Option Investor
Market Wrap

Greenspamed Again

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      04-20-2004           High     Low     Volume   Adv/Dcl
DJIA    10314.50 -123.40 10487.67 10313.58 1.95 bln  763/2498
NASDAQ   1978.63 - 41.80  2032.41  1978.63 1.92 bln  965/2243
S&P 100   547.10 -  8.68   557.55   547.10   Totals 1728/4741
S&P 500  1118.15 - 17.67  1139.26  1118.09 
W5000   10931.10 -170.90 11140.80 10931.06
SOX       469.70 - 17.30   490.32   469.69
RUS 2000  575.81 - 11.14   591.96   575.79
DJ TRANS 2911.27 - 12.50  2954.51  2909.98   
VIX        16.67 +  1.25    16.72    14.79
VXO (VIX-O)16.51 +  1.28    16.59    14.74
VXN        23.07 +  1.67    23.12    21.01 
Total Volume 4,231M
Total UpVol    739M
Total DnVol  3,464M
Total Adv  1991
Total Dcl  5353
52wk Highs  254
52wk Lows   113
TRIN       1.03
NAZTRIN    1.52
PUT/CALL   0.81

It was supposed to be a calm day with no doomsday comments from Alan Greenspan as he talked about the banking system. The prepared comments were tame and nobody got excited but the Q&A turned up the heat. Just as in the past several supposedly tame comments suddenly triggered a mass exodus and the Dow dropped more than -150 points in the last hour. Wonder what he is thinking tonight about his major appearance before the joint economic committee tomorrow?

Dow Chart - Daily

Nasdaq Chart - Daily

Semiconductor Sector - Daily

It definitely was not economics that tanked the markets today because there was only one report. The Chain Store Sales rose +1.0% last week as consumers spent their tax refunds on spring items and nobody is complaining about that. This was the third week of increasing gains and some analysts think it is also a factor showing increasing job growth. I think that is a stretch but I report, you decide. Analysts are expecting sales to slow in April to +5% from the +7% rate in March. They are suggesting the calendar and the weather accelerated buying a couple weeks earlier than normal.

The bad news that tanked the market was actually good news. Greenspan said the health of the banking sector was very good and they would not be hurt by rising interest rates. What rising rates? Traders were quick to translate that comment into the logical progression that the Fed was going to raise rates soon. Why else should the Fed head say they were in good shape for the coming change. Secondly he said "American companies had regained some pricing power" and that was one of the items on the list that needed to be checked off before the Fed could act. Strike two for the markets. If that was not enough he continued praising the strength of the economy and expressed his confidence that jobs would rise strongly. All good news for the economy but not for the interest rate outlook. The third strike came when he said the deflation monster was dead. He said "deflation was no longer a potential problem" leaving the Fed could concentrate on controlling inflation. Oops! Without the risk of deflation to keep the Fed in check and with inflation appearing in almost every report Greenspan is clear to act. The only weapon in his arsenal to slow inflation is the interest rate club. He was clearly dusting it off today and the market cowered in fear.

One quick question. Is there anybody in the market today that did not know interest rates were about to go up? I seriously doubt it. Now the $64K question. Why did the market take it so hard? The market died because the time table suddenly jumped from Sept/Jan to June/August and right in the middle of the six month equity window. The Fed funds futures jumped to a 35% chance of a hike in June and a 100% chance of a hike in August. They are also indicating a potential 100 basis point hike by January. To go from a standing start to +100 points (four quarter point hikes) over the next eight months was simply too big a leap for the bulls. Confusion is running rampant and Greenspan speaks again tomorrow on economic policy. How much more good news can the bulls take? The next Fed meeting is May 4th, two weeks from today and there is always an outside chance the Fed could jump start the process beginning in May. No reasonable analyst is suggesting that but with an election looming the Fed may want to act soon and avoid a rate hike immediately before the election. They could hike in May and again in June then rest until November. The August and September meetings would be speed bumps where the threat of a hike could be as effective as a hike without the political impact. In order for this to work they would have to act quickly to get the first ones on the board.

The challenge for the Fed is employment and the summer doldrums. They really need to see if jobs were created in April and that report is due out on Friday May 7th and the FOMC meeting is Tuesday May 4th. You and I both know the Fed will have the numbers in advance of the release. That would suggest another blowout jobs number could trigger a hike in May to shock the market and start the process. No hike at the May-4th meeting will instantly create serious discussions about the coming jobs report. That same week we have the ISM report (Monday) Layoffs, Factory Orders, Productivity, Wholesale Trade and others. Plenty of data for the Fed to analyze for their Tuesday decision.

