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Market Wrap

Size Matters

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      04-22-2004           High     Low     Volume   Adv/Dcl
DJIA    10461.20 +143.90 10496.61 10292.28 2.21 bln 2437/ 834
NASDAQ   2032.91 + 37.30  2035.39  1991.47 2.14 bln 2105/1061
S&P 100   555.24 +  6.04   556.76   547.24   Totals 4542/1895
S&P 500  1139.93 + 15.84  1142.77  1121.92 
W5000   11154.54 +160.20 11174.70 10978.22
SOX       480.48 +  1.70   485.81   468.09
RUS 2000  593.24 + 10.02   593.67   582.28 
DJ TRANS 3006.96 + 52.50  3007.01  2948.54   
VIX        14.61 -  0.99    15.98    13.86
VXO (VIX-O)14.59 -  1.07    16.36    14.17
VXN        21.35 -  1.47    22.94    20.94 
Total Volume 4,748M
Total UpVol  3,604M
Total DnVol  1,107M
Total Adv  5101
Total Dcl  2198
52wk Highs  337
52wk Lows   152
NasTRIN    0.78
TRIN       0.76
PUT/CALL   0.63

It appears that size and quality does matter when it comes to earnings and Thursday was a banner day for quality results. Good news was breaking out all over and analysts were pounding the table about the new bull market. Is it a new bull market or just a lot of bull?

Dow Chart - Daily

Nasdaq Chart - Daily

Wilshire-5000 Chart - Daily

According to market reporters earnings suddenly rocketed to the forefront and considering the economics today it was about time. Jobless Claims fell slightly to 353,000 but that marks the second week over the 350K level. That level is used as a benchmark for adding or deleting real jobs from the market. The prior week was revised up to 362K. Analysts are still blaming the seasonal adjustments for Easter as the reason for the jump.

The March PPI surprised to the upside with a +0.5% jump and well over estimates of +0.2%. Core prices rose at a slower rate of +0.2% for those of you that don't use food or energy. A +1.5% jump in food prices was the main reason for the headline bounce. For the first quarter finished goods have already risen +5.1% and although much of that was due to energy it is still a warning sign for the Fed that inflation is knocking on the door.

The Chicago Fed National Activity Index (CFNAI) dropped to 17 in March from 47 in February. This was the seventh consecutive month of expansion but the lowest month since October. The +308,000 jobs created in March added +0.09 to the headline number and it was only the fourth positive contribution by employment in the last four years. The CFNAI is seen as confirmation that the economy is still growing but the drop in the expansion rate is troubling. If rates rise soon the housing sector will slow and that could push the numbers back into negative territory very quickly.

By far the best report of the day was the Monthly Mass Layoffs which showed that there were only 920 mass layoffs in March that impacted 92,554 workers. This the second consecutive month under 100,000 and bodes very well for the coming Jobs report. If jobless claims remain low as well as layoffs then we can assume companies have reached their minimum level of employment and could be ramping up again soon. Manufacturing still accounted for the largest number of layoffs with one third of the total. Strong earnings as we have been seeing this week would also make companies more comfortable about maintaining payrolls and adding additional workers.

According to the bobble head reporters on stock TV economics were not the motivating force today. According to them the earnings picture finally took the lead and positive comments from numerous companies combined together to produce a rebound back to a two week high. Rate fears that were blamed for the Tuesday decline were forgotten and entire two day hiccup was erased.

When we discuss these things you should always remember that nearly 50% of our daily trading is done by computer programs launched by funds and institutions. This is up from a little over 20% just a couple years ago. These programs come and go daily with some buying and some selling. As long as they are balanced there is no material impact to the market. When we suddenly get several large programs that move in the same direction without any offsetting activity we get a major market event.

