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Back Where We Started

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11-13-2002                High    Low     Volume Advance/Decl
DJIA     8398.49 + 12.49 8493.51  8298.68  1702 mln   1155/538
NASDAQ   1361.34 + 11.78 1371.74  1334.13  1089 mln   1377/251
S&P 100   450.61 +  0.11  455.73  445.28   totals     2532/789
S&P 500   882.53 -  0.42  892.51  872.05
RUS 2000  376.11 +  1.42  379.08  371.29
DJ TRANS 2290.88 + 10.19 2307.29  2235.81
VIX        36.28 +  0.89   36.87  34.53
VIXN       54.46 -  0.79   56.66  52.74
Put/Call Ratio .75

Back Where We Started
by Steven Price

On a day with that had testimony from the Fed chief and an announcement that Iraq was going to unconditionally accept the U.N.'s weapons inspection proposal, the closing prices on the Dow and Nasdaq look relatively tame. Of course that would discount the intraday action that saw a swing of almost 200 Dow points and 35 Nasdaq points. We are continuing the trend of wide intraday swings, as investors try to digest conflicting signals given on a seemingly daily basis.

The market began the day heading downward, as Alan Greenspan testified that the economy had hit a "soft spot" and that the losses suffered in the equity markets had outstripped gains in the housing market. The Chairman basically said that while roughly half of equity extractions from homes go into personal consumption expenditures and outlays on home modernization, the net decline in the market value of stocks has greatly exceeded the additions to capital gains on homes over the past two years. He also said geopolitical risks have made companies reluctant to expand their operations, hire workers, or buy new equipment and business spending has yet to show any substantial vigor. On the positive side, he said that productivity gains have continued, most likely due to innovations in computing and communications technology, but questioned just how long that expansion would continue.

Greenspan also basically said that the recent 50-basis point rate cut was done because the risks of inflation were much lower than the risks of leaving rates too high in a faltering economy. He said, "Remember, most of the GDP growth in the third quarter is largely from sharp increases in July, and in some cases, early August. But it's been softening since then. Our best judgment, and, indeed, the data to date confirm that this is a gradual, not a cumulative decline. But there is a probability, small as it may be, that we may be wrong; that this may be the beginning of something more than appears most likely."

Just when things seemed bleak, news hit the wires that Iraq would accept the U.N.'s weapons inspections proposal. This was a 180- degree turnaround from yesterday, when the Iraqi parliament rejected the proposal, but said the final decision rested with Saddam. My guess is that most of yesterday's parliamentary debate was scripted, so that in the end Hussein would come out looking like a changed man, cooperating with the U.N., in spite of "pressure" at home. Quite a P.R. department they've got over there. It seems Iraq had little choice, other than agreeing to the proposal, and just how cooperative the country is, remains to be seen. Crude oil futures fell quickly on the news, after rebounding for the last three days, following the UN approval of the U.S. designed proposal. They finished the day close to $25 per barrel, after reaching a high near $31 per barrel at the end of September.

Chart of Crude Oil Futures

Nevertheless, the prospect of war seemed a little more distant and we got a big bounce from the news. The blue chips rallied from a low of 8298 all the way up to 8493, failing for the second day in a row at 8500. This rejection just reinforced the current range between 8200 and 8500, which seems to be collaring the average right now. Secondary resistance can be found at 8550 to the upside, as well, but a close over 8500 should serve as a red flag for shorts. For now it seems the best plan is to trade within the current range, getting longer on bounces around 8200- 8300 and shorter on failed rallies at 8500. If we break through these levels, then it is likely time to follow in the direction of the break. Make sure to wait for a bounce, however, if we test 8200-8300, because if those levels fail, it may be a quick trip to 8000.

The S&P 500 (SPX) appears to have a similar top on it at 900, which has served at resistance once again. This level proved tough before the big run, during the first part of last week, and can once again be used as a breakout gauge. While 925 is almost 40 points above the current level, it can be used as a signal of renewed strength on a longer term basis, since any failed rally below that point can be seen as a dead cat bounce and the possible right shoulder in a new H&S formation.

