Option Investor
Market Wrap

Shrinking Refunds?

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      04-15-2004           High     Low     Volume   Adv/Dcl
DJIA    10397.46 + 19.50 10430.62 10322.16 1.91 bln 1586/1671
NASDAQ   2002.17 - 22.70  2031.84  1989.21 1.96 bln 1210/1992
S&P 100   552.47 +  0.59   554.69   548.38   Totals 2796/3863
S&P 500  1128.84 +  0.67  1134.08  1120.75 
W5000   11024.00 +  1.10 11080.00 10948.04
SOX       488.76 - 14.40   504.15   483.40
RUS 2000  580.30 -  1.72   586.02   575.81 
DJ TRANS 2913.94 +  4.60  2930.54  2893.11   
VIX        15.74 +  0.12    16.78    15.22
VXO (VIX-O)16.24 -  0.42    17.24    16.10
VXN        22.83 +  1.24    22.97    21.53 
Total Volume 4,268M
Total UpVol  1,477M
Total DnVol  2,742M
Total Adv  3180
Total Dcl  4163
52wk Highs  159
52wk Lows   187
NasTRIN    1.89
TRIN       0.96
PUT/CALL   0.84

If you have not done your taxes your time has run out. Or you may have done the rough draft and found that your refund was significantly less than you expected. That is what the IRS pencil pushers announced today and the reason given was the improving economy late in 2003. Apparently the stronger than expected stock market increased income and taxes. The average refund has risen only $102 compared to prior estimates of +$300. This means the $350 billion tax cut package may actually cost significantly less.

Dow Chart - Daily

Nasdaq Chart - Daily

SOX Chart - Daily

That news did not help the markets today as expiration week volatility divided the indexes and produced several erratic swings intraday. The Dow ended with a gain of only +19 but the Nasdaq lost -22. The S&P closed flat and only +3 points over the 1125 level where the most SPX options would expire worthless. Good job by the market makers in holding the SPX flat at that level over the last two days.

The economics today were mixed with Jobless Claims soaring back over 350K to 360,000 and well above consensus estimates in the 335K range. This was the biggest jump (+30K) in claims since April 2003. This was not good news for the labor watchers. If this trend continues this week the April jobs report could be in trouble. The Jobs report numbers are taken from a survey done this week. One week does not make a trend but it definitely raised some eyebrows. Offsetting the jump in claims was a drop in continuing claims to 2.98 million. This was the first time under 3M since July-2001. Continuing claims are impacted by workers running out of benefits as well as those finding jobs. More than likely today's number was the result of adjusting for seasonality and a shift from winter to summer jobs. Should this trend continue next week the market impact would be much greater. It would however reduce the chance for an early rate hike.

The Job Openings and Labor Turnover report today showed that hiring and firing through February were nearly unchanged from January and opening up only +4.3% from the same period last year. We have seen net positives in this report for the last four months but the gains have been minimal. Since this report was for February analysts hope the March jobs number is a more accurate representation of the current environment.

The really good news for the day came from the Philly Fed Survey and the NY Empire Survey. The Philly Fed number rose to 32.5 from 24.2 and a three month high. While the headline numbers show continued promise several internal components slipped further. Employment was flat and the average work week dropped to 10.4 from 17.9 and the second monthly drop. Back orders dropped back into negative territory at -2.5 for the first time in nine months. Prices paid rose and prices received fell. Inventories spiked to 11.7 from -12.8. Personally I think the internals paint a much more negative picture but traders were generally encouraged.

The NY Empire Survey rose to 36.1 from 25.3 and continued to present an improving outlook for the New York area. In contrast to the Philly Fed the employment component doubled as did the average workweek. Inventories dropped into the negative column and backorders and new orders both rose. This was a very strong report on the inside and suggests the New York area rebound is gaining speed. Last month the survey showed a significant drop from record high set in January. This rebound proves the drop was just a statistical hiccup in the trend.

Rounding out the economic calendar was the NAHB Housing Index which jumped from 64 to 69 for April. All components jumped except buyer traffic which remained flat. The rise in mortgage rates this month could impact this report in May but so far the homebuilders remain very optimistic about the coming selling season. Hopefully the Fed will hold off on any rate hikes until the fall and we get one more strong summer in this sector. Building stocks were mixed on this news.

