Option Investor
Market Wrap

Much Ado About Nothing

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        WE 7-02         WE 6-25         WE 6-18         WE 6-11
DOW    10282.83 - 89.01   10371 - 44.57   10416 +  6.31 +167.18 
Nasdaq  2006.66 - 18.81 2025.47 + 38.74 1986.73 - 13.14 + 21.25 
S&P-100  547.17 -  2.58  549.75 -  5.06  554.81 -  0.09 +  7.82 
S&P-500 1125.38 -  9.05 1134.43 -  0.57 1135.00 -  1.47 + 13.97 
W5000  10997.55 - 76.05   11073 + 39.48   11034 - 11.83 +109.64 
SOX      457.31 - 21.60  478.91 + 25.83  453.08 - 23.20 +  5.37 
RUT      582.72 -  4.98  587.70 + 17.16  570.54 +  1.42 +  1.37 
TRAN    3146.17 - 18.01 3164.18 + 95.61 3068.67 + 43.96 + 32.43 

Multiple major events came and went and the markets yawned with indifference. End of quarter window dressing turned into a strip search as weak economics and earnings warnings started to chip away at investor confidence. Still, despite a return to the bottom of our recent range the markets did not appear concerned.

Dow Chart - Daily

Dow Chart - 90 min

Nasdaq Chart - Daily

SOX Chart - Daily

Ten-year Yield Chart

Friday was no different from the rest of the week with the Nonfarm Payrolls coming in weaker than expected at only +112,000 and well under the consensus estimates of 275,000. This was the third monthly drop since the March high of 353,000 and the smallest gain in four months. April was revised down from 346K to 324K for a drop of -22,000 jobs. Adding this drop to the this months gain represents only a net gain of +90,000. This is still positive and the tenth consecutive month of job additions but the trend is not healthy. The net gain was only 1/4 of the March number and suggests the August payrolls could be flat or even negative if the trend continues.

Manufacturing employment fell -11,000 in June and was the first decline in five months. The companion household employment survey showed a gain of +259,000 for June but this is a very volatile survey with wide swings. It is used as a confirmation of the Nonfarm Payroll numbers. This suggests more employees are switching to contractor status or becoming self employed. Average workweek and manufacturing workweek hours both dropped suggesting a continuing weakness in the workplace. This would also suggest next months employment numbers could be weaker. The number of unemployed workers rose +45,000 for the month to 8.248 million. This was the second consecutive month of gains in the total unemployed. The economy must add +150,000 jobs per month just to stay even with the number of new workers coming into the workforce. As you can see we actually lost ground last month.

The smaller than expected job gain sent the bond market reeling with a drop in the ten-year note yields to 4.44% and a two month low. Considering this was only two days after the Fed began a rate hike cycle this is simply amazing. While I doubt this will deter the Fed from its next hike the weak economics and the drop in bond yields will undoubtedly keep the Fed on a slow and measured pace for future hikes. The Fed funds futures immediately removed a 25 point hike from the current end of year scenario and reduced the potential for a 50 point hike in August to almost zero. The equity market did not like the weak jobs numbers but the drop in rates should help smooth over their worries once trading begins again next week. The slack in the labor market is still with us and the Fed has strong history in not raising rates until jobs are on a steady path.

Another battle worth watching is the semiconductor sector. I have written about it recent path several times but the saga continues. The SOX dropped another -2% to 456 in early trading on Friday after Deutsche Bank cut Intel to a hold on concerns about global shipments. There are conflicting data points on supply and demand constraints depending on who you read. The Semiconductor Billing report on Friday showed a +37% jump in sales on a year-over-year basis in May and at their highest level since late 2000. This should be good news but the sector is under attack from analysts suggesting the peak has passed. Viewed another way sales only climbed +2.1% in May over April and this has fueled the criticism by analysts. We will get Intel earnings on the 13th and that gives us plenty of time for analysts to polarize even further. As long as the SOX continues to be weak we cannot expect the Nasdaq to recover. Leading chip stocks like INTC, AMAT and LRCX lost an average of -5% for the week. To summarize, the component shortage suggests high demand and an increase in pricing power but limits the amount of chips sold. Earnings should continue to rise but sales may not rise at the same rate.