Chart of the SPX

The Nasdaq 100 (NDX) appears stronger than the other indices, as it has maintained support at 1000, rather than seeing resistance there. Yesterday's big jump in that group was followed by another increase today of 10 points, which was more impressive than the gains in the Dow or SPX. The Nasdaq Composite rebounded right up to previous resistance around 1360, the level from which it gapped up on November 4, so continued strength back into the gap, after if was filled on the way down, could bring it right back up to 1400. However, today's comments after the bell from AMAT (see below) may take some shine off the tech sector in the morning.

Chart of the NDX

Chart of the COMPX

Consumer spending got some conflicting data from the retail sector this morning, as well. Wal-Mart beat earnings estimates by a penny, but noted a "difficult" retail environment. The company raised its forecast for sales growth from 2-4% to 3-5% (which is still beneath traditional growth numbers of 4-6%), but said the increase in spending was less than all of us would like. The CEO also identified slowing comparable store sales growth and targeted 4th quarter earnings at the low end of analysts' expectations.

Nordstrom warned after the bell on Tuesday that it would miss forecasts, blaming the miss on increased distribution costs and record keeping changes. The stock finished down almost $3 at $19.12. Federated also beat estimates by a penny this morning, but same store sales were down 2 percent. The company said it expects same store sales to be unchanged or down for the fourth quarter, due to the slow economy and lack of consumer confidence. Tomorrow brings earnings from Target and Kohl's, as well as monthly retail sales numbers, which are expected to show a small decline in October; so we should see even more volatility in the sector. We'll get a good idea just how heavy Santa's sleigh will be this year, after this week reveals most of the pre-holiday shopping data.

Sears saw its rating cut by Goldman Sachs from in-line to Underperform. While the firm said it may have overestimated the amount of the retailers' Sears' Gold MasterCard charge-offs, it still believed the company would have to increase charge-offs and lowered 2003 estimates. The stock fell to a 20-year low, losing $1.70 to close at $21.00. I am starting to worry about other stores that offer store credit, as well. If Sears is seeing defaults on their credit cards, then I can't imagine it is the only retailer with the problem. In light of the recent problems in the banking industry with underperforming loans, this may be the next problem to raise its head across several sectors of the economy.

After the bell, Applied Materials (AMAT) released earnings that beat estimates by a penny, but had only negative things to say. It said that the results were achieved in a very, very difficult environment that it doesn't expect to improve anytime soon. The company also guided lower and said it expects first quarter revenues to drop 20% from the fourth quarter. This is not good news for the semiconductor stocks, which have so far been able to shake off poor earnings reports this season. The Semiconductor Index (SOX.X) has now failed at 300 the last three trading sessions, after falling back below that level on November 8, for the first time since the beginning of the month. Shorts in the sector can take solace in the fact that there have been rebound attempts intraday, and each time the sector has found sellers. After AMAT's report, we should see continued weakness and with new resistance in place, the risk/reward ratio seems to be getting better to the short side.

Chart of the SOX

Some of Citigroup's dirty laundry hit the newswires today. Analyst Jack Grubman explained that he had attempted to pump up his professional reputation by claiming in an email that he upgraded AT&T in order to help CEO Sanford Weill seize power from former co-chairman John Reed. This act would supposedly align AT&T Chairman Michael Armstrong, who also sat on Citigroup's board, with Weill and help him "nuke" Reed. Not sure how one pumps up a reputation by claiming they performed an illegal act, but apparently in Grubman's world, that's the way it works. In any case, Grubman claimed the email was a fabrication, just before Weill admitted he had asked Grubman to take another look at the stock. Confused? Citigroup's investors weren't. They dumped some of the stock, which lost $1.39 to close at $35.00. Something tells me there will be more to come from this story.

Tomorrow will bring more economic data. We'll get retail sales, import and export prices, and initial jobless claims. Consumer Sentiment and PPI will follow those numbers on Friday. My guess is that we'll be testing the aforementioned Dow range limits further on the upcoming data - again.

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