McTeer had already set the stage this morning by saying the Fed could raise rates and still be seen as accommodative. This was another implied warning for those that refuse to believe that the Fed is coming. He added to this by saying the unexpectedly sharp rise in the March Consumer Price index was disturbing. His comments probably tilted the sentiment into the worry column and Greenspan's comments finished the job.

Like I said above, nobody is suggesting the Fed will hike in May. It is the worry that they COULD hike suddenly that put the fear in the market. Greenspan was seen as clearing all the roadblocks off the table in an appearance that was not seen as a policy event. Traders were suddenly afraid the policy discussion due on Wednesday could be much more hawkish and profits from last weeks rebound were quickly taken.

I mentioned on Sunday that there was no real catalyst to move the markets higher despite the better than expected earnings. We had the expiration bounce on Friday and rather listless trading so far this week. After today's drop it is going to take a serious catalyst to move them higher.

After the bell today we had a strong report from Motorola which beat estimates of seven cents with a whopping +25 cents. Troubles at Nokia were apparently rainbows for Motorola. If you remember I posed that question two weeks ago when NOK warned. They said the sector grew 25% for the quarter and I suggested somebody got the business since it was not NOK. Evidently MOT was standing at the head of the line. MOT also raise estimates for the current quarter and the stock shot up +25% in after hours trading. While MOT may bounce semi stocks on Wednesday the news from the rest of the sector was not as positive. Other chip/tech companies reporting tonight included AMCC which beat by two cents, SIMG and SANM beat by a penny, STK, STX and MKSI announced inline, PSEM missed by a penny. WEBX beat by a penny and lost -$4.50 in after hours on guidance. Obviously the broader results were less exciting for that sector. Nasdaq futures are only up slightly in after hours.

Stocks were not the only major movers today. The dollar soared to a five month high and gold fell under $400 once again. Bonds dropped but not as much as you would have expected with the yield on the ten year still hovering in the 4.41% range. The bonds have been early to this move with a major sell off over the last two weeks. Stocks are finally catching up.

The Dow rose to within 13 points of 10500 this morning but closed within 16 points of 10300 this afternoon. With that move it covered its entire range for the last week. Today's drop took it below the 50 and 100dma and the uptrend support dating back to August. 10325 was support for two days last week and today's close was the lowest close since March 29th.

The Nasdaq lost -42 points to close at 1979 and also the lowest level since March 29th. The 29th was a major gap up day and a touch of 1962 would fill that gap. I suspect a drop to 1962 will be the least of our problems. Should we move below 1960 I think the Nasdaq has risk to 1900 or lower.

On the surface we appear to be oversold from today's drop. However, the risk of a more in-depth policy clue from Alan Greenspan on Wednesday suggests we are not going to rebound out of the gate. We are seeing a minor bounce to the futures overnight and we could see some gains at the open but I would not bet on it. I have mentioned before that the market looks for excuses to explain major moves. Everyone knew earnings were going to be strong. Everyone knew rates were about to go up. Everyone knew Greenspan was going to speak today and tomorrow. I doubt anyone expected him to give the "Fed will be patient for a considerable period" speech. The market is priced to perfection for the current earnings and interest rate environment and a sudden change in that status quo will force an adjustment in stock prices. Contrary to public opinion stocks do go up in rising rate environments. Under the most pessimistic rate threat of a +1% hike over the next 12 months we would still only be at a 2% Fed funds rate. Those traders who have been in the market for longer than a couple years would not worry about the long term impact of a 2% Fed rate. The market is simply adjusting to the new environment and used the change as an excuse to take profits.

The electric shock rocket short-circuited today and those holding the stock received a shock to their portfolio. Yes, TASR fell back to earth today with a -$34.55 loss (-28%) on better than expected earnings. Yes, TASR beat the street by two cents when traders were hoping for a couple dollars if you believe the gains in the stock over the last couple of weeks. Revenue soared +300% to $13.1 million for the quarter. Yes, $13 million not billion. The company had a market cap yesterday of $1.5 billion but that was cut by nearly a third today. Everyone knew it would eventually end badly but not necessarily all in one day. TASR has 9.3 million shares available for trading and nearly 50% of that total was short according to the latest numbers. However 32 million shares were traded today, nearly four times the number of shares available. That is even more amazing if you take into account the 3.5 million held by institutions. I suspect more than one trader bought the dip today thinking the misfire in the shock rocket was a buying opportunity.

Tomorrows trading could be hazardous. Volatility has returned and sentiment took a severe hit today. We have Greenspan speaking again on economic policy and the Fed Beige book. It could be the 1-2 punch or it could be all smoke and mirrors. I would be very careful about any long positions unless Greenspan has a change of heart after today and eats his words on national TV. If he rescues the "patient Fed image" from near death then the markets could also rise from the ashes. Just don't bet the family fortune without some serious confirmation.

Enter Passively, Exit Aggressively.

Jim Brown


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