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Market Wrap

Watch Your Language!

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      06-29-2004           High     Low     Volume   Adv/Dcl
DJIA    10413.43 + 56.30 10429.13 10341.68 1.68 bln 1667/1592
NASDAQ   2034.93 + 15.10  2037.60  2017.35 1.60 bln 1826/1281
S&P 100   552.51 +  2.03   553.58   549.78   Totals 3493/2873
S&P 500  1136.20 +  2.85  1138.26  1131.81 
W5000   11084.47 + 28.80 11099.92 11045.09
SOX       480.45 + 10.00   480.80   469.64
RUS 2000  587.83 +  3.73   590.07   583.72
DJ TRANS 3184.71 +  6.70  3189.05  3172.15
VIX        15.47 -  0.60    16.28    15.22
VXO (VIX-O)15.37 -  0.23    16.45    15.37
VXN        20.15 -  0.44    20.52    19.90 
Total Volume 3,512M
Total UpVol  2,247M	
Total DnVol  1,217M
Total Adv  3923
Total Dcl  3293
52wk Highs  223
52wk Lows    96
TRIN       0.82
NAZTRIN    0.56
PUT/CALL   0.87

That is what the investor community is saying to Greenspan tonight. While the actual rate decision may be anticlimactic tomorrow the language of the announcement is the key to the reaction. The market rallied on Tuesday on the hopes the "measured pace" clause is retained but the rally was muted on fears hikes could be accelerated. The fears kept us from testing the 10480+ level for the second consecutive day.

Dow Chart - Daily

Nasdaq Chart - Daily

SOX Chart - Daily

The morning started out with a minor dip but it was quickly erased as anticipation about the Consumer Confidence filtered through the markets. The Russell spiked substantially before the announcement and then led again after the release.

Consumer Confidence rose to 101.9 in June from 93.1 in May. This was well over the consensus estimates at 95.0 and was attributed to falling gas prices and a rise in employment. This was the highest level for the index in two years. The present conditions component soared from 90.5 to 104.8 and the expectations component rose to 100.0 from 94.8. Those thinking jobs are plentiful rose to 18.0 from 16.6, not necessarily a rousing rebound. Those planning to buy homes FELL to 3.6% from 4.1% and those planning to buy a car fell slightly. These surveys are impacted greatly by employment surveys and we have a new Jobs report due out on Friday. As long as we continue to see jobs added to the economy these confidence surveys will improve. We have seen the result of this expanding confidence in the home sales numbers over the last week. Both new homes and existing sales set records.

The only other economic report for the day was Chain Store Sales and at -1.2% it echoed the data we have been seeing from the big retailers. Rising consumer confidence has not translated into higher retail sales. Wal-Mart and Target have both warned this week that sales would be weak and that has been reflected in this report. Analysts have attributed the slow sales to cooler than normal weather and heavy rains in many areas. This was the biggest drop in sales in three months and I have a hard time blaming that big a drop on the weather. I suspect it is more of a combination hit from weather, high gas prices and the end of buying fueled by tax refunds. We are right in the middle of the summer doldrums and consumer debt is at record levels. Confidence may be rising but consumer cash is still stretched to the breaking point.

I mentioned on Sunday that earnings warnings have been very quiet and traders were left to trade on their own optimistic assumptions. Well the dam broke this week. In just the first two days we have had warnings of weak sales or earnings from TGT, GM, WMT, T, WM and HAL to name a few. I have not heard any news about raised guidance from anyone. If this is the beginning of a new trend we could be in trouble. July is typically the best month of the 3Q and it is not shaping up as a barn burner if this is a clue to the future.

The markets were less than inspiring today despite being positive for the day. The Dow battled 10400 for most of the morning and then used 10400 as support for most of the afternoon. The Dow traded in a 25-point range after 12:00 and closed right in the middle at 10413. Overhead resistance is still 10450-10500 and we are still stuck in the broader three week range from 10300-10490. Last week the Dow made a concerted effort to break out of that range to no avail.

The Nasdaq did manage to move back to near its recent highs at 2040 on strength in the semis and the small caps. The SOX gained nearly +10 points to move back to interim resistance at 480. With much stronger resistance at 490 we could see one more day of help from the SOX before the Nasdaq has to make it on its own. That would translate to about 2050 on the Nasdaq and it would be a new high for the week.

What is going to skew all the support/resistance levels is the Fed decision due out at 2:15 on Wednesday. The widely expected rate hike will be met strong buy/sell activity regardless of what they say. It is a program trade event on both sides. This should easily violate the current resistance levels and I am actually counting on it.

