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Market Wrap

Back From The Brink

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      03-25-2004           High     Low     Volume   Adv/Dcl
DJIA    10218.82 +170.60 10226.08 10049.49 1.90 bln 2295/ 912
NASDAQ   1967.17 + 57.70  1967.17  1923.22 1.94 bln 2280/ 825
S&P 100   544.31 +  9.82   544.87   534.49   Totals 4575/1737
S&P 500  1109.28 + 17.95  1110.38  1091.33 
W5000   10842.86 +180.30 10850.60 10662.52
SOX       485.53 + 17.20   486.34   468.14
RUS 2000  571.53 + 13.90   571.69   557.63 
DJ TRANS 2828.74 + 67.40  2831.37  2761.74   
VIX        17.88 -  1.93    19.58    17.61
VXO (VIX-O)17.76 -  2.73    19.99    17.65
VXN        23.70 -  2.36    26.01    23.49 
Total Volume 4,243M
Total UpVol  3,771M
Total DnVol    434M
Total Adv  5120
Total Dcl  2036
52wk Highs  204
52wk Lows    34
NasTRIN    0.17
TRIN       0.45
PUT/CALL   0.70

The bulls had been pushed to the cliff's edge with more than a couple being turned into hamburger on the rocks below but the remainder of the herd dug in its heels, lowered their horns and pushed their way back from the brink. There was no magic moment, no sudden change in economics or smooth tongued words of wisdom by a Fed head. After three days of trying to force the bulls over the cliff the sellers just ran out of ammo.

Dow Chart - Daily

Nasdaq Chart - Daily

The economic reports started with the Jobless Claims and at 339,000 they came in right in line with last weeks 338K and still at a positive level. The four-week moving average fell to a post recession low of 341,500 and at this level jobs have historically seen gains. The continuing claims fell to just over three million. The continuing claims are reduced by about -80,000 a week as benefits expire. This does not mean 80,000 a week are finding jobs.

The 4Q-GDP came in at 4.1% as expected with corporate profits rising at +7.2%. As long as this number holds it will mean the GDP for 2003 will be +3.1% and the best since 2000. If you read Mark's article on Thursday night you know this number is questionable. Makes you wonder where we would have been without that +8.5% gain in Q3. For today's revision the consumer spending number was revised up to +3.2% from +2.7% in the prior revision. Considering the 3Q was so hot it is amazing that the 4Q actually posted another gain but then holiday spending did finally come through in the last week of the year.

Business inventories rose for the first time in three quarters although the gain was cut to only $9.0B from $14.9B in the prior revision. The weaker dollar continued to improve the balance of trade and add to the overall GDP level. The GDP growth at +4.1% is above the standard goal of 3.0-3.5% and while not exciting it is not yet strong enough to cause rising inflation. It is kind of like the Goldilocks economy from the late 90s. The porridge is not too hot and not too cold but a little warmer would be better.

Existing Home Sales rose to 6.12 million in February and up from 6.0 million in January. The bad weather in Feb depressed sales and the overall quarter is shaping up to be weaker than expected. This could depress GDP for Q1 as housing sales ripple through the entire economy. I am still expecting the 2Q to be very strong with continued low rates and the strong tax refund cycle. This spring and summer may be the last big boom with a moderate slowing in the 4Q. The application rate for adjustable rate loans has risen to 28% and far above the 15% level during last years boom. This suggests that the buyer pool is weaker and they are stretching to be able to afford a new home. Most consumers who wanted to move up took advantage of the low rates over the last two years. There is still a ready market that is only slightly weaker and inventory is relatively low so builders will still be able to control pricing power. The next six months could be the peak for the building community without a strong economic recovery to provide the next round of buyers.

The best news of the day was the increase in the Help Wanted Index to 40 from 39. No, it was not a big jump but it was the highest level since Feb-2003 and January was revised up one point. This makes two months of small increases and we are well off the lows of 35 last May. After six months of hovering around 37 the move up could be the start of a real pickup in hiring. It is still a weak reading but any gain to a yearly high should be well received. Jobless Claims have been trending down and now help wanted ads are trending up. Looks like a real change in progress. Hiring could be stronger than this index suggests because of the shift away from newspaper advertising to online methods. Also, the quantity of workers applying for every job means companies don't have to run as big an ad or as many ads as when there was competition for employees in the late 90s. There is also a trend to employing more contractors to cut down on the high benefit costs. I am not disregarding the higher index number but only suggesting that real hiring activity may actually be stronger.

While the economic activity today was positive it was definitely not responsible for the bullish blowout. The gains today sent the Nasdaq to the strongest one day gain in nine months. The Dow and S&P posted their biggest gains since October. Guess who lead the gains? Those who had been beaten down the most. Microsoft rose +3.19% and Intel +4.74% to name just a couple. The bottom appeared to be put in earlier in the week and some of the tech stocks actually began to post gains on Wednesday despite the weakness in the Dow and S&P. Intel closed at a high for the week on Wednesday and then blasted out of the gate on Thursday. Same with Microsoft when the EU fine failed to knock it back to the lows. Buying opportunity? At least that is the way it appeared in hindsight.

