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Market Wrap

Easy as Dell, Oops!

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      11-13-2003           High     Low     Volume Advance/Decline
DJIA     9837.94 - 10.90  9852.90  9792.01 1.63 bln   1725/1388
NASDAQ   1967.35 -  5.80  1970.40  1956.41 1.80 bln   1515/1571
S&P 100   522.99 -  1.20   524.19   520.86   Totals   3240/2959
S&P 500  1058.41 -  0.12  1059.62  1052.96 
W5000   10329.90 +  2.90 10341.08 10281.26
RUS 2000  541.20 +  0.54   542.39   537.81 
DJ TRANS 2948.45 -  4.80  2954.12  2935.58   
VIX        16.45 -  0.30    17.13    16.45
VXO VIX-O  16.84 -  0.15    17.67    16.62
VXN        25.42 -  0.13    26.01    25.24 
Total Volume 3,700M
Total UpVol  1,701M
Total DnVol  1,952M
52wk Highs  649
52wk Lows    20
TRIN       1.26
NAZTRIN    1.27
PUT/CALL   0.76

At 3:20 the markets were rallying in advance of Dell's earnings due out after the close and everyone was setting up their end of day strategy. Suddenly the news was accidentally released and the market went crazy. Stops were run to the upside and the downside as everyone scrambled to enter/exit/protect trades. After about 10 min the news was completely disseminated and the urgency was over. That bout of volatility was the highlight of the day.

Dow Chart

Nasdaq Chart

The morning started with some bullishness after the Jobless Claims posted another week well away from the 400K level. The claims for this week were only 366,000 and the claims from last week were only revised up the normal 5000 to 353,000. It appears the big drop from last week is going to stick and the pace of layoffs is slowing. Continuing claims rose slightly but the trend is still down. This is a major change in the employment picture but we still need to see a consistent drop below 350,000 to indicate a stabilizing labor market.

Import prices rose only +0.1% and less than expected. Export prices rose +0.3% due to higher agricultural prices. Beef and grains are soaring on the world market due to Canada's mad cow problem and droughts in crop belts around the world. The International Trade numbers showed a greater than expected deficit of -$41.3 billion. Were it not for a large jump in exports the numbers would have been much worse. We imported $127 billion and exported $86 billion. Each was an increase of about +3.7%. This would indicate the global economy is improving although slowly.

A more negative tone was set by the Mortgage Application Survey for last week, which at 626.0 was at a 52-week low. Purchase applications fell -7.1% and refi applications fell -10.1%. This was a substantial drop and shows what we have been afraid of for months. The initial rise in rates caused a flurry of activity in October as those laggards who had been putting off taking the plunge were pushed into action. Now that activity is waning as the rates appear to be ready to start that long climb. Two Fed heads, Moskow and Poole, said today that they do not see any rate hike soon but the perception by the consumer is higher rates ahead.

The biggest negative for the morning was an earnings miss by Dow component Wal-Mart. The king of the category killers said increased competition, apparel write downs and too big a focus on sale items cut their margins and lowered profits. Considering the term competition is normally used against WMT with the adjective unfair in front of it the turn about is amazing. Also, WMT said that customers were focusing on the sale items and not the broader range of merchandise. This confirms the adage that you can sell anything if you lower the price enough. Unfortunately you cannot make a fat profit on the transaction.

Not only did the normally bulletproof WMT miss earnings but they said consumers were remaining cautious. This was the major hiccup. If WMT consumers, the most price conscious shoppers in the worlds most competitive store, are holding back on purchases because they are cautious then the entire consumer driven recovery is in question. If these consumers are hoarding cash then this is the broadest indicator of sentiment available. WMT also said inventory levels were higher than normal but manageable. This was another negative to analysts. If WMT thinks inventory levels are too high going into the holiday shopping season then the outlook for that season may be too high. WMT lost -2.44 (-4.2%) on the news and wiped out all the economic bullishness before the open.

Traders were unable to recover from the initial weakness until late in the afternoon. The Nasdaq failed to capitalize on the AMAT earnings after the close on Wednesday. They beat the street by a penny and said order growth for the 4Q was up +20%. AMAT dropped -70 cents and the SOX lost -5.32. The culprit was the -16% drop in sales, a falling gross margin and insider selling. While AMAT was pounding the drum on the future traders were looking at the past and what could be seen by some as an expensive stock price. In reality it was just a sell the news event once again. The SOX had just hit 531 and very near a new 52-week high and had plenty of expectations already priced in. We also saw on Wednesday that the Gartner Group had predicted +20% chip growth in 2004 and $210 billion in revenue for the chip sector. With this bullish data pushing the chip sector up the negatives in the AMAT report produced some disappointment.

This same scenario could be seen today when Dell announced earnings that were inline with estimates. Sales in all sectors were up strongly with their printer business up +80%, servers +30% and so on. The stock fell in after hours after Dell said that although revenue would be up +25% in the 4Q earnings would not rise as much. The CFO continued to say that sales to consumers were good but that business spending had only stabilized. This has been the complaint from every major tech stock that business buying has not increase materially but has only ceased dropping and has stabilized. Nasdaq futures were down -5.50 in after hours after the Dell conference call.

