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Market Wrap

Ten Days and Counting

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        WE 6-18         WE 6-11         WE 6-04         WE 5-28 
DOW    10416.41 +  6.31 10410.1 +167.18 10242.8 + 54.37 +221.71 
Nasdaq  1986.73 - 13.14 1999.87 + 21.25 1978.62 -  8.12 + 74.65 
S&P-100  554.81 -  0.09  554.90 +  7.82  547.08 +  1.95 + 10.80 
S&P-500 1135.00 -  1.47 1136.47 + 13.97 1122.50 +  1.86 + 27.08 
W5000  11034.12 - 11.83 11045.9 +109.64 10936.3 +  9.95 +301.26 
SOX      453.08 - 23.20  476.28 +  5.37  470.91 - 17.95 + 30.68 
RUT      570.54 +  1.42  569.12 +  1.37  567.75 -   .53 + 22.47 
TRAN    3068.67 + 43.96 3024.71 + 32.43 2992.28 + 44.27 + 82.26 

The markets traded to a draw once again as the indexes passed time waiting for coming events. We are ten days away from the Fed meeting and coming rate hike. We are ten days from the Iraq transfer of power and we are only twelve days away from high event risk of the July-4th weekend. Add to this the Russell shuffle and end of the quarter. All of these events contain high levels of uncertainty to some extent and we all know that is not something traders welcome.

Dow Chart - Daily

Nasdaq Chart - Daily

The indexes ended flat and at strong resistance once again despite some strong economic reports and some dovish testimony from Greenspan. We saw the Philly Fed rise to 28.9 from 23.9 and Jobless Claims return to the 330K levels we saw in spring. The Beige Book saw strong economic signs in nearly every area of the country that included a pickup in hiring. Industrial Production soared as did Consumer Sentiment. Good news was breaking out all over but it was not without some soft spots. The International Trade number was a new record deficit. The current account deficit also rose to a -$145 billion level and the largest deficit related to GDP on record. The NY manufacturing survey was flat and the Kansas survey fell. However, the Fed claims inflation is still low despite the PPI and CPI which both soared.

Do you see something in that prior paragraph that should concern traders? Of course it is uncertainty rearing its ugly head in the economic arena as well as on the global scene. The uncertainty in the recovery has analysts on the fence about the coming Fed rate hike. Where most were saying the Fed was behind the curve for the last couple months and suggesting the first hike could be 50 points the chatter this week has been more muted. Instead of 75 points through the August meeting analysts are now predicting only 25 points at each of the next five meetings and no 50 point jump at any point. The Fed rhetoric last week about taking aggressive action if needed has mellowed back to "measured pace" once again. The uncertainty factor still prevails. The recovery is now being called "tenuous" and while the Fed is still expected to hike on the 30th there is talk that there may not be another in August if the economy does not improve.

We are in the summer doldrums for corporate earnings and we will begin to get the predictions for the summer quarter in about three weeks when the Q2 earnings begin announcing. So far there have been few earnings warnings but we are just now getting into the real warning period. Considering the upward guidance announcements have been muted as well we are seeing an uncertainty cloud begin to form over the future guidance. You see how that "U" word is beginning to dominate our future. Remember how the "visibility" word dominated guidance a couple years ago? Welcome to the new buzz word for traders.

The problem is not just the next three weeks. Once past the July-4th weekend and earnings we will then be faced with the political conventions, Olympic event risk and then the election itself. The economic differences between Bush and Kerry could keep investors on the sidelines as long as the election outcome is in doubt. In a tie race every major election mistake by either candidate could swing the expected outcome and by default the "initial" impact of a win by the other side. In reality the market does equally well with either party in power but it does not react well to the first couple weeks after the election with a party change.

Ideally the market would react well to positive Q3 guidance, calming comments from the Fed and a clear leader in the presidential race. We are several weeks before we can count on at least two of those factors. Since the market is a very efficient discounter of future events we are effectively dormant because investors do not know which way to discount. There are just too many unknowns ahead.

The Dow has come to a screeching halt at 10430 resistance for the last two weeks and has tested it multiple times. The close on Friday at 10416 represents a close near the highs for the last two weeks and near the highest levels since April 28th. The declines for the entire month of May have been erased and we are back knocking on the resistance door. Considering the uncertainty this is amazing. This resistance range runs for about +150 points over the current 10430 level and increases in intensity up to 10575. Just getting over 10430 will not solve the problem but should at least give us a new range to trade. It does appear to me the Dow is building a bullish triangle at that 10430 level and were it not for the uncertainty I would expect a breakout almost immediately.

Dow Chart - 120 min

The Nasdaq is a little tougher to call. It has been trading in the 1980-2000 range since May 27th with only a couple forays outside those limits. The Nasdaq is being limited by the Russell shuffle due in 10 days and the implosion in the SOX. The SOX made a double top at resistance at 490 since June 1st and with the Book-to-Bill dropping on Thursday the SOX has declined to near 450. With chips falling the Nasdaq will not be able to sustain a rally. This should turn around next week IF it is going to turn. The SOX has strong support at 440 and this is where it could find buyers. Also helping the Nasdaq will be the Russell rebalance but not until month end. Once the new stocks are added there is normally a couple days of volatility and then the Russell is free to trade on fundamentals again rather than rebalance arbitrage.

Nasdaq Chart - 120 min

SOX Chart - Daily

For me all those events I discussed sets up the potential for a rally the first week of July. Regardless of the Fed action it will be behind us and the holiday weekend over. The Russell rebalance will be history and earnings will begin flowing. I am encouraged that we have not seen more warnings and think the pickup in employment is a real sign that the economy is growing, slowly but growing. The slow growth should continue to keep inflation in check and the drop in oil prices should at least keep the July inflation numbers inline. Summers in front of an election are surprisingly enough bullish as the candidates promise a chicken in every pot and jobs for everybody. Reality tends to be ignored.

With all the current negativity coming to a head very soon there is the possibility for an uncertainty relief rally on July 6th. I do not expect a 50 point hike and more than a 25 point hike is already priced in. Fund flows were actually positive +1.3B last week and June is the end of a quarter. This means there will be a larger influx of retirement funds the first ten days of July. I think there will be a pre earnings bounce and then a pause to see if the outlook will hold.

That leaves us with a slack week ahead before the fireworks begin to happen. While I would like to think we could rise in front of those events I am not convinced. I think we could see a continued uptick but we could just as easily see a final exit to the sidelines by those more cautious to wait out the events. This is truly a week where the bulls and bears could battle but the war may be waged in such low volume as to be insignificant. With rising support and strong resistance a direction will eventually be found but it may not be next week. If anything our range may simply widen depending on the strength of either side but I doubt we will see a strong move in either direction. The coming week is not a week for big bets. It is more likely a week that traders take an early vacation while they wait for the fireworks. The following week could see strong volatility in both directions as the news events unfold. Depending on those events we could see a rise into the holiday weekend propelled by high risk traders trying to position themselves for any post holiday bounce. This forecast and $5 will only buy you a cup of strong coffee at Starbucks. It may not be exactly the way it plays out but that is the way I see it today. I will continue to update it as the calendar ticks away but remember for the next ten days, uncertainty rules.

Enter Very Passively, Exit Very Aggressively!

Jim Brown



 
 



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