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Market Wrap

Trend Change!

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      03-09-2004           High     Low     Volume   Adv/Dcl
DJIA    10456.96 - 72.50 10529.70 10424.07 1.87 bln 1215/2031
NASDAQ   1995.16 - 13.60  2011.83  1987.29 2.10 bln 1022/2171
S&P 100   560.90 -  2.77   563.77   558.88   Totals 2237/4202
S&P 500  1140.58 -  6.62  1147.32  1136.84 
W5000   11147.30 - 73.30 11220.62 11147.30
SOX       486.37 +  1.10   488.04   479.65
RUS 2000  585.95 -  6.56   593.26   584.31
DJ TRANS 2834.30 - 34.40  2869.63  2826.65   
VIX        16.60 +  0.81    16.74    15.56
VXO (VIX-O)16.37 +  1.04    16.89    15.93
VXN        24.70 +  0.62    24.86    24.03 
Total Volume 4,318M
Total UpVol    999M
Total DnVol  3,214M
Total Adv  2569
Total Dcl  4749
52wk Highs  380
52wk Lows    16
TRIN       1.08
NAZTRIN    2.42
PUT/CALL   0.97

I have been telling you for the last six weeks to keep buying the dip and selling the highs as long as we stayed in our range. That range was 10450-10700 on the Dow and 2000-2100 on the Nasdaq. Boys and girls the stress moved up a couple notches today with the Dow closing at 10456 and the Nasdaq 1997. We have not fallen off the cliff yet but we can definitely see over the edge.

Dow Chart - Daily

Nasdaq Chart - Daily

What the heck happened to the rally? Friday the Dow hit 10643 AFTER the negative jobs report and closed positive for the day. Monday we jumped to 10634 again and then the bottom fell out. The Nasdaq hit 2068 on Friday, 2058 on Monday then bottomed at 1988 today. Where did all the buyers go?

There are multiple reasons for the dip. In no particular order the first major cause was a deluge of new stock coming to market. Today alone there was over $6 billion according to TrimTabs.com. $3.8 billion of that came from GE and was their first major stock sale since 1962. GE made this announcement without warning before the open on Monday and the largest market cap stock on the Dow dropped from $32.80 on Friday to 31.31 today. This was a major depression for the Dow, not just because of the stock drop but for the blow to sentiment by seeing the stock drop to a two month low. Analysts thought GE was cheap already considering their growth prospects but they were unprepared for the $16 billion drop in market cap from the sudden decline.

Adding to the Dow decline was a -2.11 drop in Intel from the closing levels last Thursday when they posted weaker than expected guidance. Not only did Intel lead the semiconductor decline but they damaged sentiment once again when they fell below their 200 dma at 28.37. This is a normal sell signal for funds and with volume at 92 million shares today there was obviously a lot of institutional selling.

With GE and INTC headlining the selling on the Dow it appears there was a lot of sympathy selling as well. UTX, IP, DD, GM, AA, BA and IBM all dropped sharply. There was no common cause other than the drop in bullish sentiment. The sentiment drop began on Friday with the jobs report.

The soaring bonds exceeded expected gains and just continued to rocket higher. They continued rising today with the yields on the ten-year dropping to 3.71% and the lowest level since July 2003. Analysts are scratching their heads for the reason why. Sure the Fed is on hold for the foreseeable future but that should not have impacted bonds so strongly. Some are now speculating that we are seeing some asset allocation programs on fears of a weakening recovery. The terms recession and deflation are starting to make it back into the press. If the campaign wars are going to depress consumer sentiment and the recovery appears to be stalling then fears of a 2nd recession start to creep into the investor consciousness. Stocks have been on an extended rally since March of 2003 and with the second half of election years not know for strong gains maybe it is time for funds take profits and move into the safety of bonds. At least that is the current thought process.

On the technical side a lot of the Nasdaq weakness was due to the drop in the SOX that was led by Intel. After hitting a high of 560 in January the SOX has been fighting a long and protracted battle to hold its gains. This week the Intel slide helped push it from 510 on Monday to a low of 480 today. This -30 point drop, nearly -6%, in only two days was very destructive for the Nasdaq as chips normally lead techs.

We are on the verge of serious technical damage across the various indexes. The Dow is on the absolute edge of the cliff at 10450 with only one more minor support level left at 10400 before facing a serious drop. Today was the first time since March-14th 2003 that the Dow failed to trade above or at least touch its 50dma. This is very bad for sentiment even though it only missed by 30 points. It has been support for so long that a failure here suggests substantial weakness. I have discussed this many times over the last couple months. Recently I have explained that the Dow had not dropped to the 50 but the 50 had risen to the Dow. Whether this is material to the actual feeling in the market is unknown. Discounting the 50dma for a moment the Dow did pull back to very strong support at 10425-10450 and managed to hold its ground. It is extremely critical that this level holds with 10400 the self destruct trigger.

