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Market Wrap

Boom or Blip?

HAVING TROUBLE PRINTING?
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      10-30-2003           High     Low     Volume Advance/Decline
DJIA     9786.61 + 12.10  9838.76  9754.01 2.07 bln   1608/1620
NASDAQ   1932.69 -  3.90  1957.53  1929.77 2.01 bln   1494/1685
S&P 100   517.53 -  1.13   520.99   516.37   Totals   3102/3305
S&P 500  1046.94 -  1.17  1052.82  1017.47 
W5000   10195.52 - 11.80 10258.46 10171.38
RUS 2000  530.37 -  1.44   536.41   530.03 
DJ TRANS 2925.28 + 23.70  2940.07  2897.97   
VIX        16.33 -  0.01    16.76    16.01
VXO VIX-O  17.50 +  0.35    18.06    17.01
VXN        24.74 +  0.02    25.09    24.49 
Total Volume 4,361M
Total UpVol  2,325M
Total DnVol  1,977M
52wk Highs 1042
52wk Lows    26
TRIN       1.00
NAZTRIN    0.70
PUT/CALL   0.81


Boom or Blip?
By Jim Brown
Click here to email Jim

Bet you did not expect the news to be that good. Nobody did and almost everybody did not know how to react. The GDP jump by +7.2% shocked everyone into inaction. The disbelief in the numbers had the talking heads battling the "boom or blip" question all day. The answer? Almost everyone had decided by the close that it was a real number but that could not prevent a pull back that left the Nasdaq in negative territory.

Dow Chart

Nasdaq Chart

S&P Chart - Double Top?

Jobless Claims came in at yet another five week low at 386K after last weeks numbers were revised up right on schedule to 391K. Whoever is in charge of producing the numbers needs to just add 5K every week before the number is announced to avoid the weekly embarrassment of having to revise them every week. I love the press releases. "Jobless Claims fell by -5000 this week to another five week low". You would think we were cutting layoffs each week and it was a pattern of falling claims. The revised numbers for the prior four weeks are now oldest to latest, 405K, 388K, 390K, 391K and this weeks 386K which will probably be revised up to 390K or more. Far from a declining pattern as the news would suggest. The news is not bad with four weeks under 400K but just far from improving.

The Chicago Fed National Activity Index posted its first positive month since July 2002. The headline number of +0.20 was not a blowout but just another confirmation of improving conditions. The recent low of -1.12 in April has been slowly improving and despite a downward revision of -0.12 to last month the trend is intact. The CFNAI is based on 85 indicators and 57 rose for the period covered in this report. Gains in manufacturing gave the index its largest boost.

The Employment Cost Index rose slightly by +1.0% last month and benefit costs were the major expense. This was no surprise and the report was largely ignored with the blowout GDP stealing all the headlines. The Help Wanted Index was flat again at 37 and has shown little movement since a slight bounce in June to 38. Some analysts suggested this could be negative since the 4Q normally sees an uptick in advertising for both permanent and temporary hiring. A flat index would suggest that we transitioned from summer help to fall help without any increase in advertising. This would suggest the current unemployment levels were so high that companies do not need to spend the money to recruit. The current index levels are 66% off the cycle highs. Only 41% of the papers surveyed reported any increase in employment ads.

The Labor Turnover Survey dropped -7.8% for August and showed no improvement over the -5.7% drop in July. These numbers are so old they do not get much play but the trend is definitely down. June was the last positive month with a +3.5% gain but that temporary bounce was quickly erased. According to the JOLT Survey the job-opening rate has fallen from year ago levels and is continuing to decline. This does not paint a convincing picture for the Nonfarm Payroll number next week except that this is an August number and conditions could have changed substantially.

The big number for the day, actually the decade was the GDP jump to +7.2%. This was well over the estimate of +6% which was already considered too high by many analysts. The sticker shock initially powered a spike from short covering but that spike was short lived. There were so many qualifications that traders did not know which way to jump. This gain was the biggest jump in quarterly GDP in 19 years. To say it was out of the ordinary would be an under statement. Personal consumption, investments in equipment, software spending and exports led the gains. Auto sales added +1.17% but shrinking inventories actually knocked -0.67% off the final number. The $35 billion drop is projecting an even bigger bounce in the 4Q or 1Q as these inventories are replenished. Exports added +.84% to the number and was mostly unexpected. The weaker dollar and stronger global demand helped pump the export number. In Q2 the GDP was powered mostly by defense spending. In Q3 defense spending was almost flat. Federal spending was also flat. Disposable income jumped +7.2% from tax cuts and rebates and helped power the jump in consumption. There are a lot of detractors to the GDP bounce but the internals show a continued increase in home and auto sales despite the high unemployment. Increases in business spending surprised most analysts and many question if the bounce will continue.

