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Market Wrap

New York Changes Name to Pamplona

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     09-03-2003            High     Low     Volume Advance/Decline
DJIA     9568.46 + 45.19  9597.38  9514.49 2.06 bln   1778/1061
NASDAQ   1852.90 + 11.42  1863.55  1846.51 2.32 bln   1777/1320
S&P 100   514.50 +  3.64   516.27   510.86   Totals   1736/1759
S&P 500  1026.27 +  4.28  1029.34  1021.99
RUS 2000  510.71 +  3.21   512.01   507.50
DJ TRANS 2761.47 + 15.63  2769.67  2745.28
VIX        20.43 +  0.48    20.89    19.94
VXN        31.19 +  1.13    31.32    29.98
Total Volume 4,689M
Total UpVol  3,016M
Total DnVol  1,594M
52wk Highs   1,189
52wk Lows       23
TRIN          0.97
PUT/CALL      0.64

New York Changes Name to Pamplona
By James Brown

It was another busy day on Wall Street. If you weren't running with the bulls then you were probably trampled under their feet. A second round of positive analyst comments and economic data swept the markets to another set of new yearly highs. Pundits were eager to share their excitement over the return of volume to the markets but skeptics thought it felt like smart money unloading stocks to the uninitiated. It's not very often that the NASDAQ Composite, the Russell 2000 and the Wilshire 5000 index can all notch a six-day winning streak. If the markets can stretch the rally a couple of more days we may have to move the Fiesta of San Fermin to New York.

Market internals continue to be positive but they have slipped somewhat from Tuesday's torrid pace. Advancing issues beat decliners 17 to 10 on the NYSE and 17 to 13 on the NASDAQ. Wednesday's new yearly highs hit 822 compared to just 13 new lows. One of the big factors that Wall Street analysts were talking about today was the return of volume and the market's ability to hold its gains. The NYSE experienced its best volume in six weeks with more than 2 billion shares traded. The NASDAQ saw the best volume since June with more than 2.3 billion shares. Volume is normally accepted as a tool for the bulls but from the looks of the doji candlestick on the NASDAQ today we could be seeing some distribution, not new buying.

Overseas markets reacted strongly to the U.S. gains from Tuesday and that helped set the mood again this morning at home. The English FTSE 100 added 57 points (+1.37%) to close at 4262. The German DAX added 80 points (+2.25%) to close at 3647. The Japanese NIKKEI rose 25 points to 10715 and the Hang Seng broke above the 11,100 mark with a 162-point gain. Meanwhile the U.S. treasury markets seem to hover in anticipation of the Beige book report out this afternoon. The 10-year note and the 30-year note remained close to yearly lows.

Chart of the Dow Jones Industrials

Chart of the S&P 500 index

Chart of the NASDAQ

Early this morning, prior to the opening bell, Credit Suisse First Boston gave the broker-technology party new energy with positive comments about the software sector. CSFB raised their outlook from "market weight" to "overweight" claiming their belief that corporate discretionary spending will increase over the next 12 months and this money would filter into the software group. As we commented on yesterday and CNBC did today, these brokers are coming in awfully late with these upgrades but that hasn't stopped the GSO software index from making new gains. As a matter of fact Microsoft (MSFT) was the biggest gainer in the Industrials today with a 3.8% move on big volume of 109 million shares. Dumping more fuel on the tech fire was SG Cowen who revealed that their most recent technology survey showed a decent recovery in I.T. spending. Unfortunately, the outlook wasn't quite as rosy as their March survey and SG Cowen lowered its earnings estimates for IBM and HPQ. Speaking of IBM, Soundview also raised their Q3 estimates for Big Blue. This comes a day after Dan Niles, with Lehman Brothers, offered positive comments for Big Blue's service division. Shares of IBM added 57 cents after giving up most of the day's gains.

One of these biggest influences on the markets today were comments from John Chambers, CEO of Cisco Systems (CSCO). CSCO is the world's largest maker of routers and networking equipment so any up tick in I.T. spending is probably going to find its way to CSCO. Sure enough, John stated this morning that August sales were better than expected but he quickly cautioned that the trend may not carry over into September. August is traditionally a slow time for CSCO so investors cheered anyway and CSCO added 3.3 percent by the close with a breakout above the $20 mark. Also contributing to the networking/communication equipment fever were shares of Nortel Networks (NT), which added 8.1 percent after signing a $1 billion multi-year deal with Verizon Wireless.

The day was not without its economic reports. This morning saw the July construction numbers come out. Economists had been expecting a rise of 0.5 percent. The Commerce Department estimated that July's construction spending came in at +0.2 percent. While less than the estimates it still put the seasonally adjusted rate to its highest level since January. This comes on the back of an upwardly revised +0.7 percent in June (from +0.3 percent). Higher mortgage rates in June and July had little affect on residential construction, which rose 6.1 percent in July on a year-over-year basis.

Economists and bond traders were also waiting to hear the Beige book report announced at 2:00 PM ET. The report takes a survey of economic conditions for the 12 Fed districts. All but one showed a pick up in business activity over the last two months. The general trend was a rise in consumer spending and a firming in the manufacturing sector, which we already knew from Tuesday's ISM report.

The combination of positive comments from the likes of CSCO, the outbreak of analyst upgrades and daily confirmation that the economy really does seem to be improving has put the markets into a momentum mode. Many believe that valuations have become too rich. However, as is its modus operandi the stock market is discounting future earnings growth. Fears of being left behind as the markets charge ahead could be fueling the recent run up.

Personally, I find it encouraging that Wall Street could mount a follow through on Tuesday's big breakout. The bad news is that I suspect the rally could run out of steam pretty quickly. The SOX has failed to participate in the rally this week and actually lost 2.68% by the close. That's not supposed to happen with the NASDAQ making new 17-month highs. The drop in the semiconductor index is suggesting that chips are due for more profit taking. Jeff Bailey likes to point out that the chips usually lead the markets higher and lower. I also note that the financial sectors were not really participating in the rally today either. Both the BKX and BIX closed with a gain but they were minor. Only the broker/dealer index has maintained any strength.

Another disturbing observation remains the bullish percent data. Bullish percent data measures how many stocks are on a buy signal. Readings under 30 are typically oversold and a good time to consider initiating longs while readings over 70 are typically overbought and time to start liquidating longs and evaluating bearish plays. Both the S&P 100 (OEX) and the S&P 500 (SPX) are at 5-year extremes. The OEX bullish percent is at 87 (out of 100) and the SPX is at 80.

I am not suggesting that we close out our longs and load up on puts but it should make traders very cautious about initiating new bullish plays. The "don't leave me behind" mentality could keep investors buying the dips long after you or I run out of money trying to short the top. So what are traders to do? The trend is obviously up but the key to short-term trading is timing and that requires patience to wait for the right entry point.

Keep in mind that with so many gains, any bad news could spark a sharp drop as investors rush to lock in profits. Tomorrow is going to be another hectic day with the August ISM Services index, July Factory Orders, the Q2 GDP revision and Intel's mid-quarter update.

Watch those stop losses.


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