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ISM Blues

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      05-01-2003           High     Low     Volume   Adv/Dcl
DJIA     8454.25 - 25.80  8488.35  8340.23 1.68 bln 1638/1541
NASDAQ   1472.56 +  8.30  1478.85  1451.32 1.43 bln 1747/1443
S&P 100   465.34 -  0.19   467.13   458.33   Totals 3385/2984
S&P 500   916.30 -  0.62   919.68   902.83 
W5000    8698.40 -  3.62  8727.83  8577.53
RUS 2000  398.83 +  0.15   399.90   394.19 
DJ TRANS 2404.79 -  4.10  2412.52  2374.17   
VIX        24.50 +  0.73    25.70    24.01   
VXN        32.49 -  0.18    34.08    32.20 
Total Volume 3,314B
Total UpVol  1,893B
Total DnVol  1,373M
52wk Highs  420
52wk Lows    55
TRIN       1.23
PUT/CALL   0.85

ISM Blues
By Jim Brown
Click here to email Jim

Investor sentiment based on hope may be surging but reality always seems to come back to wake us up from our dream. The ISM disappointed investors this morning and the Jobless Claims just added to the gloom. Friday will be another wake up call when the Nonfarm Payrolls for April are announced at 8:30.

Dow Chart - Daily

Nasdaq Chart - Daily

S&P Chart - Daily

Economically nothing has changed. The new Jobless Claims hit 448,000 for the week and last weeks 455,000 was revised upward to 461,000. The four-week moving average hit its highest level in a year at 442,000. This is not good news for the Jobs report on Friday. This was the 11th consecutive week over 400,000 and the third week in the 450,000 range. With the war over there has been no pickup in hiring over the last three weeks. If anything it has gotten worse.

Adding to the negativity was the Construction Spending which fell -1.0% compared to estimates for a gain of +0.4%. Private construction dropped -0.2% and residential construction rose a modest +0.1%. The biggest drop came in the public sector which dropped -3.5%. State and local governments have continually fallen short on revenue and they are no longer filling in the gaps from the private sector. Productivity also came in less than expected at only +1.6% and disappointed analysts. A slowing of productivity would indicate a continued slowing of demand and an increase in unused capacity.

The big report for the day was the ISM, which was much worse than expected at 45.4 compared to estimates at 47.0. Anything under 50 reflects a contracting economy. One analyst has done a study on the ISM and found that any number under 47 normally meant a negative growth quarter for the GDP. This is the fourth consecutive monthly drop for the ISM after topping out on the rebound at 55.2 for December. The 45.4 is the lowest number since October 2001 at 38.8 and the first full month after the 9/11 attack. Obviously this is not an encouraging signal. New orders fell to 45.2 and the employment index fell to 41.4 and the weakest level since Dec-2001. With the Jobless Claims rising and the employment index falling to disaster lows the outlook for the Jobs Report on Friday is not good. The consensus of opinion is for a loss of -58,000 jobs but I would be very surprised if it is not more. This could be the one-two punch that finally slows the rally.

There was some good news from a sector that has been grounded lately. The latest airline traffic survey showed passenger traffic up over prewar levels and a decreasing fear of travel due to SARS. This is a plus for the industry but a far cry from being bullish. It simply means the SARS panic may be easing and the fear of a terrorist attack related to the Iraq war may also have passed. This is far from saying the sector is recovering and may only be an indication the worst has passed. Until business travel picks back up and the travel bans in Asia ease there will still be problems.

Soundview cautioned on techs today saying that 1/3 of Intel's revenue comes from Asia. China accounts for 10% of all personal computer sales worldwide. The largest Chinese PC manufacturer, Legend Computer, said sales were only running at 60% of plan. With the panic phase of the SARS scare almost a month old the odds are good that at least another month of sales depression is ahead. Take 60 days out of the quarter at only 60% of plan and the global outlook for the tech sector does not look good. When the mid-quarter updates begin flowing there are likely to be some negative surprises.

There was a very unusual event today that impacted trading in ways we will not understand until tomorrow. Trading on the Globex exchange ceased at 10:39 and was not reopened all day. The halt was due to a massive network failure and as of 5:30 tonight it still has not been corrected. Only 276,000 of the normal 750,000 contracts of the Emini S&P futures were traded before the outage. The Dow had crashed to 8340 on the ISM news and the futures to 900 before rebounding slightly on a dead cat bounce. The Dow had rolled over again at 8380 and was heading back down when the outage first occurred. Once it was announced there was an immediate pop in the Dow futures and the large S&P as traders short the Eminis decided to hedge against potential losses and positions they could not close. The buying leveled out while traders waited for news and when Globex announced it could be several hours more traders elected to hedge their bets further. The Dow and S&P rose until just before 3:15 when Globex had announced they would reopen. When there was not a rush of pre-open orders the markets sold off again. At 3:15 Globex announced the problems were continuing and they would not open as expected and would remain closed the rest of the day. As traders became aware of their inability to close positions overnight the Dow again found buyers as traders grabbed the only futures hedges available.

This is setting up a major spectacle at the open tomorrow. There is a strong feeling among traders that there was heavy short interest today. We have seen heavy volume on the sell side every time we near 920 and we have had plenty of chances this week. With this heavy short interest on the futures and now offsetting long interest in the Dow futures as a hedge we could see some fireworks at the open. If you are short the S&P and went long the Dow futures as a hedge then a bad Jobs Report tomorrow will confirm your bearish direction and you would sell your Dow futures and add to S&P shorts. (if Globex actually comes back) This would create a double hit to the downside. Conversely if the Jobs Report surprises to the upside they will just sell the Dow futures higher.

The wildcard here is the traders that cannot trade overnight due to broker restrictions. They are at the mercy of the Jobs Report which is announced an hour before the market opens. If they bought the dip this morning then they will be praying for an upside surprise and selling on the news an hour later at the cash open. If they are short they will be praying for a downside surprise to stop the bleeding and keep them from losing their shirts before the open. There are so many scenarios for the open I cannot cover them all in the space allowed here. The bottom line for me is the potential for extreme volatility as positions are added to or squared.

This was the first time in four days that the Dow did not test the resistance high at 8520. The economics and the repeated failure at that level prompted strong profit taking at the open. Without the Globex problem and the hedging in the Dow futures the result could have been a lot different. The morning dip stopped only 40 points above the 8300 support from the last couple weeks. That stop had all the appearance of a dead cat bounce, which was already failing when the Globex problem appeared. There was a rumor making the rounds this week that the gains early in the week were due to market makers on the NYSE clearing positions, which were weighted to the short side, as the investigation into trading practices accelerated. While I doubt this was reality it would mean no bias by the specialists going into Friday.

The Nasdaq was a different story. It rose off the lows, possibly due to hedging in the larger NDX futures contract as well and closed very near its highs for the week. For whatever reason the Nasdaq bounced it was very impressive in the face of bad economic data and those downgrades from Soundview.

For Friday we have an opening out of the twilight zone. The last major economic report for April at 8:30 and potentially 500,000 contracts of missing Emini volume to square at the open. The volatility could be huge if the Jobs Report surprises to the upside. If it surprises to the downside the volatility could ease the closer we get to 905 on the S&P Futures. This is where the problem began and would represent no harm/no foul for most traders. With the war in Iraq over there is really no hindrance to holding over the weekend so predicting the closing direction is a tossup. We are up for the week and still near the highs so the educated guess would be profit taking in the afternoon. Either way the fireworks are likely to be at the open and they may be extreme.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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