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Market Wrap

I Surrender

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      04-08-2003           High     Low     Volume Advance/Decline
DJIA     8298.92 -  1.50  8342.83  8260.48 1.44 bln   1417/1774
NASDAQ   1382.94 -  6.60  1392.52  1376.60 1.26 bln   1405/1772
S&P 100   447.15 -  0.10   449.62   445.04   Totals   2822/3546
S&P 500   878.29 -  1.64   883.11   874.68 
W5000    8313.74 - 22.80  8355.84  8283.76
RUS 2000  374.66 -  1.91   376.57   373.67 
DJ TRANS 2200.99 - 30.50  2231.66  2193.70   
VIX        29.59 -  2.14    30.96    29.33   
VXN        40.92 -  0.52    42.27    40.46 
Total Volume 2,896M
Total UpVol    941M
Total DnVol  1,915M
52wk Highs  153
52wk Lows   103
TRIN       1.42
PUT/CALL   0.80

I Surrender
By Jim Brown
Click here to email Jim

Call off the war, I give up! I am tired of being a hostage to whatever the next rumor might be. I feel like a POW being given a daily choice between 30 lashes or electric shock torture. Trying to decide how the ramifications and market reactions to the hourly rumors is driving me crazy. (I know it is not a long drive but it could at least be fun.) We are no longer second guessing but third, fourth and fifth guessing what the market is expecting and what it is reacting too.

Dow Chart - Daily

Nasdaq Chart - Daily

The market ignored several economic reports and focused instead on watching the same war news repeated over and over. The Wholesale Trade report showed sales slowed in February to 1/3 of the January levels. At +0.5% the number was touted as growing at a faster rate than expected in the press with only +0.3% being the estimates but they ignored the number was significantly less than the +1.4% in January. Also ignored was the fact that higher petroleum prices accounted for all of the gains instead of increased sales. Wholesale Inventories rose +0.3% as sales slowed. The inventory to sales ratio of 1.22 is only .01 point above the record low.

The Richmond Fed Survey fell to -4 from zero last month and +18 in January. Shipments fell to -4 and the first negative number of the year. New Orders at -10 and Order Backlog at -16 remained negative but improved slightly over February. The employment index remained negative for the tenth month. This report considered conditions both before and after the war began. There was nothing positive in this report other that the six month expectations component which rose on hopes the war will be over by then.

Chain Store sales also continued their slide by -0.5% after dropping -1.4% last week. This is reported to be the CNN effect where consumers stayed home to watch war coverage on TV instead of stalking the malls for bargains. Sales for most reporting retailers were below plan. Sales of big ticket items are falling and the Fed said on Monday that borrowing for big ticket items fell to ten year lows. Unemployment and economic uncertainty is slowing spending and especially spending on credit. Non-revolving credit fell -$3.9 billion in February as consumers paid off debts to lower overhead. Now we know where all those mutual fund outflows went.

Traders were faced with conflicting urges today. On one hand Saddam and his sons were rumored to be killed in a bombing strike last night and traders ran up the futures overnight in anticipation of a quick end to the war. The hope of a post war rally is still strong and a Saddam exit would be expected to hasten that event. On the other hand there were serious earnings warnings from tech companies and continuing economic weakness. Decisions, decisions! The confusion reined all day with the markets closing flat after trading in a very narrow range. Investors simply do not know which direction to turn.

They are faced with problems in North Korea, the SARS epidemic which is still growing, fears the war could drag on and a flood of negative earnings guidance. The only hope appeared to be a Saddam exit as the final implosion of the Iraqi defense. Late in the afternoon the BBC began reporting that Saddam was alive and we had missed him again. This was only a couple hours after a rumor blew through the markets that Al-Jazzera was reporting he was dead. Confused? The markets were definitely glazed over.

By days end strong resistance of 8330 on the Dow over the last three weeks asserted itself again and the Dow was barely able to hold on to 8300 at the close. Without direction the Dow is likely to trade in the 8200-8330 range tomorrow unless we get a confirmation of Saddam's health. Dead we could bounce, alive we could drop again. The Nasdaq appears stuck between 1365 and 1400 but was weaker than the Dow due to the constant parade of tech warnings. Several more software companies warned today and the multiple chip warnings from yesterday produced a drag on the sector. The Gartner Research Group published a report that said chip equipment sales dropped -30.4% in 2002. They offered no estimates for 2003 but it is commonly assumed that IT spending will be flat to +1% for all of 2003. That would suggest another famine in the chip equipment sector.

