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Sell the News

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      01-07-2003           High     Low     Volume Advance/Decline
DJIA     8740.59 - 33.00  8802.64  8713.03 1.93 bln   1289/1988
NASDAQ   1431.57 + 10.30  1442.26  1416.23 1.74 bln   1610/1791
S&P 100   467.84 -  1.90   471.83   465.90   Totals   2899/3779
S&P 500   922.93 -  6.08   930.81   919.93 
W5000    8713.70 - 58.50  8781.71  8685.08
RUS 2000  393.95 -  3.05   397.36   391.19 
DJ TRANS 2396.89 - 24.80  2421.58  2382.11   
VIX        27.48 +  0.07    28.28    27.00   
VXN        42.96 -  0.49    45.35    42.96 
Total Volume 3.886M
Total UpVol  2,120M
Total DnVol  1,714M
52wk Highs  251
52wk Lows    61
TRIN       0.86
PUT/CALL    .66

Sell the News
By Jim Brown

You saw it in real time. The president spoke, said several things that would be bullish for the future and the result was negative. Initially we saw a nice bounce back to 8800 but once the resistance was touched the direction was straight down. Did that mean traders did not believe him? No, but the news had been out for a couple days and this was the "is that all?" result. Now we begin a long drawn out argument on the proposals and several months before anything may become law.

Dow chart - Daily

Nasdaq chart - daily

The markets got off to a rocky start this morning after the Factory Orders fell -0.8% in November. This was slightly more than expected and was the third decline in the last four months. Nondefense capital goods, which is a good indicator of private investment, dropped -2.6%. Order backlog fell to the lowest level since 1996. The broadest indicators seem to show that consumer spending is continuing to slow and business investment remains weak. This weakness throws additional doubt on the ISM numbers from last week. A note on the ISM, the institute itself was at a loss to explain why the number rocketed so high. This leads traders to believe that it was an anomaly and the January number could be much weaker again. The new stimulus plan will have no immediate impact on Factory Orders as the real benefits could take sometime to appear and they are directed at the consumer.

On the positive side the Retail Sales index only dipped slightly by -0.2% and was much better than analysts had expected. This is causing the Bank of Tokyo, which tracks chain store sales, to revise its total estimate of holiday sales due out Thursday. They raised their estimates to +2% to +2.5% growth for the two month holiday period. The rush of consumers back into the stores to cash in gift certificates and holiday gift money was stronger than expected. It is unknown yet what impact the returns will have on the overall sales.

The Mortgage Bankers Association announced that the foreclosure rate for the 3Q reached an all time high. The weak economy and rising unemployment combined to push the rate to 1.15% in the 3Q. The previous high was 1.14% in 1999. They did say the rate of loans moving into the foreclosure period had slowed slightly. They said that foreclosures from sub prime borrowers, those with prior credit problems, had fallen from 2.88% to 2.08%. The association said it appeared those borrowers with unemployment risk had already faced the challenge and without a second economic dip the worst could be over for the industry. Now all they have to do is find somebody with a job and credit to buy those foreclosed homes. According to the recent home sales numbers they should not have any trouble. The buyers are still there if the price is right.

The big news today was the president's press conference. President Bush proposed to reduce taxation on dividends, accelerate the elimination of the marriage penalty, raise the child credit to $1000 and place restrictions on the alternative minimum tax. A total of $675 billion in tax reductions over the next ten years. This package had been telegraphed over the last several days and the market had already seen the bullish result on Monday. The problems with the plan are several. First it has to be passed and the Democrats are going to be pushing their plan instead. It is going to be a long process and could take several months. Secondly the majority of the benefits will take time to flow through to the markets. Most investors are not taxed on dividends anyway since they are invested in 401Ks or IRAs. This means there is not a real and immediate benefit to individual investors. There will be a long term benefit but not something immediately visible to the markets.

Another challenge to the dividend plan is that it tends to benefit value stocks instead of growth stocks. With investors more interested in seeing CSCO hit $40 again instead of paying a 25 cent dividend the movement in stocks could be minimal. The biggest section of stocks, which will benefit will be banks and utilities who already pay dividends. Many of the big tech stocks made statements about their plans. Oracle said they might consider a dividend plan. Dell also made some weak comments about the possibility. Intel, which already pays a minimal dividend, said they would review the plan IF the tax cut was approved. Cisco, with $21 billion in cash on hand, had just made a statement that said they would attempt to use their cash to grow the business so don't expect a dividend there. MSFT, with $40 billion in cash, did not rush to the press with news of a pending change in their dividend views. MSFT likes to award dividends in the form of stock splits at $120. Most MSFT investors would love to see that happen again. The bottom line for me is that the stimulus package will eventually be better for the economy but do not expect a windfall any time soon.

A windfall is what Gateway is going to need to get out of trouble. They warned at the close that they would miss prior estimates of a -.13 cent loss and would now lose -18 to -19 cents and depending on problems with a partner maybe even 3 cents worse than that. GTW fell to $2.95 in after hours trading. The problem according to Gateway was weaker than expected demand in the 4Q and they said that weak demand was carrying over to the 1Q. Oops! Gateway said it was looking at its 272 stores and may close some as leases expire this year.

GE said today that members of the IUEW/Communication Workers of America were going to hold a two day strike next week. 20,000 workers are protesting an increase in health care co-payments. United Electrical Radio and Machine Workers will also strike at the same time. GE increased the co-pay by $200 an employee for 2003 and said the cost of healthcare per employee was +$2,350 higher than it was three years ago.

Despite all the good news and the multiple attempts to break into positive territory the internals were still bad. The new highs across all markets was the only really positive indicator with 251 new highs compared to 61 new lows. The declines still beat advancers 4:3. That is not a big ratio but the indications were clear. Volume was very high with nearly four billion shares traded. High volume, declines over advancers and another dead stop at 8800 resistance. The VIX is trading just above yesterday's low near 27 and the TRIN is neutral at .86 as well as the Put/Call ratio at .66. There just does not appear to be an overriding reason to go long at this altitude. If anything it would appear the +400 points gained in 2003 were at risk for profit taking. The economic calendar for Wednesday has Consumer Credit and Mortgage Applications as the only material events. Thursday has Jobless Claims where we will get to see if the holiday numbers were bogus and Chain Store Sales. Friday is the important Nonfarm Payrolls and the real indicator of economic health.

As an investor I would be concerned about the overhead resistance just in front of earnings season. Alcoa is the first Dow stock to announce earnings this week but next week there will be a flurry of big companies. Nobody knows how this will end. EMC raised estimates and GTW warned. DYN raised guidance and Cigna lowered. Make no mistake the 4Q was tough for most companies. There are still those leading edge companies like EMC where even in a flat economy usage of its products continues. We just need to be guarded in our optimism even if the markets appear bullish. The biggest drops tend to occur when all the surface signals tend to be weakly positive after a big run. If we do get a pull back on either bad news or profit taking I see Dow 8650 as primary support with 8550 below that.

The most bullish index is the Nasdaq where the Compx has risen to just above very strong resistance at 1425. This is very bullish for techs if it can hold. Today's move actually added +10 points to yesterday's very bullish action. The Nasdaq has already added nearly +100 points for 2003. Even if tech stocks were going to continue upward the possibility of profit taking ahead of next weeks earnings is strong. It appears the flood of retirement contributions from the year end close is targeting the techs. When that money runs out (4-10 days) there could be a serious dip. Do your homework when placing bets and be sure to use stops to protect your capital.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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