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Same Story, Same Result

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01-27-2003                  High    Low     Volume Advance/Decl
DJIA     7989.56 -  141.45  8150.34 7957.82   1693 mln  178/1501
NASDAQ   1325.27 -   16.87  1349.83 1320.32   1412 mln  352/1048
S&P 100   429.47 -   6.67   437.93  427.03    totals    530/2549
S&P 500   847.48 -   13.92  863.95  844.25
RUS 2000  368.58 -   6.48   375.06  368.25
DJ TRANS 2144.01 -  19.32  2188.58 2140.40
VIX        39.77 +   4.00    40.89   36.71
VIXN       46.59 +   1.54    47.50   45.24
Put/Call Ratio 1.02

Same Story, Same Result
By Steve Price

Geo-political events played out pretty much as expected today and last week's pre-emptive sell-off continued. The U.N. weapons inspection report from Hans Blix essentially said that Iraq had not cooperated as far as giving information on chemical, biological and conventional weapons that the inspectors know exist. While there was has been no smoking gun found thus far, the U.S. seized the opportunity to up the rhetoric ahead of the President's State of the Union address Tuesday. Blix said that "Iraq appears not to have come to a genuine acceptance, not even today, of the disarmament which was demanded of it and which it needs to carry out to win the confidence of the world and to live in peace." U.S. Ambassador to the UN John Negroponte said Iraq was back to business as usual and that it had not cooperated in the active manner required by UN resolution 1441. White House spokesman Ari Fleischer took it a step further, saying that incomplete cooperation was no cooperation. If one thing was clear by morning's end, it was that the U.S. was preparing to go the route of invasion and was simply waiting for something to hang its hat on.

The statements from the U.S. got the markets rolling downhill, sending them through last week's lows and even breaking into the 7000s, as the Dow broke 8000 to the downside on a closing basis for the first time since October 15, 2002. The head and shoulders pattern that appeared to be forming over the last few months finally saw a neckline break last Friday. In fact, the breakdown came in much the same way as the one we saw last September. Back then, we got a quick sell-off over just a few days, a mild one-day bounce and then a decisive rollover to the measuring objective of the pattern. So far, we are seeing the same thing, with the one-day bounce on Thursday and the continued rollover through the neckline on Friday. The circumstances are different this time around, with the Iraq data due out this week, but back in the summer we witnessed similar war concerns. Does that mean we will fulfill the measuring objective of the pattern down to 7500? It means nothing has occurred yet to deter that possibility. Of course, that's easy to say before several days of economic reports, earnings and political events that could all turn the tide.

Chart of the Dow

In the coming week, we will get a State of the Union address from President Bush, in which he is likely to highlight his case against Iraq, using the recent weapons report to supplement earlier arguments; we'll get the UN debate on the issue beginning on Wednesday; we'll get Consumer Confidence, Durable goods, New Home Sales, GDP, Personal Income, Personal Spending, FOMC meeting and PMI. With all of this economic data swirling around the Iraq debate, certainly anything can happen. A look at the charts shows the recent sell-off has us in very oversold conditions, which would seem to indicate a bounce at some point. However, we saw similar conditions on the last breakdown, as well and the bounce was a long time coming. The possibility that the Iraq news was basically figured into the markets also remains and if we were going to finally get a bounce off the big sell-off, the round number of 8000seemed a reasonable point for that bounce. We tend to stair step down, rather than just plummet and the last few days have been a pretty strong plummet, with a loss of 800 Dow points in eight trading sessions. If we look at the shorter- term charts, however, we have been seeing some stair stepping, which will give us an idea of when we can assume we are seeing a bounce. Those stairs, or intraday resistance levels to keep an eye on in the Dow are 8600, 8400, 8175 and 8040. If we begin to take out these intraday levels, it will throw up the first signals that we are seeing at least a short term intraday bounce.

30 minute chart of the Dow

While the Dow, SPX and OEX all took out their December 31, 2002 lows on Friday, the Nasdaq Composite and NDX actually held above those levels. If there were going to be a bounce in the broader markets, those December 31 lows of 1335 (1327 intraday) in the COMP and 984 (977 intraday) in the NDX, certainly appeared as though they would be logical points from which to bounce. The COMP did not hold at that level, taking out the relative low and closing at 1325, ten points below the Dec. 31 close and even below the intraday low. The NDX, however, held just above that level, finishing the day at 986.

Chart of the COMP

Chart of the NDX

The chip stocks, which have led the tech indices in recent months, gave up additional ground, with the Semiconductor Index (SOX) falling another 4 points today. More importantly, though, the index fell through yet another recent support level and the most significant level from which we could have expected a bounce before entering a vacuum that appears as though it could lead to a re-test of October lows in the low 200s.

Chart of the SOX

The retail sector, as represented by the S&P Retail Index (RLX.X), also has sunk to a new 52-week closing low. With Consumer Confidence and Consumer Sentiment reports due out this week, we may be seeing a foreshadowing of what traders are expecting. As we head closer to war, fuel costs remain high, and payrolls remain on the low end, these consumer surveys will give us an indication of just how willing consumers will be to spend. Stocks such as Wal-Mart (WMT), Target (TGT) and Kohl's (KSS) continued their slide ahead of those reports, indicating low expectations for Consumer Confidence, which is due out Tuesday and Consumer Sentiment, which comes out Friday.

Chart of the RLX

Although I've painted a somewhat bleak picture so far, bulls can take solace in the action in the bond markets. Bonds have proved to be a reliable contra-indicator to equities. Today's sell-off should have been confirmed with buying action in the treasuries. That did not happen. Instead we saw selling in the bond market. One theory offered by bears is that money is finding its way out of U.S. dollar denominated assets, which include U.S. bonds, as well as equities. Certainly the tremendous slide the dollar has been on would back up this theory. The dollar actually held steady today, finishing the session unchanged. In any case, the bearish confirmation that has been reliable in the past did not surface today. That could indicate that the sell-off really had little to do with an allocation out of stocks and into treasuries, but rather simply on war fears that kept money out of the market.

We did make several intraday rebound attempts, but each failed and in the end we closed under significant support levels in the Dow at 8000, SPX at 850, OEX at 430 and COMP at 1335. The trend was down before war fears took over Friday and Monday and it remains down. Bullish percents are in full retreat in the major indices, indicating a reversal in sentiment from prior bullishness to start the year. We are likely to see more extreme reactions as the week goes forward, but until we see a trend reversal, the bears are still in charge.

 
 



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