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Where is Everybody?

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09-09-2002                High    Low     Volume Advance/Decl
DJIA     8519.38 + 92.18 8558.01  8315.47 1568 mln  1556/1194
NASDAQ   1304.60 +  9.30 1310.33  1270.73 1478 mln  1562/1618
S&P 100   447.98 +  7.95  471.15  459.99   totals   3118/2812
S&P 500   902.96 +  9.04  907.34  882.92
RUS 2000  392.47 +  0.90  393.55  385.59
DJ TRANS 2263.42 +  6.35 2276.64  2209.60
VIX        38.40 -  1.64   38.49  37.53
VIXN       55.47 -  1.07   55.49  55.05
Put/Call Ratio 0.84

Where is Everybody?
by Steven Price

This morning started out looking as if a pre - 9/11 sell-off was underway. With the anniversary looming on Wednesday, it appeared investors were heading for the sidelines. Then a funny thing happened on the way to 7500. The buyers came back in. Sort of. Volume has been very light, with only 1.3 billion shares traded on the NYSE and only 1.2 billion shares on the Nasdaq.

Although the Nasdaq Composite (COMPX.X) finished the day up 9.30, to close at 1304.60, declining volume was actually slightly higher than advancing volume. On the NYSE, advancing volume was higher, but only by a 1.3:1 ratio. This is not the stuff of a convincing rally.

While it is hard to gauge long-term direction on such a light trading day, what is apparent is that investors are simply staying away. Ahead of 9/11, there is so much uncertainty about what to expect that many traders are simply doing nothing. No panic selling and no jumping on the bandwagon and getting long ahead of a post 9/11 rally. One interesting technical development, however, is the point of today's bounce. The market has sold off consistently since its August 22 high, following a rally of over 1,500 Dow points since bottoming at 7532.66 on the morning of July 24. The Dow has now tested the 50% retracement level of that gain on 5 straight trading sessions. Although it managed to close below this level on one occasion, it has provided remarkable support in light of negative news coming out regarding the tech sector almost every day. Given this morning's 111.73 point drop, the 203.91 point swing to the upside looks pretty bullish, in spite of the low volume. However, if investors were making a conscious effort to get long ahead of the anniversary, we most likely would have seen a much bigger upswing, and would not have been 111 points in the red to start the day.

Chart of The Dow Retracement

This stream of recent negative news is reflected in the Semiconductor Index (SOX.X). A look at the chart shows that after setting a new 52-week low last week, it hasn't been able to follow the rally in the rest of the Nasdaq. It appeared oversold last week. Shorts had pounded the sector ahead of Intel's mid- quarter meeting on Thursday, expecting the company to lower earnings and revenue guidance. They got the lower revenue guidance, but not nearly as bad as expected. The sector looked ready for a rebound, but was stopped dead in its tracks just over 290. Today was more of the same. The group was once again stopped short, only this time at a lower level than it was on Friday. A look at Friday's 5-minute chart shows resistance just below 293. Today, 291 provided the ceiling. It will be hard to maintain a Nasdaq rally without participation from the semiconductor related stocks. The successively lower levels of resistance, although minor, still show a bearish trend.

Charts of the Semiconductor Index for Friday 9/06 and Monday 9/09

Friday's Chart

Monday's Chart

This morning, Cymer (CYMI), which makes light sources used in chip manufacturing, said its 3rd quarter would be in line with expectations, but that the 4th quarter would come in below the 3rd. Cymer cited slowing semiconductor demand and reduced industry capital spending, as reasons it believes revenue will decline. It also expects its book-to-bill ration to be less than one. The book-to-bill represents how many orders a company has, compared to how many orders it has shipped. A ratio of less than one usually indicates weak demand.

Forecasting group IDC also lowered expectations for PC market growth in 2002 and 2003. It lowered estimates for 2002 from its July forecast of 4.7% to 1.1%, and for 2003 to 8.4% from 11.1%. It cited a lack of spending by medium and large sized businesses and a slowdown of second quarter momentum, which it said has all but disappeared, as businesses postpone PC investments and consumer spending has slowed.

Wholesale inventories rose 0.6%, ahead of the expectations of a 0.2% rise. This indicates demand may be improving. The increase matched July's number and registered the first back-to-back monthly increase since November and December of 2000. Durable goods inventories saw a 0.1% decrease, while non-durables, such as groceries, farm products and apparel, saw a 0.9% increase. This is just one more indication that the Federal Reserve will likely leave rates unchanged at its next meeting on September 24. More clues about what the FOMC is planning will come on Thursday, as Fed Chairman Alan Greenspan testifies before the House Budget Committee.

Thursday also marks President Bush's speech to the U.N., during which he will address the situation in Iraq. Comments by Vice President Dick Cheney and Secretary of State Colin Powell over the weekend indicated that Bush would be pushing for action sooner rather than later. The V.P. indicated that the U.S. has evidence that Saddam Hussein is working on a nuclear weapons program. According to Cheney, "We have to be concerned now about the possibility that we're vulnerable to an attack the likes of which we did not experience prior to last September 11, with a far more deadly weapon. We have to worry about the possible marriage, if you will, of a rogue state like Saddam Hussein's Iraq with a terrorist organization like al Qaeda."

