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Market Wrap

Finally a Rebound

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      12-10-2002           High     Low     Volume   Adv/Dcl
DJIA     8574.26 +100.90  8578.99  8469.55 1.55 bln 2167/1011
NASDAQ   1390.52 + 23.40  1397.84  1373.89 1.45 bln 2030/1347
S&P 100   460.45 +  6.45   460.92   453.99   Totals 4197/2358
S&P 500   904.41 + 12.41   904.95   892.00             
RUS 2000  393.47 +  7.17   393.97   386.55
DJ TRANS 2353.38 + 30.70  2354.58  2318.55
VIX        31.67 -  2.80    34.11    31.44
VXN        51.75 -  1.23    54.28    49.48
Total Vol   3,171M
Total UpVol 2,486M
Total DnVol   640M
52wk Highs   105
52wk Lows    116
TRIN        0.60
PUT/CALL    0.89

Finally a Rebound
By Jim Brown

The markets shook off a weak open and an uneventful Fed meeting and rallied at the close to put a green candle at the end of a string of red ones. While red and green are holiday colors many traders are wishing for a little less lopsided mix.

Dow Chart - Daily

Nasdaq Chart - Daily

The day began with bad news on the economic front. Retail Sales fell -2.3% last week according to the weekly chain store sales report. Analysts were quick to blame the ice storm in the north east but readers of the market monitor know the news has been bad pretty much all over with only a few pockets of strength. The weekly sales index fell to its low of the year at 393. The Bank of Tokyo-Mitsubishi who produces these numbers said they were lowering their estimates for the month of December to only +2.5% growth from previous expectations of +5% growth. They claim that while the current pace of sales is enough to maintain growth there is no pent up demand and low confidence. They feel that while the season is only going to be slightly weaker than last year the risks have intensified that spending is going to fall even further below current expectations. They warned that retail profits are likely to suffer as a result.

Adding to the negativity from the Retail Sales report was the Richmond Fed manufacturing survey. The headline number fell to -1.0, a seven point drop with shipments and employment negative but orders improved to +4 after three months in negative territory. Prices continued to increase despite the drops in order backlog, capacity utilization and employment. The internal expectation components continue to reflect expectations for an increase in business in the next six months. The Wholesale Trade report showed a drop back to an inventory-to- sales ratio of 1.22, which ties a record low. The -0.1% drop was far below expectations of a +0.3% gain. This was the first back to back monthly sales decline since 3Q-2001.

The Fed meeting did not help the investor sentiment before the announcement. Investors "knew" the box the FOMC members spent five hours wrapping today was going to be empty but they continued to hold out hope that there was a surprise of some type inside. At 2:15 the Fed presented their holiday gift and it was indeed empty. The official statement continued the party line. "The limited number of incoming economic indicators since the November meeting, taken together, are not inconsistent with the economy working its way through its current soft spot." The Fed was referring to the negative ISM numbers and the higher than expected unemployment. The markets dipped right after the announcement as if traders had expected another surprise cut. If so they needed serious psychological counseling. Volume buyers showed up to buy the dip around 3:15 and the Dow managed to close +100 for the day.

Most of the buying was in the big caps and appeared to be cautious despite the gain. Something unusual happened today. The 52-wk new lows beat the 52-wk new highs for the first time Nov-20th 118 to 101. Why is this surprising? The last eight trading days the markets have been dropping but the new highs beat new lows every day. A stealth movement that suggested underlying strength. Those new highs peaked on Dec-2nd with 202 stocks hitting the mark. New lows bottomed the prior day at 37. Since then the trends have been closing and today they crossed. Is it a one day wonder and if so why on a day that the markets rebounded? We have to remember that the market started the day weak and the Dow gained +72 points in the last hour. Did the trend change at 3:PM? I would be surprised if it did. We need to continue to watch these numbers as the week progresses. With big caps getting the most attention and internals weak it appears there is no conviction in today's move. A continued increase in new lows tomorrow could be a warning signal of further underlying weakness.

Much of the move was credited to a positive choice of William Donaldson to head the SEC and replace Harvey Pitt. I would not give this reason much credence even though institutions were pleased with the appointment. A more likely reason for the bounce was simply oversold conditions and strong support. The Dow dipped to around 8475 three times in the first hour of trading but sellers were not able to push it any farther below 8500 than that level. The 8500 level begins about 150 points of strong support for the Dow. The 50DMA at 8365, 100 DMA 8388 and the 38% Fib retracement level at 8344. It is going to be very difficult to break through this before the holidays. This underlying support and the failure to break even the beginning layer at 8500 on bad economic news was a sign to institutions that buying stocks could be a safe move. They used the 3:PM dip to trigger their buy programs and the rest is history.

