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Market Wrap

A Day Off

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10-14-2002                High    Low     Volume Advance/Decl
DJIA     7877.40 +  27.11 7915.00 7745.70  1380 mln   769/586
NASDAQ   1220.53 +  10.06 1221.60 1193.42  1200 mln   762/430
S&P 100   425.54 +   2.86  427.17  418.28   totals   1531/1016
S&P 500   841.44 +   6.12  844.39  828.37
RUS 2000  346.53 +   1.60  346.63  342.83
DJ TRANS 2138.75 -  15.92 2159.08  2130.36
VIX        42.12 -   1.32   44.05   42.12
VIXN       59.08 +   0.21   60.49   57.89
Put/Call Ratio 0.93

A Day Off
By Steven Price

Wake me up on Tuesday morning. Today was quite a sleeper, with the bond market closed. We are in earning's season, but most of today's releases were after the close, so the day's trading had very little to kick start it in one direction or another. There is one development that seems to be giving us some guidance as far as the current resistance level for the Dow. Any bear market will get its share of intermediate rallies, and figuring out just where they are going to run out of steam, or break higher, can provide some good long/short opportunities. The Dow lost 1879.52 points from its intraday high of 9077.01 on August 22, to its intraday low of 7197.49 last week. I highlighted last week that I would need to see a trade of 8012 intraday, or a close above 8000, in order to change my bearish sentiment and for the trend of lower highs to be broken. The other interesting development of the last two trading days, one a high-volume, enormous rally, and one a low-volume, up and down day, is the point at which the index found resistance. Both days, the move to the upside was halted right at the 38.2% Fibonacci retracement level of 7915.46. Friday's rally ran out of stem at 7901.26 and today's upside movement (I hesitate to call it a rally) ended right at 7915.00. Some could argue that this is a series of higher highs, given Thursday's high of 7560.93. However, a look at the bigger picture still shows a downward trend, with failure at a significant retracement level. Below are examples of the daily, weekly and monthly charts on the Dow. While I'd like to put a smile on readers' faces, these charts are not pretty. Cover the kids' eyes, and if you are sensitive to graph-ic violence, you may want to turn your head.

Daily Chart of the Dow

Weekly Chart of The Dow

Monthly Chart of the Dow

This week should give us a good look into the crystal ball of the fourth quarter. There are many large companies releasing earnings this week and should give commentary along with those releases in regard to outlook for the fourth quarter. Intel releases after the bell on Tuesday and Advanced Micro Devices releases Wednesday. Both should comment on PC demand outlook for the fourth quarter. The chip stocks have been trying to find some legs after a sell-off that saw the Semiconductor Sector Index (SOX.X) lose 41% of its value between August 19 and October 9. Chip stocks have been a short trader's goldmine in recent months and they finally appear to be trying to set a bottom. However, each rebound in the sector index has been turned away from breaking the trend of lower highs. The SOX has been in a descending channel since April and a trade over the recent intraday high of 263, or close over the recent closing high of 256 would help it break that channel.

Chart of the Semiconductor Sector Index (SOX.X)

This morning brought another automotive downgrade. Merrill Lynch downgraded both Ford and General Motors, citing deteriorating prices for both new and used cars. What I find most disturbing is that these companies were beat up for several reasons, including lowered earnings estimates, pension problems, poor debt ratings and the possibility of sales declines in 2003. Add pricing pressure, when they are already offering zero-percent financing and there is only one way to go. We'll be getting GM's earnings release on Tuesday, and should also get some insight into their fourth quarter and 2003 outlook.

This weekend's bombing in Bali, which killed more than 180 people, only added to the rising price of oil futures, as war fears were further stoked. This, combined with OPEC's reluctance to raise output quotas, continues to filter down to companies' earnings reports. This morning, Airborne Express (ABF) announced that they would miss earnings expectations. The company cited $4 million in airplane related costs and a $2 million increase in fuel costs. We heard the same sentiment from American Airlines, and it is likely to be repeated until oil costs drop. That is unlikely to happen, with an Iraqi invasion looming. While those costs don't get much publicity, it undoubtedly affects the bottom line for everyone from airlines, to chemical companies (See Dow Chemical), to pizza delivery drivers. Crude Oil futures are now back over $30 per barrel, after trailing off for the last couple of weeks.

