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SOX Soars & Retail Roars

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     08-18-2003         High     Low     Volume Advance/Decline
DJIA     9412.45 + 90.76  9419.38  9320.59 1.40 bln   1052/ 331
NASDAQ   1739.49 + 37.48  1739.59  1706.93 1.48 bln   1273/ 183
S&P 100   502.79 +  4.49   503.39   498.30   Totals   2335/ 514
S&P 500   999.74 +  9.07  1000.35   990.67
RUS 2000  480.92 +  9.00   480.92   471.92
DJ TRANS 2643.83 + 20.17  2643.91  2623.32
VIX        19.28 -  0.92    20.30    19.06
VXN        26.62 -  2.59    28.55    25.94
Total Volume 3,115M
Total UpVol  2,515M
Total DnVol    548M
52wk Highs     585
52wk Lows       67
TRIN          0.65
PUT/CALL      0.72

SOX Soars & Retail Roars
By James Brown

It was another big day on Wall Street as equity bulls muscled out another win and put another resistance level below them, at least for the Dow Jones Industrials. The $INDU added 90 points to close above the 9400 level, a feat not seen for more than a year. This is a clear breakout of the recent trading range and should have the bears concerned as the bulls appear to be sharpening their horns for an attempted break out above 9500.

The NASDAQ Composite out performed the Industrials with a gain of 2.2 percent. This also appears to be a breakout of its bull flag consolidation pattern. Meanwhile the S&P 500 index added nine points to close just a quarter point away from the 1000 mark.

Contributing to the moves in the U.S. markets were strong performances by their overseas counterparts. The Asian stock markets were mostly higher with the NIKKEI putting in a strong session adding 169 points or 1.72 percent to close at 10,032. The Hang Seng added more than 100 points to close at 10,525. European stocks also cast a positive glow as the FTSE 100 added nearly 25 points to close at 4272 and the DAX 30 jumped 1.84 percent to close at 3507. It's hard not to miss all the psychological resistance levels falling under the hooves of this late summer bovine buying spree.

There was plenty of speculation on what sparked the rally today. Was it a positive sigh of relief that last week's blackout was not a terrorist event? Or maybe it was a delayed reaction to last week's positive economic reports. There were some comments that it was money that moved out of bonds last week being put to work in equities this week. Except we did see bond yields dip today indicating some buying pressure there.

Whatever case you make for starting the rally it quickly spread to become a broad-based run across most sectors. Advancing stocks beat declining stocks 19 to 9 on the NYSE and 21 to 9 on the NASDAQ. New highs swamped new lows 406 to 23. Up volume was better than 3 to 1 over down volume on the NYSE and more than 7 to 1 on the NASDAQ. Total volume was actually slightly better than in recent sessions but we are still seeing very low volume numbers, which is to be expected this time of the year.

Chart of the Dow Jones Industrials:

Chart of the NASDAQ Composite:

Hitting a new 52-week high was the S&P Retail Index (RLX), up 1.95 percent to 357. Lifting the sector higher was a host of earnings news. However, probably the most significant news bit came from Wal-Mart (WMT) who did not report earnings but did report that its weekly August same-store sales numbers were looking very good. According to WMT management sales are "tracking" in near the high-end of previous guidance of 3 to 5 percent, which has been fueled by the annual back-to-school season. This pushed shares of WMT to a new 52-week high just under $59.

Shares of Lowes Companies (LOW) also hit a new 52-week high as the stock gapped higher above major resistance at $50 to close up 6.25 percent. The home improvement retailer announced earnings this morning and the results blew away consensus estimates. LOW turned in net income of 75 cents a share, up 28 percent. Analysts had been expecting 69 cents. Revenues came in at $8.77 billion, beating estimates of just $8.5 billion. The company guided higher for the third quarter and raised their full year guidance to $2.24 to $2.27 a share.

These positive announcements from major retailers like WMT and LOW have many raising expectations for another round of strong consumer spending throughout the rest of the third quarter and into the fourth. It will be interesting to hear from LOW's bigger rival Home Depot (HD), also a Dow component, who announces earnings tomorrow morning before the bell. Current estimates for HD are 54 cents a share. Plus we have the delayed Michigan Sentiment report that comes out tomorrow morning about 9:45 AM ET. As one of our commentators in the MarketMonitor mentioned today, this could be a market mover. Traditionally, stronger consumer sentiment is translated into stronger consumer spending.

The SOX pitched a no-hitter against the bears today as all 18 components in the semiconductor index closed in the green. Igniting today's tech rally were strong comments from the market research firm Gartner, Wall Street broker/analyst Smith Barney and an optimistic article in Barron's over the weekend. Gartner believes that environment for the chip sector has vastly improved. This was echoed by Smith Barney who claims that stronger PC demand and improving order trends overall could be forecasting a stronger recovery for the industry. Meanwhile an article in Barron's gave Advanced Micro Devices (AMD) a big push. The column claims that AMD's new chips set to launch next month could significantly increase its market share. AMD's stock gapped up and traded higher throughout the day to close at $8.91, up 14 percent, the largest gainer in the S&P 500 for the session. AMD's rival and Dow component Intel (INTC) also added 4.5 percent, which contributed to the SOX's 5.15 percent rally. The SOX closed at a new 52-week high above resistance at 400 and 410. Many analysts believe that it is the chip sector that tends to lead the NASDAQ higher (or lower) so this is a positive development for tech. Bulls might be looking for some follow through tomorrow with tonight's positive news from Broadcom (BRCM). BRCM raised their guidance for the current quarter claiming a new digital tuner would help push revenues higher by 10 percent. The stock is up more than a dollar in after hours trading.

The bulls may be looking gleefully for some positive follow through on today's technical developments but we must caution traders that it's still a dangerous world out there. You've heard us cautioning traders that the VIX and VXN, both of which hit new lows today, have been flashing a warning sign for the bulls. Thus far the markets have ignored them both. However, today's drop in the VIX put it below the 20 level, which is a strong historical indicator of market tops. Now this is not an exact science as the VIX can remain low (as we've already witnessed) for some time and the market tops can be days away from actually forming. The chart below is a monthly chart of the Dow Jones Industrials and the VIX. I've drawn a pink line for every time the VIX fell significantly below 20 and each time there is a near perfect correlation of a top in the Industrials.

Chart of the VIX

I'm not suggesting the market can't go higher from here. From all indications is looks like it can and will. The question is how long can the market sustain these gains without a steep correction phase. Trade carefully.

Watch those stop losses.

James



 
 



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