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Market Wrap

Bulls Back In Control

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      11-25-2003           High     Low     Volume Advance/Decline
DJIA     9763.94 + 16.20  9795.21  9723.79 1.65 bln   2112/1099
NASDAQ   1943.04 -  4.10  1956.20  1942.02 1.81 bln   1918/1358
S&P 100   519.54 +  0.23   521.74   517.97   Totals   4030/2457
S&P 500  1053.89 +  1.81  1058.05  1049.31 
W5000   10300.96 + 29.20 10336.42 10250.62
RUS 2000  543.18 +  3.67   544.33   539.17 
DJ TRANS 2923.32 + 24.30  2931.87  2888.99   
VIX        16.71 -  0.73    17.87    16.40
VXO (VIX-O)16.29 -  0.86    17.25    15.96
VXN        25.99 -  1.08    27.33    25.55 
Total Volume 3,722M
Total UpVol  2,327M
Total DnVol  1,263M
52wk Highs  695
52wk Lows    25
TRIN       0.87
NAZTRIN    1.16
PUT/CALL   0.63

Chalk up another bullish day for the broader markets and one more day within striking range of the 52-week highs. While the Nasdaq did finish in negative territory due to a sell program at the close it was still a bullish day to retain most of the gains from Monday. Using the broader averages the markets have stretched their winning streak into two days and there are two historically bullish days still ahead.

Dow Chart

Nasdaq Chart

The economic reports for the day began with another blowout GDP estimate which was revised up to +8.2% for the 3Q. The estimate was for a revision to +8% so traders were pleased. The futures spiked to morning highs on the news but the news was quickly sold. That high lasted until the 3:PM bounce as traders consolidated gains from yesterday. The GDP number showed a growth rate at a 20-year high and it is not surprising that there was a murmur of disbelief on the trading floor. While the numbers indicate a veritable explosion in the economy the anecdotal evidence from those companies that just reported earnings would suggest that the real economy grew at a much slower rate.

The majority of the gains in today's number were related to a better than expected gain in inventory levels to -$14.1 billion from -$25.8 billion. Corporate profits rose +11.8%. The main supporter of the economy is still the consumer and Q3 saw a jump of +26.5% in durable-goods consumption that was funded by the tax rebates. This consisted largely of strong auto sales. We already know that auto sales have slacked off in the 4Q as well as retail sales. The good news is that business investment is picking up and we could be seeing the rotation from consumer to business for economic support. The +11.8% jump in corporate profits was the strongest jump since 1985. The biggest problem with the upgrade in the Q3-GDP is the ratcheting up of the 4Q expectations. With numbers hitting 20 year highs for Q3 almost any number for Q4 is going to be a let down.

Consumers are still buying the economic recovery story with the Consumer Sentiment number jumping to 91.7 for November from 81.7 in October. This was well over the estimates for a gain to 85.0. This really caught traders off guard and they did not know how to react to it. The initial spike ran into strong selling resistance just like earlier GDP. This was the highest sentiment reading since Sept-2002. Current conditions jumped from 67.7 to 80.1 but the number of consumers planning on buying a new car or home shrank. Overall the sentiment number was very positive considering the growing terror threats and the worsening conditions in Iraq. Existing home sales dropped -5% in October to 6.35 million units on an annual basis. While this was a big drop it was from a record breaking pace. The major factor was the jump in interest rates. Homebuilders are still predicting strong sales of new homes through 2005 so it remains to be seen if this is the start of a new trend or just a pause to survey the economic landscape.

Also adding to the positive attitude was another gain in the NY-NAPM report to 227.3 from 226.4. While this was not a huge jump it was the third consecutive gain. The gain in the headline number was remarkable considering that the manufacturing component which fell to 54.4 from 90.0 in October. Current conditions also fell to 51.9 from 58.2. The overall numbers may show continued expansion but there were cracks in the foundation. This is what traders fear the ISM will show next week.

They will not have to wait until next week to get a glimpse of the current conditions. Because of the Thanksgiving holiday the economic calendar for the rest of the week has been accelerated into Wednesday. There are twelve major reports on Wednesday morning.

7:00 Mortgage Applications
8:30 Jobless Claims
8:30 Consumer Comfort Index
8:30 Durable Goods
8:30 Personal Income
9:45 Consumer Sentiment
10:00 Chicago PMI
10:00 Help Wanted Index
10:00 New Home Sales
10:00 Monthly Mass Layoffs
10:30 ECRI Weekly Leading Index
12:00 Fed Beige Book

The mutual fund scandal chalked up another first today. Regulators issued a death penalty sentence to Security Trust Company for illegal trading. STC is a Phoenix based trust bank and they let hedge funds trade as late as 9:PM for the 4:PM price. The reason they received the death sentence was the way they did it. They clearly knew it was wrong and engineered a way to hide the trades as retirement plan contributions. They allowed Canary Capital Partners to trade in up to 400 mutual funds and generated profits for Canary of over $85 million. They also worked a deal to get a cut of the profits from Canary to handle the illegal trades. Security Trust is a custodian for more than 2500 retirement plans with more than $13 billion in assets. The regulators told them to close the doors by March 31st 2004, which would give investors time to move to another firm.

