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Market Wrap

Is it For Real?

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09-04-2002                High    Low     Volume Advance/Decl
DJIA     8425.12 +117.07 8452.59  8280.40 1568 mln  1934/820
NASDAQ   1292.31 + 28.47 1294.65  1261.00 1478 mln  2037/1174
S&P 100   447.98 +  7.95  471.15  459.99   totals   3971/1994
S&P 500   893.40 + 15.38  896.08  875.73
RUS 2000  389.75 + 10.62  389.76  379.13
DJ TRANS 2315.22 + 62.82 2319.34  2238.41
VIX        39.94 -  3.92   43.44  39.45
VIXN       57.42 -  1.37   60.43  57.06
Put/Call Ratio 0.88

Is it For Real?
by Steven Price

The market experienced a bounce today after Tuesday's massive sell-off. The Dow finished the day up 117.07, to close at 8425.12. The Nasdaq also posted a gain of 28.47, to close at 1292.31.

The morning started off with disappointing economic data, as construction spending in July remained unchanged after a 1.7% drop in June. Expectations were for a 0.5% increase. Spending on single-family homes actually saw a small increase of 0.4%, and spending by governments increased 0.9%, but everything else remained unchanged or decreased. Residential buildings saw a decrease of 0.7% and private non-residential buildings saw a 2.1% decrease, to the lowest level in six years. Overall, construction spending is down 1.1% in the last year, in spite of government spending increasing 3.2%. Private sector spending is down 20% in the last 12 months, while spending on industrial facilities is down 48%. Suddenly, "unchanged" looks much worse when you look at what we're trying to come back from.

While the market was up today, it appears yesterday's drop put us into a new area of resistance. A look at the 60-minute chart shows the significance of 8400 in the Dow and although resistance is just above it, around 8425, it appears we may now be looking up at that resistance for a while. There are several brackets of support and resistance just around 8400, and we could wind up bouncing between them, as well.

Chart of the Dow 8400 level

Broken Trend

What may be even more significant is that during the Dow rally from its July low, we had seen a series of steadily rising lows on each pullback. We also saw decreasing correction amounts. For example, taking the intraday highs and lows, even the 702-point pullback from August 1-3 resulted in a higher low than the previous dip. The same pattern was repeated from August 9-14, when the pullback of 443 points resulted in a decreasing correction amount and higher low. The recent pullback from a high of 9077.01 on August 22 has broken this trend and does not look promising for a significant rebound. Not only was the last pullback amount of 796.61 greater than the previous correction amount during August 9-14, it is also greater than the one from August 1-3. In addition, it has broken the series of higher lows, dipping below the August 14 low of 8353, with yesterday's close of 8308 and this morning's low of 8280.

Chart of Dow Pullbacks

Chart of Dow Correction Amounts

Trucking On

While the morning started off with a mild gain, it grew as some good news trickled out as the day wore on. Automakers reported significant sales increases across the board. Ford reported that August sales rose 12 percent from last year, as attractive financing and discounts kept customers buying. The Explorer and F-Series set records for the month of August. Sales of the high- end makers Ford owns, Jaguar and Land Rover, rose over 60%. Unfortunately, concerns over the company's pension plan, which led to yesterday's downgrade, are still weighing on the stock, which was up only 0.11 on the day. GM announced yesterday that it would extend zero-percent financing until the end of October; this practice has apparently helped sales to an 18% gain in the month of August. More than half of their sales were from the company's truck lines. GM also finished the day only fractionally higher with a gain of 0.20. Chrysler also saw August sales up, in their case a whopping 24%, on the strength of their Jeep brand and Ram trucks. Chrysler jumped $1.65 to close at $41.52.

SOX Dips Again
While the Nasdaq rallied today, taking with it many of the smaller tech indices, such as Software (GSO.X), Hardware (GHA.X), Networking (NWX.X) and Semiconductors (SOX.X), the SOX did set a new 52-week low this morning. The index is still squarely within its descending channel, begun in March. It was the failure at the 50-dma of this average in the middle of August that foreshadowed a turnaround in the broader markets, as it led the techs lower. This failure occurred even after the major indices were able to hold above their 50-dmas.

Chart of the SOX

Intel will be giving its mid-quarter update tomorrow, which should shed some light on the accuracy of recent predictions by analysts that they will be lowering earnings estimates. This morning Merrill Lynch and CSFB both cut 2002 and 2003 earnings estimates for the chipmaker. They cited weaker than expected PC sales and the severity of September 1 price cuts. CSFB cut its price target on the stock to $21 from $32, as well. National Semiconductor (NSM) released earnings today, which met expectations, but issued cautious comments about the future. Chief Executive Brian Halla said, "Early indications of consumer demand for the holiday season are not strong at this point and although we have pockets of opportunity they may not be enough to offset weak end-user demand for this quarter." While we saw the SOX up by the end of the day, it is hard to believe in an extended rebound with comments like this still coming out of the sector on a regular basis.

George Bush said today that he would be seeking approval from Congress for action against Iraq. Calling Saddam Hussein a serious threat, it sounds like Bush is walking the fence between Colin Powell's suggestion that the U.S. seek more international support before launching an attack, and Dick Cheney, who has said he supports action sooner, rather than later. Bush also said he would be consulting with other world leaders, including the presidents of China, Russia and France. He will be addressing the U.N. General Assembly next week on the topic.

On Thursday we will be seeing retail sales results for the month of August. These numbers will reflect both the state of the economy, as measured by consumer spending, and foreshadow what we can expect from the holiday sales season. Analysts are expecting weak numbers after many retailers have pointed to slow back to school sales in reducing sales estimates for the month. Wal-Mart said last week that it expected same store sales to be in the low end of its projected 4 to 6 percent growth range. After the close, American Eagle Outfitters released same store sales, which showed a 5% decrease. This was worse than predictions of a 3.6% decrease and could be foreshadowing more of the same tomorrow.

Intel's comments tomorrow should have a pronounced affect on the Nasdaq tomorrow. While the possibility of lowered estimates has already been figured into the market, the reality of the cuts, along with whatever comments accompany them, could still send the techs south. In another bearish sign, the Nasdaq-100, which has led the market in recent years, recently reversed its bullish percentage. After reaching a recent high of 58%, this index, which contains some of the biggest tech companies, is now reading 42%, representing the number of companies in the sector that are currently giving point and figure buy signals.

Given the break in the series of higher highs and higher lows in the Dow and the Semiconductor Index reaching a new recent low, it is hard to believe in today's rally. Look for a reversal back down as we approach 9/11 and the "bargain" shoppers finish their buying. If the retail numbers are better than expected, reflecting an increase in consumer spending, it is possible the bounce will continue. However, with President Bush talking tough on Iraq, tensions should only go up, and fears of an anniversary attack will be around until at least next week. American Airlines said customer traffic was down 9% in August from a year ago and U.S. Air said they saw a 17.3% decline. As September 11 approaches I still see selling, especially when combined with bad news still streaming from the techs. With only a week to go before that date, I'll be keeping a few extra puts around to protect any long position that looks too good to pass up.

Steve Price

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