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Ding Dong the Bear is Dead

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      06-05-2003           High     Low     Volume   Adv/Dcl
DJIA     9041.30 +  2.30  9045.15  8969.24 2.12 bln 2026/1220
NASDAQ   1646.01 + 11.40  1646.01  1613.99 2.43 bln 2041/1296
S&P 100   496.14 +  1.11   496.14   491.07   Totals 4067/2516
S&P 500   990.14 +  3.90   990.14   978.13 
W5000    9480.80 + 49.30  9480.81  9356.67
RUS 2000  456.69 +  5.46   456.69   447.87 
DJ TRANS 2511.35 - 45.10  2556.96  2480.43   
VIX        23.12 +  0.64    23.65    22.82   
VXN        34.53 +  1.52    34.68    33.76 
Total Volume 4,873B
Total UpVol  3,170B
Total DnVol  1,662M
52wk Highs 1125
52wk Lows    19
TRIN       0.78
PUT/CALL   0.64

Ding Dong the Bear is Dead
By Jim Brown
Click here to email Jim

If you are a trader you have probably been hearing this a lot lately. The end of the bear market is at hand, the bear is dead, long live the bull! While I would not rush to proclaim this from the house tops the internals are clearly proclaiming a change in the trend for the last three years. With even the lagging Dow up over +25% from the October lows it is hard to disagree.

Dow Chart - Daily

Nasdaq Chart - Daily

The euphoria in the stock market even appears to be wearing off on the retail sector with May Retail Sales up +2.0% and higher than expectations. This makes two consecutive months of strong gains with April gaining +3.1%. These numbers are significantly above the trend of only +0.5% since the +3.2% gain in October. After a five month dry spell there appears to be a retail bounce. However, according to individual reports the buying was very spotty. Best Buy reported sales up +2.2% while Circuit City reported sales dropped -10%. Wal-Mart reported gains of +2.1% while ABS saw sales dip -1.2%. It is obviously a case of shopper selectivity based on prices and advertising. It was still enough to power the entire sector to the gains despite a -7.6% drop in footwear and -2.0% drop in furniture sales. Wal-Mart posted a cause for concern that sales were following the paycheck cycle and suggested consumers were suffering from a cash crunch as unemployment continued to grow.

That growing unemployment was seen in soaring Jobless Claims to 442,000 for last week. Expectations were for a drop to 422,000. The four-week moving average jumped to 430,500 and this is pointing out the potential for a severely negative Nonfarm Payroll report on Friday. The jump in claims this week reversed a minor three week decline. Currently 43% of unemployment recipients are running out of benefits before finding a job. This means an average of 175,000 workers are dropping off the roles each week with no job and no benefits.

The worst report of the day was the Factory Orders for April. The report showed orders fell -2.9% and a full point more than consensus estimates of -1.9%. This was the worst decline since November 2001 and the aftermath of the 9/11 attack. Nondurable goods fell -3.5%. New orders for non-defense capital goods fell -2.73%, communications equipment -2.68% and industrial machinery a whopping -28.51%. Computer equipment was the highlight and rose +19.17%. Shipments fell -2.2% and back orders were flat. There was nothing to be excited about in this report other than the computer component and this was April data. The spin doctors continued to claim it was impacted by the war and not relative. The bulls bought the excuse and the dips.

Tomorrow we are going to get the Nonfarm Payrolls for May. This report is expected to show a fourth consecutive month of declines in real jobs. The consensus ranges from a loss of between -27,000 to -39,000 jobs depending on which consensus you believe. The whisper number is significantly higher in the -75,000 range. The Fed has a history of cutting rates after only three consecutive months of declines but they didn't cut last month due to the expected post war rebound. There is a strong belief that should the job loss be over 100,000 on Friday the Fed will cut rates as soon as tomorrow. That number also ranges from 100K to 200K depending on who is doing the analysis. If they do not cut tomorrow or Monday then it is almost a 100% chance they will cut by a quarter at the June 25th meeting. The futures are now showing a 29% the Fed will cut by another 25 points in August and a 64% chance of the same second cut by the September meeting.

This morning the ECB cut rates by a full 50 basis points and that is setting the stage for a full 50 point cut by the Fed to ward off the deflation monster and maintain parity with the ECB. If they are really contemplating a rate cut in June and another in August or September then they would be better served to do it all at once in June. Slow injections may build up an immunity to the vaccinations when a big jolt of stimulus could spark a faster rebound. The market outlook is clear. There is an assumption that the ECB cut has put the onus on the Fed to match it and traders bought that rumor today despite the horrible Jobless Claims and Factory Orders.

After the bell Intel gave it's mid quarter update and NOBODY was scared of the result. Prices rose right into the bell with the new 52-week highs setting another new high at 1125 compared to new lows of only 19. Intel did not disappoint. They narrowed guidance to $6.6-$6.8 billion from $6.4-$7.0 billion. Bottom line $6.7 average on both estimates so the result was an inline guidance with processor trends at the high end of seasonal normal. This encouraged the bulls yet again and after a brief dip in after hours the Nasdaq futures took off and jumped +10.00 to 1244 as I write this. Considering the mixed messages from other chip companies over the last couple days this affirmation of Intel's outlook could be the tech blessing the markets were looking for.