Putman reported that investors withdrew $9 billion from their firm last week and that was the biggest withdrawal period so far. That brings the total withdrawals to over $30 billion since Oct-31st. The next report will be on Dec-1st. If the acceleration continues this could put additional pressure on the market. The closing of Security Trust may create additional fear among investors that they could get caught in a fund in trouble and lose money. While this is extremely remote investor psychological sentiment is very fragile. While most are not old enough to remember runs on banks they have repeatedly heard horror stories now more fiction than fact about how investors were wiped out. This could accelerate the run on mutual funds now in trouble with regulators. While there is no shortage of money for funds it is the rotation that could hurt stocks. There is definitely plenty of money available to float the markets. According to ICI the total inflows year to date were $123 billion compared to net outflows at the same period in 2002 of -$26 billion. Small wonder the market is near its highs again.

SSB cut chip stocks and chip makers yesterday based on valuation claiming they were up +92% year to date. NVLS countered that over valuation with their earnings claiming that their 4Q bookings were up +25% and well above their prior +5% to +10% estimates. They claimed that the recovery was for real and not a head fake. Still, the Nasdaq struggled today and then led the sell off at the close.

The Dow opened positive on the GDP news but quickly fell into negative territory. It ran back into positive territory on the Consumer Sentiment news but was immediately hit with selling and again fell back into negative territory. The buyers stepped in once again and managed to break the 9750 resistance again before lunch but could not hold it. Not until 2:PM did the Dow manage to creep over that strong resistance level and make an assault into the close. A buy program coupled with some short covering powered the Dow to 9795 and only a handful of points away from 9800 but the bulls could not hold it. The Nasdaq followed the same pattern around 1950 resistance and managed to touch 1956 before the sell trigger was pulled.

That sell trigger was the VXO. (old VIX) In the Market Monitor we had been watching the VXO slide all day as the bullish internals built to the afternoon climax. We had been betting that the VXO could break to a new five year low below 16.0 before the close. That happened at exactly 3:35 PM. That is exactly when the sell program was triggered that sent the averages plummeting before the close. The Dow dropped -30 points from 9790 to 9760 and the Nasdaq from 1954 to 1942.

Now the question for tomorrow is why? Is there a deeper problem confronting us or was it just a program driven sell based on the extremely low levels of the VXO. Based on the timing of the VXO tick I am pretty confident the drop was a sell program triggered by the VXO at 16.00. This is an extreme level of bullishness and one where a sell off is almost guaranteed. It is the equivalent of everyone on the Staten Island ferry not only standing on the same side of the boat but leaning over the rail as well.

The problem is what happens in the morning. There are not typically any major program trades in the last 30 min of trading. This sets up the potential for another volley at the open on Wednesday. Adding to the confusion are the twelve economic reports at the open or shortly thereafter. The day before Thanksgiving is typically bullish the sentiment building up to this event was fairly bullish as well. Internals were strong with 2:1 advancing volume to declining volume and new 52-week highs nearing 700 again. We have had two days of strong internals and that relief rally may be getting tired.

In my opinion the stage is set. On Sunday I told you to expect a relief rally this week if there were no terror events over the weekend. That rally was right on schedule. I told you that the rebound would run into resistance beginning around 9725 and we hit that level at 10:15 on Monday and could not get above it until just before Monday's close. We still struggled between 9725 and 9750 most of Tuesday. Now that we have broken out of that range we are facing even stronger resistance at 9800-9820.

The major pressure on the markets last week was due to the terror warnings. No attack over the weekend prompted the relief rally. However, every piece of positive news that spiked the market attracted strong selling pressure. Tonight as I type this the airwaves are being bombarded with warning after warning about a new terrorist threat for the Thanksgiving period. They are talking about chemical and biological threats being imminent and that ties in with the Al-Queada boast that they are planning an attack that will kill up to 100,000 Americans.

I could see a scenario where good economic news Wednesday morning would spike the markets back to near the 9800 level and that bounce would attract some serious selling. Mutual funds are still under pressure. There are strong terror alerts on every channel. The markets are near their highs and there is a long weekend ahead of us. With the heaviest travel and shopping days of the year beginning tomorrow there is a perceived amount of increased risk for civilians whether it is real or not. We have been fortunate that they have not chosen to strike again in the U.S. but we all know the clock is ticking. While the markets are normally bullish on either side of Thanksgiving these are not normal times. They sold the news today and I am betting they will sell it again tomorrow.

Nothing fundamental has changed and until the economic reports say so the markets should continue to trend up. If we do see some cautionary profit taking on Wednesday it should just be profit taking and not a change in the trend. Institutional investors with huge profits are just trying to get to the year end without taking a hit. As long as the outlook remains overall positive we should be ok. If we had any negative reports tomorrow I do not think it would matter. They might help spark some profit taking that would not have occurred on a positive report but investors are optimistic. They will believe the first couple of bad reports are just blips in an uptrend and continue to buy the dips. So that leaves us with the terror wild card again and this close to the highs it could promote extra caution. I suggest you do the same. Watch for a spike at the open on good news and snug up your stops. Then sit back and relax and start thinking about aunt Martha's turkey or who is going to win the football game and let the markets take care of themselves. Enjoy your Thanksgiving and we will start our diet next week.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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