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Market Wrap

Happy Birthday

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      10-09-2003           High     Low     Volume Advance/Decline
DJIA     9680.01 + 49.10  9768.69  9633.20 1.96 bln   1985/1225
NASDAQ   1911.90 + 18.10  1936.93  1899.21 2.10 bln   1917/1280
S&P 100   518.48 +  1.94   523.41   516.51   Totals   3902/2505
S&P 500  1038.73 +  4.95  1048.28  1033.78 
W5000   10092.92 + 54.30 10183.38 10038.58
RUS 2000  521.34 +  5.66   526.40   515.68 
DJ TRANS 2850.73 + 59.10  2876.46  2792.97   
VIX        18.82 -  0.36    19.28    18.26   
VXN        28.84 -  0.32    28.99    27.79 
Total Volume 4,377M
Total UpVol  2,947M
Total DnVol  1,343M
52wk Highs 1060
52wk Lows    14
TRIN       0.74
NAZTRIN    0.75
PUT/CALL   0.76

Happy Birthday
By Jim Brown
Click here to email Jim

My how you have grown in one year. October 10th 2002 was the bottom of the two year bear market and the birth of the new bull that we are experiencing now. The Dow bottomed at 7197 and has rebounded +2483 points (+34.5%) in the last 12 months. The Nasdaq bottomed at 1108 and has gained +804 points (+72.5%) to threaten 2000 once again. The S&P hit 769 before rebounding to 1038 today. (+34.9%) The million-dollar question is this, "what is the average rebound from a bear market bottom?"

Dow Chart

Nasdaq Chart

S&P Chart

Before I answer that question we need to wade through the market data for today and there was not a lot. In fact it was pretty limited. Jobless Claims fell to 382,000 and -13,000 below estimates. This was the lowest level in eight months. You would have thought they had said 382,000 people found new jobs last week from the market reaction. Futures exploded despite the upward revision to 405,000 for the prior week. Analysts were quick to point out that a slight drop in layoffs was a big leap from a pickup in hiring. Continuing claims fell only -7,000 to 3.63 million. Jobs are still tough to find and until that changes we should not expect the Jobless Claims to continue dropping significantly. The market rose on a stabilization of employment not a jobs celebration.

A reader sent me an analysis of the jobs situation from a viewpoint I had not considered. The nonfarm payrolls rose +57,000 last week for the month of September. He was from a hurricane state where according to him there was more than 57k workers hired to rebuild just the damage in his state. He speculated that across all the states with damage there would have been many more than that hired and that the employment would not be long term. If this is true then the Jobless Claims would have also been impacted and the October Jobs report could show a reversal of those gains. Just a different point of view from the trenches.

Another positive for Thursday was a very strong Chain Store Sales number for September. The headline number rose +5.9% and well over the +3.5% number that had been reported as the official estimate. Even better was the breadth of the gains. All components saw bigger gains from August except discount stores which, while still strong at +5.8%, slowed slightly from the +6.4% rate in August. Apparel, department stores and wholesale clubs had their best month in over two years. Total store sales growth rose +10.8% and the fastest growth since Jan-2001. While analysts were rushing to upgrade earnings estimates again the Bank of Tokyo was warning that growth in October could slow to 4.5%-5.0%. They also had said they expected September to be 3.5%-4.0% in their last weeks estimate. Sales in September were up on the remaining tax rebate checks and colder weather in the north east which prompted early fall clothing purchases. October will see a boost from 307,000 autoworkers getting bonus checks of $3,000 from signing a new contract. That is nearly $1B being paid out but a small fraction of the previous tax rebate.

Also helping cheer the bulls was the jump in the MAPI Survey to 68% for Q3 and the highest level in two years. This was the seventh consecutive quarter of expansion in the manufacturing outlook. All components except for inventory and profits increased. Shipments rose to 80 from 70, New Orders to 69 from 53 and Order Backlog to 69 from 56. This is very bullish but it is over a long period of time. This is a quarterly number but it shows the continued improvement in the sector. The low inventory number continues to predict a faster ramp up in production soon. However, the profits component will continue to suffer as reports out today outlined increasing capacity in China. Their exports to the U.S. now exceed $150 billion per year and are impacting nearly every sector of U.S. manufacturing.

Import Prices fell slightly by -0.5% compared to estimates of +0.2%. The majority of the change was due to falling energy prices early in the month. The falling dollar also helped. Meat prices continue to rise due to an import ban on Canadian cattle and lumber prices rose due to the hurricane and increased buying by the government. Seems we have to supply all the plywood and sheetrock for Iraq due to the lack of a lumber industry in the desert. Oil prices are beginning to rise again so any dip in these numbers could only be temporary.

Yahoo powered the markets higher today with its better than expected earnings and improved guidance. Short covering was rampant in YHOO, AMZN and EBAY with AMZN roaring to a high of $59 and EBAY sprinting to within $3 of its all time high of $63. You would think bubble mania had returned to Internet stocks except it was broad based across all sectors. There was over 1000 new 52-week highs and only 15 new lows. Earnings estimates were being ratcheted up yet again and as one trader said, "expectations are higher than when Adam met Eve."

