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Market Wrap


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      05-15-2003           High     Low     Volume   Adv/Dcl
DJIA     8713.14 + 65.30  8727.78  8643.11 1.81 bln 1993/1237
NASDAQ   1551.38 + 16.50  1552.98  1536.03 1.98 bln 1889/1345
S&P 100   477.68 +  3.70   478.96   473.98   Totals 3982/2582
S&P 500   946.67 +  7.39   948.23   938.79 
W5000    9016.32 + 65.00  9026.90  8945.94
RUS 2000  422.05 +  2.61   422.24   419.25 
DJ TRANS 2436.79 - 20.80  2459.16  2419.65   
VIX        21.67 -  1.09    22.82    21.47   
VXN        32.18 -  0.96    35.04    31.56 
Total Volume 4,021B
Total UpVol  2,670B
Total DnVol  1,279M
52wk Highs  574
52wk Lows    25
TRIN       0.75
PUT/CALL   0.64

By Jim Brown
Click here to email Jim

Welcome to the club. Analysts, commentators and bears are clueless but bulls could care less. They are buying every dip regardless of the economic news. A silver lining is found in every cloud and the indexes are pressing ever nearer to new highs. Instead of following the "sell in May and go away" axiom the new standard is "play until May." This means bulls are ignoring all economic reports for the March/April period as irrelevant and buying everything in sight in hopes May reports will show a strong post war spike.

Economically it was a potpourri of results with improvement in some areas and 48 year lows in others. By far the biggest report of the day was the PPI which dropped -1.9% and the largest drop ever since the index was instituted in 1945. While severely negative on the surface the major component in dropping prices was the fall in energy prices since the war. The core rate, ignoring things we do not use like food and energy, still dropped -0.9% and more than analysts expected. Analysts were sharply divided about the PPI proving the deflation scenario. They claim the lower dollar will pressure import prices but those prices are not directly reflected in the PPI. Others say the drop in the core rate is following the decline in spending and manufacturing levels since January and is inline with the current economic trend. Either way the bulls cheered the potential for aggressive Fed stimulus ahead to stop the slide.

Industrial Production dropped -0.5% for April for the second consecutive month. Despite the end of the war and positive consumer sentiment the demand has not increased. Weakness in nearly all the components showed the continued slide to be broad based. Production of consumer products fell for the third month. Capacity Utilization fell to 74.4 and the lowest level since 1983. This does not bode well for hiring and could be seen as a potential for further layoffs.

The Philadelphia Fed Survey fell more than expected at -4.8% but less than the average of the last two months at -8.4%. This was seen as the potential for a recovery beginning. It could just be a statistical anomaly related to the upturn in consumer sentiment over the last month and we will not know if it will stick until the next report. There were two new questions added to the survey this month. Suppliers were asked if they were seeing any improvement in business conditions since the end of the war. 83% said no. They were also asked if their customers were seeing any improvement in demand since the war. 90% said no. This does not paint a positive picture for the post war bounce.

There was a post war bounce in New York as shown by the Empire State Index which rose to 10.6 from last months -20.2 disaster. Every component improved except prices received. Deflation again? Some businesses said they were hiring again, which could be related to the revitalization around ground zero as well as the post war impact. Dead cat bounce from the -20 last month? We will have to wait until next month to see.

The homebuilder sector saw the NAHB Housing index rise again from 52 to 56 indicating sales are growing again. With the mortgage rates dropping again there should be another wave or prosperity for this sector. The optimism component rose to 68 and a level not seen since year end. Here comes yet another short squeeze for those short the builders.

Business Inventories rose +0.4% and slightly higher than expected. This was a March number and a surprise considering it was pre war. This report would seem to be contradicted by several more current economic reports from different viewpoints.

Jobless Claims fell slightly to 413,000 but posted the 13th month over 400K. The continuing claims rose to 3.8 million and with the Challenger Layoff report indicating 138,000 mass layoffs due this month the odds are good it will rise again. Last weeks number was revised up by +5,000. The insured jobless rate rose to 3.0% and the highest level since 9/11. Currently 41% of jobless run out of benefits before finding work. Estimates are for an additional 1.1 million jobless running out of benefits over the next six months due to the declining jobs market. Many workers are simply giving up on the search with the labor force participation rate declining from 67.4% to 66.4%.