Oil traders have been paying attention, as oil has held over $29/barrel. The October Crude Oil futures have been flirting with $29 since the middle of August, and are now approaching $30. As the rhetoric has heated up so have the bids. If President Bush, in his speech to the United nations, advocates heading into Iraq without first considering the possibility of sending weapons inspectors back into the country, Crude Oil futures will most likely head into the 30s.

Chart of Crude Oil

J.P. Morgan (JPM) received a couple of downgrades this morning, initially dragging down both the Bank Sector Index (BKX.X) and the Securities Broker/Dealer Index (XBD.X). By the end of the day, however, both groups had recovered, shaking off JPM's 0.32 point decline to finish up 8.00 (79.15) and 9.64 (401.28) on the day, respectively. The downgrade from Merrill Lynch cited the possibility that JPM will have to cut its dividend due to tough conditions in the capital markets. This sentiment was derived from a recent speech by JPM Chief Executive Bill Harrison. Harrison said that corporate credit problems have lowered the outlook for second-half credit costs and that the third quarter looks poor as well. Prudential also downgraded the bank, adding that with almost all capital markets categories showing a decline this year, the firm no longer seems as committed to maintaining its dividend.

Ford came out with some good news this afternoon. Analysts had been predicting a 3rd quarter loss for the automaker. However CEO Bill Ford said, "We beat analyst estimates in the first and second quarter and we will do it again in the third...On an operating basis, we expect to report a small profit." Financing incentives have kept consumers buying automobiles and Ford said that this reversal demonstrates the company's success in capitalizing on increased industry volume.

AOL Time-Warner, on the other hand, said things were not so rosy. The company expects 2002 cash flow to come in at the low end of the previously forecast 5%-9% range. It said that the AOL unit's revenue would come in below expectations due to a slump in advertising revenue. This also does not bode well for other internet hosts, such as Yahoo.

The real estate market has been on fire since interest rates hit a 40-year low last year. Apparently, many homeowners who jumped on board and took advantage of those low rates, extending themselves to buy bigger and more expensive homes, are now having trouble paying their mortgages. Foreclosures reached a record high of 1.23% for the second quarter, up from 1.10% in the first quarter. That eclipsed the previous record of 1.14%, set in the first quarter of 1999. With layoffs increasing, according to last week's jobs data, we could be seeing the first cracks in the housing market, as foreclosed properties come onto the market in record numbers. This is a negative sign for the economy overall. While the competition for foreclosed properties is also stiff, the indication is that many of those people holding up the housing market with new purchases and re-finances, have become financially strapped to the point of having no other option than to allow their mortgages to be foreclosed on.

In addition to consumers having trouble with mortgage payments, they are apparently struggling with other debt as well. Consumer debt grew by a greater than expected $10.8 billion in July. This amounts to a 7.5% annual increase, ahead of July's 6%. Revolving debt, such as credit cards, increased 10.8 percent, while non- revolving debt, such as automobile loans, increased 5.3%. Much of this was due to some of the lowest auto loan rates ever. The Cambridge Credit Index, however, showed that in spite of good intentions, consumers are not paying off their debt nearly as well as planned. The index showed a surge in the "Reality Gap," which measures how much debt consumers pay off, versus what they say they are planning on paying off. The Reality Gap jumped 6 points to 16 percentage points, almost back to its record level of 17 points in July. The Gap decreases as Americans pay down debt.

In addition, more than 2/3 of Americans with student loans said that their payments are a big enough burden to keep them from making large purchases, such as homes and cars.

In contrast to last month's lowering of retail sales expectations, Wal-Mart (WMT) came out this morning and announced that its September sales appear back on track. The retail giant predicted the same 4%-6% growth it did last month, when it first warned that sales would be at the low end of predictions and then missed the target altogether when same store sales showed only a 3.8% increase. Other retailers also posted disappointing August sales figures, suggesting poor back-to-school sales and a slowdown in consumer spending. One of those was Federated (FD), which operates Macy's and Bloomingdale's. Federated also affirmed their September sales targets today. This will be Federated's first positive increase since November of last year. They saw a 5.8% decline in August. This indicates that consumers may be spending again, or at least spending more than they did last month.

With so much conflicting data, and so many investors on the sidelines ahead of Wednesday's 9/11 anniversary and Thursday's speeches from Greenspan and the President, it will be hard to commit in one direction or another. The evidence, however, is thus far bullish. The Dow finding support at the same retracement line on five straight days is significant, even if there is light volume. Today's rebound was very strong and the talk of taking positions ahead of 9/11 is mostly in regard to going long. There are undoubtedly investors on the sidelines waiting to put their money back into the market after the anniversary passes - also a long indication. If it weren't for such a lousy business spending environment dragging down the semiconductors, I would be leaning long and letting it ride. However, the reality of the situation is that the techs are still suffering and a long-term recovery will depend on an increase in business and consumer spending. That doesn't mean the short-term picture won't be up as investors build confidence with the passing of 9/11. Look for a rally after that date, but keep an eye on the previously outlined 50% Dow retracement level for a break in support. If we get below that level by a significant amount, get out of the way. After all, the Dow recently broke its trend of higher highs and higher lows, and the long-term trend will still need some positive news to maintain a positive slope.

Steve Price

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