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Market Wrap

Beginning of the End

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      05-08-2003           High     Low     Volume   Adv/Dcl
DJIA     8491.22 - 69.40  8575.11  8477.36 1.67 bln 1442/1774
NASDAQ   1489.69 - 17.10  1504.04  1486.91 1.59 bln 1232/1937
S&P 100   465.34 -  4.97   470.31   465.08   Totals 2674/3711
S&P 500   920.27 -  9.35   929.62   919.72 
W5000    8763.63 - 84.90  8848.56  8760.00
RUS 2000  407.68 -  2.55   410.23   406.92 
DJ TRANS 2434.14 - 21.70  2457.59  2427.47   
VIX        23.69 -  0.02    24.40    23.08   
VXN        33.29 +  1.29    34.03    32.72 
Total Volume 3,520B
Total UpVol    760B
Total DnVol  2,680M
52wk Highs  469
52wk Lows    30
TRIN       2.22
PUT/CALL   0.97

Beginning of the End
By Jim Brown
Click here to email Jim

Or is it the end of the beginning? The markets slid a little farther on Thursday but it was far from a sell off. Where the bears can be seen waving signs saying the end is near the bulls are actually excited about the pull back and are looking for a resumption of the rally soon. To them the profit taking is just the end of the beginning and the first wave of many future waves. Only one side is right.

Dow Chart - Daily

Nasdaq Chart - Daily

The day started out with a gap down open after the Jobless Claims report, a speech by Greenspan and worries about earnings depressed the premarket futures.

The Jobless Claims stretched their consecutive weeks over 400K to 12 with -425,000 new claims last week. The four-week moving average rose to 446 and the highest in more than a year. Sentiment many be improving but jobs are not. Corporations are still dependent on cutting jobs to cut costs to show earnings instead of losses until the economy recovers. Lower costs will mean higher profits when the recovery comes but with close to half a million consumers losing their jobs each week there may not be anybody left to pay for the economic recovery. The current insured employment hit 3,665,000. (2.9%) This means only about one half of the workers currently without jobs are receiving unemployment. Benefits for the rest have already expired or they were not eligible.

Contrasting the Jobless Claims report the Chain Store Sales for April rose an unexpected +3.2%. This was attributed to a late Easter and a shopping shift into April. If you combine March and April the rate fell to a modest +1.5%. Despite the gains the majority of retailers reported sales below plan. Only GAP and WMT reported gains over their sales plans. The lagging consumer and lack of must have products is producing the anemic results. Auto sales picked up in April and this will be reflected in the broader based retail sales report next week.

The combination of the two reports provided a bounce off the bottom at the open once investors decided the bad news was already priced in and there was nothing new. The rally failed at yesterday's close and the markets drifted lower as traders waited for the FOMC minutes at 2:PM. Those minutes did not show anything new but the market could not sustain any rally attempt and barely held 8500 into the close. The minutes showed the Fed had realized that the 4Q economic bounce had faded and the consensus of the group was that Iraq ate the economy as the country prepared for war. They expressed concern and appeared to have lost earlier confidence that the economy was on the right track. They decided not to put out a balance of risks statement because they feared the economy could remain weak even if the war was resolved quickly. They feared "fundamental economic problems" such as lingering impact of the tech bubble. They also participated in a series of conference calls as the war began and may have came close to cutting rates when the war appeared to be not going smoothly. Their biggest fear was the declining job market and it has gotten significantly worse since the March FOMC meeting. Based on these minutes and the statement from this weeks meeting it is clear the Fed is deeply concerned about a fundamental weakening in the economy that is not war related. Text of Minutes: http://www.federalreserve.gov/fomc/minutes/20030318.htm

The Cisco earnings continue to weigh on the market. The CSCO expectations had been for a pickup in business based on comments made by Chambers and his CFO in prior weeks. The EDS earnings last night also did not inspire traders that the tech sector was growing. Even earnings winners like PIXR and XMSR got killed today as traders expecting the moon got reality. First Call said they have revised the expected earnings growth for the 2Q to only +6%, +12% for Q3 and +22% for 4Q. The problem according to them was that all hopes are being hung on the 3Q/4Q but we really will not know what corporate guidance will be until the end of July. With 58% of S&P companies already warning for the 2Q they claim there could be a substantial drop in estimates if the July earnings cycle goes badly. This concern that the recovery may not appear is starting to filter through the markets.

That concern is still very slight if you gauge it by the stock market but the bond market appears positively panicked. The stock market appears to be welcoming a slight pullback as a buying opportunity while the bond market appears to be going into bunker mode. The bond futures are hitting new multiyear highs while the dollar is hitting multiyear lows. That is good if you are selling U.S. products overseas but bad for overseas investors. Foreign investors account for 10% of our market and a falling dollar, falling economy and falling interest rate is very detrimental to attracting money to our markets. The ECB and the Bank of England both refrained from lowering rates today which makes a rate cut for the Fed even tougher in June.

There is a thought underway that the Fed is keeping pressure on bonds. The Fed has said they might resort to an artificial cap on rates by buying an unlimited number of bonds on the open market. This keeps real rates low without the need for the Fed funds rate being lowered. Lower real lending rates spurs a lower cost of capital and if they can push rates low enough it would create another wave of refinancing and another round of stimulus to the economy. Consumers freed up about $800 billion in home equity in the current refi cycle. Another round of even lower rates could add another $100-$200 billion if the rates were low enough. The 30-yr mortgage rates fell to 5.21% in Colorado as of 6:PM today. That is pretty cheap!

All of that does not help the stock market in the short term. The market is leery of buying stocks when the bond market is soaring. They feel they are missing something important in the news and they pull back from placing large orders. With bonds being beat up in the press lately as an investment that had run its course there were several attempts to sell them off. All failed and with yields nearing decade lows again and the Fed telegraphing a rate cut in June the squeeze is on.

The market drop today was not much of a drop. Considering the current rally is the longest trough-to-top rally since 9/11 investors on the sidelines are actually eagerly awaiting a pull back so they can get in. Those in the market are showing no interest in selling. The drop today was on light volume and other than the one major sell program at 12:00 the selling was very casual. The new 52-week highs still came in at 469 with only 30 new lows. The A/D line was only about 7:5 negative, which is almost a push. The bulls were scratching their heads about why there was not more selling but were still ecstatic that the selling was limited. The dip-buying urge is definitely alive and well.

The Dow dropped -69 points to close at 8489 and just slightly under the prior resistance at 8500. The index is still clearly above the uptrend support at 8400-8435. The Dow is in no danger of a trend change unless that 8400 level is broken severely. The Nasdaq closed well under 1500 and has risk to support in the 1435-1450 range. This is still well within the uptrend support range. The Nasdaq is not in danger of breaking that trend until something in the 1350 range and that is weeks away at the speed we are moving. Any significant change in sentiment could of course accelerate that rate.

Tomorrow is a tossup. There are no economic reports and we will be left to trade on stock news. It is the Friday before expiration week and that has been mixed lately. Friday and Monday could be boring as hell or full of adrenaline. The markets want to go up but they are still confused. They see the weak economic news and soaring bond market and realize it should be going down instead. Some bulls are glad it isn't and others are glad it is because it provides them that entry point. Because of this selling is likely to be met with buying and traders trying to square up option positions will add to the confusion. I would not personally be adding to long positions until the smoke clears and we get past expiration Friday.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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