Switching to the tech sector for guidance we had a very positive earnings report from Dell but CEO Michael Dell refrained from saying much about the health of the economy. He placed the focus back on Dell continuing to take market share from all companies in all geographies in the server market. He continued to stress that capturing market share was driving unit growth and cutting costs to an all time low were helping earnings. Nothing there says the tech sector is growing, only that Dell is performing well, very well.

A better snapshot came from Intel CEO Andy Bryant, which was caught on tape saying "I do not see an economic recovery this year and I am just hoping for a better year in 2004." Oops! Intel did affirm their estimates for the quarter but Bryant did express concern for the potential SARS impact. Bryant said he was less optimistic near term but still had hopes for a long term recovery.

Following his comments the Semi Book-to-Bill report for April was released, which showed a drop to .86 in April from .91 in March. This was the lowest number since November when the recent rise passed 80 to the upside. This is a three-month moving average, which means the actual numbers are much lower. The three-month average of global bookings fell to $737 million in April. March bookings were revised down from $822 million to $777 million.

Book-to-Bill Table

For the average to fall to $737 the actual bookings are probably below $675 million for April. They do not release the actual numbers to prevent judgments based on volatility in a specific month. If you calculate backwards it would appear something in the $673 million range should be in the ballpark. It will be hard for the bulls to spin this downward revision for March by -5.4% and then another -5% drop in April numbers. (-13.3% drop in April if you use the actual $673 million) This is not painting a positive picture for the semi sector and shows the reason for caution in Andy Bryant's comments.

There are so many things to touch on tonight and Friday brings another set of critical reports. I am not going to go into great detail on everything today because I find myself repeating many of the facts in the longer version of the weekend wrap. Other problems impacting sentiment today were weak showings by FD, TGT and KSS in the retail sector. The war is over but retail is still fighting for survival. TGT missed earnings by a penny and warned that weak demand was depressing the outlook.

Part of the boost today was caused by IBM, which hosted an analyst conference yesterday. Again bulls practiced selective hearing and only heard the "tech demand stabilizing" comment and disregarded the "tech spending flat for 2003" and "infrastructure and services businesses facing a tough time". Also helping traders was the news UAL reinstated 160 flights that were cancelled due to lack of demand before the war. They said they were seeing demand pickup slightly. It did not help the transport sector because truckers were on the outs due to falling shipments. ROAD and YELL officers said at the Bear Stearns conference that the economy remains "very flat". The YELL chairman said they had been tracking the economy for some time and there was "no pickup or decline". The transports lost -21 points on the less than exciting comments.

The parade of analysts saying the rally has farther to run is slowing and the number of analysts suggesting the opposite is growing. Dick Arms added his name to the list of technicians saying the rally was about to slow with a prediction of a pull back to Dow 8200 and Nasdaq 1400 soon. He said the TRIN was showing very overbought conditions and an oscillation extreme. I have talked with Mr. Arms many times and he has spoken at several of our seminars. His work spans several decades and is normally technically correct. It is based on advancing and declining volume patterns which are a good sign of market internals but fail to take into account external news factors. He is strictly technical and as we know you can be technically right but at the mercy of news and timing.

I told readers on the Futures Monitor today that I had no bias. I had recently been economically bearish but moving to bullish as the number of reasons for aggressive Fed action increased and technical resistance on the indexes was broken. The total disconnect to the economic factors this morning took away my bias in both directions. It is ok to be bullish based on a viewpoint that conditions "may" be improving and the Fed "may" act aggressively. However, to be bullish in the face of the worst PPI ever, second worst core PPI ever and a new 45 year high for bonds was simply unjustified. If I did not have so may readers emailing their bearish ideas I would swear every last trader had converted to buy the dip. That alone should convince everyone this rally is overdone.

The bullish case today was built on the NY Empire report and a bad Philly Fed Survey. It was just not as bad as last month. With the bad PPI the Fed is even more likely to cut rates in June and that will help stimulate the refinance wave and home buying as well as business in general. Will that be enough to lift the economy over the summer slump? The bulls are betting on it.