Considering news from the other 800 pound gorilla the Intel news was a breath of fresh air. CEO Steve Ballmer said in a memo to MSFT employees that Linux represented a serious challenge to Microsoft. Many analysts thought the mention by name of Linux in addition to open source software in general meant the threat was real. Linux has a long way to go to be any material threat to Microsoft but in today's economy every dollar counts. It is not that Linux is replacing the NT/2000 operating system that hurts but it also takes out the SQL, Exchange, Office, etc components that run on the Microsoft system. These are high dollar revenue sources for Microsoft. For every server running a Microsoft operating system there can be hundreds of users accessing it and the licensed software it runs. Changing one computer with Microsoft 2000 server running Microsoft Exchange as an email host and SQL as a database program could cost MSFT as much as $25,000 a year for a moderate size company. Every user that connects to that computer for email or data must have a license for that program. It is an intricate web of interleaving license requirements that produces huge revenue from each MSFT equipped server. BAC cut MSFT from its fresh money list on the news. MSFT dropped back to $24 support and then rallied after the close on the Intel affirmation.

The bullish turn of events this week has some confusing internals. While the new highs/lows is off the scale there are some signs of weakness. Insider selling is at a two-year high with $3.3 billion in sales for May. This was a +150% increase from already high April levels and sales were running nearly 4:1 to insider buys. If the economy and earnings, the prime mover of stock prices, are about to explode then why are so many insiders dumping stock? The VIX, an indicator of premium prices paid for puts and calls on the OEX has been rising with the market. This is completely contrary to historical trends. The VIX falls when markets rise and rises when sellers appear. The VIX hit a high of 23.65 today, up from 20.97 on June-2nd. This would indicate a growing concern for the strength of the rally. Don't get me wrong, this is good because it shows the fear factor is alive and well and the market is actually growing more balanced than in the recent past. The point I am making is that there is a growing contingent of doubters.

Much of that doubt is stemming from the lack of a recovery. DCX reported today that incentives had risen to $4,500 per car and average selling prices were down -3% due to slowing sales and increased competition. This is a major hit to the profitability of automakers which already signaled cuts in production earlier this week. Retail sales are spotty and are cycling with paychecks and unemployment could rise above 6% for May. No recovery here.

The offset to those concerns is that cash is trash and getting cheaper daily. If the Fed does cut rates tomorrow on a worse than expected Jobs Report then money markets could be between a rock and a hard place. Bonds, which could not go any higher, rocketed to a new 45 year high today with yields on the ten-year dipping below 3.25% intraday. With a half point rate cut on the horizon they could actually go below 3%. This is keeping bondholders from cashing out and switching into stocks but the equity markets are soaring anyway. Even the most bullish of pundits are now scratching their heads at the extreme overbought conditions. Add to the rally the very strong internals on strong volume and there appears to be no end in sight. The war is over according to the press and the SARS epidemic has peaked and is under control. If Intel is not going to warn despite the dent in demand due to SARS then there must be demand seeping in from other areas. At least that is the consensus tonight.

What can crash this train? Assume the Jobs Report comes in lower than expected. The Feds will likely cut rates and that would take the upward pressure off bonds. If they cut tomorrow then they would not likely cut again at the June 25th meeting. The next meeting is not until August so the July doldrums could easily settle in for the bond market. That would be good for stocks as money would flow out of bonds at the highs and into equities. Assume the Jobs Report came in better than expected at flat or even slightly positive. This is highly doubtful but a possibility. The Fed would not cut tomorrow but the pressure would still be on to cut on the 25th to match the ECB drop. Bonds might dip on on the news Friday but could resume their upward climb until the decision on the 25th. Stocks should climb based on the better than expected number. The recovery is in progress or so they would claim if the jobs surprise to the upside.

The most damaging event to the market could be a simple inline Jobs number in the -35,000-50,000 range. Not enough to scare the Fed into action and not strong enough to convince traders still waiting for recovery confirmation to come off the sidelines. At some point the current owners should be thinking about taking profits. The only question now is when. Before the Fed meeting or a sell the news event after the meeting. There is little doubt in anyone's mind that a serious bout of selling is in our future. We are at the extreme high end of the trading range for nearly the last year on the Dow. The closing high for last August was 9053. The high today was 9045 and the close at 9037. Assuming the overnight futures do not blast us over that level before morning it could be tough to break. The Jobs Report is due out at 8:30 and the cash open will be totally dependent on that.

The Nasdaq is already in the green when it comes to resistance. The longer term down trend was broken yesterday at 1612 and there is but little resistance at 1650 before reaching the 61% retrace at 1720 from the Jan-2002 high of 2099 to the October low of 1108. With today's close at 1646 it has already gained an incredible +48.5% from the October lows and +31% from the March lows. That would be classified as a good year and maybe a good couple years of gains in a regular market.

There are two things perfectly clear and in perfect divergence. The markets are extremely overbought using any yardstick you desire. The NDX bullish percent is at 84%, the SPX 74% and the INDU 70%. This leaves very few stocks to add to the numbers when you consider all the indexes have perpetual dogs that will never be a contributor to the bullish numbers at any given time. 70% is considered overbought by Dorsey. The second thing is that nobody seems to care about the first. The land rush is on and until the cash stops flowing we are just going to get more and more overbought. This is dangerous, very dangerous. We have gone from a bubble market to what some are calling a bubble echo. The current justifications for the rally are purely hope although that could turn to reality with the July earnings. It could also implode with a nasty string of earnings warnings which may have already started, FDX, ROAD, ABS, TQNT to name a few. To be fair there have been quite a few affirmations and even a few raised guidance. While there is a strong need for a pause there is no guarantee we will see one. Extremely overbought markets tend to get more overbought. It is not logical but it happens.

As a trader I would be extremely cautious about entering longs at this level. Simply the number of new 52-week highs, which proves how bullish traders are, should also warn you that there is a strong potential for a dip. Tomorrow, next week, June-26th? nobody knows but there needs to be a multiday pause in order to build a new base for higher highs. With all the external forces coming together at a peak in the markets that pause could be more than a couple days.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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