Tomorrow we have a Greenspan speech in Washington and all eyes will be glued to his every word. Today we heard from Poole that he saw rates remaining at the current level beyond March. This was an effort to head off the rising bet that the Fed would hike at the March meeting if not before, well before. Moskow also chimed in with a "Fed can remain accommodative" for some time comment. Of course it was quickly pointed out that the Fed could see itself as accommodative even after several rate hikes. The current rate is several points below the historical average. There was no shortage of buyers for the $16 billion in 5-yr notes on Wednesday and the $17 billion in 10-yr notes today. There was also significant buying in bonds and the 10-yr note yield fell -1.41 or -3.19% to 42.71 today.

92% of the S&P companies have announced earnings for the 3Q and the results are very strong with earnings growth at +20.7% from the 3Q-2002. This was the second strongest quarter in recent memory with Q2-2000 the strongest at +21.6% growth. The 4Q earnings are also expected to be strong but Chuck Hill at First Call said the comparisons stop there. The growth for Q1-2004 is up for grabs considering the much stronger 2003 comparisons. The Q3 growth was funded by the tax cuts, mortgage refi boom and the low interest rates. Q1 will see another boost from the tax checks but the other two factors have slipped into the historical mode.

The mutual fund scandal saw its first settlement today with Putman settling with the SEC and agreeing to make some major changes in the way it does business and by paying some yet to be determined penalty. MMC, the parent of Putman, saw a sharp spike in price on the news. Unfortunately it was short lived because the biggest threat is the state probes headed by NY AG Spitzer. He is still on the attack and issuing new probes into still more funds and is planning on criminal charges.

GE, INTC and MSFT saw further weakness today and it appeared the funds were still liquidating positions. IBM was the only major big cap tech to keep its gains from yesterday when IBM and GE helped push the indexes higher by making bullish comments at the IBM conference. GE traded 25 million shares, which is about 25% more than the average daily volume. The volume in the market was not heavy with only 3.7 billion across all markets.

Despite the lighter than average volume and the decline in the averages the internals were still strong. New 52-week highs were 696 compared to 590 on Wednesday when the indexes were strongly bullish. Advancing/declining volume was even. The Dow held on to the majority of its gains from Wednesday and is poised to move higher. It held above support at 9800 and showed very little profit taking. Considering the strong gains on Wednesday this was a win for the bulls. If you took out the WMT loss the Dow would have finished in positive territory around 9850. Tomorrow the bullish trend could easily return. The Nasdaq tried three times to rally back to positive territory and finished only 34 points from N2K. It may have been a negative day for the indexes but it was a positive day for the markets. I told you on Tuesday to watch the internals for the real trend and we saw 5:1 advancing to declining volume on Wednesday. Very strong. Continue to watch the internals to see if any weakness on Friday is just a dip, like today, or the real thing.

Friday we have several important economic events. We have the PPI, Retail Sales, Industrial Production and Michigan Sentiment. Considering how positive the economics for the last couple weeks have been the bar may be very high for these reports. The consensus estimates are for little gain in the surveys but the whisper numbers could be much higher. Unless there is a real disaster I predict they will be ignored and the bulls will continue to buy the dips.

That is the current trend. Buy the dips not buy the tops. Each time we near the prior highs the bids evaporate and we go back down again. Despite the strong internals the market still feels heavy. This is giving the bears hope and helping to push it higher every time they are forced to cover their shorts. One thing I noticed today was a rotation into drug stocks. This could be a leading indicator of some tech weakness ahead. Drugs have literally been killed over the last year while techs have been climbing. When institutional investors decide techs are overblown they tend to rotate into drug stocks for safety until the techs correct. This was the second day that drugs have rallied and PFE, MRK, LLY, etc all rallied strongly. PFE jumped +1.05 on 2.5 times its normal volume. PFE was helped by some news that Lipitor slowed the buildup of plaque in arteries. This is the kind of news that is typically used as an excuse for the rotation but a quick look at a few drug company charts shows the uptick started several days ago. Watch the drugs for strength, the techs for weakness and the internals for direction.

There was also a warning that was picked up by only a few news outlets after the close. According to the reports someone named Al-Hijazi and claiming to be a commander close to Osama is warning that a huge attack against the U.S. is going to kill as many as 100,000 and will be launched during Ramadan. A different report said the attack would be before the Solar eclipse on November 23rd. While I seriously doubt this will come to pass it may create a cloud over any Friday gains. Investors may not want to be long over the weekend.

As long as the Dow continues to hover just below 9900 we are always in striking distance of Dow 10,000 and the unofficial target for some profit taking. Nasdaq 2000 is also close and could easily be touched first. One of the reasons we may be having trouble moving higher is the nearness to those levels. If the entire professional trading community is planning on selling there then we could be seeing front running of those levels. The bulls are buying the dips but not the tops and that leaves us stuck in the range until the deadlock is broken. If you need proof that the sentiment is still off the scale bullish you need only look at the VXO which closed at 16.84 and another five year low today.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
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