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Market Wrap

Dollar Dominates

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      03-02-2004           High     Low     Volume   Adv/Dcl
DJIA    10591.48 - 86.70 10678.36 10568.88 1.87 bln 1416/1807
NASDAQ   2039.66 - 18.10  2064.40  2039.66 1.87 bln 1236/1920
S&P 100   565.86 -  3.57   569.71   565.02   Totals 2652/3727
S&P 500  1149.10 -  6.87  1156.54  1147.31 
W5000   11225.44 - 64.00 11297.80 11213.94
SOX       510.24 -  2.90   521.15   509.97
RUS 2000  591.06 -  3.71   596.22   590.96
DJ TRANS 2896.90 - 19.70  2923.86  2894.80   
VIX        14.86 +  0.42    14.89    14.18
VXO (VIX-O)14.60 +  0.42    14.60    14.03
VXN        22.42 -  0.12    22.93    21.97 
Total Volume 4,061M
Total UpVol  1,303M
Total DnVol  2,716M
Total Adv  3053
Total Dcl  4205
52wk Highs  705
52wk Lows    16
TRIN       1.36
NAZTRIN    1.35
PUT/CALL   0.71

Greenspan must be irritable lately because every time he takes the stage he takes aim at the status quo. The shot heard around the world today sent the dollar to the largest one day gain against the Euro ever. Those short the dollar were not happy traders today. The ramifications from Greenspan's currency talk reverberated through all the markets, stocks, bonds and commodities.

Dow Chart - Daily

Nasdaq Chart - Daily

The economics today were mostly positive with Chain Store Sales flat but up from last weeks -0.2% rate. The most positive report was the Challenger Layoff Survey for February. The headline number showed a -34% drop in layoffs from the January level with only 77,250 in February. This was the lowest level in five months but the recent average is still in the 100,000 per month range. The level prior to the recent recession was averaging only 50,000 per month. The drop in the headline number was very encouraging. The components showed the majority of the cuts were in the food services, financial services and industrial goods and layoffs in techs and telecom have dropped substantially.

This was a positive report but the Greenspan comments far overshadowed the markets and economics were quickly forgotten. Greenspan took aim at the huge amount of U.S. debt owned by Japan and China and pulled the "gotcha" card out of his deck. He said Japan owned $650B in treasuries and China $450B. He said they bought these securities to keep their currency inline with the dollar and maintain the current favorable trade rates. Today, Greenspan said further intervention by these countries was unsustainable at the current rates. Eventually they would have to let the market forces work and sell much of the debt they currently owned. This would produce a stronger dollar and higher interest rates. Oops!

Suddenly the ever declining dollar was rebounding due to the light at the end of the tunnel and those short the dollar were scrambling to cover. Also helping support the dollar was rumors of a ECB rate cut in the wings. This would remove another reason not to own the dollar and helped to provide even more incentive to cover. The dollar rose nearly +2% against the Euro and it was the biggest one day gain since the Euro began. The Euro fell to a two month low against the dollar. Ironically a rising dollar reduces the need for Japan and China to buy more treasury debt and that also reduces the demand for debt paper.

On the bond front treasuries plummeted on the prospect of less buying from Japan and China and yields rocketed. The ten-year yields soared to close at 4.05% from the 3.94% low on Monday. With the prospect of a strong dollar returning equities saw some serious sell programs as funds lightened the load on interest sensitive issues and techs. The banking sector saw some heavy selling as did some of the home builders.

In the question and answer session Greenspan was asked directly about the coming Fed rate policy. He responded with a grin that "we have said repeatedly that the current policy is accommodative and eventually we will be forced to remove that accommodation." His elaboration to that initial reply was a clear warning that the Fed patience may be wearing thin and there were rate hikes in the future. He did not indicate how far in the future and it is likely several more months or even as long as next year. He bluntly stated that hikes were coming to put the bond market on notice that the honeymoon was not going to last forever. Nobody expected it to but the recent list of weaker than expected economic reports had more analysts going on air to suggest the Fed was on hold until 2005. Greenspan cannot let that thought process continue. He has to keep the markets off balance to avoid a disaster should something unexpected come up. He has to keep the markets always on the edge to prevent traders from loading up portfolios with lopsided rate risk.

