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       WE 02-06        WE 01-30        WE 01-23        WE 01-16
DOW    10593.03 +104.96 10488.1 - 80.22 10568.3 - 32.22 +141.62
Nasdaq  2064.01 -  2.14 2066.15 - 57.72 2123.87 - 16.59 + 53.54
S&P-100  566.06 +  5.75  560.31 -  5.10  565.41 +  0.69 +  8.17
S&P-500 1142.76 + 11.63 1131.13 - 10.42 1141.55 +  1.72 + 17.97
W5000  11129.40 +100.20 11029.2 -127.58 11156.8 + 40.74 +187.04
RUT      584.07 +  3.31  580.76 - 15.38  596.14 +  5.73 + 15.21
TRAN    2894.36 +  8.40 2885.96 -186.99 3072.94 + 36.66 + 47.34
VIX       15.99 -  0.64   16.63 +  1.79   14.84 -  0.16 -  1.75
VXO       15.98 -  1.07   17.05 +  2.18   14.87 -  0.40 -  0.67
VXN       24.63 -  0.43   25.06 +  3.79   21.27 +  1.03 -  2.77
TRIN       0.62            1.00            1.15            0.47
Put/Call   0.62            0.81            0.77            0.51

The semiconductor sector cured the Nasdaq from its bout of profit taking flu with a +4.77% gain on Friday and a total of +23.68 points. Considering the Nasdaq gained +44 points you can see where the real strength appeared. Traders who were dumping chip stocks for the last two weeks suddenly decided to put that money back to work when the Jobs report failed to implode.

Dow Chart - Daily

Nasdaq Chart - daily

The Jobs report was neutral with a gain of +112,000 jobs but that is exactly where we wanted it. Not too hot to stimulate the Fed to hike rates and not too cold to suggest the recovery is failing. Yes, the porridge was just right for the Goldilocks market.

The headline number was below the general consensus estimates between 125K and 150K and well below many of the outrageous speculations in the 175k to 225K range. After some initial volatility traders breathed a sigh of relief and charged off to buy stocks. It was more of a relief rally than a rally based on a change in fundamentals.

Looking at the internals there were still some problems. The manufacturing component showed the 42nd consecutive monthly loss in manufacturing jobs with a loss of -11,000. Another benefit came from the seasonal adjustment for retail jobs. Fewer retail jobs were added at the end of 2003 which meant there were fewer people laid off in January. After the government adjusted for the normal seasonality they showed a gain of +76,000 net jobs. It is unsure whether they were actually gained or just the result of the over adjustment. Either way they "found" 76,000 jobs in the retail sector. Maybe they were making up for the decline of -13,000 jobs in government payrolls for the month. Professional/business payrolls declined by -22,000 but were offset by health services which rose by the same number. Leisure services rose by +21,000.

Service industries declined with temporary workers dropping -21,000. Private non-retail jobs grew by only +36,000 jobs and less than half the +76,000 December rate. The unemployment rate fell to 5.6% but the average duration of unemployment rose to 10.7 weeks. Those out of work more than a year rose to 22.7%. When you boil down all the internals it appears the jobless rate is decreasing more from a slow down in layoffs than an increase in hiring. The number of unemployed remains at 8.3 million but that is nearly a million less than the level just six months ago.

The alternative survey was the goldmine. Home based workers and 1099 workers increased by +496,000 according to the report. I hasten to add that these numbers are very suspect and the government is working to resolve the differences. Still the markets celebrated the official +112,000 headline number on the Nonfarm Payroll report with a sigh of relief. There was such a wide range of whisper numbers from -100K to +250K that just coming in close to the consensus was very encouraging.

Bet you did not hear this on the mainstream media. The government also revised the jobs numbers for the last seven months and found even more jobs. The total gained by the revision was only +32,000 but the key point for me was the cycle. The recent months of Nov and Dec were revised up while the prior three months were revised down. That would tend to support the contention that jobs are growing in the current environment. December was revised up to 16,000 from 1,000 and November was revised up from 43,000 to 83,000. That is an increase of +55,000 over the prior two months. When added to the January numbers that is a +167,000 gain in the last 90 days that was just disclosed Friday morning. Using the political campaign method of reporting that blurb will be improved to "211,000 jobs were created in the last 90 days". I am surprised this was not more widely reported. Now the question remains. Whenever they can shuffle the numbers at will for nearly three quarters and nobody notices is it a good thing? Since the change was positive it suggests they could always "find" jobs when needed by "adjusting" the numbers into a more favorable time frame. But, that would be a conspiracy and it would never happen, right?

Job Adjustment Table Since June

The just right jobs report gave the bond groupies a new lease on life and they bought bonds at the open and kept it up all day. According to the bond bulls the Fed should be on hold for the rest of 2004. The odds of a May/June rate hike dropped somewhere in the 18% range and the next likely target even close to the radar screen became August. Considering the political implications of a rate hike two months before the election this is not likely and puts the Fed on vacation until January. There is a December meeting but the Fed almost never raises rates the week before Christmas.

