Option Investor
Market Wrap

Battle For Control

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      02-26-2004           High     Low     Volume   Adv/Dcl
DJIA    10580.14 - 21.50 10612.14 10539.33 1.77 bln 1994/1220
NASDAQ   2032.57 +  9.60  2037.17  2012.83 1.76 bln 1944/1236
S&P 100   565.49 -  0.37   566.99   563.08   Totals 3938/2456
S&P 500  1144.91 +  1.24  1147.23  1138.62 
W5000   11162.14 + 28.50 11177.06 11088.70
RUS 2000  583.86 +  4.82   583.86   576.58 
DJ TRANS 2891.78 + 22.80  2892.76  2861.22   
VIX        14.83 -  0.01    15.33    14.69
VXO (VIX-O)14.65 -  0.34    15.59    14.59
VXN        23.10 -  0.45    24.14    23.07 
Total Volume 3,800M
Total UpVol  2,552M
Total DnVol  1,169M
Total Adv  4439
Total Dcl  2776
52wk Highs  350
52wk Lows    12
TRIN       0.93
PUT/CALL   0.64

The fight for leadership continues to keep the markets in their recent ranges as mixed indexes and sector rotation proceeds on low volume. The Dow closed down while the Nasdaq stretched its gains but the real heroes were the Russell and the SOX. Small cap techs continue to rebound from the weeks of profit taking but they are still struggling to swim upstream weighted down by heavy blue chips.

Dow Chart - Daily

Nasdaq Chart - Daily

The morning started off negative with the Jobless Claims rising to hit the 350,000 level again and helped to increase the rising fear that jobs are not improving. We will get the nonfarm payrolls for February next Friday and with the rising claims the odds are good we are not going to see a strong bounce in payrolls. What we appear to be seeing is a mild reduction in individual layoffs but no real pickup in hiring.

The Monthly Mass Layoffs announced on Wednesday rose to highs not seen since Dec-2002 and was the second month of strong increases. The January layoffs at 239,454 was a +25% jump over December and a +73% rise over November. These are very strong jumps and suggest the corporate world is still doing some belt tightening. AT&T announced 4600 job cuts yesterday and Apple announced an undisclosed number of layoffs in their education unit as well.

The Help Wanted Index rose one point to 38 for January but this is not significant as the index has been moving between 37-39 for the last year. Still no pickup in advertising for new jobs. This could be seen as confirmation that the payroll number next week could be weak.

The most negative number for the day was the Durable Goods Orders which fell -1.8% for January. Fortunately the December number at +0.0% was revised up to +1.6% which blunted the bad news for January. For the last three reporting months we had -2.4% in Nov, +1.6% in Dec and -1.8% in January. You can quickly see we are averaging a drop of nearly -1.0% for the last three months. Computer products dropped -2.1% in January and aircraft and motor vehicles fell -10.2%. If it were not for a giant +73.3% gain in communications equipment, the largest gain since 1997, the headline numbers would have been seriously deficient. The shipment component was flat and back orders fell for the first time in six months. This was not a good report and all eyes will be on the ISM release next week for more current info.

January New Home Sales fell to 1.106M and the lowest level since May-2003 but the culprit as we know was the weather. The pace is still strong despite the drop and once the spring weather appears I suspect sales will return. Inventory has risen to a 4.1-month supply and with rates close to hitting six month lows again that inventory should be sold quickly this spring.

Toll Brothers reported a +10% gain in profits today and said it saw no signs of slowing demand so far in February despite the bad weather. They said results were impacted by the weather which delayed completions and scheduled closings. Obviously these will catch up once the sun returns. TOL projected +20% revenue growth for 2004.

PeopleSoft got a reprieve today when the government said it would file suit to block the Oracle takeover as anti competitive. Larry Ellison has threatened to sue the government if the deal was blocked and it looks like he will get his chance. Once the ruling was announced BEAS spiked upward on the rumor that a failed takeover try of PSFT would have ORCL looking for other targets.