I reported earlier this week that the SOX was showing strength despite the broader market weakness and a quick check of the SOX shows a +6% rebound, +3.67% today alone, and right back to the resistance from early March. Today may have surprised some traders but most expected a rebound soon. We were very oversold and right on the edge of the cliff. We had to hold the line or die and after three days of trying the bears could not push us over that cliff. That gave buyers courage and we were off to the races. Semis normally recover first, then techs in general and this is exactly what happened.

The Dow recovered to close at 10215 and well off the 10,000 danger point where we had fought the battle all week. The +170 point gain was very strong and came very close to having curbs in on the upside. Can you imagine that? The Nasdaq rallied +57 points to close at 1965 and only a hop, skip and a buy program of points away from 2000. Volume was moderate at 4.2B but the internals were very strong. On Monday we had a 10:1 down day which normally suggests a capitulation event. Today we had nearly a 9:1 up day. Very strong! Unfortunately advancers were only slightly better than 2:1 over decliners. Still some traders not convinced. With good reason I might add.

Yes, you knew there was a "however" lurking around here somewhere. The Nasdaq rallied very strong off three days of support at 1900 and closed at 1965. Unfortunately the 1970-1980 level is very strong resistance. If this rally turns into a one day wonder like March-17th then this is the place it will fail.

The Dow has a little breathing room from its close at 10215 to strong resistance at 10300-10325. This was the level that stopped the previous rally from last week. Using the broader S&P that room stretches to 1120-1125 from the 1108 close.

This suggests the bulls can get a running start in the morning and hit these resistance levels at a dead run but the odds of a wreck are good. I would love to see the rally continue to rebound into April earnings but I keep thinking there is another shoe waiting to drop. We dropped over the last two weeks on profit taking, jobs, economy and terror. The jobs indicators are showing a continued slight improvement and the economic indicators are starting to suggest another uptick as we near the end of the quarter. Earnings are still rising at +16.0% and earnings warnings are very minimal. While everything appears to be on track for stocks we still have the terror component and the election component as wild cards that can appear at any moment.

The terror threat that was used as an excuse to take us lower still exists. Today Al Jazeera broadcasted a new tape from Al Qaeda number two man Ayman Al-Zawahri calling on the Pakistan army to depose General Musharraf. He claimed Pakistan was working for America in attacking the Pastun tribes suspected of protecting him. Obviously he is not in the rubble and not trapped in the current standoff. He appears to be alive and well and could try to pull off another attack to emphasize that fact. This raises the weekend event risk for many.

I explained last week how earnings and the economy do not always produce higher stock prices but that is a long term outlook not just weeks. We had a true correction on most fronts and traders are starting to see value once again. At least that is what the analysts are saying. I tend to think they got tired of waiting on the sidelines for the selling to stop and finally jumped in for a quick trade. It was more boredom and greed than value.

The challenge for Friday will be to hold the gains and try to move closer to those resistance levels I mentioned earlier of 10300/1980/1120. While it would be great to see another breakout I would be really surprised to see it on Friday. Weekend event risk may prevent back to back strong gains. That is ok in my book. If they would just post another gain to get us closer to resistance then we will be ready to start with a clean slate on Monday.

Next week is quarter end and we should begin to see some window dressing from funds sitting on cash over the last couple of weeks. Nobody wants to publish statements that show them in cash if a rebound really took hold. If the truth was known I would not doubt if some of the buying today was probably related to window dressing. Wednesday is the end of the month so time's a wasting if they want to put that cash to work.

If we can make it to Monday without a retracement and without any terror event then we could be in good shape. The week, other than Monday, is chock full of economic reports that could help build investor confidence. We have NAPM, PMI, Factory Orders, Semi Billings, Construction Spending, ISM and of course the Jobs report on Friday. With the continued weakness in Jobless Claims, the dramatic drop in the Monthly Mass Layoffs and the boost in the Help Wanted Index we may actually get a Jobs report with jobs. That could be a good news bad news event depending on the number. The estimate is for +100K and that is also the right temperature for Goldilocks porridge. Not too hot to stimulate the Fed and not to cold to throw water on the economy but just enough to show that employment is really increasing.

Keep your fingers crossed for Friday that we do not see a retracement of the gains and we do see some follow through. Follow through will set us up for next week. Lack of follow through could quickly remove any budding bullish sentiment and put us back in limbo once again. Since the broad market sell off began on March 8th we had an initial four day drop, followed by three days of consolidation. The big rally on the 17th was followed by two days of drops and then three days of consolidation. Is the cycle going to repeat with another lower low ahead? Nobody knows. Keep those fingers crossed but keep those stops in place.

Enter Passively, Exit Aggressively.

Jim Brown
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