The Nasdaq traded within 6 points of its 100dma back on Feb-24th and recovered to trade nearly 80 points higher. Today that average was broken at 1999 and the index closed at 1995. This is not only under the average but also below the psychological 2000 level. Granted it is only a couple points and a quick rebound tomorrow will erase the memory of the break very quickly. The danger we face here is a new leg down and the next dip could take us all the way to 1900. This is a critical turning point for the Nasdaq.

The major reason for the Nasdaq drop was the SOX as I previously mentioned. The SOX broke its 100dma at 497 yesterday as well as critical support at 495. The good news was a positive close on Tuesday after a double bottom intraday at 480. Traders will be cheering tomorrow if the SOX can hold that level and begin a move to higher ground. Support levels below us would be 475 and then 450 but nobody wants to consider that risk. Aiding the drop today was the IBD Chip Index report which fell a couple points to 54.5.

SOX Chart - Daily

Unfortunately the Russell has fallen and can't get up. The Russell dropped to 586 and showed almost no rebound at the close. The small caps are getting dumped along with big caps and this suggests the selling is very broad based and heavy. The 50dma is currently 583 and we came very close today. It has been support since March and was touched twice in February. The 50ma is way above horizontal support at 566 and trust me, we don't want to go there.

Russell Chart - Daily

Wilshire Chart - Daily

Our index of last resort is the Wilshire-5000 and it followed the other indexes down today. Fortunately the horizontal support at 11076 and the 50ma at 11084 are not only very close together but still below the close at 11147. This suggests the light selling we are seeing in the Wilshire may not be able to push through this support.

To recap how we closed today:

Dow 10456, support 10400-10425
Nasdaq 1997, support 1999-2000 (critical)
Wilshire 11147, support 11075-11100
S&P 1140, support 1137
SOX 486, support 480
RUT 586,support 583

Clearly we are at critical levels AND at the bottom of the range we have traded for the last two months. This is the edge of the cliff. Whether we are either here to just enjoy the view or investors are preparing to jump should be known over the next couple days. Volume did spike today to the highest level since Feb-19th and declining volume was 3:1 over advancing. 3:1 is strong but is was far from a blowout day of 5:1 or greater. Higher volume on a down day is bad but at this level it is only an early warning sign to be watched for signs of an increase.

Also impacting sentiment today were things like the Nasdaq all time high anniversary. On March-10th 2000 the Nasdaq posted its all time closing high of 5048. Traders with large profits on the table tend to remember milestone events with fears of a repeat. Also coincidentally it was announced today that the assets of all stock mutual funds last week exceeded the highs set in that same March 2000 time frame after three years of declines. Everybody is back in the market at or near the top. The oracle of Omaha, Warren Buffet, also said the market is overvalued and he expects no new purchases until stocks settle some. Of course as a value investor it is in his best interest to try and talk it down so he can buy cheaper. Smith Barney lowered their end of year S&P target to 1025. It closed today at 1140 and that would be a -10% drop. MER suggested traders take a more defensive posture. Caution is breaking out all over.

The biggest fear appears to be lack of jobs. TXN updated guidance last night to the high end of prior estimates and failed to impress buyers. This suggests we are faced with simple profit taking on fears that the recovery may be slowing. Add in the published survey today that Bush is behind Kerry in the polls and suddenly the outcome of the election is in doubt. The locked in tax cuts may not be as locked in as investors thought and the economic future is starting to cloud over. Interest rates may be falling and the Fed may be stable but suddenly that may not be the biggest cloud on the horizon. The current rally was built on lower taxes, higher spending and the promise that better things were to come. If the regime making that promise is in danger of being deposed then that promise may be in danger. While I do not think Kerry will win it is not what I think or you think that matters. It is fear of the unknown that matters and the market is definitely afraid of the rising economic uncertainty.

Where do we go from here? As I showed you above we are at critical levels in the markets. We are right at the bottom of the trading range that has held since Dec-30th. We have been buying this level and selling the highs for two months. Has sentiment changed significantly enough to modify that plan? I would say yes. I am not saying run for the sidelines but I do recommend caution. I would not hesitate to buy the dip if I see any indication of strength at tomorrows open. However I would not hesitate to switch sides and short the market on a Dow break below 10400. We are at the bottom of the swing and the rubber band is stretched to the breaking point. We are about to either rebound in stunning fashion or that band is going to break and there is a serious drop ahead of us. The signal is clear. Stay long over 10400 and flat or short under 10400. Any continued drop from here could be signaling that there will be no April earnings run and the election year decline has started. I have been projecting mid April for that event but the jobs report and the lowered Intel guidance may have turned the tide early.

Enter Passively, Exit Aggressively.

Jim Brown
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