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      07-31-2003           High     Low     Volume Advance/Decline
DJIA     9233.80 + 33.80  9361.40  9199.28 1.92 bln   1531/1708
NASDAQ   1735.02 + 14.10  1757.37  1728.34 1.79 bln   1869/1362
S&P 100   499.27 +  1.98   506.65   497.29   Totals   3400/3070
S&P 500   990.31 +  2.82  1004.59   987.49 
W5000    9555.05 + 28.50  9673.12  9526.57
RUS 2000  476.02 +  3.22   478.80   472.80 
DJ TRANS 2623.92 + 17.70  2653.23  2606.31   
VIX        21.24 +  0.52    21.44    20.40   
VXN        31.22 +  0.36    31.67    30.23 
Total Volume 3,999M
Total UpVol  2,628M
Total DnVol  1,321M
52wk Highs  553
52wk Lows    73
TRIN       0.62
PUT/CALL   0.68

By Jim Brown
Click here to email Jim

The bulls were partying hard with a +160 point Dow gain and a new 52-week high when somebody tripped. Tripped a breaker, tripped over bags of money or tripped on a banana peel the results were the same. The lights went out and the party was quickly over. As if somebody yelled fire in a crowded theater the rush for the exits was fast and furious. When the smoke cleared the +160 point gain had turned into only +33 and the tone of the market was significantly different.

Dow Chart

Nasdaq Chart

S&P Chart

How we went from 100% bullish at the open to the crash at the close has probably got more than a few bulls scratching their heads tonight. The morning began with another drop in Jobless Claims to 388,000 and the second consecutive week under 400K. A trend, a trend, (visions of Tatu pointing to the plane on Fantasy Island) the bulls were shouting. Granted the first number started with a 3 instead of a 4 but not by much. Still the futures were spiking. The fact that the numbers were still adjusted for the cyclical auto layoffs was lost on everyone. Continuing claims increased to 3.65 million indicating that jobs are still hard to find regardless of the adjustments.

The slam-dunk came in the form of the GDP at +2.4% for the 2Q. This was a full +1.0% over the estimates and the crowd went wild. Personal consumption rose +3.3% and non residential investment rose +6.9%. Yee-Haw! Bulls began to party and shorts began running for cover. The buying was sharp and quick and futures were quickly +8 and climbing. Bulls pointed to this report as signs of a real recovery in progress. Let's not forget that this was for the 2Q which began with a war. Remember the expected post war bounce in the economy? For about six weeks we saw a light spurt in buying in anticipation of a quick recovery. That recovery never came and we ended the quarter with an unbroken string of Jobless Claims over 400K for the entire quarter. Corporate earnings have already told us there was a bounce in April that slowly died into June. This is the evidence of that bounce. Much of the jump was due to a +7.5% increase in government spending. One of the best components was a decrease in inventories by $17.9 billion which should indicate a bounce in manufacturing soon. This assumes of course the goods were made in America and not imported.

The Employment Cost Index came in slightly less than expected at +0.9% and provided yet another warm fuzzy feeling for traders. Costs are not rising and there is no inflation in wages. With nearly 9 million workers currently unemployed it would be tough to command a premium wage and signing bonuses are a thing of the past. Wage growth actually slowed in the 2Q which is detrimental to future consumer spending.

The Help Wanted Index rose to 38 in June from 35 in May and was possibly the most bullish sign of an economic upturn. Ads for workers rose in all regions except East South Central. This was the first real improvement in months. 73% of the 51 newspapers surveyed showed ad traffic rising. While this is a positive turn the headline number of 38 is still an indication of a declining job market.

The most bullish report of the day was the PMI report which came in at 55.9 compared to estimates of 53 and actual of 52.5 in June. While the GDP is seen as a lagging indicator the PMI is seen as a current trend and an acceleration of three consecutive positive months. May was the first positive month at 52.2 and June barely squeaked higher at 52.5. The huge jump in economic terms to nearly 56 was very positive. The market immediately rocketed to higher levels. New orders jumped to 61.7 from 54.8, backlog rose to 49.4 from 45.8 and employment rose to 46.0 from 43.8. Inventories showed a significant drop to 39.4 from 48.8 indicating a replenishment cycle in our future. The news orders at 61.7 was the highest reading since November 2002. This is the report for the Chicago region and traders hope the National ISM report on Friday follows suit.

That hope suffered a setback with the NY-NAPM, which came in at 224.9 and the sixth consecutive monthly decline. The manufacturing conditions component dropped to 64.8 from 92.8 in June. This whopping decrease took the excitement out of the previous reports and cast a shadow over the ISM for Friday. Traders were left wondering if the ISM would follow the Chicago PMI or the NY-NAPM. Since the ISM is actually the old NAPM on a national basis it was a credible concern.