The Jobs report trumped the Fed and opened the window for another hot spring/summer for the home builders. With Fed rates still at 45 year lows the real rates for things like mortgages will not be surging any time soon. This should help the consumer confidence for the next quarter. There was another confidence report out Friday from the Associated Press. They said confidence FELL to 91.7 in January from 106.3 in December. Unemployment worries topped the list of consumer concerns. While this is not a mainline report it suggests the Michigan Sentiment next Friday could show a decline. The positive Jobs report will be seen as only a headline by Mom and Pop consumers and the questionable internals will never be seen. They should perk up on the news and the market gains from Friday will not hurt.

The big money tried hard to get the Dow back to 10600 for Friday's close and they almost made it with the 10593 print. The Nasdaq gained +2.2% or +44 points to close at 2063 and well away from the support levels it threatened to break all week. The winner of course was the SOX. As I pointed out last week the SOX was the key and it held support and closed right on the 100 dma on Thursday. The sector had dropped -10% and was poised for a rebound. That rebound came on Friday with a +4.77% +23.68 point gain. Was it just an oversold relief rally or real buying? I think a little of both as well as some strong short covering. The jobs disaster failed to appear and shorts ran for cover. The Russell came in second with a +2.55% gain of +14.50 points and performed a perfect rebound off its 50 dma.

SOX Chart - Daily

Russell-2000 Chart

The internals were unbelievably strong with advancers beating decliners 3:1 and advancing volume 5:1 over declining volume. Unfortunately volume was very light with barely 1.8B on the Nasdaq and 1.4B on the NYSE. The light volume was probably due to major events occurring over the weekend. The G7 is meeting and while nothing material is expected to happen it is still a potential powder keg. Also, President Bush is going to be on Meet the Press for a full hour on Sunday and you can bet Tim Russert will ask some pointed questions. Again, I expect no smoking gun but it will definitely be a risk. These events made some traders think twice before making big bets on Friday.

For next week the economic reports are minimal with no important releases. The biggest challenge will be the Greenspan testimony to Congress on Wed/Thr and will give him the opportunity to correct any misunderstanding about the current Fed stance. Don't hold your breath. He typically does not divulge much real information but the potential exists for a slip of the tongue and the markets will be cautious until this event passes.

Traders will also be watching the bonds with over $60 billion in new supply coming to market. The consensus of opinion also suggests the dollar will be under pressure again on Monday after a successful G7 meeting with no material announcements. That produces a mixed bag of blessings with the weak dollar providing an earnings boost to most companies doing business overseas. Of course the administration supports a strong dollar, wink, wink.

Despite the pullback in techs over the last two weeks investors are still pouring money into the market. AMG Data said that as of Wednesday over $24 billion had moved into equity funds for the year. Five weeks and over $4B per week. That is a pretty good clip considering how high the indexes are after the 4Q rally. That rally is being called the flight to garbage rally due to the inversion of normal values. Stocks graded by Schwab with an "F" outperformed stocks they had graded an "A". Stocks with an S&P rating of one star out performed stocks with their five star rating. I mentioned last week we were seeing a rotation out of those stocks and back into blue chips. The Friday rebound was clearly on the back of those same small cap tech names with big cap stocks like IBM and MSFT up only fractionally while GE was down for the day. This was a retail investor rally and they partied with their old favorites instead and let those new found friends walk home.

Where are we going now? I told you on Thursday that I thought Friday was a throw away day. It was going to be reaction driven and I thought any negative news was already baked into the cake. That prediction turned out to be correct with the mediocre jobs number providing a big gain in techs. I did not say "strong" relief rally because the volume was less than exciting. At 4B it is about -20% below recent market ramp days. When we were setting new highs two weeks ago we had many 5B days in succession. Still the internals were strong and I am chalking up the light volume to the weekend events. I suggested we monitor Monday as the moment of truth and I still believe it. If we do not get a news event over the weekend that moves the markets then the Monday direction will be the key for the week.

I would not be surprised to see a drop at the open as shorts squeezed out on Friday try to take it down again. If there is no bad news then I expect that dip to be bought but not in volume. This is the pivot week for the quarter. It is the week before option expiration and earnings are about over but it is too early for mid-quarter updates. There will be a shortage of stock events to move the market and an excess of face time by Greenspan on TV.

What I would like to see is another week of consolidation at this higher level. The Dow now has some breathing room above 10450 support and could easily trend sideways in a higher range above 10500. The longer we hold the higher ground the better chance of making new highs once the mid-quarter estimates start flowing. The Nasdaq is now well above its 50 dma support at 2021 and has some room to breathe of its own. If we can hold over 10500/2020 all next week we should be in good shape for an April earnings run. We are not out of the woods yet but that may be daylight up ahead. We dodged several large bullets last week with a successful Super Bowl and a positive Jobs report. Greenspan is now the hurdle for this week. Monday should be the key and another positive day would give us a nice cushion to wait out the Greenspan speech. A word of caution, February is normally a consolidation month. Since we have not seen normal in a long time I do not know if that trend will continue but that makes Monday even more critical as a directional indicator.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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