Option Investor
Market Wrap

No Surprise Yet

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      07-15-2004           High     Low     Volume   Adv/Dcl
DJIA    10163.16 - 45.60 10235.65 10162.94 1.70 bln 1686/1426
NASDAQ   1912.71 -  2.20  1925.76  1910.13 1.64 bln 1479/1512
S&P 100   537.88 -  3.91   542.81   537.84   Totals 3165/2938
S&P 500  1106.69 -  4.78  1114.67  1106.60 
W5000   10792.14 - 29.38 10861.07 10790.07
SOX       418.53 -  2.20   425.49   416.75
RUS 2000  562.16 +  2.42   564.35   559.74
DJ TRANS 3125.39 + 40.20  3141.32  3084.24
VIX        14.71 +  0.95    14.73    13.60
VXO (VIX-O)15.73 +  0.71    15.75    14.96
VXN        21.68 +  0.04    22.14    20.96 
Total Volume 3,603M
Total UpVol  1,531M	
Total DnVol  1,985M
Total Adv  3536
Total Dcl  3364
52wk Highs  148
52wk Lows   181
TRIN       1.61
NAZTRIN    1.13
PUT/CALL   0.83

As the earnings momentum increases the markets continue to trade sideways as investors hold their breath expecting big surprises. So far those surprises have not appeared and we are seeing earnings much like the economics, mixed. After the close today we had an almost equal amount of earnings warnings, earnings misses and companies beating the street.

Dow Chart

Nasdaq Chart

SPX Chart

Recent economics have resembled a box of chocolates, you never know what you are going to get. It started with the Jobless Claims this morning spiking to 349,000 once again and completely erasing the one week drop to 309K last week. Continuing claims moved closer to the three million market with a jump to 2,971,000. While the government and analysts speculated that last weeks low number was an anomaly, nobody expected a jump right back to the 350K level. Last weeks low number is being attributed to incorrect July-4th seasonal adjustment factors. The jump this week is being attributed to a shutdown in automakers to retool for the 2005 production year. Most notable for me is the flat trend for claims. They have quit falling over the last six weeks and have stabilized just under the 350K level. This is troubling but it could be just the summer doldrums of hiring.

Business Inventories rose a smaller than expected +0.4% in May. Retail inventories were flat for the month and the first time they have not risen since August 2003. Concern about the direction of the economy and early warning signs about the slowing consumer trend probably kept retailers from stocking up. Business Sales rose +0.7% and when coupled with low inventory levels keeps exposure to potential economic risks at a minimum. The inventory to sales ratio remained at its record low of 1.30 for the third month. That means there is only 1.3 months of inventory on hand. Any further increase in sales should force a continued uptick in manufacturing or eventually there will not be any product to sell.

The NY Empire Manufacturing Survey jumped to 36.5 from 29.9 in June. This was well over consensus estimates of only 28.3. Shipments, orders and back orders all posted large gains. Even employment eked out a small gain. Unfortunately Prices Paid rose while Prices Received dropped. This shows inflation pressures building but could also be a reflection of higher energy prices.

The Philly Fed Survey jumped to 36.1 from 28.9 and echoed the same theme as the NY Survey. This was well above consensus estimates of 26.3. Employment in the Philly Survey jumped to a very strong 24.6 from 16.8. The various Fed surveys have been mixed of late. Different regions are showing different stresses and this is normal for a slow growth environment. The current expansion signals are very positive for future non inflationary growth.

The main inflation gauge for this week the PPI posted a surprising -0.3% drop. This was directly related to the drop in oil prices last month and this is good news for the Fed. Unfortunately with the oil spike to $41 this week this brief drop in the PPI may not last. This report produced a spike in the futures on the headline number but that spike did not hold once the cash market opened. There were lots of positive internals but they were mostly related to the drop in oil so I will not dwell on them.

More important to the economic picture was the drop in Industrial Production by -0.3% when expectations were for a small gain. May's gains were also revised down slightly. Capacity Utilization dropped to 77.2, a drop of -0.4% from the prior month. Consumer goods production dropped -0.7%. This does not bode well for the retail inventory buildup I discussed above.

For the Fed this was a very good day. Headline inflation falling and manufacturing still expanding but enough slack in the industrial production to prevent a resumption of that inflation any time soon. The chances for a 50 point rate hike in August have dropped to only 15% according to the Fed Fund futures and this is a statistically insignificant chance. There is still a good chance for a 25 point hike in August and that meeting is only three weeks away. Sure seems like we just had one but that is what the calendar is saying. Time sure flies when you are having fun.

The big news for the day was earnings and Nokia headed the morning list with another warning that future profits were threatened by increased competition, lower prices and a lack of popular new models. Nokia has been the poster child for the problems in the cell phone industry of late and today's whining is no different. Yes, we know it is a tough market and the easy money has been made. Suck it up and forge ahead.

