Option Investor
Market Wrap

Sleep Walking

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      03-30-2004           High     Low     Volume   Adv/Dcl
DJIA    10381.70 + 52.10 10387.26 10306.15 1.63 bln 2059/1066
NASDAQ   2000.63 +  8.10  2000.68  1981.44 1.60 bln 1893/1205
S&P 100   552.53 +  2.07   552.74   548.91   Totals 3952/2371
S&P 500  1127.00 +  4.53  1127.60  1119.66 
W5000   11037.06 + 54.50 11039.40 10956.20
SOX       487.03 -  0.50   487.57   478.22
RUS 2000  589.40 +  6.01   589.41   582.14
DJ TRANS 2883.64 -  2.30  2885.77  2862.04   
VIX        16.28 -  0.22    16.80    16.13
VXO (VIX-O)15.99 +  0.03    16.92    15.96
VXN        23.18 +  0.02    23.70    23.04 
Total Volume 3,541M
Total UpVol  2,293M
Total DnVol  1,107M
Total Adv  4433
Total Dcl  2575
52wk Highs  362
52wk Lows    22
TRIN       0.87
NAZTRIN    0.91
PUT/CALL   0.61

The markets woke up with a hangover this morning after triple digit gains on Monday and promptly went back to sleep. The minor wandering movements for the majority of the day could be seen as traders sleep walking through the session while waiting for the floor show to begin tomorrow. With the economic calendar light for Mon/Tue the economic overdose begins in earnest on Wednesday.

Dow Chart - Daily

Nasdaq Chart - Daily

The minor economics for the day included the Chain Store Sales Snapshot which came in a -1.9% for the week compared to a minor gain of only +0.2% the week before. Analysts claim the constantly rising price of gasoline is taking a painful amount of money from the pockets of consumers. This cash drain is hitting retailers where is hurts, right in the spring product changeover. That extra energy tax does not appear to be disappearing any time soon. Oil closed at $36.12 again after rebounding off the $35 support level we have seen over the last month. The bounce was due to conflicting claims that OPEC was still committed to production cuts to be announced at their meeting on Wednesday. With global consumption continuing to rise any production cuts would guarantee even higher prices for oil. Retailers will have to hold out for the wave of tax refunds to boost their sagging business and offset this undeclared energy tax. We will have earnings from Best Buy and Circuit City before the bell on Wednesday. This could give us a clue for the present trend but retailers in general have been upgrading guidance over the last couple weeks. WMT and TGT both affirmed the high end of guidance just last week.

Oil Chart - Daily

The only other economic report today was the Consumer Confidence for March. The consensus had been for a drop to 85.8 from 87.3 in February. The headline number came in higher at 88.3 but the really good news was an unusually large number of revisions to prior months. February was revised up +1.2, January +1.2 and December +3.1. These back month revisions are not really important on a current basis but it is comforting to see such broad improvements. With the revisions the March number ended up nearly unchanged and better than expected. The present situation component rose just under a point and the future expectations fell just under a point. Clearly consumers have shaken off the Madrid bombings and the drop in the market and are holding their current levels of optimism. Considering the political mud slinging about the state of the economy this is actually a bullish sign. It suggests consumers are already glazing over from the mud fight and may not let the comments depress them further. Those planning to buy a home rose slightly due to the lower interest rates but those planning to buy an auto dropped substantially from 7.2 to 5.1. This is the lowest level since 1995.

The positive Consumer Confidence report provided the only real excitement for the morning and helped pull the markets back from an opening slump. The bounce was minimal and brief but it did help erase the negative bias from the Chain Store Sales. Unfortunately the markets were unable to retain any momentum and slipped back in their rut to wait for the rest of this weeks reports. After a triple digit gain on Monday and an overall bullish tone for the prior three days just consolidating at the highs and in positive territory was a very good sign.

