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Market Wrap

Oversold Bounce?

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     02-25-2004            High     Low     Volume Advance/Decline
DJIA    10601.62 + 35.25 10615.56 10560.07 1.67 bln   1841/ 996
NASDAQ   2022.98 + 17.54  2024.20  2007.73 1.68 bln   1968/1091
S&P 100   565.86 +  2.17   566.74   563.64   Totals   3809/2087
S&P 500  1143.67 +  4.58  1145.24  1138.71
RUS 2000  579.04 +  7.17   579.09   571.56
DJ TRANS 2868.96 +  9.65  2873.27  2849.52
VIX        14.93 -  0.97    16.05    14.93
VXO        14.99 -  0.83    15.98    14.89
VXN        23.55 -  1.13    24.80    23.52
Total Volume 3,718M
Total UpVol  2,648M
Total DnVol  1,024M
52wk Highs     267
52wk Lows       21
TRIN          0.78
PUT/CALL      0.77

Oversold Bounce?
By James Brown

What felt like a rather slow day on Wall Street actually turned into a rather bullish session. Stocks ignored disappointing home sales data and rising oil and gas prices to focus on positive comments from Fed chairman Alan Greenspan. Tech stocks actually lead the bounce with chip and networking stocks posting strong gains. Overall the major indices turned things around to end the recent losing streak.

Market internals were very bullish with advancing stocks sweeping past declining issues 18 to 10 on the NYSE and 20 to 11 on the NASDAQ. Up volume was better than 2-to-1 over down volume on both exchanges but total volume was light for the session. If you're feeling pessimistic this may look like an oversold bounce after five days of consecutive losses but the rebound today was very widespread. The only sector to turn lower was the XAU gold & silver index, which lost 1% and only due to the strength in the U.S. dollar. Gold futures dropped $8.70 to $396.10 an ounce after the greenback rose against the euro and the yen.

The Dow Jones Industrial average traded in a relatively tight 50- point range but remained above support and managed to close over the 10,600 level. This bodes well for tomorrow and its short- term oscillators are suggesting a continuation of the bounce. The rebound in the NASDAQ is probably more important. It was crucial that the tech-heavy NASDAQ hold support at the 2000 level and today's move should send it back toward overhead resistance at its 50-dma.

Chart of the DJIA:

Chart of the NASDAQ Composite:

Also noteworthy was the rebound in the Russell 2000 (RUT) and the Semiconductor index (SOX). The RUT broke support at its 50-dma on Monday but never saw any follow through during Tuesday's session. Today's bounce puts it back over the 50-dma and the index has put in a new higher low compared to the earlier February drop. The SOX also made an impressive turnaround with today's 1.82% gain putting it back above its 100-dma and the 500 mark. Boosting the SOX was news from the Gartner research group who said that global semiconductor sales should rise 22.6% in 2004, the largest improvement since 2000. What I find interesting is that in Gartner's press release they call their 2004 forecast "deliberately conservative".

Chart of the Russell 2000:

Chart of the Semiconductor Index:

The economic data this morning turned out to be disappointing. Economists were looking for a dip in existing homes sales to 6.27 million units, down from the previous month's 6.47 million annual adjusted rate. What we got was a 5.2% drop to 6.04 million units. It may have been this news that influenced early morning weakness in the homebuilders even though these were existing home sales and not new ones. Tomorrow could be important for the homebuilding sector as the new homes sales numbers are released.

The media was also buzzing about the strong gains in oil and gas prices today. Crude oil rose $1.10 to $35.68 and gas prices rose 3.45 cents to $1.0589 per gallon to hit their highest levels in almost a year. Driving the news was a report from the Energy Department that unleaded gasoline inventories had dropped 1.6 million barrels last week to 203.4 million barrels, which is below year-ago levels. As mentioned in yesterday's wrap the high price of oil is a major influence on multiple sectors in our economy and the markets ability to ignore this rise has been extraordinary. Concerns over OPEC suggesting another production cut at their April meeting has some analysts speculating that we'll see drastically increased prices at the pump this summer. The rise in oil is the major factor in the oil service sector's three-month rally.

Hogging the spotlight again was Alan Greenspan's third appearance this week. This time Alan was speaking before the House Budget Committee and shared his views on the U.S. economic outlook. Greenspan stated that the Bush tax cuts had sparked the current economic expansion and the Fed's accommodative stance (a.k.a. the lowest interest rates in 40 years) had allowed the U.S. to move from a "period of sub-par growth to one of more vigorous expansion". He did issue strong caution on the rising deficit and said Congress needs to address it while both congress and the President need to curb spending. Of course the real hot topic today was Greenspan's comments on Social Security and his proposals to "fix" Social Security by adjusting policy for inflation and longer life expectancies. More importantly for us short-term were his comments that, "The most recent indicators suggest that the economy is off to a strong start in 2004 and prospects for sustaining the expansion in the period ahead are good."

A few market pundits went on to speculate that Greenspan's comments may re-ignite the rally in tech stocks. Currently the U.S. economy is expected to grow by 4.6% through 2004, well above the 3.1% seen in 2003. Many believe that tech stocks have already priced in this rate of growth. However, if the market interprets Greenspan's comments today to mean that the economy can grow even faster then there may be more room for stocks to run again.

Given the rebound today I believe tomorrow should be bullish assuming there aren't any huge negative surprises in the handful of economic reports. Before the opening bell we'll get the weekly initial jobless claims, the durable goods orders for January. After the open we'll see the Help-wanted index and the new home sales figures. Plus, the markets will get to hear from Ben Bernanke, one of the Federal Reserve governors, as he speaks in Washington tomorrow.

Traders can also keep an eye on retail stocks. Announcing before the opening bell is American Eagle Outfitters (AEOS), The Limited (LTD) and Liz Claiborne (LIZ). Announcing later on Thursday will be Kohl's (KSS) and the Gap (GPS).


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