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Nervous Bargain Hunters

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      05-11-2004           High     Low     Volume   Adv/Dcl
DJIA    10019.47 + 29.50 10038.35  9974.05 1.87 bln 2648/ 683
NASDAQ   1931.35 + 35.30  1931.48  1909.50 1.72 bln 2234/ 960
S&P 100   536.00 +  3.32   536.17   532.68   Totals 4882/3643
S&P 500  1095.45 +  8.33  1095.69  1087.12 
W5000   10648.22 + 99.30 10650.29 10549.07
SOX       470.15 + 11.30   470.25   458.90
RUS 2000  548.67 + 10.81   548.69   537.86
DJ TRANS 2836.17 + 26.20  2843.33  2810.81
VIX        18.57 -  1.20    19.28    17.94
VXO (VIX-O)18.49 -  1.25    19.14    18.13
VXN        27.75 -  0.16    27.90    26.84 
Total Volume 3,944M
Total UpVol  3,260M
Total DnVol    634M
Total Adv  5421
Total Dcl  1982
52wk Highs   32
52wk Lows   452
TRIN       1.07
NAZTRIN    0.48
PUT/CALL   1.11

Buyers returned at the open on Tuesday but they were unable to force any material gains in the Dow. Tech stocks and the small caps saw the strongest buying but it was very cautious. Resistance levels from Friday held on the big caps but the SOX soared +2% led mostly by Intel.

Dow Chart - Daily

Nasdaq Chart - Daily

After several seriously negative days in the markets traders rested from their selling and waited to see if anybody was going to buy the dip. Some bargain hunters did stick their toe in the water but the sharks were still circling and none ventured a dive into the waves. Resistance held and buyers were content to close the day in the green and chalked it up as a win.

Economics were mixed with Retail Sales and Manufacturing slowing but employment indicators rising. Retail Sales fell to a gain of only +0.3% for the week as higher gasoline prices continued to pressure consumers. This number included the Mothers Day week and indicates the lack of a real buying surge for the holiday.

The Job Opening and Labor Turnover Survey for March jumped +10.9% compared to only +4.3% in February. This is a stale report since the April employment report already told us there was a jump in hiring. It did confirm from a separate source that +441,000 workers were hired in March. This is a different survey base than the Employment Report but both reached the same conclusion. This bodes well for the coming months.

A slight bump in the economic road appeared in the Richmond Fed Manufacturing Survey, which fell to 13 from 30 in April. This is a significant drop and a four-month low. It also represents the first drop since November in manufacturing activity. New Orders fell to 17 from 28 and Shipments to 13 from 30. Order backlog also fell as well as the six-month outlook. Anything over zero is considered an expansion of manufacturing activity but a drop of this magnitude is not a good sign. Inflation rose slightly with prices paid rising faster than prices received. This report suggests profits will be squeezed and hiring will be weak in the area. This could be somewhat market positive because it suggests the Fed was right in delaying a rate hike because economic growth is still stumbling along.

Also leaning on the markets was the price of oil rising over $40 per barrel. OPEC was said to be considering a new target price for oil above the current $22-$28 level. This was not good news for the market as consumers watched gas prices rise well over $2 in some areas.

In news after the bell Cisco announced earnings that beat the street by a penny and announced guidance that was not met with excitement. The company said revenues could rise only +3% to +5% for the quarter. They also said earnings were helped more than they expected from an extra week in the first quarter. (strike one) They also benefited from buying back $3 billion in stock over the quarter which reduced their outstanding shares by 131 million and increased the earnings per share. This is an IBM trick from years past. (strike two) Cisco also said inventory levels rose +20% from the prior quarter and in excess of their targets while their book to bill remained "about one" according to Chambers. (strike three) The stock dropped in after hours on the "moderate" outlook from Chambers. He reinforced the idea that they would see growth equal to GDP growth in the markets they served. Investors were not excited with this limited view after seeing many other techs reporting +15% to 25% growth prospects despite being cautious. Cisco's problem is one of scale. Once you become so large it is tough to continue to grow at the rate of the small cap competitors. This is just one more reason why Option Investor never recommends holding options over earnings announcements. It was actually a decent report but the market did not like it.

Bonds actually gained some ground despite $24 billion in supply coming to market today in 3yr notes from the quarterly refunding. Wednesday and Thursday will see another $30 billion in 5yr and 10yr notes. The bid to cover ratio for the 3yr notes was 2.08, slightly below the 2.27 from February but well above last years 1.80 average. The 3yr notes are seen to be the preferred issue this week and they went at 3.199%. Some of the money raised from stock sales over the last couple days could have ended up in the bond market where safe returns over the next couple years are assured. Traders were happy to see the decent bid numbers because short interest is at an all time high in anticipation of the Fed beginning a rate hike program that some think will end up like 1994.

