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Market Wrap

Both Sides of the Argument

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11-18-2002                High    Low     Volume Advance/Decl
DJIA     8486.57 - 92.52  8636.24 8480.68  1523 mln   644/857
NASDAQ   1393.69 -  17.45 1425.42 1393.66  1681 mln   720/921
S&P 100   396.15 -   7.07  408.26  394.80   totals   1364/1778
S&P 500   900.36 -   9.47  915.91  899.48
RUS 2000  382.58 -   3.34  388.08  381.82
DJ TRANS 2290.64 -  42.56 2349.65 2290.45
VIX        31.11 +   0.28   31.35  29.96
VIXN       48.09 -   1.59   49.46  46.69
Put/Call Ratio  0.65

Both Sides of the Argument
By Steven Price

Everyone take a deep breath; the markets certainly did today. Not that the Dow broke its string of triple-digit intraday moves. However, it continued that streak on light volume, and gave us little indication of momentum. While we finished down on the day, it wasn't a powerful sell-off and after the recent rally the question is whether this was just a normal pullback on the way up, or a trend reversal.

There are a couple schools of thought for traders to consider. First, the bears can look at the still in tact head and shoulders pattern that may be forming in the Dow and S&P 500. The left shoulder of that formation has a top at 8547, the head at 8800 and the right shoulder could be forming anywhere under 8800. The recent rebound was necessary for the bearish formation and today's rollover in those indices could be just the continuation of that pattern. If we continue to either drop, or go sideways and then drop, then the measuring objective of that formation would place the Dow at around 7800. The neckline breakdown necessary to complete the formation is between 8300-8400 and after a rally of 1600 points since bottoming at 7197 on the morning of October 10, we are severely overbought and due for a correction. The bears can also point out that we are still in a bear market and that any bear market is subject to intermediate rallies on the way down. The fact that previous resistance at 8500 in the Dow did not serve as support on the pullback also appears to be bearish, for those investors who were hoping to enter long on a pullback to support. Unemployment still remains high and there has been no noticeable up tick in IT or business spending. The Nasdaq Composite has not been able to crack its August high of 1426, having found resistance there on each subsequent attempt. Today's high of 1425 found significant selling, as the index fell 32 points after failing that level. The recent rally is just another shorting opportunity and anyone who buys stock in a company that has warned about declining revenues and no visible turnaround (as many of the rising chip stocks have) ought to have their head examined. A fool and his money.... By now you get the bearish picture. So why on earth is anyone bullish?

Bulls can point to the fact that we are still more than 3000 points below the Dow's high of 11,750 back in January of 2000. The chip stocks, as measured by the Semiconductor Index (SOX) have dropped from a high of 1362 in March 2000 to just 319 at today's close. That index was trading as high as 641 back in March of this year, and the recent rally in the sector is due to the fact that recent earnings were not as bad as expected and many of the companies trading in single digits are a steal if IT spending ever picks up, which it eventually will. Bulls can also point out the fact that, sure the Dow's point and figure chart approximated the same bearish vertical count as the head and shoulder's indication, but it reversed up into a buy signal last week with the trade of 8550 and some pullback is to be expected after such a big recent run. A trade of 8450 would be required to reverse that buy signal and so far we have not reversed that far. The next point and figure sell signal does not come until 8250, and until that happens, the bullish vertical count is at least 9250, and could go higher if the index continues higher without a reversal. The SPX has also held support over 900, and although the Dow gave up 8500 today, the S&P is a broader measure and is less responsive to a move in just a few of its components, with 500 stocks, versus 30 for the Dow. Sure, the Nasdaq has been rejected at the August high on several occasions, but doesn't that mean that the index is testing its highs? It is also curious that the NDX volatility index (VXN) finished down on the day, in spite of the late day sell-off. If any of the large institutions thought we were getting ready for another big drop, they certainly weren't buying puts.

Chart of the Dow

Point and Figure Chart of the Dow

Chart of the Nasdaq

There were no official economic data releases, but there was one report that I give significant weight to. That would be Wal- Mart's sales report that said stores open at least a year were tracking at the low end of forecasts for the month of November. Last week, the retailing behemoth beat earnings expectations, but guided toward the low end of earnings forecasts for the fourth quarter. More importantly, Wal-Mart has traditionally forecast same store sales at a growth rate of 4-6% per month, and has lowered that estimate to 2-4% in recent months. That essentially means Wal-Mart could see growth as low as one third of its traditional range. As the world's largest retailer, supplying everything from clothing, to groceries, to electronics, a slow month heading into the holiday season is a poor sign for consumer spending. While much of Wal-Mart's sales problem has stemmed from a decline at its Sam's Club warehouse chain, reflecting the fewer number of small businesses, the trend still shows yet another month not meeting expectations, but this time at a lower level. Federated (FD), owner of Macy's and Bloomingdale's, also chimed in with similar comments as those from Wal-Mart, saying that sales for the second week of November were "disappointing" and reiterated its expectations of same store sales for November and December coming in flat to down 2.5%. This sentiment would seem to cover all levels of the income scale, with the higher end stores of Federated, and the discounters like Wal-Mart all suffering another disappointing month. Lowe's (LOW) actually posted decent earnings numbers, beating estimates and raising profit targets, mostly as a result of the housing and refinancing boom. While this was good news for stocks like Lowe's and Home Depot (HD), investors apparently put more stock in the far- reaching Wal-Mart report and sold off even LOW (-$1.60). We have seen some conflicting data from the Consumer Confidence Index, which has been poor and sinking, and the University of Michigan Consumer Sentiment Survey, whose preliminary number was positive and beat expectations last week. The real dollars show up at places like Wal-Mart, so for the time being I'll lean toward the Confidence report. The Retail Index (RLX.X) appears to be rolling over from its fourth lower high, although the last rebound was actually a higher low.

Chart of the RLX

United Airlines announced it would be laying off 9,000 more workers and cutting back on flights, as part of a plan to avoid bankruptcy and turn a profit by 2004. Of course, this was part of a plan to obtain a $1.8 billion federally guaranteed loan and also included the deferment of all scheduled aircraft deliveries through 2005. The plan includes a severe reduction in capital spending from an annual average of $2.4 billion to $450 million in 2003 and $400 million in 2004. Those are an awful lot of dollars out of the spending stream and mirror statements that have accompanied most of the largest companies' recent earnings releases.

Nokia has some positive things to say about the handset market growing 10-15% for the next three years. This is consistent with statements from Qualcomm, which has seen increasing shipments for wireless phone chips and seems to be one of the few segments of the chip sector safe to put money into, when considering a ride on the rising wave in the SOX. The chip sector tested its recent highs again today, before dropping with the broader markets in the afternoon fade. It still finished up on the day and continues to look resilient in spite of a slew of earnings and revenue warnings over the past couple of months.

With the Dow under 8500 and the SPX over 900 (barely), it is tough to pick direction right now. If this is just another pullback and we get a rally tomorrow, then 900 will be the level to watch on subsequent pullbacks. If we continue to drop, then it looks like Dow 8500 will be the key to support for a sustained rally in the future and the next number to watch will be the neckline in the Dow H&S pattern. If the Nasdaq can manage to break through that August high, however, I'm stepping out of the way short and letting it run.

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