It was a busy evening for earnings and there were some mixed results. IBM reported inline and called future analyst estimates "reasonable". Investors don't want reasonable they want positive guidance. IBM said services orders were less than analysts had expected and despite gaining some market share they were cautious about the future. IBM's revenue rose +11% for the quarter but if you take out the currency translation from the weak dollar it would have only been a +3% gain. As we all know the dollar has been rising for the last week and will continue to rise as long as the Fed rate hike threat is ahead. This is going to hamper results from not only IBM but all major international corporations.

Once of the companies IBM is taking share from is SUNW which announced earnings tonight or maybe I should say losses. The company lost eight cents and slightly more than analysts expected. SUNW warned recently so the loss did not come as a shock. They are continuing to lay off workers and fight the new server offerings from IBM and Dell.

Chip company earnings were represented by CREE +20 cents, PMCS +6 cents, LEXR +11 cents (miss) and TMTA at -0.11. PMCS had preannounced upgraded guidance and still posted better than expected results. They raised guidance again in the conference call. CREE beat estimates and raised guidance on strength in its LED business. On the negative side TMTA posted a loss on declining revenue and warned that the loss could grow next quarter.

LEXR was the dog of the group. LEXR posted a small earnings miss of a penny but warned that future earnings would be rough. The company said "after several quarters of relatively stable average selling prices, second quarter price declines will be sizeable." According to the CEO the declines are occurring sooner than anticipated due to excess supply in the flash memory sector. While that is good news for chip consumers it is bad news for chip makers. SNDK had already taken a -$5 haircut this week after they also warned that revenue would drop substantially.

Another sector that got hammered was the network storage business. EMC results were less than hoped for and the group took a nose dive on Thursday. After the bell McData (MCDT) warned that revenue would be lighter than previously expected. "This change in anticipated revenue reflects less robust-than-expected early 2004 purchase patterns by end users and customers, some of which may relate to a slower pace of economic recovery and seasonal softness in IT spending in the first quarter."

SEBL beat the street by a penny aided by strong cost cutting efforts. While the news was good for the company it was not greeted warmly. Investors would rather see gains from increasing revenue instead of cost cutting.

The futures fell after the close on the earnings news and on the warning from Colin Powell for all non essential personnel to leave Saudi Arabia. According to the press release the threat level has shot up with escalating events building up to a potentially devastating attack in the future. While this is in Saudi it is not the kind of news that leads to rallies. There was a new Bin Laden tape today with the requisite warning to America and its allies. Investors realize it is only a matter of time until we are hit again in the US and each escalation brings it closer to home.

The markets are faced with more warnings and earnings misses this week than we have seen in some time, the terror threat is increasing and the election is a toss up. These problems are converging with the normal start of the summer doldrums. Institutions are starting to get nervous and there are a surprising number of references to the crash of 1987. We get these whenever the chart patterns match up and the current match is scary. While I do not subscribe to this theory for various reasons the concerns are making the rounds. Rumors, however untrue, still cause concerns that a repeat could happen.

Dow Comparison Charts 1987-2004

For today the Dow completed its second day of testing support on the 100dma at 10350. After Tuesday's drop we have traded in a range between 10415-10325 and the outlook is not positive. We appear to be setting up for a test of the March low of 10000. With the general earnings trend already established there is not a lot of expectations left unfulfilled. Most are reporting slightly higher numbers with inline guidance. I can't wait for the next First Call update to see if the forecast for the quarter has slipped.

The Nasdaq was the weakest link today as the tech news has been less than exciting. We broke 2000 intraday and barely recovered to close back over that level. The expectations and hopes that took traders to 2075 last Thursday has left the building and several more results like IBM, SUNW, LEXR and MCDT will pull the rug out from under Nasdaq 2000.

How much of this weakness and volatility is related to options expiration on Friday remains to be seen. We may not be able to tell from Friday's trading as we could see stronger event risk flight tomorrow than last Friday. The bloom is off the rose and traders could be thinking of moving to safety rather than trying to squeeze another point out of the week. There are no material earnings out in the morning other than ET and NOK. Nokia has already warned so no tech help from that announcement.

I suggested on Tuesday that traders wait until next week to enter new positions and let the uncertainty from earnings and expiration volatility dissipate. I am still leaning in that direction. If we close down on Friday and nothing happens over the weekend then we could get an oversold bounce on Monday. We will know then how the fund flows came in for this week and the drain for tax payments will be over. There is always another day in the markets and waiting patiently never lost anybody any money.

Enter Passively, Exit Aggressively.

Jim Brown


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