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Market Wrap

Call it a Draw

HAVING TROUBLE PRINTING?
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      05-13-2003           High     Low     Volume Advance/Decline
DJIA     8679.25 - 47.50  8723.29  8647.60 1.71 bln   1485/1731
NASDAQ   1539.68 -  1.70  1548.59  1529.56 1.82 bln   1670/1565
S&P 100   475.41 -  2.55   478.53   473.73   Totals   3155/3296
S&P 500   942.30 -  2.81   947.51   938.91 
W5000    8973.54 - 20.50  9018.93  8941.65
RUS 2000  419.23 +  1.03   420.40   415.26 
DJ TRANS 2476.90 - 12.60  2489.35  2468.19   
VIX        22.03 +  0.61    22.91    21.57   
VXN        32.84 +  0.26    33.87    32.28 
Total Volume 3,735M
Total UpVol  1,951M
Total DnVol  1,724M
52wk Highs  545
52wk Lows    26
TRIN       0.96
PUT/CALL   0.67

Call it a Draw
By Jim Brown
Click here to email Jim

The markets traded on both sides of zero on Tuesday and after the smoke cleared we were very close to where we started. The Nasdaq and S&P closed within a couple points of flat with the Dow the biggest loser at -47. Not even a dent in the bulls armor considering the recent gains. For a few moments today the Wilshire 5000 traded over 9000 again. Can the Dow be far behind? The W5000 broader market index traded within a handful points of the Dows low of 7197 in October and has outperformed the narrower Dow in the rebound. This could be a leading indicator of the future.

Dow Chart - 240 min

Nasdaq Chart - 240 min

Before we get too carried away with bullish enthusiasm let's look at a potential preview of the remaining economic reports for the week. If the W5000 is a leading indicator for the Dow then today's Richmond Fed Manufacturing Survey could be a leading indicator for the flood of economic reports due out Thursday and Friday. The Richmond Fed Survey dropped to -18 and the lowest level since December 2001. This is an April not a March number and is the first of the real post war reports. Shipments fell to -18, new orders to -20, order backlog -36. Need more evidence the economy did not bounce after the war? This was the third consecutive monthly decline from the January high of +18 and a marked decline from only -4 in March. The drop is accelerating in this sector. Granted this is not a true picture of the entire U.S. but when added to the last NY State drop it easily offsets the minor gains in the Kansas City Survey. The Kansas survey rose +4 points to +15 overall but the new order component still fell -5 points. It would be better to say there were pockets of weak growth rather than pockets of recession. We will get the May NY State Survey on Thursday along with the Philly Fed Survey. A key point in the Richmond survey today was 21% more companies reported cutting jobs than adding jobs for the month and the average work week is dropping. That suggests further demand slippage and danger of more job cuts ahead. This survey is done mainly in the last week of the month meaning it had the farthest reporting time from the end of the war. Participants also said they expected prices paid to increase and prices received to continue to shrink.

On another front, despite the lower dollar the Trade Deficit rose to its second largest level ever at -$43.5 billion. The largest was the nearly $45 billion in December. Much of this increase was in imported energy prices and the impact of the dollar's change. The internal data is getting worse and the export numbers to Asia are going to drop significantly over the next couple months due to the SARS impact.

Chain Store Sales for the week fell -0.2% as the impact of severe weather filtered through the system. This is only a weekly snapshot and we will see the sales for all of April on Wednesday. Wal-Mart reported weak Mother's Day sales and earnings that only met the street estimates and fell -$4 billion short in revenue. They said the weaker dollar and international sales helped them make the target. They guided lower for the current quarter. ANF also met estimates of 26 cents but guided lower due to a growing weakness in the retail sector. They said it was very difficult to predict future revenues due to the very volatile environment. They projected earnings as low as 30 cents with the prior consensus at 34 cents.

Despite these events the markets managed to trade up intraday. Not only the equity markets but the bond markets and oil markets. This has confused traders completely. According to TrimTabs.com there is $3 billion in new supply coming to market this week including the IMPT IPO and new offerings from existing companies. This additional supply was expected to depress the markets as old money shifted and new money was put to work. Normally a new offering can depress the price of a current stock as the equity is diluted. Money going into these issues, while encouraging, does nothing to buoy the indexes. Insider selling was also escalating with 70% of insider trades over the last two weeks being sells. This is normally not a positive sign.

According to Laszlo Birinyi the market is at record levels of overbought as measured by the 10 day average of the net advances and declines. He said long time traders were perplexed by the bond advance and equity advance in such overbought conditions. Most long time traders use the yield on the ten year treasury as an indication of economic growth as the bond market normally is a better predictor of the economy than stocks. According to Birinyi the falling bond yields are pointing to little or no recovery for the rest of the year.

The market did not care what Birinyi had to say or Merrill Lynch or Wal-Mart. It continued to show a bullish bid most of the day. Before the open CSCO was cut to underperform at Bernstein based on valuation. They said the lack of a rebound made the consensus estimates for longer-term growth and profitability unattainable. Brave step there and right in the face of an upgrade on Cisco on Monday. Obviously there are conflicting opinions on our future. Merrill Lynch downgraded several chip stocks including NVDA, SMTC, MXIM, ISIL, APOL and ATYT because the stocks have gotten ahead of the broader market and the analyst does not believe business conditions warrant a continued rise in the chip sector. Merrill Lynch said the SOX near $360 at yesterday's close was 20% over valued and could trade down to 270-280 by summer. They felt the bounce in orders during the first quarter were prompted by a supply chain anomaly rather than new demand. Low inventory levels prompted a replenishment round to replace end of year inventory depletion.

