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Market Wrap

Bears Confused By Facts

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       WE 01-09        WE 01-02        WE 12-26        WE 12-19 
DOW    10458.89 + 49.04 10409.8 + 85.18 10324.6 + 46.45 +236.06 
Nasdaq  2086.92 + 80.24 2006.68 + 33.54 1973.14 + 22.12 +  2.02 
S&P-100  556.55 +  6.56  549.99 +  7.21  542.78 +  2.52 +  8.48 
S&P-500 1121.86 + 13.38 1108.48 + 12.21 1096.27 +  7.61 + 14.52 
W5000  10929.00 +151.14 10777.9 +115.48 10662.4 + 82.96 +114.94 
RUT      575.20 + 14.35  560.85 +  5.75  555.10 +  8.22 -  0.71 
TRAN    2988.94 - 19.22 3008.16 +  8.49 2999.67 + 12.24 +  4.02 
VIX       16.75 -  1.47   18.22 +  0.83   17.39 +  0.97 +  0.01 
VXO       15.94 -  2.00   17.94 +  1.36   16.58 +  0.53 +  0.10 
VXN       23.01 -  1.50   24.51 +  0.56   23.95 -  0.94 -  0.97 
TRIN       1.63            1.01            0.79            1.02 
Put/Call   0.65            0.76            0.86            0.80 

The Jobs Report on Friday confused the bears but failed to sway the bulls. The terror threat level was lowered and a doctor with an MBA was the first wannabe cut by Donald Trump. The Martian Lander phoned home that it was locked in its room and Bush is sending men to Mars to help out. Pete Rose admitted he bet on baseball and Brittany Spears is single again. The Nasdaq set a new two-year high. Sounds like a normal week in the markets. Can't wait to see what next week brings.

Dow Chart

Nasdaq Chart

There is no way to sugar coat it the Jobs Report was ugly enough to stop a clock. Just a clock, not the stock market. There was no good news unless you count the fact the headline number was barely positive at +1000 jobs. I am betting it gets revised down to negative next month. There were only an additional 20 jobs created for each state for December. The official consensus estimates were +127,000 to +150,000. The whisper numbers were as high as +300,000. Sure looks like a lot of analysts were on drugs when they did their research.

The Jobs numbers were actually worse than it seems. The Nov numbers were revised down to 43,000 from 57,000 and the Oct numbers were revised to 100,000 from 137,000. The bottom line was a drop in jobs of -51,000 over the prior 60 days and almost zero job creation in December if the meager +1000 stands. The unemployment rate fell to 5.7% but not because people found jobs but because 309,000 workers gave up looking during the month. Household employment also fell -54,000 after big gains in November according to a different jobs survey. Weak manufacturing payrolls continue to be the burden. Levi Strauss closed its last American plant this week completing a move of its entire manufacturing process overseas. According to one analyst 630,000 apparel manufacturing jobs are going to be moved overseas in 2004 based on known announcements. 1300 apparel plants in the U.S. are scheduled to be closed. Over 170,000 workers in India are now employed in call centers that were exclusively U.S. jobs two years ago. Over 200,000 IT services jobs were moved to India over the last twelve months. This is just the tip of the iceberg. It is no surprise to many that the jobs numbers remain weak.

The drop in jobs was the second monthly drop and with historical trends suggesting January will be weak the odds are good that string will stretch to three. Job creation was also weak in the ISM Services report earlier in the week and with services a leading indicator for manufacturing that suggests we are in for some rough going. The manufacturing work week fell to 40.7 hours and a further drop will force GDP revisions for the 1Q and we have not even seen the first estimate yet. Hours for the production workweek fell to 33.7. Average hours worked fell to 98.8 in December. Used as a proxy for GDP this number for the quarter only rose +2.18% suggesting the GDP will be lighter than expected.

The Jobs report was the weakest report since July when the economy lost -57,000 jobs. According to almost every real economic analyst and the Fed the economy is not expected to produce a sustained monthly pace of +150,000 jobs until 2005. Why then did the majority of the street analysts think we were going over 200,000 on Friday. It boils down to hype. The bullish sentiment was so strong that everybody starts exaggerating to move out of the crowd. The first guy says 150K, the second 160K, and so on. By the time it makes the rounds the first guy is thinking he missed something and raises his estimates again thereby starting the process all over. Economic Bubblemania.

Why is this important? New jobs produce new consumers. A drop in jobs removes consumers from the economy. Sure they continue to buy food and pay rent in some form but they are not out buying HDTVs from Gateway, Harley motorcycles, 2004 cars from GM or houses from Ryland. According to the Jobs report 309,000 workers chose a lower standard of living in December by dropping out of the workforce. That translates directly to a drop in sales at Wal-Mart and Target each month it occurs. Actually I am wrong. It probably helps Wal-Mart and hurts ANN, GPS, SAKS, BBY and JWN. Wal-Mart gains a new part time welcome greeter and they spend their meager paycheck in the store. Jobs produce consumers, consumers produce earnings.

Ten Year Note Yields

The best thing from the Jobs report was the certainty that the Fed is on hold for probably all of 2004. This will keep them from making changes for the next three months and once past the May-4th meeting the political implications will keep them from raising the rest of the year. Yields on the ten-year notes fell to 4.08% and a three month low. (red candle on the chart above) The drop on the yields was the biggest move since September. This is good for the economy and for the interest sensitive sectors. Homebuilder stocks were mixed on the news despite a glowing guidance statement from Pulte Homes (NYSE:PHM) saying their orders soared +31% in the 4Q to over 8,000 units. The reaction to the sector was mixed because they applauded the drop in rates but worried if unemployment will become a bigger sales issue.

