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New Excuse

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      04-27-2004           High     Low     Volume   Adv/Dcl
DJIA    10478.16 + 33.40 10537.35 10441.75 1.84 bln 1765/1454
NASDAQ   2032.53 -  4.20  2053.57  2027.64 1.96 bln 1572/1603
S&P 100   555.62 +  1.00   559.91   554.62   Totals 3337/3057
S&P 500  1138.15 +  2.62  1146.84  1135.53 
W5000   11129.34 + 19.60 11211.76 11109.70
SOX       468.33 -  6.40   479.48   466.76
RUS 2000  590.76 +  1.31   594.98   587.24
DJ TRANS 2973.28 +  3.10  3001.46  2964.34   
VIX        15.07 +  0.30    15.17    14.37
VXO (VIX-O)14.98 +  0.04    15.36    14.24
VXN        21.84 +  0.01    22.32    21.59 
Total Volume 4,077M
Total UpVol  1,675M
Total DnVol  2,344M
Total Adv  3769
Total Dcl  3497
52wk Highs  299
52wk Lows   276
TRIN       1.07
NAZTRIN    2.08
PUT/CALL   0.72

The market sold off at 2:PM and the excuse given was either fighting in Iraq or explosions in Syria. Far as I know there has been fighting in Iraq for quite some time. Syria arrested three terrorists near the Iranian embassy but it does not sound like a market moving event. The Dow had risen to strong resistance at 10530 just before the sell off. Do you think there was any chance it was just profit taking? Odds are very good.

Dow Chart - Daily

Nasdaq Chart - Daily

SOX Chart - Daily

The markets rallied at the open but it was not due to strong Retail Sales because they were far from strong. Sales dipped last week by -0.5% from the +1.0% gain the week before. The reason given by retailers is the long lull between Easter and Mothers Day (May-9th). They expect shopping to improve again next week.

The real excitement came from a stronger than expected Consumer Confidence report and a very strong housing report. Consumer Confidence jumped to 92.9 from 88.5 and well over estimates of 89. After two months of decline the unexpected jump went a long way to confirm the recent indications of a growing economy. Positive consumers spend more money and this helped provide positive sentiment for stocks. There were strong gains across all but one component. Both present conditions and future expectations posted big jumps. Unfortunately those planning to buy homes fell to 3.5% from 4.2% but auto buyers jumped to 6.4% from 5.4%. Consumers who felt jobs were now plentiful rose to the highest level since Sept-2002. Those that felt jobs were hard to get fell to the lowest level since Nov-2002.

Also surging higher were Existing Home Sales, which rose at the fastest rate in more than two years. Sales jumped +5.7% to 6.48 million and the second highest rate ever. This is really good news and suggests consumers were expressing their confidence by purchasing a new home. This jump turned around a -5.8% slide in January and meager +2.2% gain in February. I have predicted before that home sales would pick up once the weather improved and this is proof. The only disturbing news is the drop in those planning to buy a home in the near future in the Consumer Confidence report. That could turn around as well as home builders begin their strong summer sales push and heighten consumer awareness of available features. Despite the jump in rates they are still very low on a historical basis.

Helping the bounce in the home builders was positive comments from Pulte Homes. (PHM) They are one of the largest builders in the country and they also build outside the U.S. The CEO said they controlled 290,000 lots and were growing at 3-4 times the growth rate of the industry. He also said the Fed could raise interest rates by 300-400 basis points without materially impacting their business. They build across all price ranges in multiple geographic areas. They are estimating earnings of $7.25 for the year and the stock is just over $50. While this is a stock specific story we are seeing the same pattern from almost all the homebuilders and the projections just keep getting better. This positive attitude and results from those in the sector should continue to boost investor prospects for a continued economic recovery. Home sales are a very big component to overall economic health.

However, not all sectors are seeing this kind of growth. We began seeing some downgrades today on the prospect of tougher comparisons ahead. As we move into the earnings from smaller companies we are seeing some earnings misses and/or some soft forecasts. This translates into lowered earnings estimates for future quarters. This is actually beneficial to some extent because it lowers the bar and makes it easier to beat. Unfortunately it also lowers the price targets as we begin the PE compression phase.

The semiconductor sector is already seeing this PE compression as the SOX dropped below critical support at 470 today. The bloom is off the rose in semis and that led the Nasdaq to a weaker performance for the day.

The Nasdaq has spent three days trying to break through the 2050 level and today's close was a three-day low. The Nasdaq is at a critical turning point. In early April it rose to strong resistance at 2070 with three intraday spikes briefly higher over a six day period. We saw the mid April pullback to below 2000 and then a strong dead cat bounce last Thursday. That bounce culminated on Friday morning at 2050 and that resistance level has held for three days. The Nasdaq must rebound from the brink tomorrow or be faced with the potential for another trip under 2000. The NDX has been fighting the same battle with resistance at 1500 all month and the best it could manage before dropping back this week was 1499.45. This is very strong resistance for the NDX and by association the Nasdaq Compx.

The Dow has been fighting the same battle at 10550 since early April and we watched it creep back to 10537 today before a quick sell off. The sell off was blamed on shooting in Syria and/or fighting in Iraq but if you look closely at the A/D line for the last two days I think you will lose that excuse quickly. On Monday at exactly 2:PM the A/D line dropped -1300 issues. On Tuesday at exactly 2:PM the drop was -1500 issues. Recently mutual funds have been entering/exiting the market when? 2:PM. With the indexes right at strong resistance and near highs for the month this is a very good spot for funds to take profits. This is not an indication that there is a specific down trend ahead but simply a good place to shift cash ahead of some very critical economic reports and a Fed meeting over the next eight days. It is simply prudent money management.

A/D Chart - 15 min

There is not enough data yet to determine if we are looking a bullish May or a bearish May. Earnings are still flowing and most analysts are still bullish. As long as investors are still sending in retirement contributions we are likely to continue to trade in this range. I suggested on Sunday to sell the tops and buy the bottoms and today was very close to the top of the range. Until we breakout of the range that advice remains the same.

The challenge for the next several days will be the impending Fed meeting on Tuesday and the impact of the economic reports on their decision. Wednesday is still calm but Thursday starts the heavy reporting cycle with GDP for Q1, Employment Cost Index and Help Wanted. Friday picks up the pace with Personal Income, NY-NAPM, Consumer Sentiment and PMI. Monday has the ISM so traders will likely want to square positions before Friday's close to avoid not only weekend event risk but economic event risk as well. With the Fed meeting on Tuesday and rising fear they could actually hike rates there may not be many buyers after tomorrow. Most institutions will want to see what decision the Fed makes before making a commitment. Even if you thought there was no chance the Fed would hike rates and that those economic reports would be strong would you want to invest millions of dollars near the current market highs without knowing for sure? Probably not.

That pretty well sums up our forecast. Odds of big bets are slim and volume has already started to dry up. Volume on the NYSE and Nasdaq totaled only 3.5B shares today and it should continue to decline. Keep your eyes open for some new excuses for market movement and watch that 2:PM time slot for clues to market direction. Watch the SOX as a leading indicator for the Nasdaq. We are still range bound and until the trend changes watch the top of the range (10550/2050) for weakness.

Enter Passively, Exit Aggressively.

Jim Brown
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