Many investors are pinning their hopes on a rate cut by the Fed before the May 6th meeting but the chances of a rate cut are dwindling. Currently the Fed fund futures are only showing a 45% chance of a 25 point cut by May-6th. This is down from last week. Traders are assuming the Fed thinks the war will be over soon and the economy will bounce without a rate cut. As long as the potential post war rally is glimmering in our future it appears everything is at a standstill.

One challenge I had with the market action on Tuesday was the lack of action. The futures ran up overnight after seeing a 60 foot crater where Saddam was eating a late lunch with his inner circle. By morning they had sold off again without confirmation he was dead. There was no Saddam video and no appearance of any Iraqi leaders except for the information minister saying there were no Americans anywhere close. Same story, business as usual but no instant denial of Saddam's death unlike before. Intelligence sources said they found him after he did the walkabout video last week which pinpointed the likely area where he was hiding out. Tips provided the lunch location and 12 min later there was a hole in the ground. If he is not dead do you think he is stupid enough to stick his head out of his bunker again? Either way investors feel the war is about over and the potential for a death announcement is very good at any time. So, why didn't the market go up?

If the war is about over and there is going to be a post war rally then why did the market languish? Was it because of the earnings? Was it because Saddam might be still be alive despite the 60 foot crater where the restaurant used to be? As the US keeps pointing out Saddam is already irrelevant. I think the more reasonable analysis is that the rally has already occurred. I know the bulls will disagree but we have had two days of monster gains totaling +500 points in the last week. This was after the +1100 point rally in March. The rally this week failed exactly at the same level as the March rally. The rally in March was due to traders jumping the gun on the reenactment of the 1991 post war rally. Traders and the world expected a two-week war and everybody tried to beat others to the punch by entering positions early. The two rallies in the last week were on positive war news and expectations for that news to produce a quick end. But the potential Saddam exit today did not produce a rally. This should be confusing to anyone still expecting a post war bounce.

Instead of trying to decide if the war was responsible for today lets look at it technically. Just pure chart analysis. We got almost exactly a -50% retracement of the March gains with the drop that ended on March 31st with a low at 7929. That is -600 points from the high of 8520. The close for that day at 7988 was a -534 drop from the high and a -48% retracement. This was as close to perfect as it gets. Over the next five days the market retested 8520 again and failed. The close today was -220 points below that retest high. Granted we may not be done yet and the lack of any significant selling today could be seen as bullish. The strong gains from Monday which sold off before the close would normally have been seen as VERY bearish. Instead the markets held their ground on Tuesday. This could be a bullish consolidation. Technically there could be several reasons why we did not break out on Monday.

First the Dow ran head first into the 200 EMA average for the fourth time since Nov-27th. All attempts to break this resistance have failed. Secondly this was a perfect double top retest of the March 21st high at 8520. For a retest to be considered relative it has to be more than two weeks away from the first attempt. This was the eleventh trading day after the first high. This second test also failed at the down trend line from the Dec-2nd high. These could all be coincidences but I think we were simply too extended from the March lows to break this strong resistance. The war bounce is an external event. It is not stock or market related. Therefore it is built more on sentiment than fundamentals or technicals. That makes is more susceptible to strong technical resistance. Support for the Dow is 8200 and positive stock news could help us hold that narrow range between 8200-8330. Below 8200 there is a pretty large area with next real support in the 7975 area.

Dow Chart - 60 min

Where are we going now? If anyone knew for certain they could sell that information for enough to buy a palace in Iraq. The war excitement may be fading but the technical resistance has not. I do not want to bore anyone with more war facts but most war analysts think the war could continue for a minimum of 4-6 weeks even if Saddam is found dead. Our sensitivity to it will be slowly ground down until we are numb. Since we are already able to go anywhere we want in Baghdad there are not a lot of high profile news events in our future other than any Saddam death. That means there will be even more commercials on the news channels and more repeats of canned footage to provide color for the lack of news. With earnings beginning to flow on Thursday it is possible the markets attention will be focused back on stocks and less on the war. The bottom line is a tough market to trade and one with stronger overhead resistance than support. This could continue to be a market driven more by news events than stock events.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
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