates are still in the lead in the presidential election for October and the wrong winner would be a sure disaster. Add in the increasing likelihood that we will go after Saddam on our own and risk having our oil cutoff from other Arab countries and you can see why the Fed was not eager to spend its remaining rate cuts frivolously.

Friday is a toss up. We finished the day over 8800 but well off the highs. The Dell news is a positive but probably already priced in with today's gains. The retail earnings announcements were excellent but almost all warned of slower sales trends. Trading at new relative highs after a big decline puts us at risk of hitting new sell programs with every +25 point gain. Until the majority of traders turn bullish the remaining bears will continue to make our life miserable with every up tick. The bright side is every bear becomes a panic buyer if the markets continue to trend up. Tomorrow we have the CPI report, Housing starts and the Consumer Sentiment. Sentiment should have remained flat for the first two weeks of August since the market has been trending up. This is the number one cause of its decline. The housing starts should rise slightly due to the good weather and continued lower interest rates.

The key for tomorrow is for the Dow to remain over 8750 and close over 8850. This will keep the current short term up trend in place and keep pressure on the shorts. The Nasdaq needs to close over 1354 for the same reasons. Ralph Acompora came out into the sunlight today and said the close over 8796 today indicated we could rally to 10,060. He has not been right for a long time but he said the July-24th low was the bottom and he expects +1000 to +1200 point gains from here. Let's hope his luck has changed.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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