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Market Wrap

U.S. Hits the Accelerator

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02-24-2003                   High    Low     Volume Advance/Decl
DJIA     7858.24 -  159.87  8017.34  7851.11  1455 mln  274/1175
NASDAQ   1322.38 -  26.64  1343.09  1321.44   1197 mln  286/877
S&P 100   421.47 -  8.40    429.87  421.17    totals    560/2052
S&P 500   832.58 -  15.59   848.17  832.16
RUS 2000  358.22 -  6.14    364.36  357.90
DJ TRANS 2017.69 -  78.72   2095.82 2013.01
VIX        36.77 +  2.63    36.78   35.43
VIXN       44.88 -  1.22    46.84   44.58
Put/Call Ratio 0.85

U.S. Hits the Accelerator
By Steven Price

It is getting more and more difficult to decide just how much world events are weighing on the markets and just how much economics are figuring in. Friday's wild intraday swings were no doubt due to international developments. However, today's drop may have been either a look back at Thursday's poor economic numbers or a result of the U.S. apparently setting a timetable on war.

Colin Powell said in a speech in Japan on Sunday that the U.S. wants a U.N. Security Council vote after Weapons Inspection Chief Hans Blix gives his report on March 7. On Friday, Blix asked Iraq to destroy Al-Samoud 2 missiles by March 1. The order was the result of the missile's range exceeding limits set by the U.N. in 1991 and 1994 and Iraq said it was studying the order. Blix also said in a Time Magazine interview that the country had yet to account for its stocks of VX nerve agent and Anthrax. The U.S. and Britain introduced a new U.N. resolution on Iraq that is believed to declare the country in "material breach" of resolution 1441 and basically says Iraq blew their last chance. It does not go so far as to authorize military force, but appears to set the tone for such action if/when the U.S. and Britain decide to move in. The resolution is a risky proposition, since there is anything but a consensus on the use of force at this time, but if nothing else the U.S. can say it tried to get a coalition before making its own decision. France, Germany and Russia are submitting their own resolution which will likely call for more inspections. Conspiracy theorists will suggest the U.S. would not be introducing the resolution unless it was fairly sure it would eventually get a favorable vote. Right now, it only has 4 of 13 votes and it will take some pressure to swing the pendulum. It needs 9 votes and no vetoes for it to pass, however, the latest resolution may simply be an attempt at window dressing a decision that has already been made. CNBC reported today that Dan Rather had held an exclusive radio interview with Saddam Hussein, in which Hussein said he would not destroy the missiles, as Blix has requested and he challenged President Bush to a radio debate. While the White House has already responded that the issue with Iraq is about weapons, not debates, I suppose it is possible Hussein is laying the groundwork for a U.S. presidential run in 2004, since it is unlikely he will still be running Iraq at that time (GRIN).

Chart of the Dow

Turkey is also a step closer to allowing the U.S. to launch strikes against Iraq from within the country. I suggested last week that once it came down to a matter of dollars, at some point it would be worked out. Turkey's stated concerns about the economic impact of war in the region were really just a bargaining chip, but a hollow one since the country would likely suffer those effects whether the U.S. launches attacks from its turf or elsewhere. The Turkish cabinet has already approved the latest U.S. aid package and a Parliament vote could come tomorrow.

All of the war talk is not doing much for the aerospace/defense sectors. The Defense Index (DFI.X) continues to set new 52-week lows and is just about the ugliest sector chart I've seen recently. Whether this is due to predictions of a short war not having much impact on these stocks bottom line, or whether it is a reflection that they were overbought on war jitters to begin with, they look anything but bullish. It is hard to imagine anything creating a rally at this point, if they haven't moved higher as we head closer to a deadline for an invasion. The DFI is now down 20% since January 6 and looks like it has fallen off a succession of cliffs.

Chart of the DFI

The chip stocks actually showed some decent relative strength today. It is hard to say what is holding up the sector, but with a poor book-to-bill already released and a severe warning from AMAT already figured in, apparently the picture wasn't as bad as many institutions were expecting. This morning Cisco announced that its new Compatible Extensions wireless chip technology will be adopted by chipmakers Intel, Texas Instruments and Intersil. CSCO is offering free licenses to include the technology on chips and IBM and Hewlett Packard have already agreed to support the technology. This seems to be the lone impetus for the bullish hold in the sector, but the more important part of today's action is possibly that it has held onto last week's gains, while the rest of the market has been bouncing around the last few days. It did eventually succumb to market wide weakness, but spent much of the day in the green, before losing less than a point on the day. This strength should be a red flag for bears, as the tech indices will likely hold some of the recent gains as long as the chip stocks do. If it does begin to roll over, however, with resistance just above at the 300 level, we may be seeing a short entry point. No sign of weakness yet, however. We did see one vote of non-confidence from J.P. Morgan, which downgraded equipment maker Cymer, saying it saw diminishing prospects for lithography demand acceleration in the second half of 2003. Morgan said the next two to three quarters exhibit above average risk for the company.

Those traders following the point and figure charts can note a development that doesn't show up on today's charts. On Friday, the SPX, which had been on a strong reversal higher in a column of "X," rolled over back down into a sell signal. The rollover, however, came on the drop that followed the terrorism scare after the explosion on Staten Island. As soon as that scare was over and it became evident that it was an accident, we quickly reversed direction and headed higher. That reversal called into question the bearish reversal signal we saw, as charts are incapable of taking into account world events. This morning, however, we got some confirmation of that reversal. While we failed to trade as low as we did on Friday in the SPX, we still traded down below that reversal at 835, confirming the bearish signal.