After the close today AMAT weighed in on the health of the semi sector and posted earnings that beat the street by a penny. The guidance did not beat and AMAT was trading down in after hours. Q1 Orders of $971 million were weaker than revenue of $1.1 billion. They guided to the lower end of guidance at 3-4 cents for Q2 when consensus was for 4 cents. They said the current environment was lackluster and new orders were still volatile and unstable. This is only one more chapter in the semi book with upcoming highlights being the Intel mid quarter analyst meeting on Thursday along with the semiconductor book-to-build report. Dell also reports after the close on Thursday. Dell said today they closed their Taipei office after a worker developed SARS.

2000 revisited? If you looked at the performance of the Internet stocks today you would think the bubble was alive and well. EBAY, YHOO and AMZN soared on no specific news with each hitting new 52-week highs. EBAY traded six cents shy of $98 and showed no indications of pulling back. The company is well over its normal split range between $75-$90 and could announce any day. For AMZN and YHOO the gains are even more amazing. EBAY at least has strong earnings to support its sky high PE of 98 which is something AMZN cannot yet claim.

UBS, the tenth largest bank, went on record today as saying the bear market may be ending. They said the conditions are tough and will likely remain so after posting lower profits for the quarter. The comment that drew attention was "While some further degree of volatility cannot be excluded, we do feel that the downward pressure on the industry - could be easing and the worst declines are behind us." This is far from a new bull market comment but it did prompt an early rally in the financial sector but it did not hold. The UBS comment carried weight early only because of their position in the industry.

The comments from Fed Governor Olson continue to make the rounds. Olson is reported to have said the Fed is prepared to take aggressive and unorthodox methods to prevent deflation. Those methods are said to include more rate cuts, strong support of long term bond rates and the potential for buying non-dollar assets. While talk is cheap this table pounding by Olson and Ben (printing press) Bernanke are giving the bulls confidence to buy into an overbought market ahead of its fundamentals. Every time a little weakness appears these comments are repeated on CNBC even though they were initially made some time ago. Traders trying to fan the flames back into the dying embers with a quick call to Bob (trader talk) Pisani?

I mentioned last week that the Q1 earnings, after removing windfall energy profits were far below the current market gains. After another week of announcements those Q1 earnings have fallen to only +4.7% after removing energy from the overall +11.5% number. With 55% of the S&P already warning for the 2Q the estimates for S&P earnings ex-energy are only +4.3% and still dropping. This is far below the optimistic estimates of +13% to +15% just a couple weeks ago. The Dow has rebounded +17% from the March lows on hopes for a recovery. The Nasdaq has rebounded +23% in the same period. Bears are scratching their heads and bulls are unconcerned. This disconnection from reality along with the continuing rise in bonds means either stocks or bonds are going to end badly. One of them is wrong.

The market shook off the terrorist attacks in Saudi Arabia and the simulated biological/radiological attacks in Chicago and Seattle. There were emails from Al Quaeda claiming the start of a new round of attacks and repeated pictures of bombed buildings overseas. Traders paid no attention. It appears the markets are bomb proof. Traders are imitating the three monkeys, deaf, dumb and blind and continuing to buy the dips. This strategy will be tested again on Thursday. Wednesday has a couple of economic reports, April Retail Sales are expected to be flat and Import/Export prices, not normally a market mover. Thursday is the big day with six major reports. If good news is already priced in then the Richmond Fed Survey this morning should have sown seeds of doubt. Apparently it didn't. It appears traders are continuing to welcome bad news as more evidence the Fed will have to act aggressively in the future. This bad news is good news joke will be tested on Thursday when the PPI is expected to show a drop of -0.7% and Jobless Claims could exceed 450,000.

The Dow today failed again at the down trend line from last August at 8725. It did not fail far with a close at 8679 and indicates a continued bullish bid under the market. The Dow has plenty of room to move with real support in the 8500 level. The Nasdaq does not appear to be showing any weakness despite a slight loss at the close. The Nasdaq traded to a new high intraday near 1550 before dropping -10 points before the close. The Dow weakness on losses from WMT, CAT, PG and MMM provided an anchor to the Nasdaq's rally attempt. Yesterday the Dow was the leader and the Nasdaq was the laggard.

Wilshire 5000 Chart - Daily

Wilshire 5000 - PNF Chart

Let me put on my bullish hat for a moment. The Wilshire 5000 charts above has broken both the down trend lines that have been plaguing the Dow. It is also showing a classic triple-top buy signal on a breakout over 9000. Conversely, a failure here would be a clean signal to short. With the underlying bid to the market there are going to be a lot of eyes on this broadest indicator of market breadth. The PNF chart already shows a classic PNF ascending triple top breakout in progress. If 9000 breaks we could be off to the races. We traded 18 points over today but could not hold. The close at 8973 was also not a convincing failure and could be just a step back to get another running start.

My gut instinct is that the markets are due for a rest. However, if you look at the internals and the sentiment the markets are telling us they want to go higher. The technicals are grossly overbought although the -47 point Dow loss may have eased that somewhat. You could call this a consolidation day after two days of +100 point gains. Wednesday should be another toss up day. The economic reports are not market movers and the AMAT/NTAP/CSC earnings tonight have not influenced the futures is either direction. We have the potential for another day of gains before the more serious economic reports on Thursday. Investors are hoping for an economic surprise on Thursday and they may get one. With the bad news is good news and good news is better news outlook I am not sure what it would take to slow this rally down. My LONGS are thriving but I keep thinking this cannot last much longer. I have been thinking that for the last 500 points. I will snug up the stops again tomorrow and keep watching for the sharp objects in the road ahead. If this rally blows a tire at this speed it could be spectacular.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
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