The markets rallied at the open but the Dow never got very far away from the flat line. Only a buy program at the close kept the Dow above 10000 for the day. Resistance remains 10025 from Monday afternoon. With the 200dma at 10005 we are fighting a real technical battle for control. There was no real urge to buy stocks today but the bargain hunters were able to keep the Dow from disaster.

The Nasdaq was the strongest index of the big four with a gain of +35 (+1.86%) but the Nasdaq gain was on the strength in the SOX and the Russell. The SOX gained +11 (+2.45%) led by Intel to near the 470 level. The SOX has moved up for seven days since hitting a low at 435 the first trading day in May. The Russell gained +11 (+2%) to bump back into range of the 550 level. The Russell washed out on Monday to 534 intraday and managed to post an impressive rebound back over its 200dma at 544 today. It was definitely a 200dma day with the major indexes either crossing or closing very close to that technical level. The Nasdaq closed at the high of the day just below 1931 but there is very strong resistance between 1930-1965. The one-day rebound, however strong, should not be seen as the beginning of a trend.

SOX Chart - Daily

Russell Chart - Daily

The futures took a serious hit after the Cisco earnings but there is a lot of darkness before morning. Anything is still possible. They recovered most of their losses when the Nikkei reversed a week long trend with a +150 point gain early in the session. The challenge is finding a catalyst to produce any further rally. Despite the rebounds today we are still very oversold according to some and still over valued according to others. We have seen money flowing out of funds and there are serious geopolitical events unfolding. There is no reason to aggressively buy stocks. That does not mean the bargain hunters will not supply a steady bid for the stocks they want. As long as there is no reason to sell it is entirely possible we could remain in a range over Dow 10K while these events unfold. It is just not likely.

Internally today was an exact opposite of Monday. Volume was moderate and about a billion shares less than yesterday but advancing beat declining volume by 5:1. New 52-week lows at 452 were less than of half yesterday's level at 1181. Monday was the most negative internals since Oct-2002 and the new 52-week highs were the lowest since July-2002 at only 32. That was the same number we had today. While internals were better they were far from good. Today could be seen as a holiday for sellers more than a return of the buyers.

The key point for me is simply support held. Make no mistake this is strong support at these levels. It should have held on the first test and it did. Whether we rebound from here or not the odds are good that this support will be tested again. Considering the strength of the multiple 200dma averages and the various interactions of the various indexes it could be tested several times before it either holds or breaks for the final time. One thing for sure a break of these levels could produce a significant downward move while any rebound could face quite a challenge for a considerable period of time, maybe until after the election.

The current drop could be the election premium being priced into the market as I have discussed before. Pollster John Zogby predicted today that Kerry would win the election. According to his website Kerry is ahead 47% to 44% in a two man race. According to Zogby there are very few voters still undecided and those usually break in favor of the challenger. Kerry is ahead on economic issues 54% to 35% and 57% to 36% on Iraq. Bush is still way ahead on terrorism at 64% to 30% but the Iraq problem is increasingly negative for Bush. According to Zogby, the election is now Kerry's to lose.

This administration change uncertainty is very damaging to the stock market as each candidate is reaching the point where they will say and do anything to win votes. Nothing is sacred and administration policies 12 months from now are anybody's guess. For many institutions this is the time for caution in their investments. For many with big profits still on the table from the 2003 bull market it may be time to exit stocks and find safety in bonds at the current levels. Earning a safe 3%-4% for the next 12-18 months may be starting to look appealing.

For traders the biggest economic reports left this week are the PPI and CPI on Thursday and Friday. This may provide a better clue to the current inflation rate. Lately there have been many analyses of the CPI making the rounds which show how the government "adjusts" the numbers to produce "real" inflation. This suggests we will not find any inflation this week and I doubt the reports will really influence the market. There may be a lot of volatility as they are announced but like the election numbers most traders already have their minds made up. They are just waiting for a signal to make their next move.

SPX Chart - Weekly

I think the next move for us is still to sell the rallies. Overhead resistance is very strong on the Dow at 10200 to 10300 and I do not foresee a breakout. Resistance on the Nasdaq is still 1930-1965 and despite the strength in the SOX I would be surprised to see higher Nasdaq numbers. SPX 1078 (200dma) is the strongest major support of all the indexes since most technical trading programs key in one way or another off the SPX. A break under 1078 could quickly test the 38% retracement level of the March 2000 high to the Oct-2002 low at 1067. The 50% retracement level at 1160 held for two months and prevented an upside breakout. I am not as confident about 1067 being support but it should at least be a speed bump if tested. Until the trend changes be very careful about buying the dip.

Enter Passively, Exit Aggressively.

Jim Brown
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