Part of the strong selling at the close had to be due to the strong economic calendar for Friday. The previously mentioned ISM plus Nonfarm Payrolls, Construction Spending, Personal Income and Spending, Consumer Sentiment, Semiconductor Billings and July Auto sales. It will be a busy day. The ISM has been in negative territory since February and it is expected to jump +2 full points from 49.8 to 51.9. Plenty of opportunity for disappointment here. The Nonfarm Payrolls are expected to show a jump of +13,000 jobs with a whisper number of +25,000 jobs. Again, plenty of room for disappointment. Consumer Sentiment is expected to rise to 90.8. Worries are that it could follow the confidence earlier this week with a drop instead.

The market drop today on a full deck of strongly bullish economic reports could be due to many reasons. Worry over the reports on Friday may have helped but were not likely the total reason. The best guess is interest rates. The 10-year yield reached 4.56% today after being only 3.07% just six weeks ago. This is a disaster in the bond market the likes of which have not been seen since 1994. Back then the bounce was not as bad but it had dire repercussions. Several major investment houses folded and Orange County California went bankrupt due to over leverage in the bond market. The rumor making the rounds today is that there are one or more big investment companies, maybe even FNM or FRE, in serious trouble. Major insurers announced this week they were canceling bankruptcy insurance for Merrill, Schwab and dozens of other institutions. The insurance policies, which protect investors over the $500K federal protection limit, have become too risky according to Travelers, AIG and Radian Group. Sign of the future?

The rising rates, regardless of economic news, stock market movement or Fed commentary has everybody baffled. Bonds just keep going down and seldom pause for more than a few minutes during the day. Confounding the constant selling is a lack of money flowing into the stock market. Normally when bonds sell off a large portion of the money moves into stocks. It is not happening. Even given the large economic bounce at the open today the volume was still only average and the market breadth was terrible. On the NYSE decliners beat advancers by nearly +200 issues. New 52-week lows rose to levels not seen in months.

Not only are the interest rates a problem for the market the 30-year fixed mortgage hit 6.14% today. Refinance applications have dropped -50% in the last four weeks. This is a major blow to the consumer supported economy. Like financial junkies we have been living off our equity for years and that equity just dried up faster than a busted drug dealer. The shock to the system will be strong and the tax cut/credit may not be able to take up the slack. This shock to the economy has traders talking of asset allocation programs again ONLY from stocks to bonds. Boy, talk about full circle. There were several rumors on the floor today about major institutions, fearing for the future and dumping stocks. It was not hard to find believers if you look at the major hits to the averages on a blowout bullish day.

The Dow dropped -50 points on a sell program just after the open with bullish news floating all boats. It fell -60 points on another sell program right after the PMI was announced with a huge bullish jump. Clearly the programs were keyed in and waiting for the bullish news to break so they could sell into the heavy volume. The Dow dropped -70 points at 2:25 on a very strong sell program from the highs of the day. The last one came at 3:20 and knocked a full -100 points off the Dow in a very short period of time. Think about this a minute. On the most economically bullish day I can remember this year four monster sell programs knocked -280 points off the Dow for no apparent reason. There were plenty of buy programs as well but those were to be expected. Why are the big guys selling? What do they know that we don't? Did they find out Saddam has a dozen clones?

Another factor, which should be considered, is the August record. In the last 15 years August has been the worst performing month for the Dow and S&P, period. With the big gains in stocks and the sell off in bonds I could see where institutions may want to asset allocate. They did it constantly on the way down when bonds were growing to the sky and with them in the cellar and August in front of us it would only be prudent to revise the ratios again.

Personally I think the major reversal in the market today on the most bullish news in months is very negative. It could completely reverse again tomorrow and set another new high on good ISM and Jobs data but tonight I am skeptical. I was ready to join the bulls and party till January when the Dow hit a new high today but the breadth kept bothering me. The sell programs at the open bothered me. The rumors of a major fund collapse worry me the most. I remember losing money on the Russia default, the Brazil default, the Thailand default, Long Term Capital and a dozen smaller financial events over the last ten years. They all tend to appear just as the market is about to hit new highs. It must be a karma thing or the worlds biggest repeating coincidence. Either way Friday should be exciting and I am sure we can expect some serious volatility at the open. After that it is a coin toss on a summer Friday. Volume is likely to die by noon as traders head for the beach or the mountains to escape the heat. Look at the bright side. We have the three most volatile months of the year beginning tomorrow. If you can't make money trading over the next three months you should find another hobby. I get excited just thinking about it and I hope you do too.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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