If you read between the lines above you probably picked up on the "before the holidays" comment. I am becoming more concerned about numerous declining internals and the eventual impact on the broader market. I have been reporting on declining retail sales for a couple weeks and the numbers today were no surprise. Retailer profits are going to be tough to find in this post holiday season. Tech stocks drew some attention with the Nasdaq rebounding +23 points but that is hardly a blip compared to the recent losses. Chip stocks managed only a minor rally on the Taiwan Semiconductor news and positive comments from several other techs. There is simply no normal end of year budget flush that usually provides a 4Q lift to techs. WR Hambrecht reiterated a sell rating on JNPR with a $4 price target due to smaller than expected orders from large customers. This syndrome bodes ill for the entire tech sector. Companies are holding on to the extra budget cash, if any, instead of spending it.

Home builders, a staple in the current economy, took heat from an article in the Wall Street Journal about donating money to non-profit groups to be then given to home buyers as down payments. This donation scam helps to eliminate excess home inventory by selling to people who would not normally be able to afford it. According to the report 17,000 Americans per month have been buying homes with down payments from "gifting groups" funded by homebuilders. It is feared now that these buyers are an increased credit risk because they do not have any of their own money at risk and a downturn in the economy could create a massive wave of foreclosures. If home builders are suddenly cut off from those 17,000 buyers per month then the inventory backlog will ripple down through the food chain. Prices will drop, layoffs will occur, suppliers will suffer, etc. Locally in Denver 38% of sales by KB Homes were funded with down payment gifts. If this program was to cease you can see the potential problems. Even worse, the builders have admitted raising the price of the homes to compensate for the gift program. Lenders are afraid that the houses are now over priced compared to normal houses bought in the area. This makes the loans even higher risk for foreclosure in any downturn because the loans exceed the value.

Need more evidence of weak economic internals? Wendy's hit a 52-week low and other food retailers are not far behind due to lagging sales and shrinking profit margins. Even Lance, the vending machine snack company, warned tonight that they were cutting 4Q earnings estimates by about -10% due to lower than expected 4Q sales. Think about this. They do not rely on corporate budgets, IT spending and they are not impacted by the IRAQ war or terrorists. This is spending at the lowest level. Pocket change from consumers mostly in office buildings or convenience stores. We are not talking about slowing sales of $1,000 workstations but slowing sales of 75 cent cheese and crackers. At least there will be plenty of excess inventory available to send to the troops in Iraq.

Traders are also starting to be more concerned about the IRAQ problem as well as new problems coming to light today. The new high tech IRAQ war nerve center in Qatar, which is staffed by hundreds of U.S. Central Command officers went live today with a full test of command and control planned. U.S. troops have taken over one quarter of Kuwait and are conducting live fire exercises with tanks and planes this week. Warships intercepted a North Korean freighter today loaded with Scud missiles for Yemen. On Wednesday President Bush is expected to unveil a new plan for global policing of weapons of mass destruction. He is expected to make the case for preemptive action against any nation that possesses or supplies them to another. With North Korea the number one supplier of weapons to smaller nations they are expected to be high on the hit list. Let's see, IRAQ, Afganistan, Yemen, North Korea, the number of battle zones is increasing daily. If the announcement is broad enough we could add another dozen countries to our list of potential targets. The markets are not likely to react positively to any administration announcement that sounds like "disarm now or we will disarm you" when he is talking about countries who have nuclear weapons like India and Pakistan.

The Dow bounced +100 points above support on weak volume from very oversold conditions. Period. We need to be careful not to read too much into this event. I think next year will be bullish due to new tax breaks and economic stimulus finally taking effect. However, we have to get past the next six weeks, which will include more earnings warnings, a likely war declaration, end of year tax selling, portfolio rebalancing, S&P and Nasdaq rebalancing and a good possibility of a terrorist attack over the holidays. Sounds like a wall of worry to me but nothing the market can't conquer given time. Just don't expect the rest of December to be full of long green candles. Buy the red ones, sell the green ones!

Enter Very Passively, Exit Aggressively!

Jim Brown

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