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Market Wrap

April Fools

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      04-01-2004           High     Low     Volume   Adv/Dcl
DJIA    10373.33 + 15.60 10419.04 10342.59 1.91 bln 2132/1097
NASDAQ   2015.01 + 20.80  2019.09  1996.45 1.82 bln 1980/1148
S&P 100   553.64 +  2.51   555.87   551.12   Totals 4112/2245
S&P 500  1132.17 +  5.96  1135.67  1126.20 
W5000   11107.42 + 68.00 11132.06 11039.42
SOX       495.32 +  8.20   498.78   487.12
RUS 2000  595.32 +  5.01   596.15   590.31 
DJ TRANS 2918.66 + 23.20  2918.79  2896.76   
VIX        16.65 -  0.09    17.25    16.65
VXO (VIX-O)17.15 +  0.42    17.44    17.01
VXN        23.41 -  0.35    24.02    23.32 
Total Volume 4,056M
Total UpVol  2,907M
Total DnVol  1,080M
Total Adv  4644
Total Dcl  2576
52wk Highs  563
52wk Lows    28
NasTRIN    0.61
TRIN       0.89
PUT/CALL   0.61

AT&T, EK and IP were kicked out of the Dow. Google is seeking employees to work in an oxygen depleted environment. The administration is ready to reinstate cheap generic gasoline and Martha Stewart wants a retrial because a juror may have hit his girlfriend several years ago. Which of these events is not true?

Dow Chart - Daily

Nasdaq Chart - Daily

Actually they are all true to some extent. Google did post an advertisement asking for candidates to work at its lunar hosting facility. "This unique opportunity is available only to highly-qualified individuals who are willing to relocate for an extended period of time, are in top physical condition and are capable of surviving with limited access to such modern conveniences as soy low-fat lattes, The Sopranos and a steady supply of oxygen." link

While that may have been the highest profile April Fools joke there were several other news events that could have qualified. Google actually may be regretting its joke because it prompted the announcement of its Gmail.com email service to be seen as an April Fools joke as well. The company was quick to respond that it really was going to offer a web based email service to compete with Yahoo and Hotmail. The service will be free and provide 1000MB of storage per user. Rumor has it that the Google IPO could be as early as the end of April. A little marketing buzz in advance sure did not hurt.

The Dow managers did announce today that AT&T, IP and EK were being replaced by PFE, AIG and VZ. AT&T has been in the Dow since 1939 and was also in it for 12 years prior to 1928. EK has been in the Dow since 1930 and IP since 1956. These companies are being replaced as no longer reflective of the broader business environment and not representative of corporate America. AT&T has been cutting off limbs for years and is only a fraction of its former self. Ironically SBC was added to the Dow in 1999 and it was one of the pieces previously split off from AT&T.

Eastman Kodak has also shrunk to a much smaller part of the economy with the traditional film market being taken over by overseas companies. Kodak was slow to jump on the digital camera revolution and while they may be on a revitalization program they are no longer a true Dow company according to the managers. International Paper was dropped according to the managers due to materials companies no longer being representative of a broad portion of the US economy. This emphasizes the emergence of high tech and services sectors as more important to overall GDP.

Pfizer is the second largest market cap company behind GE and is a natural inclusion into the Dow today. The financial sector will gain additional representation from AIG. The change will take place before the open on April 8th. It will not have any immediate impact on the Dow's level as the index will be rebalanced after the close on Wednesday based on the closing prices of each component. This is done by re-weighting the individual components based on the closing price to equal the index price at Wednesday's close. The Dow is price weighted and as of today's close the price of the three stocks being voted off the island was $86.66 and the three new stocks were worth $145.86.

Oil prices dropped substantially to close at $34.27 after the administration said it was considering exempting some states from the stringent emission standards to allow the cheaper and more easily produced gasoline to be used. The unleaded gasoline futures dropped -5% on the news and oil prices broke below recent support. Hold the applause, you would probably not see any impact to pump prices for at least a month.

Oil Chart - Daily

Rounding out the April Fool questions Martha Stewart does want a retrial based on supposed errors in omission from a juror. Stewart's attorneys claim juror Chappell Hartridge, 47, lied on his paperwork by omitting the fact he had been arrested for hitting his girlfriend in 1997. They claim that a violent act against a woman evidences extreme misogynistic tendencies and made him unfit to sit on a jury with a woman defendant. Hartridge did not mention it because the complaint was dropped and charges were never filed. Grabbing at straws Martha?

