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Market Wrap

Volume Still Strong

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      01-22-2004           High     Low     Volume Advance/Decline
DJIA    10623.18 -  0.44 10660.88 10607.40 2.27 bln   1683/1558
NASDAQ   2119.01 - 23.40  2152.12  2119.01 2.36 bln   1216/2013
S&P 100   566.21 -  2.43   569.84   565.71   Totals   2899/3571
S&P 500  1143.94 -  3.68  1150.51  1143.01 
W5000   11164.78 - 37.80 11232.92 11160.00
RUS 2000  591.73 -  5.75   600.61   591.53 
DJ TRANS 3080.32 + 16.70  3090.07  3063.73   
VIX        14.71 +  0.37    14.87    14.01
VXO (VIX-O)15.01 +  0.58    15.34    14.39
VXN        21.74 +  1.03    21.78    20.42 
Total Volume 4,953M
Total UpVol  1,642M
Total DnVol  3,218M
Total Adv  3339
Total Dcl  4007
52wk Highs 1040
52wk Lows     8
TRIN       1.52
NAZTRIN    1.41
PUT/CALL   0.92

Volume on Thursday was nearly five billion across all markets and stretched the string of high volume days to 13. Declining volume was unfortunately the highest since Sept-24th and twice the up volume. Still the Dow held its ground and clung to its 52-week highs. The Nasdaq saw some profit taking in front of Microsoft earnings but even that was muted.

Dow Chart

Nasdaq Chart

The economics were about as mixed as the markets. The Jobless Claims fell -1,000 to 341,000 and pushed the four-week average to a new post-recession low of 345,000. Analysts had wanted to see a little bigger drop in claims but had hedged their bets with a consensus estimate of 349,000. Obviously they were pleased as the numbers show a consistent improvement although very slow decrease. Continued claims under 350K have in the past led to an increase in jobs by about +150K per month. With the Nonfarm Payrolls due out in two weeks hopes are going to be running high.

Those claims may be about to increase according to the Monthly Mass Layoffs which came in today at 1,929. These layoffs will cut 192,633 workers and was up substantially from the 1,438 and 138,543 workers from last month. This is a December number and I suggested last month we could see an increase at year end and into January as companies trim the sails going into the new year. Manufacturing still accounted for the majority of the cuts with 34% of the total. This is a trend that should continue as long as jobs continue to be outsourced overseas.

There have been several high profile comments recently that suggest the "lost" jobs from December's Jobs report will be found. Fed President Bob McTeer said he was shocked and went on record that he felt they would be found in the January report. Treasury Secretary John Snow echoed those exact comments this week that the report "must" be in error and the inaccuracies will be corrected and the lost jobs found by January's report. This is just a sample of the posturing we are seeing and it suggests the jobs will be found regardless of whether they exist of not. It is an election year.

With the economics mixed the markets were left to trade on stock news. The biggest news of the morning was news of a massive layoff by Eastman Kodak. They are cutting -15,000 workers over the next three years as they close plants and reduce manufacturing square footage by about one third. The company is moving out of traditional film and into the digital camera market. Investors liked the announcement and pushed the stock up +10% to $31.02 and a six month high. This helped the Dow overcome weakness from INTC, T, DD, KO and Boeing. EK gained +3.49 and the next largest Dow gainer was CAT at +0.60.

Lucent was the target of some serious selling on volume of more than 200 million shares after Smith Barney cut them to a sell. Smith Barney said traditional wireline suppliers had seen their stocks rise well above fundamentals in the last month and were due for a correction. The analyst said capex spending in the sector would likely be flat with declining spending in the switched circuit markets being offset by increases in VOIP equipment and routers.

AT&T complicated the picture for the telecom sector when it announced earnings that were soft from weak customer demand and heavy pricing pressure. AT&T said it saw further sales declines for 2004. Revenues dropped -12.8% as long distance continued to be eroded by consumers switching to LD free cell phones and VOIP. Consumer revenues fell -18.9%. T fell -$.85 cents on the news and below its $21 support level to rest on the 50 DMA at 20.39.

After the close the 800lb gorilla announced earnings and the futures market dropped sharply. Microsoft reported earnings of 34 cents and beat estimates by +4 cents but nobody seemed to care. After hours investors keyed on the 14 cent headline number and recoiled from the 20 cent charge for stock based compensation. This charge was well over any estimates at nearly 60% of gross earnings. Other problems appeared to be a drop in subscription revenue and a lower unearned revenue number. Revenue was up slightly over the prior quarter and Microsoft said PC demand continued to exceed expectations. They also said they were seeing early signs of an IT recovery. They guided slightly up for the current quarter which is normally unheard of. Despite the good guidance the number crunchers panicked and the stock sold off slightly in after hours trading. From the action in the futures you would have thought they had missed their numbers with the S&P futures dropping -4.00 on the news. This was a severe over reaction to the -50 cent drop in the stock.

Part of that futures drop was attributed to some guidance from other reporting techs. KLAC beat the street by +3 cents and guided higher for the current quarter. They said orders were up +50% from the prior quarter and felt they were in the early stages of a sustainable upturn. They felt the orders for the 1Q would increase by +15%. They beat the street and raised guidance but the stock fell over -$1.00 in after hours trading.

