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Market Wrap

Bad News Bulls

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        WE 5-02         WE 4-25         WE 4-17         WE 4-11 
DOW     8582.68 +276.33 8306.35 - 31.30 8337.65 +134.24 - 73.74 
Nasdaq  1502.88 + 68.34 1434.54 -   .96 1425.50 + 66.65 - 24.66 
S&P-100  471.87 + 15.77  456.10 +  2.49  453.71 + 12.74 -  5.72 
S&P-500  930.08 + 31.27  898.81 +  5.23  893.58 + 25.28 - 10.55 
W5000   8834.06 +308.17 8525.89 + 59.04 8466.85 +239.31 - 92.43 
RUT      407.67 + 19.17  388.50 +  4.80  383.70 + 12.40 -  1.98 
TRAN    2460.80 +108.19 2352.61 -  9.58 2326.19 +131.63 +  6.28 
VIX       23.61 -  0.29   23.90 -   .69   24.59 -  3.68 -  4.53 
VXN       32.36 -  1.34   33.70 -  2.18   35.88 -  3.74 -  2.83 
TRIN       0.66            1.95            0.50            0.88   
Put/Call   0.71            0.87            0.52            0.79  

Bad News Bulls
By Jim Brown
Click here to email Jim

Feeding the bulls a diet of bad economic news has made them tougher than a pack of junk yard dogs. Falling jobs numbers, contracting economy, terrorist alerts, no problem let's rumble. Rumble they did and pushed the indexes to new highs and above resistance which has held for months.

Dow Chart - Daily

Nasdaq Chart - Daily

Friday morning started slow with the Jobs Report showing a loss of another -48,000 jobs. While this was bad it was not as bad as was expected and the talking heads spun the news as positive for the entire day. The March number was revised upward to -124,000 from -108,000. The unemployment number rose to a high of 6%, a number only seen two other times in the last two years, Apr-02 and Dec-02. Reporters made a big deal of the smaller loss than the prior two months. (-353,000, -124,000) The actual number was only about a third as bad as the worst whisper number of -150,000 and in reality this is the reason the markets celebrated. With the new Jobless Claims still rising to obscene levels everyone thought the Jobs Report would be terrible and the bad news was already priced into the market.

Was it a bad report or should we celebrate only losing -48,000? We need to remember this report is done by survey during a one week period early in the month. Three weeks ago the war had just ended and euphoria was rising along with the markets. Did that affect the survey responses? Did the strong losses the prior two months provide us a layoff lull in April while employers seeing the war end were holding firm to see if an instant recovery appeared? Three weeks ago Jobless Claims were at the lowest level for the month (412,000) as the war was ending on TV. The bottom line will be the May numbers. If the report improves then February layoffs were the bottom and all is well in the economy. If May surges back to a -100,000 or higher then April was just an end of war induced lull and we are back to problems again. We have lost jobs in five of the last six months and new Jobless Claims have been over -400K and rising for eleven weeks. Analysts do not expect any material job growth until mid-2004 and they expect 6.2% unemployment by year end.

Anther point to emphasize is that there are 600,000 more full time workers employed in part time jobs than there was this time last year. It means full timers have resorted to part time employment in order to pay the bills while they continued to search for a permanent job. Despite this surge in temporary employment the unemployment rate continues to rise. Historically we have not had three months of job losses in recent decades without having a recession. Not a good historical precedent. Also, we have not had three months of losses without the Fed cutting rates. We have an FOMC meeting on Tuesday and the Fed Funds Futures are only showing a 19% chance of a cut at that meeting. Clearly the Fed is not telegraphing any change in rates and they will want to see if the trend continues and if the wars end changed the economy before making a move. There are so many external factors that the Fed is likely to sit on their hands.