The other market mover was oil topping $41 a barrel this morning and the cancellation of the OPEC meeting next week. They instead believe they can implement the increase in production without impacting prices. Let's see. They are already pumping well over their stated levels even after the "formal" production increase. Oil prices are $41 today and rising despite this increase in production. It does not take a rocket scientist to figure out that the "proposed" increase already in effect will not impact prices. Yep, no reason for a meeting.

After the close today the big numbers came from IBM which posted earnings that beat the street by +4 cents. This should have produced a rousing reception but the lukewarm guidance poured cold water on the flames. IBM repeated its guidance word for word from the previous quarter saying "analysts estimates were reasonable." They were right on the mark on their revenue with only a miniscule miss of $20 million on total revenue of a whopping $23.15 billion. They said spending was continuing to improve led by growth in emerging markets like China. I am not normally a fan of IBM earnings due to the game they play each quarter. Like other quarters they bought back $1.3 billion in shares which raises their earnings per share. They also received a currency benefit of 2-7% depending on the division and type of sale. Still IBM did post an increase in revenue, profits and said they expect margins to improve going forward. There was nothing really negative in this report. This alone may not be enough to produce an earnings bounce on Friday but there is nothing here to really push us lower.

Helping the markets in addition to the IBM news was earnings wins for PMCS and RMBS after the bell. PMCS beat by a penny and RMBS by two cents. PMCS talked up the future prospects but suggested that summer revenue could be flat to +7% for the quarter. PMCS fell about -50 cents in after hours but the overall outlook was very positive. Offsetting the PMCS weakness was RMBS which doubled its earnings and grew revenue by +20% to a new record. Rambus was bubbling with excitement and the stock jumped about +12% in the after hours session.

The reason I am thinking we could see a relief rally tomorrow is two fold. First we had a fear of IBM crash at the close where the major indexes tanked as investors bailed rather than be long over their earnings. This created an artificial oversold bias. Secondly, IBM, PMCS and RMBS were all making bullish comments about chips. Considering the two day drop in the SOX to 420 support any good news should be a reason for a rebound. The SOX is very oversold and due for a rebound off that 420 support which dates back to September of last year.

In addition to the IBM comments about spending increasing we had the CEO of Eaton (ETN) saying this was the strongest economy on all fronts he had seen in years. Eaton is a diverse manufacturer and like GE they are saying business is good.

Offsetting that warm feeling was NFLX, which missed estimates by -2 cents and failed to impress investors with their story. The stock dropped -$4 in after hours. HOTT warned after the close but that is old news as we already know the retail sector is under pressure.

SOX Chart

The drop in the SOX and fear of IBM sent the Dow back to its monthly lows at 10162 just before the close. It did not recover. This is a little more than -20 points below its 200dma at 10189 and right on the edge of a real breakdown. It is time for the bulls to make a stand if they are going to rescue the markets from a retest of the May lows this summer.

The Nasdaq has slowly inched down to its lowest close of the month at 1912 but it appears the decline is slowing as we near support at 1900. I have speculated before that 1900 would be a good bottom for a summer trading range and I would really like to see a relief rally on Friday give us a little more breathing room before the Democratic convention on the 26th.

Our best chance of a rebound comes from the SPX which is about to test its 200dma at 1102 after closing at 1106 on Thursday. This is a critical test of market support and one that should hold. The S&P futures hit 1102.50 in after hours and have rebounded slightly already. We may need the cash test to trigger the buy programs (speaking optimistically here) and that could come at Friday's open. It is an option expiration day and sharp volatility at the open could be the key to the test.

The focus on Friday will be on Martha Stewart and the betting line is 10 months in a minimum security prison. The sentence will be given at 10:00 tomorrow and you can bet all eyes will be watching whether they really care about the outcome or not.

Volume on Wednesday's Intel led dip soared to 4.239B across all markets. This was the highest volume since June-25th and the Russell rebalance. Unfortunately it was 2:1 negative. Thursday's volume was only slightly lower at 3.651B but the ratio was only slightly negative. New 52-week highs have been rising daily since last Friday's low. That low capped a two-week slide since June 23rd. What I am suggesting is that the internals are not quite as negative as the indexes and we could easily rebound from the IBM dip at the close. However, with the Dow teetering on the cliff at 10162 this is a do or die situation. A failure to rally here could setup a quick retest of Dow 10000 or even the May lows at 9900.

The major problems still ahead are the Democratic convention only one week away. I believe any rally will be short lived as investors take protective positions ahead of that event. Earnings will continue to increase next week and there will be plenty of companies to cuss and discuss.

The setup for Friday sees markets at their lows and right at critical levels. It would be a good place for a major move in either direction and I am hoping it is up but ready to react in either direction. I suggest you do the same.

Enter Passively, Exit Aggressively.

Jim Brown


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