Those expectations took a slight hit when the CEO Conference did not produce any evidence of future confidence. The IP CEO was on CNBC several times bragging about cost cutting but saying he saw no sustainable increase in orders. The various surveys taken by attendees showed they expected the economy to remain flat to only slightly up over the next year. Participants were equally divided between those that were seeing a slight increase ahead and those seeing a slight decline. The biggest hindrance to future gains was seen as a growing excess in global manufacturing capacity and increased price competition.

Despite the calming influence of the CEO Conference the markets roared into the stratosphere and new 52-week highs all around with the Dow up +140 at noon. Dow 10,000 comments were flying and traders were back slapping each other on their good fortune. Then Uncle Ben took to the podium. Ben Bernanke took the stage in London and the headline on the wire services was "Bernanke says, Too soon to say if the recovery was sustainable." Like an under age drinking party with cops at the door the party goers raced for the exits. While the -100 point drop from the highs was dramatic it was not material.

The damage to the bears psyche was already done and bulls rushed to buy the dip. New highs and better than expected earnings were just signs of the future according to the bulls. The dollar rallied overseas overnight, gold fell and bonds were selling off. All positives for the equity market. There simply seems to be nothing on the horizon to put out this fire regardless of how high it blazes. The bears continued to claim over valuation in excess of bubble market levels in some cases and no surge in IT spending. The bear battle cry is "good news priced in". With better than expected earnings apparently the order of the day it is hard to convince traders that better times may not be ahead. The problem will remain until the pony appears. If your daughter spends the month before her birthday buying riding clothes, boots, whips, helmets, etc in anticipation of getting a pony for her birthday there will be hell to pay if the pony does not appear. Today it looks like the earnings will appear on schedule and until there is reason to worry the bulls will continue to party.

Just how long can they party? For the answer to the initial million dollar question consider the following facts. The average bear market lasts 6-12 months. The bear market that ended on Oct-10, 2002 was the longest bear market on record since the great depression. According to Ned Davis Research the average bear market is 418 days while the average bull market lasts 673 days. The average bear market knocks -31% off the Dow while the average bull market adds, are you ready, +81% to the Dow. If the last bear market was the worst ever knocking -4553 points off the Dow high of 11,750 (-38.7%) then might we expect at least the average bounce of +81%? If your answer was yes then take a deep breath before calculating the answer. If the averages hold the Dow could hit 13,026 in the next 307 days. While I doubt it and I am sure even then most blatant bulls doubt it that is what the averages predict.

Obviously, we cannot rely on averages except over very long periods as in decades or dozens of bull/bear markets. Averages are the tools of statisticians and historians. Historically October is known for dramatic dips but the biggest dip we have seen so far is the -23 point drop on Wednesday. So far in October the Dow is up exactly +400 points with bullish sentiment in the extreme. I confess I thought we were going negative for the day when the afternoon drop began. I see no reason for it but we don't always know the reason in advance. When profit taking begins in earnest it can take on a life of its own and there does not have to be a reason. We are roaring into the last three weeks of October with option expiration week just ahead. If there was ever a period of time to be cautious this is it.

We will get GE earnings on Friday but no fireworks are expected there. That sets up a potential for a negative surprise if they caution about economic conditions. GE is normally seen as a proxy for the economy and as such the earnings are critical. Not for the earnings because everybody expects an inline report but for the guidance. GE reported two weeks ago that orders for its plastics division were down -5% and plastics supplies 10% of GE earnings. The plastics division is also seen as a proxy for the market because nearly every manufactured product contains plastic.

Once the GE earnings are public tomorrow morning the potential for a bout of profit taking increases for Friday. Even if GE earnings are positive there may be just too much profit for traders to resist the urge to take some off the table. Dow 9600 would be the best estimate of a target and it would probably be bought heavily. The flood of earnings does not really begin until next week and traders are looking forward to some big names like INTC on Tuesday and IBM on Wednesday along with over 250 other companies.

Market Breadth

Volume for Thursday was strong with nearly 4.4 billion shares traded. Advancing volume was 2:1 over down volume. I posted the market breadth spreadsheet above last week to show how the market had been changing sides daily. From Aug-22 through Oct-2nd there was 109 billion shares traded. In the last five days we added nearly 20 billion shares. Note the update for this week that the top eight days have been very strong volume wise and most of that volume has been on the upside. This market breadth is very bullish but with the big jump at the open traders would like to have seen a much stronger imbalance to the upside. It was strong but market technicians want to see 4:1 or 5:1 up volume on breakouts to confirm the move. This increases the potential for some cautious profit taking on Friday. Whether this potential comes true or not it has definitely been an exciting October week already and we still have three weeks to go! As I said last time, keep those seatbelts fastened as our thrill ride gains speed.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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