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Market Wrap

Good Signs

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      03-23-2004           High     Low     Volume   Adv/Dcl
DJIA    10063.64 -  1.10 10131.35 10047.41 1.77 bln 1771/1352
NASDAQ   1901.80 -  8.10  1928.61  1898.94 1.79 bln 1559/1542
S&P 100   535.15 -  0.95   539.27   534.18   Totals 3330/2894
S&P 500  1093.90 -  1.50  1101.52  1091.57 
W5000   10693.36 -  4.40 10769.42 10669.16
SOX       457.46 -  1.40   465.87   453.37
RUS 2000  560.92 +  1.93   566.05   558.51
DJ TRANS 2763.12 + 12.30  2788.21  2751.60   
VIX        20.67 -  0.91    21.33    20.01
VXO (VIX-O)20.45 -  0.98    21.78    19.70
VXN        26.84 -  0.31    27.21    26.25 
Total Volume 3,930M
Total UpVol  1,820M
Total DnVol  2,048M
Total Adv  3751
Total Dcl  3256
52wk Highs  159
52wk Lows    54
TRIN       1.21
NAZTRIN    1.49
PUT/CALL   0.68

The markets rebounded strongly at the open and celebrated that support had held and terrorists had disappeared again. Unfortunately that celebration lasted about as long as the opening bell. It was not a good sign that the indexes almost returned to Monday's lows before rebounding to the highs of the day around 3:PM. It was not a good sign that they failed at those highs for the second time and sold off once again in the last hour. It was not a good sign that we closed on support instead of resistance. It was not a day for good signs.

Dow Chart - Daily

Nasdaq Chart - Daily

The only economic report for the day was positive but did not excite traders. The Retail Sales Snapshot rose +0.2% for the week and pushed the year over year growth to +7.1%. Most of that growth is due to very weak comparisons last year. Helping the gains for the week was mild weather and the approach of Easter. The majority of retailers said sales were at or ahead of plan for the month. Target said same store sales were on track to exceed expectations and Wal-Mart said they expected to hit the high end of their forecast for +4% to +6% growth. Consumers my be saying they are concerned about jobs and the economy but they are continuing to spend. As tax refunds start to flow we can expect those sales to rise even more.

Wednesday will make up for the lack of economic reports with a flurry of events.

7:00 Mortgage Application Survey (last 1,117.1)
8:30 Consumer Comfort Index (last -22)
8:30 Durable Goods (est +1.7%, last -1.8%)
10:00 Chicago Fed National Activity Index (last 0.49)
10:00 New Home Sales (est 1.084M, last 1.106M)
10:00 Monthly Mass Layoffs (last 2,428)

The only really material report is the CFNAI at 10:00. This will give us a peak at what the next ISM may look like.

Personally I don't think any of them will matter. The economics are not what's moving the market. The markets are moving on news, negative news. All the good dog and pony show positioning for the day was worthless. The GE CEO was on CNBC and said this was the best economy in over four years. He said plastics orders up +20%, appliances +12%, airplane parts +15% with nine of their eleven businesses growing by double digits and the stock closed down and at the low of the day.

The markets are definitely in the midst of a phase where changes are being made. They appear to be headed south and nothing is going to stop them. All sectors, all stocks all sizes are all going the same direction. I heard one commentator today mention market correlation at turning points. Normally markets trade more or less in the same direction but move in different tangents according to the individual stocks in the indexes. Housing stocks may be up while biotechs are down, etc. Very rarely do all markets trade exactly the same way and that is happening now. This suggests it is not a fundamental change. Earnings are still rising and warnings have been nonexistent. That is not the problem. The problem is the new risk paradigm and funds are liquidating stocks across the board.

We have the "new" terrorist threat from Al Qaeda. I say new because they could be planning on influencing our elections with specific attacks after their success in Spain. We have the new Hamas threat where they are claiming they will get back at us for their leaders death. We have the new threat that Bush might be vulnerable to losing votes because of the 9/11 commission and the Clarke attack. The markets are afraid Kerry might actually win. The uncertainty from all these events is causing serious indigestion for traders. Bonds are continuing to rise, money is rotating out of stocks and funds are seeing cash outflows. In short either the bull died or maybe it is just sick but pulse is definitely missing.

The Dow tried twice today to climb out of the Monday hole and failed both times. Twice today it failed at 10125 and closed very near the low of the day at 10050. We still have not touched the 10K level but came very close at 10012 on Monday without any material bounce. The Nasdaq came within one point of Monday's lows at 1397 and also closed near its lows for the day.

Today should have been a dead cat bounce, relief rally, bargain hunting rebound, etc. Pick your own label. When we have a very big drop on 10:1 down volume that punctuates several days of losses the normal reaction is a gain the following day. Obviously these are not normal conditions.

The lack of a rebound and the velocity of the sell off at the close should be telling us not to sleep in tomorrow. After the close futures continued to slip without any additional news. Tomorrow could start out with a loss and with the indexes right on the edge of the support cliff any material loss could easily break that support. The Dow closed at 10066 and the Nasdaq at 1901 with the S&P already under support at 1094. In non technical terms this could get ugly quick.

Should the Dow move under 10K and hold the rats will be fighting each other to abandon ship. News driven changes in market sentiment can take on a life of their own and they almost always over react and over reach. Once the herd smells smoke and begins to move away from danger it can easily turn into a stampede. Despite the 10:1 down volume on Monday the selling was orderly. Until it becomes disorderly it may not provide the capitulation event needed to end the selling. This suggests we could break current support and we could see another drop again tomorrow. If it does not happen on Wednesday then there is a chance we could dodge the bullet. Once traders take time to catch their breath the greed principle will return and the selling pressure should ease.

On Wednesday AMAT will host its annual meeting and we could get some positive news from that sector. After the close Micron will post earnings and there are some rumors that DRAM chips are available on an allocation basis only for the first time in eight years. Any news on this from Micron should help the SOX which is fighting to hold above six month lows. After the bell today PMCS said Q1 revenue would be at the high end of its prior guidance. They also said their book-to-bill for the March quarter was already over 1.0 with orders rising. It is news like this that should be lifting techs but instead it has been ignored.

Goldman Sachs was the star of the day when they posted profits that best estimates by 85 cents at $2.50 a share. They said equity related business as well as an increase in corporate activity levels added to their gains. GS was thanked with a nine cent gain in the stock price.

If you are like me and have been waiting for EBAY to pull back for an entry then today was your day. My alarm at $65 went off this morning after a negative article in Business Week suggested the company was over priced. EBAY traded over $69.50 on Friday and under $65 today. That is about the biggest two day drop in recent memory. The 100 dma is just under $64 and has not been touched since Nov. If you like EBAY this may be a buying opportunity for a stock that refuses to drop. Unfortunately when markets are weak for external reasons even good stocks sink with it. Look for evidence the drop is over before making a bid on this auction.

I would be especially cautious about entering new positions until the volatility eases and "normal" markets return. Of course that depends on what your definition of normal may be. With the current overnight sentiment indicating we may open down on Wednesday I would look for something that resembled a capitulation event to go long. Look for heavy volume and a large imbalance on the internals and the appearance of a bottom being formed. There is no guarantee we will get one or that there will be a rebound but that would be my target for a long entry this week. Until then trade the trend.

Enter Passively, Exit Aggressively.

Jim Brown


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