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Market Wrap


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       WE 04-02        WE 03-26        WE 03-19        WE 03-12 
DOW    10470.59 +257.62 10212.9 + 26.37 10186.6 - 53.48 -355.47 
Nasdaq  2057.17 + 97.15 1960.02 + 19.55 1940.47 - 44.26 - 62.90 
S&P-100  558.10 + 14.58  543.52 -  0.16  543.68 -  6.24 - 18.53 
S&P-500 1141.81 + 33.75 1108.06 -  1.68 1109.74 - 10.83 - 36.29 
W5000  11202.42 +362.24 10840.2 - 12.80 10852.9 -115.20 -346.24 
SOX      513.86 + 34.61  479.25 + 15.90  463.35 - 21.75 - 19.15 
RUT      603.45 + 30.53  572.92 +  2.18  570.74 - 12.10 - 16.70 
TRAN    2966.66 +130.76 2835.90 + 49.07 2786.83 - 76.26 - 29.98 
VIX       15.64 -  1.69   17.33 -  1.82   19.15 +  0.85 +  3.82 
VXO       15.56 -  1.65   17.21 -  1.95   19.16 +  0.44 +  3.92 
VXN       21.35 -  1.69   23.04 -  2.95   25.99 +  0.69 +  3.22 
TRIN       0.52            0.89            1.93            0.44  
Put/Call   0.68            0.77            1.03            1.05   

The administration finally found all those lost jobs and they eagerly took to the airwaves to pound their economic drum. The markets exploded at the open with new highs for the week across the board. After two attempts to sell off the markets returned to the highs at the close. This was a very bullish end to a bullish week.

The big news for the day was of course the blowout Jobs report. The economy added +308,000 jobs in March according to the Dept of Labor. They also conveniently "found" some additional jobs for Jan and Feb. The Feb number was revised up from 21,000 to 46,000 and the January number jumped from 97,000 to 159,000. The total new jobs for this release totaled an amazing +395,000 jobs. This was nearly four times the consensus estimates if you include the revisions.

Job Table - last ten months

Gains were broad based across all industries with service companies adding +230,000 jobs. The unemployment rate rose to 5.7% because there was a net increase to the unemployed of +182,000 despite the strong job creation. This could be from midterm graduates and returning national guard troops. There were some strange side effects. The hours worked index fell slightly and the Household Employment survey showed a drop in employment for March. This survey has been showing strong gains and the government has been pointing to it as an example of entrepreneur growth. Overall the jobs report was very strong and with the revisions proves the wild whisper numbers were not as wild as analyst's had thought.

Now the bad news. The massive jump in jobs wiped out bonds with yields returning to early February levels. The cheap interest rates available to spur home buying and refinancing this spring are now history and the downhill trend was completely erased. The chances for the Fed to reenter the mix have increased dramatically. The Fed Funds Futures are showing the chance of a hike is possible after the May 4th meeting. It could come as early as the two-day meeting on June-29th. The Fed will likely wait for the May Jobs number to see if we get a confirmation. That jobs report is due out on May-7th, three days after the FOMC meeting. If that number is another blowout the odds are good we could see an inter meeting rate hike. This has been a historical pattern when jobs suddenly explode.

Economists were quick to point out that the Jobs blowout on Friday was exactly ten years to the day from the jobs blowout in April 1994 when +468,000 jobs ended a long drought. The economy was in the midst of another jobless recovery after the first gulf war and each month analysts were predicting strong gains but each month was a constant disappointment. The April blowout broke the trend and started a long string of months with strong job growth that led into the late 90s economic boom. Investors are hoping this repeat of the 1994 pattern will continue. This was the largest single month job gain since April-2000.

One day too late to be another April fools prank MSFT and SUNW kissed and made up. They buried their hatchets and not in each others back. Steve Ballmer and Scott McNealy shook hands and traded jokes at a news conference to announce an end to lawsuits between the two companies and a new ten-year agreement to cooperate. Scott was especially happy from a nearly $2 billion windfall that Microsoft agreed to pay to end the fighting and as an advance on future deals.

With SUNW slowly slipping off the technology screen with the advent of Linux and the growing IBM server threat the deal was a life preserver for SUNW. Sun may not be in any financial risk with $7 billion in cash but agreeing to join Microsoft to take on the world was a good move. This puts them on the winning team with the 800lb bully ready to kick dirt on any competitors. The two are stronger together than they are as adversaries and the market celebrated with a +21% jump in SUNW stock. This is even more amazing considering SUNW warned Friday morning that they were not going to hit estimates for the 1Q and would lose -23 to -25 cents when analysts were only expecting them to loss -3 cents. They said they were cutting -3300 employees in a restructuring effort to return to profits. The agreement should improve communications across networks with SUNW servers and Windows PCs. It also removes even more antitrust concerns from the cloud over Microsoft and puts them several steps closer to emerging from the constant threat of litigation.