Chart of Oil Futures

Oil prices are one of many factors that will affect the economy if we do take action against Iraq. There is also concern consumers will be inside watching television reports, rather than shopping during the holiday season, and staying home out of fear of retaliatory strikes in public places. Recent statements attributed to Osama Bin Laden, praising terrorist attacks on U.S. soldiers in Kuwait and on a French supertanker off the coast of Yemen, threaten continued action against the U.S. if it continues its presence in Muslim nations. While it is not clear if the statements are from Bin Laden, they underscore the fear of retaliation for action in Iraq.

The Nasdaq Composite (COMPX) is getting even closer to breaking the trend of lower highs, which was actually broken by the Nasdaq 100 (NDX). In the past, the NDX has given the first signals of a turnaround, and that pattern break occurred last week. Bears may want to watch this index, which contains some of the largest tech stocks, for signs of failure, before picking a top and going short. If it continues higher, it could be a sign that the Dow will follow.

Chart of the Nasdaq Composite and Nasdaq 100

The slowdown in retail and PC demand has made it into the electronics manufacturing services sector (EMS), according to this morning's prudential downgrade. The research note stated," With demand for communications equipment continuing to be weak, enterprise hardware having recently weakened and PC demand trends mixed, we are concerned that there are very few 'legs' left supporting demand for electronics goods and consequently our companies' services." The note also cited weak end demand and customer credit concerns.

Boeing got more bad news, as they were beat out for a commercial jet contract by Airbus. Easyjet, Europe's no-frills version of Southwest, ordered 120 planes, with options for 120 more. The deal was worth up to $6 billion, although Airbus offered a 30% discount, which would place the order closer to $4 billion. Up until now, Easyjet has had an all-Boeing fleet, and loss of the order casts additional doubt on Boeing's 2003 and 2004 projections. The company produced 527 commercial jets in 2001, 380 in 2002, and predicted 275-300 in 2003. Analysts now predict only 250-260 in 2004, as well as possibly fewer in 2003, as well. Boeing has complained for some time that Airbus, which is government subsidized, is able to win a price war, and those fears appear to be well founded. That doesn't mean there is anything they can do about it.

Energy firm TXU Corp. cut its dividend by 80% this morning, announced it plans to significantly reduce capital expenditures at all of its divisions and put its European businesses up for sale. Morgan Stanley and CFSB downgraded the stock. The moves were made to try and free up cash to deal with serious debt problems created by European operations. TXU's debt ratings were lowered by Standard and Poor's and Fitch, which lowered its ratings on the European subsidiary to "CCC," which indicates a likelihood of default. The stock lost 31%, to close at $12.94. TXU traded as high as $40 on October 1.

After the bell, forest and paper product producer Temple Inland (TIN) beat earnings estimates by $0.03. Profits were still down 66% from a year ago, due to low prices for lumber and the boxes it manufactures. The entire industry has been hammered to levels not seen since November 2000, but has rebounded the last few days with the broader markets. Mohawk Industries, which makes floor coverings for homes and offices, beat estimates by $0.01. That was an increase of 46% over the year ago period and reflected a reduction of shares, increased sales due to a merger and internal growth of Mohawk products, including a 9% increase in residential products. MHK's results seem to indicate continuing strength in the housing market, although that could change this quarter, if the homebuilding stocks are any indication.

Volume was very light today and it is hard to make any momentum judgments based on that lack of activity. Although advancing volume outstripped declining volume by a small ratio, new lows beat new highs by a 3:1 ratio. Things should pick up tomorrow, with the earnings releases and continue for the rest of the week. Until then, make sure to keep an eye on the big picture, and the important resistance levels just overhead.

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