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Market Wrap

Saddam Put

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      07-29-2003           High     Low     Volume Advance/Decline
DJIA     9204.46 - 62.10  9289.69  9168.26 1.71 bln   1218/2001
NASDAQ   1731.37 -  4.00  1744.60  1713.21 1.69 bln   1564/1630
S&P 100   497.85 -  3.64   502.92   495.41   Totals   2782/3631
S&P 500   989.28 -  7.24   998.64   984.15 
W5000    9542.12 - 54.30  9618.71  9489.23
RUS 2000  473.60 -  0.23   476.04   469.70 
DJ TRANS 2618.37 -  4.40  2635.90  2609.36   
VIX        20.23 +  0.30    21.07    19.96   
VXN        30.16 -  0.24    31.82    29.81 
Total Volume 3,683M
Total UpVol  1,312M
Total DnVol  2,309M
52wk Highs  456
52wk Lows    67
TRIN       1.31
NAZTRIN    1.24
PUT/CALL   1.01

Saddam Put
By Jim Brown
Click here to email Jim

The Saddam put overruled the Consumer Confidence short this morning and continued to rule all day. The disaster in the economic numbers was ignored once when rumors of a Saddam capture filtered through the markets. I am going to check EBAY tonight and see if I can find a used "rumor mill" of my own.

Dow Chart

Nasdaq Chart

Despite the improved guidance from Wal-Mart this week the Chain Store Sales snapshot fell -0.3% following three weeks of gains. Food, drugs and seasonal goods helped hold the line but apparel weakened. Warmer weather, as in blistering in the southwest, has helped power the seasonal product sales. We are rapidly entering the back to school phase and consumers should be receiving tax credit checks and more take home pay by now. This should help to maintain the consumer sales for the next month. The downside is the drop in refi applications and the drying up of the home equity pipeline. The higher interest rates will not immediately hit Wal-Mart shoppers but major appliances, autos and big ticket goods could be softer soon.

The biggest shocker of the day was the dramatic drop in the Consumer Confidence to 76.6 from 83.5. The index hit a plateau at 83.5 for May/June and it appears the bloom is off the rose. The rising interest rates, volatility in the market and higher unemployment continues to drag on optimism. This was the lowest level since March and countered expectations for a small gain. The biggest drop was in the expectations component, which fell -10 points to 86.4 and erased the majority of the gains from May/June. The present situations component dropped for the third month in a row. The current conditions component is at the lowest level since 1994. If the Jobless Claims on Thursday and the Nonfarm Payrolls on Friday show increases in unemployment the confidence numbers could get ugly fast. Everyone is betting on the post war rebound and that rebound is turning into more tortoise than hare.

On Wednesday we will get the Fed Beige Book, Chicago Fed National Activity Index, Mortgage Applications and the Consumer Comfort Index. The CFNAI has been negative for nine of the last ten months and it is expected to be negative again tomorrow. The May Beige Book had shown some limited postwar improvement with the main support in the housing market. Despite the pickup the overall tone was somber and the outlook is for more of the same this month. The Comfort Index was trending down for the past two weeks and it will be interesting to see if the trend accelerates or breaks in light of the Consumer Confidence. The mortgage application index has also been trending down since the May-30th number of 1,856 with a 1,284 last week. It is doubtful it has improved much in a week with 30-year mortgages back at 6.0%.

Needless to say there may not be much economic excitement on Wednesday but there is the potential for upside surprise. Since the outlook is not exciting any negative news could be covered by the Saddam put and we continue to trade sideways. Our enemy is not Saddam any more but the bond market. The ten-year yield closed at 4.4% and a 52-week high. This bond disaster is going to continue to spiral out of control until something happens to break the trend. The terrible Confidence number today only slowed the selling for a few minutes before it promptly began again in earnest. The good news is that some of the money is finding its way into the stock market. The bad news is that the rapidly rising interest rates could produce a death blow to the barely conscious recovery.

The earnings parade continues and as of last night 326 S&P companies have reported earnings. According to First Call 66% beat estimates, 22% were inline and only 12% missed estimates. Earnings are showing around +15% growth and slightly better than the +14% estimates. Those would be very good numbers if they were actually from sales. The majority of earnings gains have been from cost cutting and not repeatable. Another significant source of earnings surprises have been currency gains due to the weak dollar. This is also not repeatable. With warnings for the 3Q running 2:1 over positive guidance it is not a positive picture.

Some of those warnings are coming from companies that touch all of the American economy. Jones Apparel warned today that consumer spending was very uncertain and earnings would be down for the quarter and the year. ADP, a nationwide payroll processor, warned that they were seeing very little improvement in the economy. The largest furniture maker in the country, FBN, also warned last week that they were seeing no improvement in the economy. FedEx was cut today based on falling small package deliveries. NVDA missed estimates and said the next quarter will be below estimates. Positive performance came from MCD, DD, ALA and AHC with TYC posting a profit and restating earnings again going back to 1998.

Other negative news included a warning from the State Dept that Al-Queda is planning more suicide hijackings of airliners before the end of the summer. Quoting specific and credible information from detainees and corroborated by other intelligence they said the attacks could take the form of flights coming into the U.S. from other countries. They suspect five person teams with weapons hidden in things like cameras and laptops. With the anniversary of 9/11 quickly approaching I would not doubt the threat exists. However, the market ignored the warning due to the Saddam put.

Basically most traders believe that Saddam will be caught/killed in the next several days. We are getting constant chatter out of Iraq that the noose is tightening and he is running out of places to hide. Every day more contacts are arrested, today was his personal bodyguard and hundreds of tips are reported received daily since Udai and Qusai were killed. Traders expect the event to produce an instant market rally that could add +300 points and push us over the current 9300 ceiling. With this event expected any day there is no interest on the part of the bears to short aggressively. Bulls are buying the dips on the hope of quick profits on the bounce. Thus, the market has an insurance put in the form of an expected Saddam capture. That expectation was responsible for a vertical +100 point rebound off the Dow bottom today when a brief rumor hit the floor that Saddam had been killed. There was a brief bout of selling when the news turned out to be a new Saddam tape calling his sons martyrs instead but the selling was brief. It showed the put was alive and well and had not expired.

The trend was broken today. For the first time in 10 weeks the Nasdaq closed negative on a Tuesday. It was not a major loss, only -4 points. The Dow has closed negative for two consecutive days. That is about the only negative points I can make. The market action is very bullish and the Dow held 9200 with fierce determination at the close. Same with Nasdaq 1725. They refuse to give up the gains from the last couple weeks and the Dow has now traded within arms length of 8300 each of the last four days. It is building a very impressive bullish wedge at 9300 and were it not for the Confidence today we could have easily broken out. I say easily but there is strong resistance at that level which must first be overcome. The more important levels are S&P 1000 and 981. This is the broad market support and resistance which must be overcome before the market can make any major moves. 981 is the 50 DMA on the S&P.

S&P Chart

With the Saddam put in place any negative economic news on Wednesday is likely to have limited impact. That may not be true on Thr/Fri when the economic reports are critical and plentiful. We will have the GDP, ECI, PMI, Help Wanted Index and Jobless Claims on Thursday. Friday has Nonfarm Payrolls, Michigan Sentiment, ISM, Personal Income/Spending and Construction Spending. It is going to take a lot more specific and credible rumors to protect the bulls if those reports turn negative like Consumer Confidence did today. The markets are poised to move big and the only question is which way. The trading range is slowly narrowing and the breakout in either direction could be sharp and quick. Keep those stops in place regardless of the direction you are expecting.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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