Option Investor
Market Wrap

Jobs Lagged

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      03-16-2004           High     Low     Volume   Adv/Dcl
DJIA    10184.67 + 81.80 10221.11 10103.41 1.87 bln 1882/1334
NASDAQ   1943.10 +  3.90  1961.99  1927.69 1.96 bln 1438/1694
S&P 100   545.56 +  3.30   547.14   541.20   Totals 3320/3028
S&P 500  1110.70 +  6.21  1113.82  1102.61 
W5000   10844.34 + 45.70 10891.48 10771.38
SOX       477.04 +  5.30   480.45   470.01
RUS 2000  566.64 -  0.31   573.85   562.67
DJ TRANS 2788.35 -  2.10  2815.66  2771.04   
VIX        20.34 -  0.79    20.94    19.86
VXO (VIX-O)20.71 -  0.67    21.34    20.20
VXN        27.34 +  0.21    27.66    26.66 
Total Volume 4,175M
Total UpVol  2,605M
Total DnVol  1.473M
Total Adv  3742
Total Dcl  3465
52wk Highs  159
52wk Lows    55
TRIN       1.08
NAZTRIN    0.63
PUT/CALL   1.06

The Fed met and caught up on all the pertinent family news, enjoyed a leisurely lunch, talked a little economics then threw the markets into a turmoil with a carefully worded announcement. How do you get a job like that?

Dow Chart - Daily

Nasdaq Chart - Daily

The morning started off a little rocky with the second drop in a row for New Housing Starts. The drop surprised everyone when a gain was expected. The headline number at 1,855M was the lowest level since last August. January was revised up slightly but not enough to offset the -4% drop in February. The decline was broad based and across all product types. Permits also slowed which suggests there will be even fewer starts in March. Analysts are still claiming that winter storms have been particularly numerous although not very severe. If this is running the construction teams behind it could mean we are going to see prices soar in the spring due to lack of inventory. The continued low interest rates now dropping even lower should offset any weakness from the lack of new jobs. I feel we are just passing time until the spring weather and buying season arrives and the explosion will begin.

The Manpower Survey for Q2 was also announced and the results were very strong. According to the survey 28% of employers plan to hire in the 2Q compared to 20% in the first quarter. Only 6% plan on cutting jobs in Q2 compared to 13% in Q1. If these projections hold true it means there is a significant jump in hiring in our near future. To put this in perspective the net number, percentage planning increases minus the percentage planning cuts was 22% for the 2Q. This was up from only 7% in Q1 and an average of 11% all the way back to 2003-Q1. This is double the quarterly number for the last five quarters and triple the Q1-2004 number. This is very bullish in my opinion. We still have to see these projections turn into real job growth but the fuse has been lit. Historically a net number over 20 has coincided with net job growth of 200,000+ per month.

The big news of the day was of course the Fed meeting and the resulting market impact. The Fed left rates unchanged as everyone expected and they left the announcement ALMOST unchanged from January. The keyword there is almost. The jobs statement changed from "Although new hiring remains subdued, other indicators suggest an improvement in the labor market" to "Although job losses have slowed, new hiring has lagged." The change from "improvement" to "new hiring has lagged" sent the bond market through the roof. The acknowledgment by the Fed that jobs are slipping should mean the Fed is on hold for a considerable period instead of raising rates any time this year as some have feared. The ten-year yield fell to the lows for the month and closed at 3.68%.

They also changed the economic growth statement from "the evidence confirms that output is expanding briskly" to "indicates that output is continuing to expand at a solid pace". Note the subtle difference with "confirm" and "briskly" to "indicates" and "solid pace". This suggests that the confirmation has failed and the Fed has briskly moved away from any affirmation of strengthening growth. Solid pace sounds like a mall walker with a cane where briskly is a vision of an outdoor power walker being towed by a dog on a leash.

The Fed also refused to discount deflation as a threat and would only say that the risks of inflation/deflation were "almost equal" with deflation still getting the nod. Also failing to stimulate any positive market response was the risks to upside/downside sustainable growth remain "roughly equal." Roughly equal? Sounds like the odds of sustainable growth or returning recession are a coin toss. What was expected to be a lackluster repeat of the prior position could be interpreted as a caution that things are not as positive as they seem. The bond market definitely took it that way and so did some equity traders.

The Dow made three trips between 10100-10200. The opening spike bled points until the Fed announcement and then dove to the 10100 level on the weak interpretation. Buyers who felt the Fed statement meant they were on the sideline for the rest of the year bought the dip and the Dow rebounded to hit 10200 before the close. The Dow finished up +81 points but the Nasdaq only managed +3. Tech stocks remain under pressure despite the morning bounce and they barely returned to positive territory before time expired.