Point and Figure Chart of the SPX

The Dow reversed lower on the PnF chart last Thursday when it traded down to 7900. The big intraday rally on Friday actually failed to reverse that signal back up into a column of "X" and today's move back below 7900 also seems to confirm that bearishness from these levels. The Dow did set another intraday lower low, ticking a few points below Friday morning's low, but bouncing again off 7850 (low of 7851). The OEX also reversed its bullish column of "X" back into a bearish column of "O" after topping out at 430 on Friday and breaking below the 422.50 level today. We have been watching this index on a 2.5-point box, which more closely mirrors the activity in the Dow and SPX.

Those Dow theorists watching the transports for confirmation of the moves we are seeing in the broader markets will not that the TRAN has not only fallen below its February low, but it now also testing its October lows. Dow Theory holds that any move in the Dow must be confirmed by a move in the transports (although it actually started years ago with the Rails Index), before determining a true trend. Higher fuel costs continue to weigh on the transports and led to a downgrade of several trucking stocks. Bear Stearns lowered its ratings on trucking stocks CVTI, HTLD, JBHT, KNGT, SWFT and WERN, saying that the group underperformed at the beginning of the last Gulf War, when oil prices jumped from $23 to $41 per barrel.

We are seeing the affect of higher fuel prices across the board, not just on the transports. We have heard from numerous companies that they have had to adjust their earnings expectations due to these costs and both the consumer and producer price indexes released last week showed fuel prices as the highest contributor to inflation. Natural gas prices continue to surge, jumping an amazing 21% in a single day today; heating oil hit an all-time high today; and crude oil futures were on the rise once again, adding almost $1 per barrel on the April contract to close at $36.52 per barrel.

Chart of the TRAN

Traders will also note the Market Volatility Index (VIX), which bounced back above the 35% level that had served as support in the recent past and had indicated market pullbacks. We closed below that level on Friday, and it appears it was not as reliable as it had been recently. However, it did bounce above the last false breakdown signal (contrarian to stocks), which came on February 3 and also was followed by a drop in equities. The next resistance level and the one that has signaled intraday and daily equity bounces is 40% and with the VIX sitting at 36.77, it appears that we have room to fall before this indicator signals support for the OEX. In contrast, however, the VXN, which measures implied volatility levels of the NDX, actually fell in spite of the drop in stocks and failed to confirm the move higher in the VIX.

The retail sector got some mixed news today, as Lowe's (LOW) not only beat earnings expectations, but raised its full-year guidance. The company said the raised guidance was due to its plans to expand into New York and other large cities, many of which are currently dominated by Home Depot (HD). On the negative side, Federated and J.C. Penney both warned on February same store sales results. The companies both blamed bad weather on the east coast for keeping shoppers at home. Federated said its sales would drop 7-8%, approximately double previous estimates. JCP had said its sales would be flat, but now says they will be down 2-3%. Wal-Mart didn't suffer quite as badly, but said its sales would track at the low end of the previous 2- 4% guidance. The RLX reversed Friday's gains, finishing down 2% on the day. With most retail earnings reports just behind us, we will be judging the market based on these weekly and monthly sales results and so far they are not promising. While so far they have been blamed on the weather, which is a valid excuse due to much of the terrible east coast snowstorm, it will be interesting if those sales make up for the loss on the positive side, or if these are simply lost profits. Given the current state of the economy, based on last week's jobs data, I actually believe the increase in job losses may be partly responsible for the drop in sales, as well as the weather, and the losses will be at least partly unrecoverable.

Used car prices have now dropped to a five-year low. This is mostly due to a combination of the economy and the deals that have been offered on new cars. While those new cars have been flying off the lots, the pressure on used car prices affects dealers and manufacturers bottom lines on more than one front. First and most obvious is the margins on the used car lots, which often outstrip the profits on new cars. But maybe more significantly, the residual values that are figured into the price of a lease are affected. Dealers figure lease payments partially by what they can sell a car for when the lease is done and if that value drops after the lease is written, it cuts into the expected profits.

One of the catalysts for sending most of the techs lower (with the aforementioned exception of the SOX), was a comment from Thomas Weisel regarding Oracle's earnings projections. Oracle CFO Jeff Henley said he expected the February quarter to show slightly positive revenue, although he qualified the projection, saying they'd have to wait and see. This morning, Weisel said its channel checks suggested the February quarter still hinges on the final two weeks of the month and expressed caution in the environment.

Today it once again looked like the bounce we saw last week was just a temporary reprieve on the way down. However, it seems that each wrap I write carries a different tone than the day before. The news that the U.S. was pressing the accelerator no doubt had some affect on the market. If we get news that there will be resistance to the U.S. resolution and more favorable treatment for that of Russia, France and Germany, we may see another move higher tomorrow - the theory being that there will be another delay in U.S. action. There is also the thought that multilateral action is better for the markets than unilateral action, as it may prevent foreigners from pulling money out of U.S. assets. It is still very tough to predict the next day's move. The PnF reversals back down indicate the next move is lower, but I am still not willing to bet the house on it. Stick to risk capital only and make sure your stops are set in accordance with a risk profile that makes you comfortable. After all, being able to sleep at night will always hold its value.


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