Option Investor
Market Wrap

January 2003

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      02-24-2004           High     Low     Volume Advance/Decline
DJIA    10566.37 - 43.30 10637.11 10521.70 1.92 bln   1631/1615
NASDAQ   2005.44 -  2.10  2018.07  1991.05 2.06 bln   1398/1786
S&P 100   563.69 -  0.89   566.19   561.29   Totals   3029/3401
S&P 500  1139.09 -  1.90  1144.54  1134.43 
W5000   11075.48 - 14.60 11126.20 11034.24
RUS 2000  571.87 +  1.67   575.91   566.21 
DJ TRANS 2859.31 +  4.50  2869.94  2836.48   
VIX        15.90 -  0.39    16.76    15.77
VXO (VIX-O)15.82 -  0.11    16.72    15.47
VXN        24.68 +  0.30    25.27    24.36 
Total Volume 4,330M
Total UpVol  1,658M
Total DnVol  2,568M
Total Adv  3413
Total Dcl  3902
52wk Highs  253
52wk Lows    34
TRIN       1.34
NAZTRIN    1.10
PUT/CALL   0.76

That is how long it has been since the Dow and S&P have been down five days in a row and that is what happened today. The technical support levels are being hit left and right but in reality nothing has changed.

Dow Chart - Daily

Nasdaq Chart - Daily

The two economic reports this morning did not help traders confidence levels with Chain Store Sales down along with Consumer Confidence. Chain Store Sales fell -0.2% for the last week but that was only a very slight drop from the strong gains for the prior two weeks. We averaged +1.6% gains for each of the prior two weeks so the minor drop today was a non-event. Year over year growth rose to +8.1% and the best since May-1999. The majority of the gains came from easy comparisons from severe weather last year. Considering the slow employment and dropping sentiment just holding the gains from the last three weeks is very bullish.

The biggest problem for the morning was a drop in the Consumer Confidence to 87.3 from 96.4 in January. This nearly -10 point drop was very significant and followed drops in all the confidence/sentiment reports for the last couple of weeks. The present conditions component fell to 73.1 and the lowest level since October. The expectations component fell to 96.8 from 107.80 but the jobs component dropped to only 11.8. Those expecting to buy a home rose slightly but consumers expecting to buy a car or major appliance fell. More consumers found that jobs were hard to get and fewer found then plentiful. Sounds like the same things but they are separate components. The decline was stronger in the various expectation components and that suggests the election mud slinging is having a negative impact on consumer viewpoints. The magnitude of the deficits and the constant harping on the lack of jobs is producing consumer worry.

Also impacting the market weakness was the continuing currency crisis with the dollar losing ground again. John Snow went on record again as supporting a strong dollar. Snow is rapidly losing credibility every time he repeats that statement. We all know the administration is happy with the dollar drop as a way to increase demand for our exports and pressure imports.

The firing of the Russian Prime Minister and his cabinet today by President Putin failed to rock the U.S. markets as it was seen as an attempt to bolster his support. The Russian Prime Minister is primarily responsible for the economic policy. Putin said he wanted to avoid uncertainty in the executive structure and was reshuffling the positions to push stronger reforms. The PM was the last holdover from the Boris Yeltsin era.

Greenspan took aim at FRE and FNM in front of the Senate Banking Committee and pressed the need for increased regulation. He said that the risk was great for companies that big which needed to grow profits continually to justify their stock price. While they are both GSE firms their debt is not really guaranteed by the government. Greenspan suggested a failure at either company could send shock waves through the banking system and the economy. Greenspan wants their subsidy removed so that normal capital requirements would apply. He suggested the size of their portfolios be limited to reduce risk and unfair competition. Between them they control over 75% of all single-family mortgages worth more than $4 trillion. Because of their size they are able to control market rates.

The SEC filed charges against divisions of Fleet Boston for mutual fund trading practices. The SEC alleged the companies allowed market timing in their trades.