Money does not appear to be a problem for the markets. The mutual fund cash flows soared to +$3.8 billion for the week ended on Wednesday and stretched the string of positive weeks to nine. This is the longest positive inflow streak in three years. According to reports nearly $20 billion flowed into money market funds in December, not stock funds. This would suggest there is plenty of liquidity available but most investors were not ready to plunge into the stock market. This suggests there are plenty of buyers at the right price.

Helping the markets in late morning was a change in the threat level from orange to yellow. The markets celebrated for about 20 min then went back to business as usual. The change did not affect all sectors or geographic locations but Tom Ridge would not say who or what was staying on orange.

Despite the bad jobs numbers the market barely even blinked. The indexes had the obligatory gap down open but the Nasdaq roared right back to set yet another new high at 2113. The rise in techs dragged the Wilshire 5000 to 11018 and a new high but the broader index rose reluctantly, kicking and screaming. The Dow never regained yesterday's highs and struggled to break 10550 all day but was never successful. About 1:30 the Nasdaq recovered from some profit taking at the morning highs and managed one more upward push to set the 2113 high before the selling began. The Dow and Wilshire succumbed to the selling pressure and finally stop the Nasdaq advance. Once the momentum changed it began to pick up speed and the Dow finally cracked the 10520, 10500 and 10475 intraday support from earlier in the week and closed down -133.

The Dow has stair stepped up in 20 point increments for the last week but before that we were moving up in 100 point sprints. Support levels for Monday begin at 10450 with good support at 10400. Below 10400 it begins to thin out to about 10000 where the 50DMA comes into play. The Nasdaq has support at 2075 but if that breaks we could get to a gap fill at 2000 rather quickly if the selling continued. The Wilshire has decent support in the 10800 range and very good support at 10400. The charts below show the Dow with two very good indicators. Each is suggesting that we could see some weakness ahead. In contrast the Nasdaq chart shows the MACD still rising and still below previous highs.

Dow Daily Chart with RSI

Dow Daily Chart with MACD

Nasdaq Daily Chart with RSI

Nasdaq Daily Chart with MACD

The first week of 2004 was a banner week. At the highs Friday the Nasdaq was up +5% and the Dow +1% for the year. The Nasdaq is rallying off six-year lows not seen since July of 1996 and has gained +1000 points in the last 15 months. The Dow has gained +3200 points from the March lows just nine months ago. The stall at the 2002 highs has been expected. The biggest surprise has been the strength of the rally to this point.

A Dow drop of -133 and a Nasdaq close -26 points off its highs is nothing. This was simply a one-day profit taking event prompted by the strong gains for the week and the bad Jobs report. This should not be interpreted as a correction or the beginning of a bear market. There is so much bullish sentiment under the market that any further drops are not likely to be swift or sharp. What we had on Friday was a normal event on bad data. If it continues next week then it could morph into something worse but regardless of the depth it is still a buying opportunity.

Next week we begin the Q4 earnings announcement cycle. We have seen a pickup in guidance announcements last week and they went both ways, positive and negative. Dow component Alcoa released earnings Thursday night and on the surface the news was good. After closer examination there were a number of unusual items and a benefit from a lower than expected tax rate. What started out as a good report turned into an earnings miss and the stock dropped about -5% Friday morning. Alcoa will not be the only company that does live up to expectations. Next week the releases pick up speed and importance.

Wednesday begins the tech parade with AAPL, LLTC, PLNR, QLGC, TER, YHOO and INTC. Thursday we have JNPR, SUNW, ASML, CREE, DGII, EXTR, FCS, RMBS, TMTA and VNWK. Friday we get GE. This list of earnings reporters is far from complete but the ones I listed should give us a pretty good idea how the rest of the month will go. If we see several of the techs going soft on guidance then we could see additional weakness in the markets. If they beat the estimates and raise guidance then the Nasdaq could retest the Friday highs. Because of the very strong gains in the last six days strong expectations have been priced into the market. Just like the strong expectations were priced into the Jobs report a disappointment in these earnings could be a challenge.

Traders will be looking at the economic reports for next week for confirmation that the recovery is still alive. We start on Monday with the Kansas Fed Manufacturing Survey. Tuesday is the Richmond Fed Survey. Wednesday the PPI and the Fed Beige Book. Thursday we get the CPI, NY Manufacturing Survey, the Philly Fed Survey and the MAPI Survey for Q4. Friday has Business Inventories, Consumer Sentiment and Industrial Production. Make no mistake this is a very full week.

Wednesday is the key day with two Fed surveys out of the way, the Beige book, AAPL, YHOO, QLGC and INTC earnings. This is an information overload day and what happens on Thursday will be a direct result. Nobody expects YHOO or INTC to miss earnings so the key is always the guidance. The risk is a simple guidance affirmation. If they do not guide higher in some form we could see trouble. So far in 2004 the techs have led the league in base hits and home runs. Gains have been astronomical in SUNW +18%, JNPR +19%, RMBS +16%, TMTA +22%, JDSU +23% and TLAB +20% to just name a few. The valuation calls are already beginning. For instance Morgan Stanley downgraded Lucent on Friday saying the gains were overdone. With techs only expected to gain +22% overall in 2004 there is obviously a disconnect. All the predicting and forecasting is over and next week is where the rubber meets the road.

Earnings are generally expected to come in at +22% for the 4Q with Thomson Financial suggesting they could be as high as +28%. This is huge if it really comes to pass. It would be the best earnings quarter since 1993. The stage is set and the curtain is rising. All we need is for the stars to give the performance of the decade. Can they do it? Can they meet these very strong expectations? Check back next week and we will see how many are nominated for Oscars and how many were booted off the stage.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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