When I started this wrap I was neutral. Confused but neutral. I literally spend about 16 hours a day studying the markets. I read every scrap of data and analysis I can find. I watch the indexes, trade and read hundreds of emails including other newsletters every day. I am still confused. In my opinion I think the rally has been overdone for the last 500 points. But, and this is important, every major rally in the past has had the same critics saying the same thing all the way up. Bull markets are built over a wall of worry and over the backs of screaming bears. The constant short, cover, short, cover pattern by the disbelieving bears helps fuel the gains to highs otherwise unachievable on simple economic justifications.

I have been guilty of overzealous bullishness and bearishness in the past and I am sure my bearish economic have been coming through loud and clear lately. I think the factors this time around have changed ever so subtly week by week since March. Each new spin cycle is good for one more week. First it was the gains in front of the war, the gains when the war started, the gains when it was going well, gains when it was over, gains on technical levels (200DMA) being broken, gains on Fed comments, gains on 65% of companies beating absurdly lowered estimates, etc. Each week it is something new and none of them were realistic. The market went up on a change in sentiment and reality had nothing to do with it. After three years of pain traders wanted to believe. They wanted to hope. That hope has propelled the indexes to new highs for the year. The major indexes are up over 20% on average from their lows. Now what?

Like Leigh Stevens said in his Sunday Index Trader Wrap, "If not stocks then what?" I do not see traders plowing boatloads of new money into bonds with yields at 45 year lows. They are still going up but just like stocks in 2000, trees do not touch the sky. Nobody wants to buy at the top of anything, stocks or bonds. Yes, stocks are way overvalued considering an estimated +4% earnings growth for Q2. But are they really considering the alternative? Money markets are going to start charging soon to hold your money. Bonds will eventually collapse on the first really positive piece of economic news. If not stocks then what?

Yellow Freight, not a highflying tech company said they could double their earnings with only a 10% increase in business. How much more can Cisco, Dell, IBM, MSFT or any other cut to the bone company increase their profits on any real recovery? The point is not whether we will have a recovery but when. There will not be an alert triggered across your TV screen like a severe storm warning. "Attention, the recovery has started, take shelter in stocks now." Investors are simply looking at the alternatives and saying there is no future in bonds or money markets and we have to be closer to a recovery now than 6, 12, 18 or 24 months ago. They are holding their nose and buying stocks in hopes of riding out the summer and seeing a better second half. Actually I think most are hoping the economics deteriorate over the summer to encourage even more stimulus to even further juice the economy when the rocket finally ignites.

What I am really expecting is the mother of all asset allocation programs soon. It may not be tomorrow but it could be soon. Once the Fed or a Fed governor starts making noises that there will be no rate cut it will look like a game of hot potato. Institutions will be dropping bonds faster than Andrew Firestone dropping bachelorettes when the tide turns. They will be racing to reallocate their portfolios and invest their massive profits from the bond boom. The next Fed meeting is not until June 24th and there is a 100% chance the Fed will cut by at least 25 points. There is a growing chance they could cut by 50 points. If you were a fund manager sitting on several billion in bonds you might wait for that meeting on the hopes of a 50 point cut giving your portfolio one more spike before selling. There is a better chance that the hopes for a cut are already priced into the market and we could see some early sellers soon. With bonds yields at 45 year lows how much how much farther can they go? Trying to milk that last few cents by waiting could be disastrous if a couple economic reports showed signs of life. Like the NY Empire Index and the Philly Fed Survey today? If you were sitting on mountains of bonds like Scrooge McDuck in his money bin would those reports make you nervous? Bond yields closed right a triple bottom on Thursday that corresponded with the October-10th, March-12th equity market bottoms. Where are the markets today? At the highs for the year. Confused?

Dow/$TNX.x Chart - daily

I am going to leave you with this thought. Based on the chart above what do you see happening? There are only two rational alternatives to this totally irrational situation we are in now. One possibility is the market is going to crash and bond yields are heading for a 100-year low. The other possibility is we are about to explode over that down trend resistance at Dow 8725 and bond holders are going to take their profits and run to the potential 6-12 month returns in stocks. Which makes more sense? Bonds going to 100-year highs or stocks breaking out on hopes the economy recovers in the next 12 months? Either way it should happen any day. The ideal situation would be one more dip in the market with bonds making one last climax high. Then traders would feel much better about not having to buy stocks at the highs before summer. But then, ideal scenarios seldom come to pass.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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