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Hope Fades

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      11-26-2002           High     Low     Volume   Adv/Dcl
DJIA     8676.42 -173.00  8844.40  8670.18 1.89 bln 1117/2090
NASDAQ   1444.43 - 37.50  1478.73  1441.12 1.90 bln 1318/2086
S&P 100   467.08 -  9.87   476.95   466.34   Totals 2435/4176
S&P 500   913.31 - 19.56   932.87   912.10             
RUS 2000  398.32 -  6.53   404.85   397.15
DJ TRANS 2268.35 - 58.60  2327.18  2263.51
VIX        28.74 +  1.79    29.31    27.18
VXN        47.99 +  2.31    48.57    46.49
TRIN        1.84 
PUT/CALL    0.83

Hope Fades
By Jim Brown

The markets tripped over reality again this morning as the seven week old Dow rally faltered on good news. Yes, good news. Investors apparently were hoping for significantly better economic data and news that growth was still struggling was not what they wanted to hear. With huge paper gains and a what amounts to a week long holiday ahead they decided to cash out and take their chips off the table.

Dow Chart - Daily

Nasdaq Chart - Daily

The markets were already looking for a softer open on news of terrorist plots and arrests around the world and news that there could be terrorist links to the Saudi royal family. For investors who are holding their breath as we approach the holidays any terrorist news is unwelcome. The economic news showed the economy growing but at a slower pace and there were some unsettling trends beginning to be seen.

The GDP was revised upward for the 3Q from 3.1% to 4.0%. While this was positive it was based on the stronger than expected inventory accumulation. This accumulation could be seen two ways. It could be a buildup due to an expected increase in orders in the 4Q or because sales are slowing. Obviously the latter would be bad news. In the internal GDP numbers corporate profits after adjustments fell and corporate cashflow was down. With this release it appears the odds of a double dip recession have dropped but the chances of a robust recovery have dropped as well.

The Consumer Confidence number came in 84.1, which was a huge bounce from last months 79.6 but less than analysts expected. This was the first bounce in the headline number in six months. Almost all of the bounce came from a jump in expectations from 81.1 to 88.4. These expectations were boosted by a rising stock market, the Fed rate cut, the capture of the snipers and the impending holiday season. The internal CC numbers painted a different picture. The number of people expecting to buy a home or auto fell to six year lows. The index of people who thought jobs were plentiful dropped to 14.1 and a major low. The long term out look remained flat. The biggest hurdle as evidenced by the confidence report was the lack of pent up demand. Almost everyone who wanted a new car or home has already bought it and there are no buyers left to consume the currently expanding supply.

Adding to the confusion today was a jump in layoffs to 171,088 in October. This was 47,000 over the September number and with the pace of layoffs expanding again it appears November could be worse. With the health of the manufacturing sector still weak there appears to be no employment rebound in sight.

These conditions prompted a decline in home sales of -4.5% from September and inventory levels rose to a 4.1 month supply. The low interest rates should continue to support sales but the number of buyers as indicated by the confidence report has fallen to a six year low. With buyers shrinking and inventory rising it does not take a rocket scientist to see the eventual housing wreck. One thing between home builders and a vast oversupply is the stock market. The negative wealth effect has taken an entire segment of potential buyers out of the market. Until the market returns to bull status those investors will be in conserve mode. Add in the longer-term impact of the baby boomers selling their family homes over the next few years to move into smaller retirement homes and condos and the eventual rise in rates and trouble is brewing. Mortgage applications have already been trending down for several weeks.

Due to the shortened week there are a flood of economic reports due out on Wednesday. The Fed Beige Book, Chicago PMI, Durable Goods, Jobless Claims, Mortgage Applications, Personal Income and Spending, Help Wanted Index and another Consumer Sentiment report will be announced. This flurry of reports after today's mixed numbers would have been enough to trigger profit taking by many traders.

Tech traders were also worried about the SUNW mid quarter update due out at 4:30 this afternoon. SUNW said it was expecting a seasonal uptick in sales and affirmed it's revenue estimates for the current quarter. However, they said pricing was very competitive and margins would be below last quarter's levels of 41.2%. SUNW refused to give any profit estimates saying the conditions were still tough. Analysts expect them to post a penny loss in the current quarter. This was actually an upbeat report since they refused to give any visibility in last months conference call.

NVLS affirmed guidance for an +11 cent profit and said orders for new equipment could exceed previous projections. The company said conservative scenarios were still being executed by customers but the outlook was hopeful. CHRT gained ground on news that it had a new deal with IBM for an advanced semi manufacturing processes.

The market the rest of the week is a toss up. Historically the day before and after Thanksgiving is bullish. I outlined a scenario in the Market Monitor this afternoon that suggested a bullish bounce was possible tomorrow. The reasoning behind this is the "forced bottom" tactic by big money. Sometimes when big money sees potential bullish conditions ahead but are looking for a potential entry point they try to force a bottom. They sell short stocks they want to buy to try and find a support level where buyers appear. Essentially they try and run the stops and take out all the weak holders and find out where the real buyers are lurking. When conditions are ripe for profit taking they can accelerate this process and when the market stops falling they cover the shorts and go long. With historical trends favoring bullish conditions later this week this was a good day to try and force an entry point.

Nobody knows if this is what happened today and it could have been just normal pre-holiday profit taking. However, if the week has been bullish for the last nine years then why take profits today and miss the buyers? You can easily see why trying to analyze daily market trends can drive you crazy. Fox Mulder would never have run out of X-Files plots if he had been investigating the markets instead of aliens.

Any rally later in the week will run into the beginning of earnings warning season next week. This is where reality will meet expectations once again and any flurry of negative news could sink the current bullish sentiment. There will be the endless news stories about the success or failure of retail sales over the holiday weekend. That will color the market outlook going forward as it will be the first real clue about the current strength and mindset of the consumer. It is time for consumers to stand up and vote for a recovery with their holiday dollars.

Enter Very Passively, Exit Aggressively!

Jim Brown

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