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Market Wrap

Distribution Zone or Consolidation?

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        04-23-2003        High      Low     Volume Advance/Decline
DJIA     8515.66 + 30.67  8526.38  8451.45 2060 mln   2032/1252
NASDAQ   1466.16 + 14.80  1468.08  1447.65 1893 mln   1925/1185
S&P 100   467.31 +  4.23   467.85   462.25   totals   3957/2437
S&P 500   919.02 +  7.65   919.74   909.89
RUS 2000  394.97 +  3.81   395.01   391.16
DJ TRANS 2374.00 + 22.04  2376.49  2343.20
VIX        23.49 -  0.02    24.51    23.31
VXN        33.13 -  0.52    34.32    32.97
Put/Call Ratio      0.63

Distribution Zone or Consolidation?
By Jonathan Levinson
Click here to email Jonathan

The indices made relatively small moves higher on very respectable volume today, accomplishing a larger transfer of shares following yesterday's strong gains. The consolidation and lack of pullback was admittedly not-bearish, but tomorrow will be an important test of today's gains.

Chart of the INDU

Chart of the COMPX

The Dow broke above round number resistance at 8500, while the COMPX tried but could not top 1467 resistance. Both indices closed near their highs of the day, well within range for either an opening gap above today's highs or a failure below significant resistance. With no sell signals on the admittedly toppy oscillators and bear wedges printed this month, the stage is set for a battle royale between bulls and bears at current levels. Note that the COMPX is trading well-clear of the crucial 1430 resistance level and its 200 day ema, giving the bulls plenty to celebrate.

The markets opened with light selling in treasury bonds that persisted until 10:30, when yields flipped briefly to red. The put to call ratio opened at its low of the day, .55, bounced up to .70 from there, and then drifted in the mid .60s for the remainder of the day, well off its levels above 1.20 seen through much of yesterday. The bearishness that these readings implied was entirely absent, as the markets marched stubbornly higher with only a shallow pullback in the mid-afternoon commencing about 20 minutes prior to the release of the Beige Book report. Treasuries closed only slightly lower, with FVX +1.1 bps, TNX +1.2 bps and the TYX unchanged. My guess is that the fed added some thirties to its growing portfolio, but that's a topic for another time.

The early morning's economic data were not positive, with mortgage applications falling from 376.1 to 359.9 (4.3%) this week and the Refi index falling from 5546.7 to 5103.9 (7.9%), for a 5th straight week of declines. However, the Energy Department reported a rise in crude stocks of 9 million-barrels for the week ended April 18, bringing total US inventories to 286.2 million barrels, 12.7 percent below their year-ago level. Analysts had expected crude stocks to rise 3 million barrels. June crude fell $1.31 to close at $26.68 a barrel.

The Beige Book was released at 2PM, in which the fed reported that the US economy's continued "softness" was exacerbated by war concerns and bad weather. Retail sales were weak, and manufacturing activity fell in 9 of 12 districts. 5 of 12 districts reported weakening economic conditions since February. Unemployment remained persistent.

The fed sat on the fence today, adding $4B in overnight repurchase agreements to refund the maturing $4B in overnight repos from yesterday. Around the same time, the White House issued a release requesting Al Green's response on the President's offer to renew his term. As Jim pointed out, it might have been appropriate to wait for the painkillers from yesterday's prostate surgery to wear off before publicly pressing the 77 year old man for a response to yesterday's offer. After the bell, Mr. Greenspan replied, "If President Bush nominates me, and the Senate confirms his choice, I would have every intention of serving."

Earnings were fast and furious. To name a few, we saw positive intraday corporate results from T, BLS, LU, BA, XRX, NXTL, KRB, and SIAL, and negative news from PSFT and EK. BUD met estimates. Blake Bath at Lehman Bros upgraded T later in the day, with MRK downgraded by GS to "inline", citing valuation concerns.

After the bell, we had announcements from AWE, which announced earnings of 5 cents per share vs. 2 cents estimated. QCOM beat estimates by 2 cents per share, earning 38 cents per share on a pro forma basis. The stock was trading up 2.19% after hours. FDRY was up .37% after hours after beating analyst estimates of 9 cents by 2 cents. KLAC earned 14 cents, also beating by 2 cents on revenue of 304M, which was inline with estimates but showing a decline in net revenues and earnings compared with the same period last year. The stock was down -0.29% after hours. SYMC beat by a penny and increased revenue from 3 cents a share last year to 41 cents but got smoked for -3.15% after hours. Overall, QQQ was down 5 cents in after hours trading, with S&P June futures trading 917.50 and NDX June futures 1113.50 at 4:30PM.

Led by Assistant Secretary of State James Kelly, the US delegation began its three-day talks with North Korea and China in Beijing to discuss Pyongyang's alleged nuclear weapons program. These are the first talks between North Korea and the US since the latter accused the former of having a nuclear weapons program 6 months ago.

The US warned Iran to stay out of Iraq following news that Iranian agents were active in southern Iraq among Shiites and Iranians in the promotion of Iran's interests.

The SARS story worsened today, as the WHO increased its travel warnings, advising against non-essential travel to Toronto, Beijing, and Shanxi Province. There was talk of significant differences in the genetic code of different samples of the virus, pointing to mutation of the virus. More deaths and new cases were announced as well. After the bell, the Major League Baseball announced that it would be advising players visiting Toronto to refrain from signing autographs and mingling with crowds. Increasingly, focus seems to be being drawn to the economic impact of the disease, but it has yet to noticeably affect any of the US indices.

Unfortunately, the story remains the same as yesterday. The indices, led by the COMPX, have come very far, very fast. Whether you are bearish or bullish, some pullback is expected. The confidence of bullish traders is demonstrated most clearly in the volatility indices, of which the VIX is a fine example. Just as there are currently no sell signals on the INDU or COMPX, there are no "buy" signals on the VIX, as complacency reflected in collapsing option premiums continues to reign.

Chart of the VIX

For tomorrow, we have Initial Claims before the bell, last week's number 442,000, as well as Durable Goods Orders for March, forecasted to come in at a -1.0% decline, previous reading of -1.6%. The Help Wanted Index is forecast at 40, previous reading of 40. These reports will doubtless be definitive in setting up tomorrow's opening bias. Capital preservation should remain our prime directive as the market decides whether to extend its rally or reverse it. I would be shocked to see a repeat of today's relatively narrow range, and so either way, tomorrow should provide some answers as to which direction the market wants to take next.


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