The challenge appears to be the small caps with the Russell closing negative for the day. Even the SOX closed in positive territory. The Russell broke support today and failed to recover despite an end of day bounce. The afternoon drop took it within one point of the 100dma but the rebound was lacking. This could be a prime example of a shift in the market sentiment. We know techs are being sold despite the guarantee of low rates because business is not booming. It also suggests there is rotation underway from small caps into blue chips. This is the most troubling symptom for me. It could mean institutions are expecting trouble ahead and they want to be in the highly liquid issues where they can still be in the market but exit quickly if they must. The Russell weakness really began last Wednesday when the first Al Qaeda link to the bombings in Spain was reported.

The best analogy I can draw would be in ice fishing. The best fishing is sometimes far from shore in the deeper water and somewhat thinner ice. In the spring the more aggressive fishermen may ignore the potential for thinning ice in hopes of a bigger return. One day while they are fishing they start to hear the ice groaning and creaking. After discussing it they decide they are probably safe until the April temperatures really start to thaw the ice quickly. Suddenly there is a loud crack and the ice shakes. They realize the threat was closer and more dangerous than they thought. No longer are they concerned about catching the last of the big fish for the season but in getting off the ice before it breaks under them. Apply this analogy to mutual funds, tech stocks, April earnings, bombings in Spain and the realization that Al Qaeda may have found a way to shatter the ice faster with terror events before key world elections. Get me the heck out of here and back to the safety of liquidity, quick. Fortunately we are not seeing any race to the exits and this is just an analogy but the March winds may not be bringing just April showers.

Schwab reported today that trading volume in February fell -21% from January levels. They also said March was on track to post the same meager levels as February. That analysis bears out if we look at the volume over the last couple weeks. The only heavy volume we have had was on down days. The few bounces have been on relativity light volume showing a lack of interest by buyers. Mutual funds reported negative cash flows for last week. That was the first time since last July that funds failed to see gains. With the rising levels of uncertainty the "sell in May and go away" crowd may not be waiting until May.

I know this potential analysis may seem very negative and I definitely do not want to give that opinion. Markets tend to do exactly the opposite of what they are indicating on the surface and especially when they can embarrass the most people. I would love to see the rebound we saw today blossom into a raging bull again but we need to see some proof before we can claim it.

There were several critical levels hit today that could be seen as support for a new rally. I have been pointing you to the SPX uptrend support and 100dma at 1100. We came within two points of hitting that level today and saw a strong rebound. This is the closest and strongest support the bulls can claim as their bottom. The Wilshire is fighting to hold the 10800 level which is also the uptrend support. The SOX has held above strong support at 475 for the last five days despite the major market drops. This is very bullish if it can continue to hold this level. The NDX has spent three of the last four days fighting to hold 1400 and median support from the fourth quarter. This is a key level for the NDX with the 200dma at 1375. This is a very strong support range for all of these indexes.

SPX Chart - Daily

Wilshire-5000 Chart - Daily

SOX Chart - Daily

NDX Chart - Daily

The Dow ventured as low as 10103 today and while that is not a real support level it has held for the last two days. The next support level is Dow 10000 and while it is more of a large psychological target than a support level I expect the market makers and funds to try and hold it. A drop back below 10000 would send such a negative message to the market that funds would hemorrhage cash. When they have cash outflows they have to sell stock and it produces a self perpetuating cycle. They should try to hold that level at all costs. This also equates to Nasdaq 1900 although it is less visible. The 1900 level is strong support on the Nasdaq and a level that could be tested at any time. We are only one down day away from 10000/1900.

One potentially bullish sentiment indicator is the number of oversold stocks on the Nasdaq. In March of 2003 and at the lows for the year there were only 22 Nasdaq stocks over their 100dma. As of today there were only 31. We are very close to what many would call bargain hunting levels that were worth the risk.

The rest of the week could be incredibly exciting or very boring. This is a quadruple expiration week and there could be some heavy position adjusting over the next three days. If however we saw that adjusting over the last week as evidenced by the last four days of 100 point swings in the Dow then we could just expire in the current range. Index option volume is running nearly twice the normal average and it suggests traders are either betting on a change or protecting existing positions.

The points where the most index options will expire worthless is generally slightly higher than our present level and suggests we could see a slightly higher bias as the market makers try to steer the prices to those levels. These are the levels most favorable to the market makers.

SPX 1125 NDX 1450 DJX 104 OEX 550 RUT 580 SOX 500 QQQ 36

I am not going to try and suggest what will happen for the rest of this week because the number of internal and external factors are enormous. There is no way to quantify them all into some sort of comprehensive view. Quite a few analysts think this is a terrific buying opportunity, others are suggesting selling the rallies. Earnings are still growing as evidenced by the MMM news yesterday and a couple of the home builders today. We are far from down and out but the market discounting mechanism is in full swing and compressing PE ratios left and right. Volume today as in Friday's rally was light. New 52-week highs at 160 were at their low for the year and at levels not seen since August-7th. The VXO has traded in the 21 range for the last three days and at levels not seen since October. Make no mistake there is risk in the market for both the bulls and the bears. Play in the traffic if you must but be sure to look both ways before stepping off the curb.

Enter Passively, Exit Aggressively.

Jim Brown


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