The equities market was faced with the potential for higher rates sooner than expected and possibly inside the six month window and some institutions decided to take profits. The market typically discounts all events for six months in advance. With the general outlook of no rate cuts until 2005 there was little rate risk built into the next six months of earnings expectations. What happened today was the addition of some rate risk back into the current expectations.

Another problem weighing on the markets is the price of oil. On Monday it hit the $37 level and closed today at $36.70. It is normally reported that every $1 increase in the price of oil costs U.S. consumers around $7 billion a year. Most budget estimates assume a historical average oil price in the $22-$25 range. We are currently $12 over that range and that is an $84 billion hit to our economy. Obviously it will hurt companies that depend on oil much more than those who don't but the end result is the U.S. consumer will end up footing the bill and that is real cash out of our pockets. This problem has been mostly ignored for the last couple months but the closer we get to $40 the more press it is going to get.

Other commodities are also shooting through the roof. Copper is exploding, platinum just hit a 40 year high and even soybeans have been hitting daily contract highs. Prices for goods made with these raw materials have to rise to cover the increased costs. Again, these costs will be passed on to consumers but in a weak economy with no pricing power there has to be some earnings pressure. Corn prices just rose to a six year high and this is pressuring the livestock industry to the point where the little guys are beginning to give up. Hogs are currently trading for $45 per cwt and it costs over $42 to produce them. In 1998 hogs were selling for $8 per cwt. Corn is up +50% per bushel from last year and soymeal is up +57% over last year. The bottom line for me is that the cost of everything is spiraling up but the pricing power of the producer has not yet returned. This suggests that earnings six months from now may suffer.

I got sidetracked on this thought while discussing oil and its pressure on stock prices but there are broader problems in our future. Fortunately the drop in the Euro and the gain in the dollar had a depressing impact to commodities today. It seems hedge funds had been buying commodities to hedge the falling dollar and the trades started coming unwound. Using a falling dollar to buy a rising commodity like gold, oil or soybeans makes sense as long as the divergence continues. Once the dollar begins to rise the divergence collapses. The CRB fell -3.78 today as 14 of its 17 component commodities dropped on the news. The biggest losers were cotton, platinum, silver and soybeans which fell -3.24%. Obviously there is a mixed message here and it may take sometime for the stock market to figure it out.

The fallout from all the currency gyrations was a Dow that gave back nearly all of Monday's gains with a -86 point loss. What was so promising near 10700 on Monday evaporated and knocked the index back to support at 10580. We actually came very close to the 50dma currently at 10533. For a few minutes I thought the dip to 10568 was going to hold and be close enough for a test of that average but another bout of selling at the close killed the afternoon rebound. The negative close across all the averages sets up another potential retest of that average at tomorrow's open.

The Nasdaq traded up in early trading to a high of 2064 and appeared determined to rescue the Dow from its weakness. The SOX helped support the Nasdaq at the open by quickly adding points to yesterday's gains. Unfortunately the Greenspan currency talk and the prospect of higher rates was bad news for tech stocks and the bottom fell out quickly. Once support at 2050 was broken it never recovered. The Nasdaq did not give up all its gains from Monday but the close was very negative with concentrated selling. XLNX and STX provided mid quarter updates after the close and traders were not happy with either. The Nasdaq closed back under its 50dma once again and we are faced with the potential for another retest of the bottom of our range at 2000. I hate it, you hate it but it is a fact of life that Greenspeak ruined a perfectly good rally once again.

The best thing I can say about Tuesday is that the Russell and SOX did not sell off to the same extent as the Nasdaq and Dow. There were buyers taking advantage of the dips and they held the Russell well above its recent support and to only a -3.71 loss for the day. Were it not for the selling right at the close the loss would have been less than two points. The Russell is +12 points above its 50dma and it not in danger of a serious drop unless conditions change drastically.

SOX Chart -Daily

Russell-2000 Chart - Daily

The SOX gained nearly +12 points on Monday and gave back only -2.87 today. Considering the market this is remarkable. At one point today the SOX was well above its 50dma at 517 and was the strongest index on the board. The SOX closed -11 points off its highs but nearly flat for the day. On Wednesday it might not be so strong. The XLNX and STX updates were not exciting and chip stocks sold off slightly in after hours. The good news and we hope it is good news is the Intel update on Thursday night. This normally provides a market boost in advance and sometimes after the update. Many times it is the trigger for the quarterly earnings run to begin. If there was ever a quarter where we needed Intel to produce a bounce this is it. Should the SOX open down tomorrow the next real support is 507 and the 100dma and then horizontal support at 500.

