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Q1 Ends In The Red

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     03-31-2004            High     Low     Volume Advance/Decline
DJIA    10357.70 - 24.00 10401.70 10314.89 1.82 bln   1713/1107
NASDAQ   1994.22 -  6.41  2004.00  1985.04 1.85 bln   1683/1398
S&P 100   551.13 -  1.40   553.69   549.40   Totals   3396/2505
S&P 500  1126.21 - 14.41  1130.83  1121.46 
RUS 2000  591.67 +  0.91   591.67   585.16
DJ TRANS 2895.43 + 11.79  2899.97  2863.53
VIX        16.74 +  0.46    16.96    16.23
VXO        16.59 +  0.60    16.90    16.19
VXN        23.76 +  0.58    24.03    23.49
Total Volume 4,154M
Total UpVol  1,844M
Total DnVol  2,152M
52wk Highs     468
52wk Lows       30
TRIN          1.19
PUT/CALL      1.31

Q1 Ends In The Red
By James Brown

The first quarter of 2004 has ended and the Dow Industrials and the NASDAQ Composite both posted losses. Disappointing economic news, production cuts from OPEC, concerns over this Friday's jobs report and new violence in Iraq were all factors in today's declines. The good news is that the declines were mild but volume continues to be light indicating a lack of conviction ahead of Thursday and Friday's economic reports.

Global exchanges were mixed as Asian stocks tracked higher against European stocks, which slipped lower. The dollar fell strongly against the euro and hit new four-year lows against the yen. The Japanese policy change about not intervening between the dollar/yen is starting to have an effect. The U.S. markets were volatile earlier in the session after rumors surfaced that Federal Reserve Chairman Alan Greenspan was sick or had a heart attack. This is not a new ploy by those who would try and manipulate the market lower as we've heard the Alan is sick card before. However, this time the Fed chose to come out and respond saying Greenspan is fine, which is unusual since their normal policy is not to comment on any rumors.

The U.S. markets ended the session mixed with only about half of the major sector indices in the red. Yet the tone of the session felt weak as the Dow, NASDAQ and S&P 500 all closed lower. The Dow ended the first quarter of 2004 with a 1% loss while the NASDAQ lost 0.6%. This was the first quarterly loss in a year for both indices. Flexing its relative strength was the S&P 500, which ended March up 1.3% YTD. The last few sessions have been pretty bullish for the markets as mutual funds finished their end-of-quarter window dressing. Today we began to see some un- dressing and tech stocks were hit the hardest. Investors were rotating out of hardware stocks and disk drives/storage related issues mainly due to QLogic's earnings warning. Buying was heaviest in the airlines, homebuilders and oil.

Market internals reflected the mixed market message as well. Advancing stocks outnumbered decliners 17 to 11 on the NYSE and almost 17 to 14 on the NASDAQ. Yet down volume on the NASDAQ rushed past up volume 11-to-7. Bulls pulled ahead on the NYSE but up volume narrowly beat down volume 9-to-8. Volatility indices ticked higher and the yield on the 10-year note dropped to 3.837% as money sought safety ahead of Friday's economic reports.

The good news is that the markets have managed to maintain their gains from last week's lows. The bad news is that we're short- term overbought and with apprehension growing over Friday's economic reports we're liable to see some profit taking between now and then. The battle for support resistance remains. The Dow is holding above minor support at the 10,325 level but the NASDAQ is back under the 2000 mark. Meanwhile the S&P 500 is trading right at its minor support/resistance level of 1125.

