Option Investor
Market Wrap

The Day the Market Stood Still

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      05-18-2004           High     Low     Volume   Adv/Dcl
DJIA     9968.51 + 61.60  9987.04  9906.64 1.68 bln 2304/ 893
NASDAQ   1897.82 + 21.20  1903.39  1890.95 1.48 bln 2000/1113
S&P 100   533.82 +  3.42   535.25   530.40   Totals 4304/2006
S&P 500  1091.53 +  7.43  1094.14  1084.10 
W5000   10598.26 + 80.40 10615.01 10518.57
SOX       453.36 +  8.40   455.97   444.94
RUS 2000  542.56 +  7.22   542.56   535.34
DJ TRANS 2842.36 + 30.00  2844.18  2811.35
VIX        19.33 -  0.63    19.70    19.14
VXO (VIX-O)19.82 -  1.21    20.54    19.23
VXN        27.75 -  1.44    29.29    27.58 
Total Volume 3,421M
Total UpVol  2,628M
Total DnVol    742M
Total Adv  4793
Total Dcl  2321
52wk Highs   52
52wk Lows   190
TRIN       0.83
NAZTRIN    0.51
PUT/CALL   0.99

Almost like a scene out of an old science fiction movie the markets gapped open on Asian relief and then just stopped. They traded almost completely flat after 10:30 on very light volume. Intraday charts showed a near flat line despite the advancers controlling the day. It was not a surge in buyers but a complete lack of aggressive sellers.

Dow Chart - Daily

Nasdaq Chart - Daily

Nasdaq Chart - 5 min

The lack of excitement worried everyone and there was a total lack of conviction. However, there were several attempts to press a sell off and they all failed quickly. Resistance held and so did support. Considering the weak economics this morning just holding in place was an accomplishment.

Chain Store Sales came in at -0.8% and the second consecutive weekly loss. Consumers are getting killed at the pump with gas prices hitting an all time high today. This is taking cash out of consumers pockets and summer weather kept them out of stores. Tax refunds have begun to dwindle and consumers are running out of surplus cash.

New Residential Construction fell to 1.969M units from 2.011M in March. This shows that builders are not as optimistic about the future with rising rates. The drop was not significant and we did have a very strong March so this is not really a factor to fear. If it dropped another 50-100K traders would start to worry more that the sector was weakening. Several comments and events recently have begun to question if the Fed would actually hike in June so the picture is still cloudy. We still have a couple strong months ahead for home sales.

The majority of the market relief today was due to a recovery in the Asian markets. India led the rebound with a +8% gain after Sonia Gandhi turned down the Prime Minister position. The Indian markets fell -17% intraday on Monday and recovered to close only down -11% but it was still the biggest loss on record. Other Asian markets fell on the news on Monday with the Nikkei down -3%, Taiwan -5.1% and Korea -5%. All those markets recovered on Tuesday and the U.S. markets rebounded at the open on relief. We also saw the GDP in Japan come in at +5.6% when only +3.5% had been expected. That was the last major economic release for the week and the Nikkei jumped +2% but only recovered two-thirds of Monday's losses.

No sooner had the markets opened up than Fed President Al Broaddus delivered a hawkish speech expressing concern that core inflation had quickly bottomed and was on a subsequent upswing. He said there was a growing concern at the Fed about inflation. He said that after a long period of worrying about lack of inflation he would now have to dust off his inflation hawk feathers in case he had to attack it again soon. As if he feared he had said to much he repeated the current Fed refrain of "labor market slack and excess capacity will restrain the inflation pressures in the period immediately ahead." He also repeated the "measured pace" phrase but said there is no question the risk is greater now than just three months ago. He dismissed 1994 parallels saying the Fed only wanted to "stabilize" inflation at the current levels today and not "reduce" it as they did in 1994. Since it took almost 20 years for the last inflation cycle to be broken the Fed does not want to go there again and Broaddus made it clear the Fed would not allow it to happen again. This was the most hawkish of the recent Fed speakers and brought the June rate hike back into focus.

That hike had been discounted somewhat over the last couple days with oil hitting 22 year highs and depressing the current economic environment. Coupled with global market instability there were some beginning to think the Fed could still take a pass in June. I think the inventory adjustment to the GDP will push it high enough that the Fed will feel required to act.

Helping push the U.S. markets higher at the open were strong earnings from CSC and Agilent. This helped push the Nasdaq back to 1900 but the index could not hold it. The Dow tried to regain 10000 but that was also an elusive target. The Dow rebounded from 9900 support that held firm yesterday and climbed to 9970 by 10:30 and it held that level the rest of the day. By failing to recover 10K after trading very close all day it cast significant doubt on the quality of the rally.

