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Nothing Bad Happened

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09-11-2002                High    Low     Volume Advance/Decl
DJIA     8581.17 - 21.44 8726.90  8570.22  987 mln   549/430
NASDAQ   1315.45 -  4.64 1347.27  1314.96 1068 mln   663/384
S&P 100   455.41 -  0.48  464.02  454.73   totals   1212/814
S&P 500   909.45 -  0.13  924.02  908.47
RUS 2000  393.37 -  0.79  397.55  393.20
DJ TRANS 2297.32 +  9.72 2326.39  2285.87
VIX        37.23 +  0.27   38.45  35.92
VIXN       54.00 +  0.93   54.00  52.52
Put/Call Ratio 0.69

Nothing Bad Happened
by Steven Price

It is very difficult to gauge overall market direction on a day when many traders either didn't come to work, started late or went home early. We opened the day with a triple digit rally in the Dow. However, as the rally faded there were a couple of significant technical developments. First, the Dow crossed back above the 50-dma (currently 8614) for the first time since closing below that level on August 28. For the second, let's look at the Fibonacci retracement levels of the rally from July 24 to August 22. The 50% retracement provided support on 5 straight trading sessions last week, giving the Dow a consolidation point, from which it broke out above the 38.2% level. Today that rally ran out of steam just below the next level of 19.1% at 8782. A hold above the 50-dma could have been seen as bullish, with the group finding another level of support from which to rally, as it did following the last 50-dma breakout on August 19. That previous breakout brought the Dow over 9000, to the recent high of 9077 on August 22. But in this case, the group could not hold on, dropping back below that level. So, what looked to be a significant move up, instead turned into failure at the 50-dma.

Chart of the Dow 50-dma

The failure at the 19.1% retracement level also looks bearish. If you extend this level backward, it also provided resistance during that rally from July 24 to August 22. This level of resistance, on both sides of the August 22 high, appears as though it may be acting as the shoulder level in the possible development of a bearish head and shoulders pattern. A look at the graph below shows the possibility of a neckline forming at the 50% retracement level, depending on how long it takes to fall back to that level.

Chart of Dow Head and Shoulders

So here we are between a couple of significant points, and we also have different forces at work pulling on the markets. On one hand, there are sure to be investors who have remained on the sidelines, waiting for the 9/11 anniversary to pass before feeling comfortable putting money back into the market, knowing how badly stocks tanked after last year's attacks. The fact that they all did not return on the one-year anniversary does not necessarily mean that they won't. Is this factor enough to get the markets rolling again? More buyers, meaning more demand, can certainly lead to a sustained rally. However, no matter how many potential buyers are out there, they still need a reason to buy. With 9/11 out of the way, we may have a seen a reason "not to buy" removed from the equation, but the news has still been consistently negative. We have seen nothing but downgrades from the tech sector. Just a couple of days ago, forecasting firm IDC lowered growth estimates for the semiconductor stocks from 4.7% to 1.1% in 2002 and from 11.1% to 8.4% in 2003. This followed Intel's lower guidance and warnings from a host of other techs on an almost weekly basis over the last several months. If you had been saving your money to invest in the market after 9/11, you would still want a reason to put it back in.

Right now, all we are hearing is that IT spending is still declining. ISM reports have showed that manufacturing and non- manufacturing sectors are slowing and this morning's Beige book did nothing to allay fears of an overall economic slowdown. The report suggested the growth of economic activity has slowed in recent weeks. There was little or no gain in employment in July and August and there was widespread concern that rising health care costs will affect labor costs negatively. Manufacturing activity was also sluggish. The report noted that manufacturers have become less optimistic than they were earlier in the year. Although residential real estate sales remain strong, commercial real estate markets are weak. Residential mortgages and lending are still at high levels, but business lending was light across the board. Contacts in Philadelphia, according to the report, expressed concern about the sustainability of real estate lending in the absence of growth in other sectors. Retailers have pared their inventories, expecting fall sales to be flat or only slightly up from 2001. The golden goose of residential real estate is still going strong, but everything else is heading the other way, and with foreclosures at all-time highs, the cracks in the housing market may be starting.

A look at the bullish percentage figures shows a significant drop from just a couple of weeks ago. Bullish percentage measures the percentage of stocks in a sector that are currently giving point and figure buy signals. The Nasdaq-100 (NDX) has fallen from 50% down to 36%. The Dow has fallen from 60% to 50%. The S&P 500 has fallen from 58% to 52%. These drops, when combined with today's market weakness, appear to be foreshadowing a negative immediate future.

The semiconductor sector, which has been a bastion of bad news, is attempting a comeback. After setting 52-week lows in the Semiconductor Sector Index (SOX.X) last week, it has moved above resistance at 300. Although it pulled back yesterday after breaking that mark, it made it back above that level and held today. A look at the descending channel it has been in since the beginning of the year shows that although it set that new low, it actually rebounded from a higher point in the channel than it did during previous bounces on the way down. The last effort to break out of the channel at the end of August was turned back by the 50-dma. The descending 50-dma could once again provide resistance if the SOX breaks the channel, and it appears to be trying to break the channel once again. As the failure at the previous 50-dma, in contrast to the major averages breaking through theirs, seemed to lead us back down, a break above that level could be the foundation for a turnaround to the upside. One thing that will have to improve first, however, is the sector bullish percent, which is still a paltry 20%. The 20% does indicate the group is oversold, which coincides with the daily oscillators, which appear to be turning up from oversold territory and giving buy signals.

Chart of the SOX

After yesterday's heightened security alert, investors remained jittery as reports of incidents on two separate airplanes, and a ship trickled out through the news wires. The plane incidents turned out to be three men locking themselves in a bathroom, and a suspicious comb. The ship, on the other hand, was a Liberian container ship, which gave off traces of radioactivity and was re-directed to a safe area several miles offshore.

It is hard to take any real conviction from a shortened trading day, where less than a billion shares were traded on the NYSE, and traders minds were undoubtedly focused on the ceremonies surrounding ground zero just a couple of blocks away. The Nasdaq, which opened earlier than the NYSE, but still later than usual, saw barely a billion shares change ownership. The last three Septembers have been brutal for the Dow, so today's failed rally seems to be following the script. With the 9/11 anniversary behind us, some of those buyers still may creep in, but I suspect we'll need some positive economic news to find any real commitment.

President Bush will address the United Nations tomorrow and make his case against Iraq. In today's memorial speech he made sure to include "dictators" in the same sentence as "terrorists" that plot against us, so there is little doubt how he intends to characterize Saddam Hussein. The effect an Iraqi invasion will have on our economy has been debated, but one thing is clear - we will see oil prices rise. This may be a small price to pay for long-term security, but it is something the markets will pay attention to, as it will affect many businesses and consumers. Alan Greenspan also testifies before the House Budget Committee tomorrow, so we will get a peak at the likelihood of interest rates being cut further this year. His comments on the economic recovery will also cause some jumpiness as he speaks. In addition we will see Initial Claims for last week and August Import/Export Prices. After layoffs increased, but unemployment for August decreased, the Initial Claims should give us a sense of direction for employment.

With these speeches from the President and Fed Chairman, normal trading hours, and higher volume, tomorrow should be a better indication of which way we will head, with 9/11 behind us. We could still see a post-9/11 rally, without any major events scaring investors away. My guess, however, is that it will be temporary, until the buyers have a better reason than "nothing bad happened."

Steve Price

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