Factory Orders surprised traders with a +2.2% gain compared to only a +1.2% estimate. This was surprising considering it was for the March period when all the company guidance was for gloom and doom due to the war beginning. For investors expecting a bearish prewar drop it actually showed some increases in things like new orders +2.2%, back orders +0.3% and shipments +1.9%. Suddenly there was new hope that a recovery was actually underway. Traders should be aware that this report is a month older than the ISM, which we received on Thursday. That would indicate that the Factory Orders for March at +2.2% and the weak ISM for April shows that the economy is deteriorating from a March bounce. Obviously bulls will read these reports many different ways and ignore the facts on which they disagree. Nobody will know the real answer until another 30-60 days have passed in the postwar economy.

Bulls not only ignored the economics but they ignored several reports of problems in the tech sector. JP Morgan said they had surveyed manufacturers and fabricators and in all cases the days of inventory on hand had increased over the last four weeks as the impact from SARS filters back through the supply chain. IBM, FLEX, TSM, UMC and others had reported an increase in inventory levels as sales slowed. Several chip companies had reported delayed orders due to SARS as well. I think this is only temporary but there has been an undeniable dip in 2Q revenue worldwide. Contrary to the above comments Soundview spent a day at IBM and came away saying they expected revenue to come in above estimates.

Those minor negative points were disregarded by traders as they bought the dip again and did not stop until they had pushed the indexes over strong resistance and to highs not seen in many months. Airlines posted strong gains on bargain hunting from investors that feel the worst is over. No attacks, no AMR bankruptcy and oil dropping like a rock. The transports broke resistance at 2425 that has held since last October. The chart is showing a clear breakout and confirming the Dow move. Traders seeing this felt if the transports were on fire then everything else could not be far behind.

The Banking Index also broke to a new high at 806 and over resistance dating back to last August. With banks and transports leading it probably brought tears to long time traders. Could it be, a REAL rally? On the surface it sure looks like it and there is little anyone can say to deflate the expectations. The predominant theme was "maybe it is not as bad as we thought." We will get to test that theory next week. JPM is holding a tech conference where HPQ, MOT, IBM and INTC will be among the top presenters. It will be a dog and pony show more than an update on the state of the economy but traders are hoping to get a few positive indications of how business is going.

While earnings are about over with 411 S&P companies already reported there are some major companies still to report next week. Of those 411 companies 58% have already warned about the 2Q and 24% have raised guidance. (2:1) Some of the major announcements for next week include MET (Monday), CSCO, ERTS, PRU, G (Tuesday), EDS, PIXR, THQI (Wednesday), NVDA, LTR, XMSR (Thursday) and BRKa on Friday. Obviously the biggest names for tech followers are CSCO and EDS. The week is weighted to the smaller tech and biotech companies but those two giants will be the ones to watch. Cisco has made comments in the last couple weeks that would lead investors to believe things are improving. Obviously this positive expectation is already priced into the stock. Cisco is hovering near strong resistance at $15.50 that has held it back since Aug-2002. EDS has under performed the market after rocking techs with a massive warning in September. After dropping from $40 to $10 on the warning the company is easing up to the $20 level again with strong resistance at $21. Should EDS, which competes with IBM for services contracts, says things are improving we might see a strong rebound not only for EDS but for IBM and techs in general.

I mentioned this earlier but it bears another comment. The Fed meets on Tuesday and while there is no change in interest rates expected we have seen three months of negative job growth and historically they take action. Traders may bid up stocks in advance of the meeting in the hopes they follow suit again. Either way the guidance they give in the announcement will be key. Several Fed governors have gone on record recently with positive comments and should those comments bleed into the official guidance we could see another celebration in the markets.

The celebration on Friday was very strong. Volume over all exchanges was over four billion shares with the NYSE almost reaching the two billion mark. Advancers were 3:1 over decliners on the NYSE. On the Nasdaq at 1.86 billion and little more than 2:1 ratios the action was good but not as great as it appeared on the surface. Don't get me wrong. I am not complaining about the Nasdaq closing over 1500. This is a banner day not only for the Nasdaq but for almost every index on the board. The Nasdaq is only a few ticks away from the last major resistance for the last year. That is the 1521 high on December 2nd. We have a strong higher low in Feb/Mar, a month of consolidation just under 1425 and now several days of breakout trading at higher highs. I know there was applause somewhere when the Nasdaq closed over 1500 because there was definite excitement in my office.