This is what happened on Tuesday and again today. On Tuesday at approximately 2:30 we saw several sell programs triggered and the selling was blamed on Greenspan comments. With Alan Greenspan scheduled to speak again the next morning nobody was ready to buy the dip. More sell stops were hit and the drop accelerated. The selling was not especially heavy for the entire day, only for the duration of the sell programs. Volume was only moderate at 4.2B shares across all markets. The market had been moving higher that morning but fear of Greenspan was prompting some underlying profit taking all day. The sell programs just accelerated the event. It was not a watershed day. It was simply a reaction event made worse by the lack of buyers. Traders were concerned it would carry over into Wednesday but Greenspan said nothing new and it turned into a false alarm.

The exact reverse occurred today. The market opened down and we bounced along the 10300 level for about an hour. At 10:30 a strong buy program triggered taking us to new highs for the day. Once those highs were made new programs appeared and we raced to just over the 10400 level where we rested for a couple hours. Shorts without stops were caught off guard and were forced to bite the bullet in increasing numbers when there was no immediate sell off. At 1:25 those shorts hoping for an end of day retracement were surprised when another strong buy program appeared to push us within 13 points of 10500. Short covering held us there and we closed with little or no selling.

Dow Chart - 30 min

Advance-decline Chart (programs)

Despite the numbers on the board it was not a blowout. The volume was strong at 4.8B shares across the board but up volume was only 3:1 over down volume. Advancers only beat decliners by little more than 2:1. It was simply a day where the buy programs outnumbered sell programs and it was helped by positive earnings chatter. On the chart above you can see the marked moves where large programs pushed the indexes around. A plus/minus change in the A/D line of 1000 issues in a single 30 min period in the middle of the day is not created by retail buying and selling.

Advance-decline - Chart (normal)

I chose today to elaborate on the program activity because the TV announcers were tripping all over themselves trying to explain how the bullish earnings news had prompted this massive buying. Surprise, the news today was no different than the news on any other day this week. The rate picture is still the same. In fact Bernanke spoke today and said the Fed was in policy transition mode, indicating the Fed was preparing to raise rates. Nobody blinked. Wayne Angel, a prior Fed governor, was on TV saying he thought +50 points in May would be the right move. Nobody blinked. There were multiple terror events around the world and a train wreck in Korea potentially killing 3000 people and the markets did not blink. The markets go up and down based on money flows into funds and asset allocation by major institutions. Retail traders simply go along for the ride.

Those pulling the trigger on those buy programs probably did so because of the long term outlook as earnings continue to beat expectations. That part is true. If a fund is sitting on a large pile of cash and the Tuesday crash and Wednesday speech failed to break support at 10300 then why not take advantage of the best buying opportunity over the last month? It does not even take guts or conviction. Index funds have to invest the money and the best market timing they can do is buy the dips whenever possible. Does that mean the rally was false? Does it mean we are not going to see any summer doldrums? No to both questions. It means nothing except some shorts got squeezed. You cannot make market decisions based on single day events. Granted it was a bullish event but it was just one day.

It was a very bullish day for sentiment. Company after company raised guidance and made glowing statements about the future. Comments from Caterpillar were repeated almost hourly day. The company CEO said "it appears the world's economy will have one of the strongest, broadest recoveries in years." CAT raised its profit outlook to +65% to +70% growth from the prior forecast of +40%. That was just an example of similar comments from dozens of companies.

Thursday was the heaviest earnings schedule for the April cycle with 70 S&P 500 companies reporting along with hundreds of others. After the close we got several high profile reports including MSFT, AMZN, AMGN, BRCM, GLW, MCHP, XLNX and PSFT.

Microsoft blew away estimates of 28 cents with profits of 34 cents and Microsoft was uncharacteristically bullish in its comments. CFO John Connors said 2004 has been a great year and we see a very bright future for the company and its shareholders. It did not announce plans for its $56B in cash but did say it will announce some news before the companies analyst meeting in July. Many expect a larger dividend, possibly a one time cash disbursement and some acquisition plans. The resolution of numerous antitrust cases recently has reduced the need to hoard cash. The company said it saw broad based demand and solid execution across all segments. They said demand increased in servers, PCs and in overall technology spending. The MSN division also returned to profit status and Xbox sales rose +30%. Life is good at Microsoft today. The stock jumped nearly $2 in after hours trading. They also raised estimates for the current quarter. They raised estimates for PC growth for the rest of the year but lowered estimates for 2005.