Next week is a relatively light week for economic reports with those on the schedule not specifically market movers. We will have the ISM Services on Tuesday and the MAPI Survey on Thursday and those are the highlights. Investor focus should begin to shift to earnings as the Q2 cycle begins. It will start with a whimper on Tuesday with AA, DNA and YHOO followed by GE and ABT on Friday. The next week beginning July-12th has over 300 reporters headlined by Intel on Tuesday. After the GE guidance on Friday and the Intel guidance on Tuesday traders will make decisions about Q3 direction and the markets should react accordingly.

The big news has passed with Iraq, the Fed, quarter end, Russell shuffle and Jobs now history. If anything we could be facing a long hot summer of investor apathy as vacations and election conventions take center stage. Analysts are pretty much in agreement that the economy is slowing but only slowing to a more sustainable pace. The starting sprint out of the recession lows is over and the market will settle into its long distance routine. Economics will begin to be ignored as long as they maintain a positive trend and post election 2005 earnings guidance will begin to take center stage.

The prospect of no immediate catalyst provided traders with no excitement on Friday. The indexes dropped at the open on the Jobs news but they rebounded slightly once support levels were reached. The Dow fell to 10275 and light support just a couple dozen points below its recent range bottom at 10300. It tested that 10275 level multiple time during the day and appeared on the verge of cracking on weekend event risk most of the day. In the end support held and the Dow closed at 10282 for a loss of -51. Internals have declined significantly and the Dow is back to June-2nd levels having given back -200 points from the weeks highs.

The Nasdaq retreated to resistance turned light support at 2000 and hovered there most of the day. With the SOX heading south it was remarkable to see the Nasdaq hold this level for most of the day. The Nasdaq does not face a support challenge until 1965 and that is well below our current levels. The YHOO earnings on Tuesday could be pivotal in whether we test that support. Traders were not able to make any gains into the close and there was a distinct lack of short covering. The Nasdaq ended at 2006 for a loss of -9.

The flurry of earnings warnings and the weaker than expected ISM and Jobs reports have put a crimp in my expectations for a post holiday rally into earnings. I really do not think economic conditions have changed much but the perception of a worsening is growing. With the markets near 10500/2075 and the recent highs stocks were priced to perfection in anticipation of strong earnings. The warnings have tarnished investor outlook and we are seeing much less of a bullish undertone. Where I was looking for a post holiday uptick into the earnings week of the 12th I have moved back to a neutral position.

While we could easily go either way there is still strong support below us. That support could evaporate with a couple more high profile warnings and we could begin a sideways decline into October. I know this flies in the face of the summer rally crowd but when you think about it there is no reason for stocks to rise. If real earnings are going to decline and the economy continue to slow then stocks are fairly valued at the current level. What we need is for GE and Intel to brag about how strong business really is and raise guidance for Q3 and beyond. Personally I think the odds of this happening now are very slim. I think they will just affirm guidance and leave it at that. Should Intel lower guidance as two analysts have suggested we will be in serious trouble.

This makes next week a tossup and I suspect moving higher will be a challenge. We have seen the range expanded on the high side to 10487 and I think we could see the low side pushed back to 10150. This gives us a very broad range to wander over the next couple weeks without any damage being done. July is typically the strongest month of the 3Q and so far it is not shaping up as bullish. The Nasdaq has room to 1965 and is currently right in the middle of its recent 1965-2065 range. Again, plenty of movement potential without any conviction required. Our volume on Friday was definitely light with only 2.7B shares across all markets and that was weighted 2:1 in favor of declining shares.

Tuesday is going to be telling for market direction. I would use Tuesday as an indicator for the week and trade what you see not what you think. There could easily be a sentiment change in progress and we need to see which way the traffic is moving before stepping off the curb. Speaking of traffic have a safe holiday weekend and remember to buckle up. The Dept of Transportation is predicting 522-550 deaths from traffic accidents over the weekend. This weekend kills and injures more people than any other. Buckle up and live to trade another day.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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