Regardless of your take on the GDP the market was completely confused. The opening bounce took the Dow back to a high of 9827 but the selling begin almost immediately. The Dow drifted back to 9754, -73 points off its high and nearly -20 points into the red before 10:30. The Nasdaq bounced to 1956, only -10 points from its 52-week high before a quick drop back to support at 1930. The quick drop was due to disbelief by some and profit taking by others. With only one day left in the fiscal year for many mutual funds this was a perfect opportunity to unload stocks. However, they did not sell the bounce and despite the opening dip and the closing dip the action for the day was positive. The Nasdaq was the weakest and closed slightly negative and right on 1930 support. The Dow clung to yesterday's resistance at 9780 and refused to give up ground at the close.

For Friday we have another flurry of economic reports and another chance for a news driven market event. The lack of a sell off today could have been related to some month end window dressing that offset any year end rebalancing. This leaves Friday up for grabs. Futures are positive in the overnight session and the post closing analyst musings are suggesting a positive spin to the GDP once the sticker shock dissipates.

My analysis of the event is probably a little different from some others. While there are many qualifiers in the GDP number those qualifiers only impact a very select few traders. The general public only sees the headline number and thinks "wow, the economy really is recovering". They begin to feel better about overall conditions and the sentiment numbers over the next month will show another boost. Still my thoughts go more to the underlying market action today. We did NOT sell off. This to me was the biggest event. The current market rally had been predicated on a +6% GDP for the last two months. Everybody with a podium had been using the GDP as a rally point with every speech. If ever there was a number baked into the cake this was it. Everyone who was ready to pull the exit trigger on a +6% or lower number was shocked into inaction by the blowout. Suddenly the concept of market top was called into question. Whoa, if the economy is better than everyone expected then maybe there is more to go. Maybe I should not sell yet.

Obviously this is an oversimplification but you get the point. There was selling on the news but there was also buying. The opposing forces were evenly matched and volume was strong. The advancers/decliners were even at 3102/3305 and the markets finished flat. Flat, not +200 on the good news or -100 on the expected news. Confusion reigns and that is a good thing. The VXO (old VIX) hit 17.01 on the bounce today. This is an unbelievable number and only 2 ticks away from breaking the 17 barrier. Any move up on Friday will likely do the trick. That leaves us heading into a weak heavy with economic reports and the market near its highs with the VXO at a five year low. The high odds bettors are backing up the truck to load up on puts. This type of alignment happens very rarely and almost always ends badly. The wild card in that scenario is the GDP.

The traders almanac says the first three days of November are normally bullish as funds reinvest the cash they got from selling in October. Since we had almost no selling I would be skeptical of a positive first three days if it were not for the parade of increasingly positive economic reports. Assuming we do not see a sudden reversal of fortune on Friday we will go into the weekend at market highs with good economics and good earnings and even greater expectations for the 4Q. Greenspan could not have scripted it better.

Before we get too far ahead of ourselves let's remember that the estimates for growth in the 4Q and the 1Q were only in the +4% range last week. That range could change but with earnings expectations turning down due to a stronger 4Q-2002 comparison there could be some dampening of expectations in the market. The Fed has begun to drain the excess liquidity out of the money supply and interest rates are climbing again. Unemployment is still high and the Fed is still worried about deflation. We are not out of the woods yet but offsetting these negatives is the influx of cash into mutual funds. TrimTabs said we could see record inflows for October of $30 billion. With the +7.2% GDP headline all we need now is a Dow 10,000 headline and even the hard core should become converts. CDs and worthless money market accounts would be tapped to try the stock market again. It makes no difference how badly they were burned in the past they see the lure of easy money and want to be winners too. If you are walking through a casino and pass a table where all the gamblers are cheering and screaming with every roll of the dice it is very hard to keep on walking. When you see them raking profits off the table with every roll the urge to throw some money on the table and get your share is very strong. Of course what I just described is a market top that is doomed to eventually correct but it could be weeks or months before that correction.

A quick look at the charts above should prompt caution from any technical analyst. The S&P came to a dead stop at 1050 once again and could easily be forming a double top at that level. Same goes for the Dow and Nasdaq. For any bullish scenario to develop these indexes must break out to news highs over the next couple days of the bulls will become worried and we could see weakness appear again.

That brings us back to tomorrow. We could easily move 100 points in either direction or remain flat as October slips into history. I personally think the odds favor some profit taking on Friday. The Dow traded over 9820 three separate times on Thursday and failed to hold the high ground each time. The Nasdaq went out near the low for the day and could be seeing some profit taking by funds. With it being the last day of the month for all and the last day of the year for many, anything is possible. The only resistance above us is the 52-week highs at 9850 and should that break we are only a broad jump away from Dow 10,000. That is still my target for the next real profit taking event. The only real unknown is how far in front of that target will the bulls become nervous and begin exiting the game.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
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