Amazon posted its third straight quarterly profit with earnings of 26 cents compared to a loss of -3 cents in the same quarter last year. Revenue jumped +41%. Amazon beat analyst estimates but the stock fell after the news. AMZN still forecasts a profit for the coming quarter but the guidance left some confused and suggested earnings could decline on lower margins. Considering AMZN has stretched its profits to quarters where it has always had losses and sales are continuing to increase it is evident the business model is working well and the short term volatility should pass. Amazon is getting into the search engine business and keyword click sales. That is a pure profit effort and their billions of page views will capitalize on that space.

Broadcom beat the street by two cents but the good news was the upgraded guidance. BRCM said earnings in the current quarter should increase by +10%. They said bookings had been very strong into April and they were seeing broad increases in demand. They bragged about the strength in the broadband market and claimed it was their fastest growing segment.

XLNX, another chipmaker posted earnings of 36 cents against estimates of 25 cents and raised guidance going forward. This is getting to be a repeating pattern. Those beating are leading the pack and raising estimates while a few stragglers are still catching up. It is a stock by stock problem related to product mix but the chip sector is definitely improving. Other chips reporting tonight included IDTI +1, MCHP +2, TQNT +1, VTSS inline, MCRL inline, MSCC +1.

Corning beat estimates of five cents with an eight-cent gain and raised guidance. They said demand for liquid crystal display panels remained very strong. They did say they did not see telecom recovering until 2005. They said LCD sales grew +16% for the quarter and demand was growing faster than expected.

These are just some of the positive reports seen today but the overall picture continues to be strong. American Express said travel fees rose +23% for the quarter as Americans suddenly increased their rate of travel. Sabre raised their estimates as well saying bookings were climbing quickly. Starwood Hotels said business travel had increased faster than their expectations in just the last couple months. Credit card companies are posting strong profits and saying debtors are making payments faster and weak credits are decreasing. Maytag said orders were increasing to the point where materials shortages were becoming a problem. Norfolk Southern said rail shipments were growing strongly. UPS said package growth across all segments was strong with international shipments especially strong. Ryland Homes said new orders were the highest in company history at nearly 5,000 homes. They also closed a record 3,000+ homes in the first quarter. The strength in the home marketplace bodes well for the entire economy as we move into the spring buying season.

Yes, earnings are great, the economy is growing and everyone has accepted that rate hikes are on the way. What is wrong with this picture? Nothing and that scares me. Bad things tend to happen when all the news is good. The Dow ran back to begin testing its April resistance and that test could come as early as tomorrow. 10550 has been tested five times in April and failed each time. A breakout there could attract more buyers who were planning on waiting out the summer doldrums.

The Nasdaq has the same resistance hurdle at 2070 and while it had a strong +37 point run today it is still well below that level. The tech news after the bell has failed to really juice the futures with the S&P +3 and the Nasdaq +12. Not big numbers considering the number of positive surprises.

The problem we have to face is not something we can point to and wait for the announcement. It is not terror, rates or rising economy. It is expectations. All the good news is already priced into the market and investors will have to decide if they want to buy at the highs while knowing that future quarters will not be this strong. Stranger things have happened and we will have to wait out the rest of April to see if that occurs. Today was the largest day of the cycle and we will start to see shorter list of earnings schedules beginning next week. Most of the big guys have already reported and the sterling numbers normally decline from here as the lower quality companies report later in the cycle.

For Friday I would be very cautious about buying any bounce unless 10550/2070 is broken. With weekend event risk ahead the odds are slim we are going to make that break tomorrow. If it is going to happen I would bet on a Monday attempt. I would instead look at buying any dip in anticipation of any potential gains next week. We are far from out of the woods but that may be daylight just up ahead. Is it a new bull market or just a lot of bull? We will know soon.

Enter Passively, Exit Aggressively.

Jim Brown


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