After all the cussing and discussing over the last two months we are finally down to the last tick on the event clock and that occurs at 2:15 on Wednesday. Iraq has passed with no material news events and the end of the quarter buying has failed to materialize. The Russell shuffle is behind us and we are left with only the Fed decision before June expires. That decision is not really in doubt but the language will be hotly debated. Most feel they will keep the "measured pace" descriptor for future rate hikes but there is a growing group of analysts that expect that terminology to disappear by August.

The real fear has always been that we would see a 1994 rate hike scenario where the Fed ran out of control with an unprecedented series of hikes. The Fed has tried to express that calm will prevail and the recent economic reports suggest the Fed is right in that claim. We have seen numerous weaker than expected reports over the last month suggesting the economy is growing slower than hoped and the Fed is not behind the curve as many have claimed. In fact the Fed has claimed that it will be patient in removing the economic stimulus of low rates until they actually see a substantial increase of inflation. So far they continue to claim that the excess capacity in the economy will keep inflation at reasonable levels for the rest of the year. Just in case they are wrong the Fed has said they will not hesitate to act aggressively if the pace of inflation increases.

This is the key language traders will be looking for tomorrow. If the Fed retains the "measured pace" comment then we should rally despite the size of the rate hike. If they change the language to make it conditional to the inflation rate then we could see a strong negative reaction.

The majority of traders claim that any Fed rate hike has already been factored in and most feel the language will be neutral. Currently there is only about a 40% chance of more than a 25 point hike. Regardless of the decision and the language we should have some strong moves and everyone should remember the first move is not normally the one that sticks.

This leaves us with a vast number of trading possibilities for Wednesday. Add in the multiple earnings warnings and lowered guidance and suddenly the outcome does not look so exciting. I still have a positive bias but I am not as convinced as I was last week. I think the gains in the Nasdaq are the key. As long as techs are finding buyers the rest of the market will probably muddle ahead. We are still seeing some positive movement in the Russell despite some dumping by speculators of stock nobody wanted last Friday. There was a strong program bounce at the open and the close indicating not all funds have filled their rebalance needs.

I studied a lot today trying to decipher the various reactions we could see tomorrow and more importantly for Thursday and Friday. It is not a simple problem. We will have four of the five major issues resolved by tomorrows close but there is still a major roadblock in our future. This roadblock is the Friday Jobs Report. The estimate of +275,000 jobs is very high in my opinion based on the weak employment components we have seen in various surveys over the last month. This may be borne out by the almost complete lack of any high profile analysts making higher estimates or even talking about Jobs so far this week. I am sure we are seeing the focus on the Fed decision take precedence over the Jobs number but you can bet that focus will change in a heartbeat once the Fed decision has passed. We have to assume the Fed will know the Jobs number in advance and that will be part of their decision. How they word their statement should be based in part on how strong Jobs were in June.

This looming report could keep a cloud over the market after the Fed decision. Assuming a positive statement I think the cloud will be minimal but still a cloud. The worst-case scenario would be a runaway rally on Thursday with a complete collapse on a Job implosion on Friday. This fear should keep the big buyers from making any sizeable commitments prior to Friday. The keyword is "should" and we all know how that tends to cause trouble. Since it is widely assumed that the market will rally after the Fed decision, uncertainty will have vanished, there is always the possibility we could see some portfolio allocation programs hit that tape in hopes post Fed volume will dilute the impact of their selling.

In short, there is simply no way to deduce the eventual outcome once the smoke clears. As I said before July is normally the best month in the 3Q and this is an election year which normally increases the odds of a better than average month. However, with the election now a dead heat it could be a hindrance to progress rather than a positive. I am going on the assumption that the flurry of earnings warnings was a fluke and we will still see a positive pre/post holiday bounce. Once we exit next week all bets are off and our direction will be related to real earnings. Until those earnings begin to appear buyers will be hesitant to increase their positions.

If you are in the market after the Fed decision keep Dow 10500 resistance firmly in mind because that is the next key level to be broken. I would be very surprised to see that happen on Wednesday. Fed decision days are normally best used to take your spouse shopping. It is cheaper than trying to second and third guess the extreme post decision volatility. Don't forget there are other economic reports tomorrow, NAPM-NY, Chicago Fed NAI and PMI. Any strength/weakness there will only increase the post Fed volatility. Keep your focus on the language and not on the hike.

Enter Passively, Exit Aggressively.

Jim Brown
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