The EU imposed a minimum one month ban on poultry and poultry products from the U.S. after a much stronger strain of bird flu turned up at a Texas farm. This was the first highly pathogenic strain of avian flue found in the U.S. in over 20 years. The fear from the rapidly spreading strains of bird flu is that a new pandemic could appear. The bird flu is a rapidly mutating type of flu that can move to other animals and even humans. Once the flu mutates in humans it can produce an flu epidemic from which humans have no defense. The last pandemic in 1918 killed more than 40 million people and was started by an outbreak of bird flu like we are seeing now. According to various reports over 100 million chickens have now been killed worldwide in an effort to eradicate this current threat. Unfortunately this threat has been recurring more frequently in recent years and many health researchers suggest the next pandemic event is not a question of "if" but "when" it will occur. The impact is hotly debated with estimates of human deaths from 10 million to 100 million. With health controls and response times much better now than in 1918 those in power suggest the massive deaths are not probable. They are racing to produce a vaccine for the current strain but it will not be available in even limited doses for at least six months. Mad cow? Bird flu? Soy burgers are looking better every day. Major poultry suppliers are PPC, SFD, TSN and SAFM.

This was the first time in a year that the Dow and S&P were down for five consecutive days. Sellers are still taking profits but the volume was only moderate. The Nasdaq fought to close over 2000 and managed to regain 2005 after trading down to 1991 intraday. The last time the Nasdaq closed under 2000 was Dec-26th. The Nasdaq has been in a downtrend for the last five weeks but it is still trading in the range we have been discussing between 2000-2100. The drop is only now beginning to appear risky for techs as the Nasdaq nears its 100dma at 1986. Currently the Nasdaq has broken the uptrend support and the support at the 50dma at 2044.

The Dow broke with its recent support at 10575 late today and we saw a dip to 10521 before a late day rally brought it back to close at 10566. The 50dma, which has been strong support for the Dow since last April has risen to 10479 and only 42 points from today's low. The biggest market factor today was another drop in the Dow due to a continued fall in UTX. The stock has dropped -$6 (45 Dow points) in the last two days.

Despite the thought process that the world is coming to and end for techs you might be surprised to learn that INTC, MSFT, CSCO and IBM all closed in positive territory. Each set new recent lows on Monday and rebounded today in what could be a leading indicator of a tech rebound in our future. The Russell and the SOX both closed in positive territory as well.

The Russell seemed to find a bottom today at 570 with a small break of its 50dma at 574. The Russell closed at 572. The SOX appears to have found a bottom at 495 and closed just under 500 with its 100dma at 503. You can easily see that they better find support quickly or we are going to fall out of our current range.

Russell-2000 - Daily

SOX Chart - Daily

I have been suggesting that the major indexes would trade in their ranges (10450-10700, 2000-2100) until we got through the February consolidation period. I think that is still a valid viewpoint as long as the Nasdaq holds its 1986 100dma. The real key for the current market is no longer the techs but the potential for the Dow to hit its 50dma at 10479. This has been a highly visible target since the end of November when it was last tested.

Both the major indexes came very close to their critical numbers today. (10479, 1986) The Russell and SOX appear to be finding a bottom and the four biggest tech stocks all closed positive for the day. Today was the fifth down day for the Dow and S&P. All these factors are coming together to suggest it is time for a bounce. In circumstances like this there can be an explosive rebound as shorts who are thinking new lows get caught off guard and race each other to cover. It does not mean we are done with the selling but any decent bounce would relieve the oversold conditions and bring fresh money into the markets. Nothing goes straight down or straight up and a bounce is due. We could still see one more dip to actually test those critical levels before that bounce appears or we could simply move up at the open. I would rather see the dip to conclude the current cycle and I think a touch of the averages would attract stronger buying. Should the current support level (1986) fail for the Nasdaq the next support target is well below at 1900.

I need at least one more dip so I can get an entry in EBAY at $65. (grin) That stock just refuses to go down despite a -25% drop in AMZN over the last month.

Despite the drop in confidence there is no real sign the economy is slowing. Copper rose over $1 today and that is a clear indication that manufacturing is increasing. Oil closed at $34.58 and the market continues to ignore it even when most U.S. corporate profits are based on $22 oil. The Russian government layoff was ignored. The Greenspan attack on FRE/FNM had little impact on the broader market. This is a normal consolidation period and during a consolidation markets focus on the negative news rather than the positive. The S&P and Nasdaq lost only two points each. No real fear there.

I have been telling you that we are going to trade in this range for the last three weeks. I have been suggesting that buying the dip was a valid strategy until conditions changed. Until we close below 10479/1986 those conditions have not changed and those tactics are still valid. We are at the point where that could happen tomorrow so be prepared. It will either be the best entry point of the week or the beginning of a new trend or both. We will not know the real answer until week is over.

Enter Passively, Exit Aggressively.

Jim Brown
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