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Market Wrap

Dial "M" for Monday

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04-21-2003                  High    Low     Volume Advance/Decl
DJIA     8328.90 -  8.75  8397.95 8301.94   1362 mln  1594/1246
NASDAQ   1424.37 -  1.13  1432.08 1413.71   1218 mln  1623/1399
S&P 100   453.06 -  0.65   456.30  450.97   totals    3217/2645
S&P 500   892.01 -  1.57   898.01  888.17
RUS 2000  385.30 +  1.60   385.30  382.89
DJ TRANS 2297.85 - 28.34  2326.19 2295.01
VIX        24.27 -  0.32    25.48   24.27
VIXN       35.49 -  0.39    37.72   35.43

Put/Call Ratio 0.71

Dial "M" for Monday
By James Brown

Earnings reports were the only events keeping Wall Street's collective eyes open today. Otherwise the session was a yawner. The Dow Jones Industrial Average and the NASDAQ Composite both traded higher very early morning only to quickly reverse lower. By 10:40 AM the markets had established a 100-point trading range on the Industrials and a 20-point range on the NASDAQ. The rest of the day was spent sideways oscillating on both sides of unchanged.

Compounding the lack of direction was another session of light volume with many traders still traveling home from their Easter weekend. Internally, advancing issues outpaced decliners almost 16 to 12 on the NYSE and 16 to 14 on the NASDAQ. Up volume beat down volume on both exchanges but the difference was rather narrow on the NASDAQ. The only broad market (U.S.) index closing positive today was the Russell 2000 (RUT) with a negligible gain.

Compare the daily candlestick chart of the Dow Jones Industrials (below) to the Point-and-Figure chart of the Industrials. You can see that both are painting the same consolidation pattern with only slightly different levels of support and resistance.

Chart of the Dow Jones Industrials:

Point-and-Figure chart of the Industrials:

Glancing at the chart of the NASDAQ Composite there really isn't much change from Thursday's session. With a minus one point tally on the day, I wouldn't expect much change.

Leading Indicators Fall Again

One of the big economic reports Wall Street was looking for this week is the Conference Board Leading Indicators index. The numbers in March were not that encouraging with a 0.2% decline in addition to a revised lower decline in February of 0.5%. The leading indicators index looks at 10 indicators of economic growth and is designed to forecast trends three to six months in advance. As Jeff noted earlier in the intraday updates today, this index has been relatively flat since December 2001.

Looking closer at the results we see that five of the ten indicators they follow (building permits, jobless claims, interest rate spreads, money supply and consumer confidence) were lower in March. So why didn't the market see more profit taking or selling pressure on such negative economic news? Probably because the Conference Board also stated that current data for April would indicate that we're not going to see a third month of declines. I'm sure Greenspan and the FOMC have their fingers crossed.

Speaking of Alan Greenspan, how would you feel if every financial news outlet in the free world plastered your face under major headlines about your upcoming prostrate surgery? That's really not something I would enjoy publicized. However, considering that he is one of the most powerful men in the world given his guidance over interest rates and his position as Chairman of the Federal Reserve one can begrudgingly see the interest by reporters. But honestly folks, do we really need to know if they're using general anesthesia or not? I don't think so. Alan's staff says he plans to be back to work by the end of the week and will be attending the upcoming May 6th interest-rate policy meeting. Which, by the way, will see a lot of focus as it approaches since many analysts still believe the FOMC will cut rates again by the end of the second quarter.

Earnings, Earnings and More Earnings

Headlining the earnings announcements today was drug giant, Merck (MRK). MRK turned in Q1 net income of $1.7 billion, 76 cents a share. Sales actually surpassed analysts estimates and came in at $13.4 billion. The company also reaffirmed its profit goals for 2003 and reiterated their plans to spin off its Medco unit some time in 2003. We're going to see more big drug company results tomorrow with Pfizer (PFE) and Eli Lilly (LLY) reporting. The street expects a nickel increase in net income for PFE up to 44 cents a share while analysts look for LLY's numbers to be inline with estimates near 58 cents. The DRG.X drug index did close in the green today but not by much.

Arguably the "biggest" earnings report today was MMM's. This Dow component turned in net income of $1.27 a share, or $502 million with an 11 percent rise in sales to $4.32 billion for the quarter. This put their Q1 results near the top end of analysts forecasts. Previously, we noted that one analyst had cut their full year numbers for MMM due to the SARS illness affecting sales in Asia. This report showed a 1.0 percent rise in sales in the U.S. and a 19.5 percent rise in sales overseas. MMM's strongest geographic region was the Asia Pacific with volume up 19 percent (Reuters). Obviously, SARS has so far failed to affect the company's sales. Unfortunately, by the reaction in the stock price, investors were not that convinced things were going to stay this strong. Shares of MMM were hammered hard on Thursday ahead of the weekend in what looks like profit taking before today's earnings report. The stock held at the $128 level last week before bouncing into Thursday's close. Today's intraday action and MMM's 15-cent loss looks like a mirror of the Dow Jones Industrial average. MMM is a very important component to the DJIA since the average is dollar weighted with higher dollar stocks having a bigger influence on the average's movement.

I've posted a point-and-figure chart of MMM below so you can see the general long-term up trend and the stock's rising bullish support. So far the trend is for MMM to bounce off support and this one stock has been a pillar of relative strength for the DJIA. Should it fail it will be a massive weight around the Industrial's collective neck.

Point-and-Figure chart of MMM:

Earnings will remain in Wall Street's spotlight with fully one- third of the S&P 500 expected to report this week alone. The market appears to be reacting favorably to the lack of any really big misses by its larger companies. What concerns me and most of the staff here at OptionInvestor.com is the VIX. This indicator has been too right too many times to be ignored. The volatility index fell again today to 24.27. According to Mark Phillip's research, this should be a new absolute bottom for the index. However, it's completely possible that the VIX will revert to its more traditional trading range with market tops being signaled when the VIX trades near 20.

As Jim said in the wrap on Sunday, this should take several more big days of buying to push the VIX back down to 20. An alternative would be a slow and steady grind lower as the market continues to churn sideways. Or as Mark stated in his latest LEAPS column, we could see this bullish atmosphere continue to last another couple of weeks, which is just long enough to finish the bulk of the Q1 earnings announcements. Then when all the news is out, the war is over and there's nothing left but murky economic data and investors beginning to look toward the slow summer months ahead. This doesn't sound like a recipe for a new bull market to me.

Don't get me wrong. When I see the pattern of higher lows on the S&P 500, I want it to breakout to the upside. Maybe we can get another leg higher. However, I'd be extremely careful on any long positions and keep those stops tight as the VIX continues to slip lower.

James Brown


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