The blowout on Friday was led by techs and the jump in Microsoft and Sun Micro did not hurt. However the gains were very broad based with advancers having better than a 2:1 advantage over decliners. Nasdaq volume was much stronger with 2.1B shares and 6:1 advancing over declining. This was a very strong tech move and the Nasdaq soared to close at the high of the day at 2054.

The Dow vaulted back to 10470 and a +97 point gain. This capped a +463 point gain from last weeks lows. Traders were somewhat disappointed with the less than +1% gain on the Dow for the day compared to the +2.1% gain on the Nasdaq and +3.74% gain on the SOX. The NYSE did trade over 2B shares but the A/D numbers were almost equal and the A/D volume was only 2:1. The challenge on the NYSE was the large number of financial and stocks related to home building that took serious hits on the jump in interest rates. A +97 point gain is nothing to sneeze at but the Dow definitely has an uphill battle from here.

From the March high at 10753 to the March lows at 10007 the Dow dropped -746 points. Friday's close was exactly to the 61.8% retracement of those gains. For the prior two days we were stuck at the 50% retracement level at 10380 and Friday's news blew that resistance away only to come to a dead stop at the next higher level.

For next week we have a light economic schedule and the calendar timing and Good Friday holiday will produce very few earnings. The really heavy news on stocks will not begin until the following week. This sets up next week as a positioning week. With bonds likely to be dead money for the foreseeable future there should be some serious asset allocation back into stocks. What better week to do it than the first week of a quarter with retirement funds flowing into equities and with a real signs the economy is growing. Earnings are still expected to be strong and the positive jobs news will give Bush a boost in the polls. All the stars are aligning for an April rally. What is wrong with this picture?

Emotionally nothing but technically it will not be a walk in the park. For the Dow I mentioned the 61% retracement level at 10468 and there is also the 50dma at 10461. There is also strong horizontal resistance at 10525 and the Dow is very extended at +463 off the lows with no real profit taking.

Dow Chart - Daily

The Nasdaq has exploded off the bottom with a +8.5% gain of +160 points and no material profit taking. The close at 2057 is just below resistance at 2060 with additional resistance at 2085. This sets up a very rough uphill road over the next 30 points.

Nasdaq Chart - Daily

On the surface it would appear the markets could struggle next week. However there could be a strong bid under the markets from asset allocation and from an affirmation of the economic trend. One of the strongest indexes on Friday was the SOX. The SOX bounce came from the strong year over year gains in the Semiconductor Billings report also on Friday. February billings only rose +0.2% over January but this is normally a declining month. Chips usually decline in Dec/Jan and remain weak due to seasonal patterns making the even the minor gains a welcome change. When viewed on a year over year basis February billings were up +31% and the strongest gain since late 2000. Higher global spending on IT equipment is credited with the surge in billings. There are strong tax incentives that expire this year that allows companies to depreciate an additional 50% of equip and software if purchased by year end. The latest CIO magazine poll showed CIOs plan to increase spending by more than +7% this year and signs of an expanding economy could push it higher.

The SOX rallied strongly on the news and this could help keep a bid under techs next week. Also helping keep a bid under the market is the mutual fund quarter end retirement flows and the asset allocation shift out of bonds. This could setup a really strong move. This may sound entirely contrary to the prior resistance paragraphs. However if you think back you will probably remember that some of the strongest gains tend to come when the most factors predict otherwise. Shorts begin loading up on the bearish technical factors and the sudden buying catches them off guard. While everyone is predicting a profit taking pullback the rally just keeps getting stronger. We have seen this numerous times in the past. I remember several vividly as I was one of those ticking off the reasons why the markets "should" be resting.

I watched the markets rise into the close on Friday from a position of amazement. We were already severely extended and at resistance with weekend event risk ahead. News reports of terror warnings for the US failed to push anyone to the sidelines. I am sure it was partially due to shorts finally taking their lumps but there were also strong internals suggesting buyers trying to get in ahead of next week.

Tuesday is Passover and Good Friday is a market holiday. Volume will be light on Tuesday and Thursday is loaded up with economic reports. This is typically a bullish week but Monday will be the key. We have a strong running start going into Monday and a strong open that does not crumble could set the trend for the entire week.

I am definitely not going out on a limb and suggesting that next week is going to see a continuation of the rally but I am not going to bet against it either. For whatever reason we had a normal correction in March and one that was way overdue. This cleared the way for a new leg up if conditions warranted it. This week we had a strong ISM and strong jobs and bullishness is breaking out all over. Next week could be the staging platform for any earnings run and there are no bears in sight. This alone is a prime reason to keep your eyes open for a sudden reversal but don't fight any further gains. Go with the flow not against it. Easy to say, hard to do.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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