MCHP announced earnings inline with estimates and guided higher for the current quarter. They said their book-to-bill ratio was 1.26 and raised their dividend. They said sales of microcontrollers were at record levels. The stock was trading down over -$1 in after hours. MCHP was one of the three stocks rated five stars on Wednesday by S&P. (INTC and TXN) They suggested each had the potential for another +25% gain.

MSCC beat estimates by +2 cents and raised guidance. Income increased +50% over the fourth quarter and margins increased substantially. Book to bill was only +1.06 and sales only increased +4%. While it appeared great for the company investors were not as impressed. The stock was trading down in after hours.

GNSS beat the street's estimates of +3 cents with a huge jump to +8 cents profit. Sales were up +17% over the prior quarter with gross margins increasing to 39.6%. Great news but they had the misfortune of guiding inline with estimates and the stock traded down in after hours.

AMGN accidentally released their earning on their website just before the market closed and dropped substantially due to missing estimates by -2 cents. They closed at $61.47 and well off their $63.46 intraday high. The earnings miss was due to rising expenses and higher marketing costs to fend off new competition from Abbot on Enbrel.

Corning posted earnings inline with estimates but the big news was surging demand for LCD display panels used in PCs and laptops. GLW said it expected to sell out of its LCD glass despite boosting output to meet demand. This was the second consecutive quarterly profit in more than two years. You guessed it, GLW traded down in after hours.

Volume is strong, tech earnings are great and guidance is mostly positive but techs are retreating. Good earnings are being met with selling more often than not. PC sales are now projected to be double digits through June (per MSFT) and chip companies are trending flat to down. Small caps have been on a roll but sold off -5.75 today. Seeing a trend here?

This is normal post earnings depression like we have not seen since the Internet bubble. We had a massive earnings run on extremely optimistic expectations and those have generally been met. Investors are simply taking their profits. This is not the end of the world but it may be the end of the vertical gains without any new catalyst.

Russell Chart

S&P Chart

The markets are very extended and several critical points have been reached. The Dow hit 10660 today and within 13 points of the 2002 resistance highs at 10673. The S&P hit 1150.51 and only -1.50 points away from a +50% rebound off the Oct-2002 lows. 1160 is the 50% retracement of the drop from the Jan-2000 highs. 1173 is the 2002 resistance highs. Getting crowded over 1150. The Russell 2000 hit 600.61 today and while that is still -14 points from the all time high in March 2000 it has been the unofficial target for over a month. The Nasdaq has failed at 2150 four times now and despite great earnings is threatening to retest 2100. While these technicals tests are critical they are all just signs of a tired earnings run. The Nasdaq had no trouble breaking 2000 and the Dow is now well over 10000 on the strength of these expectations. It should not be surprising to see some profit taking and consolidation once those expectations were met.

Distribution or consolidation? Ask me again in a month. The very strong volume patterns suggest we are seeing some distribution at critical market levels. The down volume is increasing but we are not yet seeing any real selling imbalances. The new highs were over 1000 again for the fourth consecutive today and showing no signs of retreat. Until those numbers decline substantially we are just consolidating. The last time they were below 800 on the new 52-week highs was the week before Christmas.

While there is still significant resistance above us there is also significant support below. The Nasdaq spend most of the last two weeks fighting to get over 2100 and stay there and it is going to take a lot more selling than we saw today to fall below the 2085 level that we saw during that fight. Should that level fail the 50 dma is right at 2000 and that has been support since March.

The Dow has successfully defended 10500 numerous times and 10400 more than once. The 50 dma is currently at 10100 and that is more than -500 points away from today's close. The S&P has very strong support at 1115-1120 and is well above the 50 dma at 1085.

What all this gibberish means is that we could see several days of selling without any serious harm. The problem as I see it now is the lack of a motivating factor. Earnings are coming in as expected and more than 50% of the S&P will have reported by tomorrow. There should be no more big upside surprises. The Fed meets on Tuesday and the odds are good they will begin to condition the markets for a rate hike. Nobody expects a hike before the elections but they will likely begin to set the stage. This could put pressure on the markets through Wednesday.

I believe we will see a gap down on Friday that will be bought by traders looking for an entry point. That bounce could fade by days end and leave us range bound through the Fed meeting which ends on Wednesday. Once any reaction to the Fed meeting is over I would look for a ramp into the Jobs report on Jan-6th. We have been virtually assured that it will show positive job gains. Potholes or stepping stones into that Jobs report will be the GDP due out next Friday and the ISM on Monday the 2nd. The big challenge will be the GDP. The official estimate is for +4.5% growth for the 4Q. The whisper number is already +6.5%. This is a prime opportunity for a disappointment. With the recent earnings and sales increases for the 4Q I suspect it will be over 4.5% but not as high as the whisper. Since the Fed will undoubtedly have the GDP numbers during their meeting any overly strong number will influence their rate stance. It is a catch-22. An inline number will be seen as pleasing to the Fed but disappointing by traders. A blowout number could cause a Fed reaction which would disappoint traders. The best possible number would be something just over 5% so the Fed is pleased but not scared and traders can be pleased but not ecstatic.

Friday is going to be a tossup and a chance for traders to begin positioning themselves for one more week of very intensive earnings followed by a week of intensive economics. After that it is time to coast until the April earnings run begins. Now, that chapter in this investing saga will be very interesting as we get to see if this months guidance lived up to the hype.

Enter Passively, Exit Aggressively.

Jim Brown


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