The Nasdaq rebounded +20 points at the open and then traded in a six point range the rest of the day. This is yet another lower high and another failure to return to critical levels. Both indexes gave the appearance of a simple dead cat bounce where sellers paused in hopes buyers would rush into the dip and push indexes back to resistance so sellers could pile on once again.

I mentioned on Sunday there was a chance the market could see an option expiration rally off critical support at NDX 1400 and Nasdaq 1900 on Monday assuming there were no weekend events. Obviously the Asian market implosion was a key event over the weekend that nullified that rebound potential. The failure for the NDX/Compx to return to those levels today is a clue to the weakness still ahead. The lack of volume was another clue. We are two days into expiration week and it appears everyone is content to let the week end at this level.

Hedge funds or just funds in general have been pushing the market around worse than the ball in a Ping Pong match. On Monday volume in the QQQ was over 150 million shares. Today it was only 96 million. Average volume is 103 million. A 50% increase in volume on one day should give you a clue how heavily the funds are hedged. Program trading hit 52.3% on the NYSE last week, the highest level ever. Average daily volume in program trades was 847 million shares. Only 11% of the program trading was due to arbitrage. That is the buying/selling of a basket of stocks and futures to capture differences in the fair value. (link) The retail trader is being tossed around like a ship in a storm as the big guys fight for points. The lack of ANY volatility after 10:30 today indicates the hedge funds and institutions took the day off. Whether they are comfortable holding the indexes just under key resistance or they were hoping for a bounce to sell we will not know until tomorrow.

One statistic on cash flow that hit the airwaves today was the outflow of cash by foreign investors. In March there was an inflow of +$2.4 billion but April saw outflows of -$13.5 billion. This was the highest outflow since records began in 1978. Deficits and rate hikes were given as the reasons for the withdrawals as foreign accounts repatriate money.

A positive for today's market was a drop in oil of more than a $1. July crude fell -1.08 to $40.40 after setting an all time high yesterday. There is no reason other than profit taking and the recovery of the Asian markets. The Bush administration said it would NOT use the strategic oil reserves to reduce prices. That oil is supposed to be for national emergencies and for a defense stockpile. Prices are not an emergency. Considering the rate of escalation in price and the heated words over oil in the press I don't think it is a bad idea to store it up. Planes, ships, tanks, trucks and humvees don't run without oil. I also don't think it would hurt to start applying the screws to OPEC nations. Cutting off trade favors to several might take the smile off their face. It only costs an average of $8 to produce a barrel of oil so profits are huge.

One market factor I mentioned last week was eliminated when Bush formally reappointed Greenspan to his position today for another four year term. He now has to be approved by Congress but that is not expected to be a problem. Greenspan cannot serve the entire term. His term at the Fed is up on Feb-1st 2006 and he will have to abdicate by then. By law he cannot continue at the Fed past that date. That gives us a little over a year and an election before potential successors will start posturing in the press.

After the bell today several tech companies reported great earnings. Leading the list was Hewlett Packard, which did announce inline at 34 cents and a profit of $1.3 billion on an operating basis. Sales in Europe surged +17% on things like digital cameras, music players and laptops. Carly Fiorina said the quarter was strong but admitted corporations were still reluctant to spend millions on computer upgrades. She said pricing was extremely competitive and sales depended on price. HPQ raised its guidance but it was clear that Dell was breathing down their neck in hot pursuit and IBM is chipping away at the HPQ base.

AMAT beat the street by three cents and said orders were up +32% in the first quarter to $2.21 billion. AMAT raised its guidance for the current quarter and said its plants were running at 100% with plenty of opportunity for upside. NTAP also announced earnings inline with estimates and they predicted revenues would grow +4-6% in the current quarter. ADSK also beat the street by +6 cents and boosted estimates for the full year. PLAB beat the street by +3 cents and will give guidance on a conference call on Wednesday.

Earnings are good, the economy is growing and Asia is still booming as evidenced by Japan's GDP today. However the U.S. markets are still weak. Even the finding of a couple chemical weapons in Iraq could not send them higher. You know why and I do not need to spell it out again. There are still some rocky times ahead and while we may be nearing some strong support there is still strong overhead supply. There is stock for sale and until that supply goes away we will continue to be weak. June 30th is the key day for more than one reason. The key for me is when will traders decide that enough is enough and start nibbling at beaten up issues in hopes of a summer rally after that date. The velocity of the decline is slowing but we may not be done yet.

For the rest of the week there are no economic reports that should shake up the markets. We have three days left in expiration week and based on today's volume it could be very boring. I have been suggesting everyone sell rallies until the trend changes but I am recommending a neutral approach today. Until we get past expiration it could be terminally boring interspersed with periods of extreme volatility. Neither environment is conducive to profitable trading. Next week we should return to normal and a trend should emerge again.

Enter Passively, Exit Aggressively.

Jim Brown
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