The Dow also broke out over the 8520 resistance that has kept it in check since March 21st. This is a strong signal and the breakout of the bullish wedge is a very good sign. Next resistance on the Dow begins around 8700 and gets stronger around 8850-8900. Make no mistake. The trading on Friday turned a lot of heads and Monday could be exciting. If Ma and Pa Investor look at the "New Highs" headline in Saturday's paper they could decide the 1% return of their money market funds is no longer attractive. That makes Monday confirmation day. The volume on Friday was good but not great. I attribute that to being an early summer Friday. If we can get a strong volume confirmation on Monday then the race could be on. I am not expecting a vertical rise to old highs but I do think the current performance in the face of absolutely terrible economic news is very strong. We will have pullbacks and there are some hair pin turns and sharp objects in the road but the road was heading uphill at least on Friday.

We still have SARS. We still have terrorists. There was a new alert issued by homeland security on Friday. We still have rising unemployment but traders are convinced these factors do not matter. They are convinced the third time is the charm. You know, the second half recovery of 2001 and then 2002 and now 2003. Actually there is good historical precedence for a 2003 recovery as it is the third year of a presidential term, normally bullish, and the campaigning has already begun.

Next week is a wasteland in the economic arena with very little in the way of reports to feed the bears. The ISM Services is Monday but it should be ignored if bad and cheered if better than last months negative report. Tuesday is the FOMC meeting and the only thing important there is the guidance. Wednesday we get Wholesale Inventories and short of a disaster nobody will notice. The week ends with Jobless Claims and FOMC minutes on Thursday. After 11 weeks over 400,000 new claims there could be a dip at any time to something starting with a three and it will be heralded as a clear sign the recovery has sparked into life.

Life is good when the indexes tack on triple digits in a week that breaks strong resistance. It is like leaving on a long vacation trip to some exotic destination. You are full of hope for the excitement ahead and the cares of the office are left behind. Everything is wonderful until the tire blows or the radiator overheats or both. Your trip is still intact but suddenly the excitement fades with greasy hands and complaining passengers. We cleared the traffic jam of strong resistance today and we are cruising down the highway for those cool mountain tops ahead. Dow 9000, Nasdaq 1600? Who knows, half the fun of the getting there is the journey or so they say. We all know what comes next. Detours, traffic jams at higher levels and the required pit stops for repairs and profit taking. The bottom line is that the trend has changed. Baring a catastrophic event next week the markets could continue climbing higher on the backs of the disbelieving bears. Trust me, there are a bunch of us, ahh, them. Yes, I am converting, almost.

I don't believe it for a minute. I see an economic disaster behind every rock and believe we are in a recession. However, it does not matter what I believe. The market wants to go up. Just like it did in October and again in March. There was no economic justification for either of those events. The bears just kept denying it and shorting every resistance level. The bulls just kept denying it and waiting for the pull back that never came. Eventually it became and race until those advances simply became so over bought they just could not advance any more. Short, chase, cover, chase, short, chase, cover, chase. I know so many readers that are short to their eyebrows it is crazy. The ones that are not short were sending those "is this it, I don't want to miss it" emails all day Friday. If the volume had been 25% stronger and the advance/decline 4:1 or 5:1 then I would feel better about saying this is it. I can't because the internals were just not that strong. BUT, this was a summer Friday and Monday is a new day in new territory.

If we get confirmation on Monday then there could be a lot of real money come off the sidelines. Quit worrying if this is it and trade what you see. If you see strong upside volume on Monday then go for it. If the volume is mediocre and the price does not confirm with a new high then be afraid. Breaking out of a downtrend does not guarantee success. I think we are seeing another breakout of the SIE virus (Severely Irrational Exuberance) and until the bulls get their vaccination it could spread rapidly to borderline bears. This virus is very contagious among weary traders. Tonight the rally looks very good on paper but Monday is a new day. Trade what you see and keep looking for sharp objects in the roadway ahead.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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