Today the Wilshire 5000, the broadest measure of the market, came within three points of a new post 9/11 high. The Wilshire has struggled to shake off the Dow anchor for two months and today's attempt was the highest level since Feb-19th hit 11302 and the current high. On the surface I feel this is the best indication that a rally was in progress and a breakout imminent. How the Greenspan speech will eventually impact the indexes remains to be seen.

Wilshire-5000 Chart - Daily

We all know that the first reaction is the worst and is typically a knee jerk reaction and not necessarily the real direction for the market. Unfortunately we have a Fed meeting on March 16th and the scuttlebutt will be flowing freely for the next two weeks. Real worry will be absent because the level of new jobs has yet to rise high enough for the Fed to act. However that will not keep traders from being nervous until the meeting statement is read.

Wednesday morning we will get the ISM Services report and while no surprises are expected we can not afford to be complacent. The regular ISM on Monday fell slightly but the rising employment index was the key to the Monday bounce. In the ISM Services index the employment component has fallen the last two months. This does not set a good precedent for tomorrow considering the headline number is already expected to drop a couple points.

The rest of the week rests on the Intel update Thursday night and the Employment Report on Friday morning. There is no real whisper number for the Jobs report this month and the official estimate of +125,000 jobs is pretty much what is expected. Analysts have been so wrong over the last couple months that they are afraid to second guess the announcement. This sets up the Thursday close and Friday open as very volatile sessions. On Thursday we will have fear of both Intel and Jobs going into the close and we could see some weakness. On Friday morning we will have reaction to both and hopefully both will be positive. That could produce a significant relief rally.

The risk here is the XLNX update tonight. They said revenue would be up +9% to +10% for the quarter which was basically a raising of the lower end of the range. It was an upgrade from the +7% to +10% range they had previously given. The lack of material improvement did not excite traders. The stock was down -3% in after hours. This is my greatest fear about Intel. If they just affirm guidance the street will not be pleased. If they raise the bottom end only slightly the street will not be pleased. There is a lot of risk and very little expected reward. Seagate, STX, also updated guidance tonight and they said first quarter disk drive orders were weaker than expected. They also expected first quarter units to decline by 5 to 6 million units. STX primarily makes disk drives for desktop PCs and a drop of five million desktop PCs would be drastic for Intel's projections. Obviously we hope somebody else got the business such as Maxtor and this is just a Seagate problem but until Intel's update we do not have a clue. Remember, Intel was already downgraded by JPM based on channel checks showing a drop in notebook sales. Either way Thursday night is going to be interesting.

So, where are we going tomorrow? That is the $64 question tonight and I am afraid I do not have a satisfactory answer. With the STX/XLNX guidance we could start with a negative bias for techs. With the ISM Services that bias could be erased or enhanced depending on the employment component. I would like to think the 2020-2030 level would hold on the Nasdaq but it depends on the SOX and what traders decide to do before Thursday night. Either way I would expect 2000 to hold unless disaster strikes.

On the Dow we are entering a congestion zone between 10620 and 10550. The 10550 level should hold especially as the 50dma at 10533 is rising to support it. I am expecting 500 to hold on the SOX and by extension 580 to hold on the Russell. When I say hold I am thinking about Wednesday. Until we see what fallout we have tomorrow from the bonds and techs it will be impossible to predict the rest of the week. I am still in buy the dip mode and while I would love to see another retest of Nasdaq 2000 to pickup one last bargain I would rather not face the possibility that a retest may not hold. I start getting nervous when we near that level. I feel like our ace in the hole is the 50dma on the Dow. Once that is hit it could act as an electric fence and repel the average back higher. It has held every test since April-2003 and while that should comfort me it actually worries me. Eventually it will fail and I just hope this is not that test.

Technically nothing has changed. We are still trading in the same range we have seen for the last six weeks (10450- 10700 2000/2100) and until that range breaks we just need to keep buying the dips and selling the highs.

Enter Passively, Exit Aggressively.

Jim Brown


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