Chart of the Dow Industrials:

Chart of the NASDAQ Composite:

Chart of the S&P 500 Index:

The Chicago PMI and the Factory Orders numbers were the two big economic reports out today and both turned in disappointing results. Economists had been looking for the Chicago Purchasing Managers Index to drop from 63.6 in February to 61.6 in March. Unfortunately, the results were worse than expected at 57.6 and marked the biggest drop since March 2001. The glass-is-half-full crowd will tell you that March is the 11th consecutive month of economic expansion since any reading over 50 marks improvement or expansion. The real story here was the employment component, which dropped from 54.8 to 49.2. Factories may be expanding output but they're certainly not hiring to meet demand and this doesn't bode well for Friday's jobs report. Manufacturing payrolls have dropped for 43 months in a row and today's PMI report suggests we're going to see 44 months. The factory orders for February were just as disappointing. Economists were looking for an increase of 1.7% but received an anemic 0.3% increase instead.

The biggest economic event today wasn't a report at all but the decision by OPEC to proceed with their previously announced plans to curtail oil production by 1 million barrels a day starting April 1st. The markets have been speculating/fretting over this decision for weeks and now that it's here the price of crude actually drops 49 cents to $35.76 a barrel. Maybe it's because everyone knows that several of OPEC's member tend to cheat and produce more than they are supposed to. Or that if OPEC doesn't cheat those countries not in the cartel will pump all they can with crude oil at 13-year highs. While this does look like a sell-the-news reaction in crude I'm a bit surprised that we didn't see more volatility intraday. It was only a week ago that the FBI warned of possible terrorist attacks on oil refineries in Texas and this morning British Petroleum (BP) announced that there was a fire in one of its refineries in Texas. Fortunately, they were quick to suggest the cause was not likely an act of sabotage.

Speaking of fuel Qlogic Corp's (QLGC) earnings warning this morning sent the stock to a 22.7% loss and sparked heavy selling across the tech sectors. QLGC now expects Q4 earnings at 36 cents a share on revenues of just $128 million versus analysts' consensus estimates of 38 cents and $140 million for the quarter. QLGC is a chipmaker that specializes in circuits for storage devices and host bus adapters. The company blamed a drop in orders and the news dragged its rival Emulex (ELX) to a 6.5% loss.

On a more positive note Americans still managed to feed their desire for the latest techno gadgets and wide-screen T.V.'s in spite of the rising prices at the pump. Best Buy Co (BBY) and rival Circuit City (CC) both announced earnings this morning and the results were strong. BBY, the larger of the two companies, reported earnings that were 3 cents better than estimates at $1.42 a share. Revenues jumped from $6.99 billion to $8.45 billion and same-store sales soared 9.7%. BBY stood by its forecasts for 15 to 20% earnings growth for the year and said it should be able to maintain same-store sales growth of 4-to-6%. Meanwhile Circuit City remains firmly in BBY's shadow but appears to have turned a corner as earnings came in at 46 cents a share, well above estimates for 36 cents. Revenues came in at $3.25 billion while same-store sales managed a positive increase of 1%. CC has been in a very lengthy restructuring to make it more profitable and more competitive and today they announced plans to buy Canadian firm InterTan (ITN) for $284 million in cash and a separate deal to buy the assets of MusicNow, a provider of digital media. The performance of both BBY and CC is great news for the retailers and foreshadows what many are expecting to be a positive earnings season.

Before the markets can focus on earnings we have to wade through a crowd of economic reports. They begin in earnest tomorrow. According to Ford and GM the auto and truck sales numbers tomorrow should be pretty strong. We'll also get the weekly initial jobless claims and the construction spending numbers. Yet the big reports on Thursday will be the long overdue February PPI report and the ISM Index. However, even these two are overshadowed by the non-farm payrolls report on Friday morning. Economists are looking for 120,000-125,000 new jobs but the employment component in this morning's Chicago PMI survey isn't a good sign.

Considering our short-term overbought status and the opportunity for investors to use any news as an excuse to take profits ahead of the jobs number I'm not looking for a bullish day tomorrow. Furthermore traders might want to prepare for what could be a volatile day on Friday. Even if the jobs numbers does come in strong there is the argument that strong jobs growth is the last and final component we've been waiting on for the economic recovery and that means the Federal Reserve is one step closer to raising rates. Of course we expect the Fed to wait for several months of strong jobs growth before raising rates but you know how excitable the markets can be.


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