The Dow stagnated just under resistance at 10350 and Nasdaq seemed to fixate on 1990 as the price magnet for the day. The Dow was never in danger but the Nasdaq was crippled from the opening bell due to weakness in the semiconductor index. The SOX was down -8.75 or -1.8% at midday on weakness in INTC and AMAT and others. Semis lead techs and techs lead rallies but the reverse is also true on sell offs. Without the SOX to lead the Nasdaq was in trouble. The NDX was also challenged with strong resistance at 1445 and that level held until well after the 3:PM rebound had started. The NDX has strong resistance at the 50dma at 1455 and again at horizontal resistance at 1460. Moving higher is still going to be a challenge but a break over those levels should generate some serious short covering.

SOX Chart - Daily

NDX Chart - Daily

The strongest index for the day was the Russell 2000 with the RUT rebounding to the 590 level and showing almost no weakness all afternoon. This is very encouraging because strength in the Russell normally means mutual funds entering the market. The Russell broke through resistance at its 50dma at 582.50 and closed at the high of the day only 11 points from the magic 600 level. This is a very key indicator for any broad market rally and suggests the buyers are back in control on the mutual fund level. ICI made the formal announcement today that February fund flows had fallen to only $26.2 billion from January's $43B. We already knew there was a drop in flows and we also know there were negative flows two weeks ago. That suggests March is going to be well under February. This is even more important when you look at the Russell gains over the last four days. It bottomed out at 555 last Wednesday and now it is closing in on 600. As of the close today we have already rebounded +6.3% from last weeks lows. For me this is a lot of conviction that this rally has legs and the funds are behind it. This suggests the negative cash flows from two weeks ago are history and funds are eagerly anticipating a big flow of retirement cash now that the quarter is over.

Russell Chart - Daily

Another index jumping out in the lead today was the Internet Index. The $IIX and the $DOT both broke out of their January downtrends on leadership by YHOO and EBAY. This helped offset some of the Nasdaq weakness from the SOX. The move today capped four days of strong gains and suggests many shorts got caught by surprise.

$IIX Internet Index Chart - Daily

While the rally continuation today was encouraging there were still signs that it was primarily window dressing and today was the final markup of prices. Now all they have to do is hold them at these levels into Wednesday's close. They will probably try to push them a little higher tomorrow to get the Dow back into positive territory for the year. The Dow closed 2003 at 10453 and we are still about -72 points below that level. The Nasdaq closed 2003 at 2003 and we are VERY close to going positive for the year with today's close at 2000. The S&P-500, the index of choice for comparison of mutual fund performance closed 2003 at 1112 and the 1127 print today pushed that index back into a gain for the year. The Russell is still the winner now up +6% from the 2003 close at 556.

Bonds started the day stronger on multiple fronts including short covering in front of Japan's fiscal year end tomorrow. Traders are afraid of any last minute window dressing in the currency markets to try and clean up the massive amount of dollars Japan has been spending to support the Yen. The Yen is on the verge of hitting a three-year high against the dollar and suggests that the intervention suspension talk may have more truth than Japan would admit. Also helping bonds were some negative comments about the lack of jobs on the wires. Bernanke upheld the party line in his Fedspeak for the day. He said we are 2.5 years into the recovery but job growth was still distressingly slow. He also said he expects jobs to recover before year end. This has been their expectation for quite come time and it has yet to come to pass. Bonds ended the day selling off their gains and the ten-year yield closing nearly flat for the day. Traders are facing a mountain of economic reports for the rest of the week and there were adjustments of positions on both sides.

Ten-Year Yields - Daily

Bonds are set for a volatile session on Wednesday despite any equity market manipulation by the big money to close the first quarter in the green. The economic reports on tap are the Mortgage Application Survey and no surprises are expected there with interest rates still low. The first stumbling block for bonds will be the NY-NAPM. The report has shown sharply accelerating business conditions in New York for the last three months. Last months report hit a new high but there were several components with the early stages of a reversal. Traders will be looking for those to rebound again and hopefully not be worse. The NY-NAPM number for Feb was 267.2 and there is no estimate for March.

Next up is the Chicago PMI and it also dropped in Feb from a nine year high in January. Nobody complained about the drop considering the record high in January but another continuation of that drop in March could have trader worry resurfacing that the economic rebound has already peaked. Factory Orders are expected to climb +1.5% from the -0.5% drop in February. Again, a rebound here will bring a sigh of relief where another dip or minimal gain will bring back those recovery fears.