DNA got approval for an anti cancer drug that is supposed to add five months to the life expectancy of colon cancer patients. In anticipation of this approval the stock has surged from $40 to $98 and an increase of $30 billion in market cap. The stock surged on the approval today from $98 to $103 adding even more to the market cap increase for this one drug. IF this was going to be a blockbuster like Viagra or Prilosec if would have to apply to a larger segment of the population than just colon cancer patients. I find it hard to believe this gain will stick and I believe you are looking at the Editors Play for Sunday. Hint, hint.

The indexes posted a lackluster day of trading on weak volume and a lack of big cap leadership. The Dow continued to trade sideways just below 10600 for the fourth consecutive day and showed no real inclination to fight the status quo. While it waits for motivation the 50dma continues to rise and was slightly over 10502 at the close. Instead of the Dow falling to retest the 50dma support the 50dma is slowly rising to meet the Dow. This sets up an interesting scenario of a support test without a drop. Is it a valid retest? That remains to be seen and at the current rate of ascent and the weakness in the Dow that touch could come as early as Friday.

The Nasdaq closed at 2031 and well over the low for the week at 1991. That low was only +5 points above the 100 dma and is close enough for a support test for me. The next real test for the Nasdaq is the 50dma just overhead at 2048. When you consider the weakness in the Dow the Nasdaq has been holding up the markets since Tuesday. Actually it has been the small cap techs in the Nasdaq that are seeing the new buying interest.

The Russell and the SOX have been the stars. The SOX has moved up for three consecutive days and closed just below 510 today. Comments from NVLS and several other chip stocks have been reinforcing the idea that chip orders are rising quickly and where the SOX goes the Nasdaq will follow. The SOX will hit new resistance at 515.

Semiconductor Index - Daily

Russell Chart - Daily

The Russell is in the best shape of any index and is only 14 points below its February high. We had a very successful test of the 50dma this week with three days of trading on that support before it launched the current strong move. The Russell closed exactly on its 10dma today at 583 and that should be the last line of resistance before a return to the highs. This is very bullish and if it continues the little guys could actually drag the blue chips back from the cliff and trigger the start of the April earnings run.

With the exception of the Dow all the major indexes have been improving slightly as the week progresses. The Dow would be taking part in the rebound if it were not for three stocks. In the last four days UTX has dropped from $97 to today's low of $89 and impacted the Dow to the tune of -60 points. Boeing dropped to $42 from $45 for another -21 Dow points. MMM fell from nearly $81 to $78 for -21 Dow points. That is only three stocks that have accounted for over -100 Dow points over the last four days and the Dow closed today only a handful of points below Monday's close. The Dow has taken the whipping and held its ground.

Tomorrow the challenge will be the GDP revision at 8:30. Estimates are for a drop to +3.6% from the initial estimate of +4.0% last month. Nobody expects a material revision but you never can tell. Also out on Friday is the Consumer Sentiment, Chicago PMI and the NY-NAPM. Considering how the recent economic reports have been all over the map we can't count on these reports being business as usual. There is always a risk that some number will stray from the acceptable norm.

Friday is also month end and the next three days are historically bullish as window dressing and month end cash flows push stock prices higher. Traders looking for a bounce to lighten the load are probably looking at the next three days for that purpose as well. We are still in a consolidation period and until the indexes start pushing away from the averages and venturing out toward the recent highs there is not going to be much excitement. Trading this week has been very boring and interspersed with only a few random program trades to wake traders up. Volume has been very light with the last two days trading less than 3.8B shares across all markets. We were hitting 5.2B when the markets were at their highs. After Friday we will be two thirds of the way through the quarter and traders will probably start thinking about positions for Q1 earnings. They will probably not enter those positions until after the Employment Report next Friday. Nobody wants to make a big bet only to have it blow up on them with a negative jobs report.

I am still in "buy the dip" mode and so far it is working fine. Last Thursday I told you to expect some bargain hunting opportunities this week and the dip played out as expected. The Nasdaq stopped its drop at 2000 and the SOX and Russell both rebounded from textbook tests of support. I am not ready to sound the charge yet but I do think we are getting close.

Enter Passively, Exit Aggressively.

Jim Brown


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