Moving back into the more mundane events the Jobless Claims fell -3000 from last weeks number but that number was revised up +6000. Net result was number +3000 higher than the number announced last week. This constant backward revision process is a major pain in the accounting process. We just need to have them add the "found" claims to the current number instead of the prior week. It is an economic shell game where they can rearrange the numbers for weeks at a time to impact the outcome. Just report them as they find them and be done with it.

Construction spending fell -0.1% and posted the second monthly drop. The prior month was revised down from -0.3% to -0.8%. This report was ignored because of the historical nature, February, and the abundance of more important data.

The much delayed PPI number showed a rise of +0.1% and well under consensus estimates of +0.5%. Estimates were higher due to a larger expected impact of higher energy prices. There was some evidence of inflation with core intermediate goods rising +0.9% and core crude goods rising +5.5%. These are very strong jumps and were predicated on the constant rise in commodity prices up +3.5% for durable goods and +12.4% for steel.

The ISM Index for March rose to 62.5 and well over consensus estimates of 60.5. This was a strong report and relieved some of the fears that the economy had peaked in January. The internals showed minor improvements but still upward motion in the critical components. Only New Orders, Inventories and Imports declined slightly. Unfortunately the component with the biggest jump was the Prices Paid which jumped from 81.5 to 86.0. This suggests inflation is creeping into the system. The backlog of orders rose to its highest level since the recovery began at 63.5. The current string of five months with the headline number over 60 is the longest string of strong monthly expansion since an eight month string in 1983.

ISM Index Component Table

The Risk of Recession report rose to 9.4% chance of a new recession and this has been steadily climbing since the low of 3.4% in November. Components impacting this number are the stock market, consumer confidence, jobless claims and average work week. At 9.4% this is still not a problem but bears watching over the next couple months.

After the close today Gateway announced it was closing all of its retail stores and 2500 employees would be laid off from the move. Gateway said it was continuing to lose money from the retail side after the eight year effort. They are continuing to seek other methods to market their products but for now they are depending on phone and web orders. Gateway rose in after hours trading after the announcement.

Airlines gained a little ground after the drop in oil prices but still remain under pressure. Every $1 price in the cost of oil translates to a $500 million loss to the airlines on an annual basis. Considering they will lose $2.1 billion as a group in 2004 they still need a lot of help. The odds are good today's drop in oil is only temporary.

The first quarter ended on Wednesday and it was the first losing quarter by the Dow in a year and the first by the Nasdaq in six quarters. The indexes resolved to not let it happen again and stormed out of the gates this morning with strong gains. The Dow rallied to 10419 and the Nasdaq to 2019 before sellers appeared. The rest of the day was a low volume battle as traders positioned themselves in front of the jobs report due out on Friday. The indexes did jump at the close on either short covering or positioning and the Nasdaq is now positive for the year at 2013. Just a day to late for the calendar historians.

The gains for today where muted despite closing at new two week highs. The bets have been placed and everyone is waiting for the only economic report due out tomorrow. The Jobs report is still drawing high profile estimates from analysts but the official consensus is still 100,000. The official whisper number (a contradiction of terms?) is now 125,000 but reality may be much different. There is a way for institutions to purchase options on the expectations for the report. This allows them to place bets or hedges on the announcement. The highest volume of options today were in the 50K-75K range which indicate the real consensus is a lot lower than the 125K to 250K being tossed about in the media.

Jobs Table - Last Nine Months

Unless the number is well over 100K it is likely to be seen as less than exciting. However, with the better than expected ISM today and the coming earnings cycle there is an outside chance that a consensus number may actually be met with buyers. While I think the expectations are already priced in the bullishness in today's market could be pointing to an April earnings run. The jobs number may be seen as a green light if it is just not as bad as some fear. Obviously everybody has an opinion about tomorrow's outcome and when the bad news bulls are in control the answer may not matter.

From a technical standpoint we are very extended from last weeks lows and we are facing a weekend ahead. The odds for some profit taking before the close are very good. If we do move higher the Dow has resistance at 10450 and the Nasdaq at 2050. Both of those levels could be reached on Friday with any decent jobs news but odds are good they will not hold into the close without a blowout. Remember a very strong jobs number dramatically increases the chance for a Fed rate hike sooner rather than later. Keep those stops tight on any bounce and look for another potential buying opportunity next week.

Enter Passively, Exit Aggressively.

Jim Brown


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