These reports are small potatoes compared to the ISM on Thursday and the Jobs report on Friday. The ISM is expected to drop nearly a point for the second consecutive monthly decrease and we could really use a positive surprise here. This is a key indicator of overall economic activity and two down months will not be greeted warmly.

The report with the biggest focus for the week is the Employment Report for March, which is due out on Friday. We all remember the estimate games that have been making the rounds for the last four months. The general consensus estimates have been in the 150K range and they have yet to come close. In recent months whisper numbers have risen to the ranks of the insane with up to 350K being tossed about. Last month it was a little more reserved with many of the big guessers a little too ashamed to show their faces back on the air after missing the mark so badly for the prior three months.

Their back! Yes, whether it is the spring weather, warm sunshine or just an infection of March Madness the numbers making the rounds are quickly reaching astronomical proportions again. The official "consensus" number is +100,000 but the official "whisper" number is +125K and easing toward 150K. The bigger names are shaping up like this. Lehman has targeted +95K, Goldman Sachs +160K, Wachovia +225K, TheStreet.com +250K and the winner at +350K was an analyst at Prudential. He said he would raise his official estimate to 350K but too many of his clients were already laughing at him at +175K. Wise move.

Continuing to raise your public estimates to multiples of the official consensus after being publicly humiliated for multiple consecutive months has got to hurt your credibility. It is like betting on a coin flip and always calling heads. It will eventually end up heads but you could lose a lot of money waiting. In Vegas I have seen fortunes lost on red/black bets on the roulette table. I once saw a string of 37 reds spins. Gamblers were 20 deep around the table all trying to bet their bankroll on black because it just "had" to hit. That is the way I see the jobs numbers. Eventually they will be right but it may not be this month. The proliferation of high whisper numbers has the potential to depress the market more than impress it. Once everyone begins to expect a blowout anything else is a letdown. This is what I expect for Friday. Even if we hit the official +100K number the majority of traders will be disappointed. It could be just like an inline earnings report for Intel. Yawn! Is that all?

A four-day rally with the Dow +370 points above last weeks lows is begging for some consolidation. The abundance of economic reports ahead should give traders plenty of excuses for that consolidation. Whether the porridge is too hot, too cold or just right the expectations are already priced into the market. Much of the impact of those expectations was aided by the end of quarter window dressing. Those artificially inflated gains also came on very low volume where the recent sell offs have been on stronger than normal volume. On Tuesday the NYSE and the Nasdaq barely broke 1.6B shares each. This is very light, almost holiday volume and the third consecutive day for volume across all exchanges to barely reach 3.5B shares. This is not a good sign technically. We are also seeing an increase in put buying with the index put/call ratio rising to 1.45 today. This is actually good since it shows a level of fear in the marketplace that is not being reflected in the VIX which has fallen to 16.29.

This is definitely shaping up to be an exciting week. That would be a definite improvement over the Tuesday sleep walk. If we do manage to go higher from here the Dow has only minor resistance at 10400 which develops into major resistance in the 10450-10475 range. This is exactly where the Dow needs to be to close the quarter in the green. The Nasdaq is at critical resistance at 2000. It must move higher to break the current downtrend since January and there is plenty of resistance to battle. Helping the Nasdaq will be a little breathing room on the SOX before it hits downtrend resistance just under 500. An even bigger help to the Nasdaq would be a Russell move over 590 resistance giving it a clear run to 600. This more than anything could provide the breakout bias to all the indexes. If the funds have already finished their end of quarter small cap shopping then extending the Russell rally could be a challenge. Let's hope they saved some pocket change to dress the tape at Wednesday's close.

With all the economic potholes ahead I would be very leery of opening any new long positions. We need to see some consolidation of the current gains and digest the economic news before moving higher. Next week is plenty of time to join the party if the rally has legs. Of course economic blowouts across the board could push us higher but after four days of our coin turning up heads do your really want to bet heads again?

Enter Passively, Exit Aggressively.

Jim Brown


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