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Market Wrap

So Far So Good

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      07-27-2004           High     Low     Volume   Adv/Dcl
DJIA    10085.14 +123.20 10103.13  9963.54 1.97 bln 2030/1223
NASDAQ   1869.10 + 30.10  1872.17  1843.04 1.77 bln 2115/ 975
S&P 100   535.53 +  5.44   536.50   530.09   Totals 4145/2198
S&P 500  1094.83 + 10.76  1096.65  1084.07 
SOX       402.91 +  2.60   405.71   393.21
RUS 2000  544.61 + 11.12   544.63   533.49
DJ TRANS 3063.60 + 15.00  3073.74  3046.78
VIX        16.55 -  0.75    17.34    16.30
VXO (VIX-O)15.70 -  1.30    17.14    15.70
VXN        24.31 -  0.98    25.53    24.11 
Total Volume 2,892M
Total UpVol  2,021M	
Total DnVol    845M
Total Adv  4259
Total Dcl  2504
52wk Highs   43
52wk Lows   247
TRIN       0.68
NAZTRIN    0.79
PUT/CALL   0.72

With the Democratic convention 25% over the markets rallied off its lows for the year in anticipation of a successful conclusion. The massive security and multi block long safety zones on all sides of the convention must have convinced investors the event risk was far overdone. They ventured back in the market to vote for their favorite stocks and the market election was a success.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Daily

The market rebound caught shorts off guard and after a large buy program hit at 2:30 it was rocket time into the close. Many still short after the last week of market weakness were forced to cover once the programs began firing. The buy programs between 2:30 and 3:PM added over +1000 issues to the advance/decline line on an otherwise low volume day.

The morning started off well with another small gain in the weekly Chain Store Sales of +0.2% but the good news came at 10:00 with a significant jump in Consumer Confidence. The July number rose to 106.1 from 102.8 in June. The majority of the jump came in the expectations component which rose from 100.8 to 105.8. Those planning on buying a home or car rose slightly but major appliance purchasers dropped significantly from 34.3% to 30.4%. Seems consumer just will not turn loose of any cash out of pocket but will buy things on credit. The headline number was well over the consensus estimates of 102 and at 106 is the highest level for the index in 25 months. The previous sentiment decline on high gas prices appears to have eased and consumers have become immune to paying $2 for gas.

The rise in consumers planning on buying homes should be good news for the homebuilders. The latest reading on New Home Sales came in at an annualized 1.326 million and while it is a minor drop from May's 1.337 level it was far better than consensus estimates for a drop to 1.255 million. June's number was only slightly off the record pace set in May and suggests the news may not be as dire as people predicted a couple weeks ago. Interest rates have declined despite the Fed's new rate hike cycle as markets come back in line with reality. That reality is a still growing economy moving at a steady pace that will not excite the Fed into aggressive action. Demand is still very high and builders are slowing the pace of construction to prevent high levels of inventory going into fall and an uncertain 2006 season.

The biggest news of the day revolved around the HMO sector with the abrupt departure of the CFO at Cardinal Health. CAH lost -6.50 on the news. The recent disclosure that the government would oppose the Wellpoint/Anthem merger also continues to weigh on the sector. Wellpoint beat earnings by 4 cents after the close but was trading down -6.50 on the merger news. The HMO Index ($HMO) dropped -4.20% or -38 points on the strong blows to the sector. The HMO sector had been a strong rallying point in the markets with a three month high as late as July-16th. There could be some convention risk being priced in as the high price of health care becomes the focal point of both parties. The drop in the HMO Index took it back to the 200dma at 878 and buyers did appear at what should be long term support.

Oil traded over $42 today with a bounce to $42.25 but pulled back to close at $41.83. The Yukos oil company, the largest company in Russia appears on the verge of collapse. The stock fell -14% on the Russian exchange and at 105.66 rubles it was the lowest level since Oct 2001. The stock dropped -20% in trading on Monday and -55% since last week when the court said they would begin selling Yukos assets to pay its tax debt. There are allegations of a criminal conspiracy and while the company is still pumping 1.7 million barrels per day there are worries a slow down in production could be coming as various issues are resolved. This is keeping upward pressure on the price of oil and flushing gas dollars out our tail pipe.

The chip sector suffered another setback on the heels of the SLAB and CRAY warnings but was able to recover from its 393 low to close at 403. Considering the current environment for techs that was a positive move. Techs have been the weakest link and investors have been voting them off the island since this earnings cycle began. Equity funds specializing in techs have seen 25 straight weeks of outflows. While some of that is historically seasonal for techs to be weak during the summer months they are not normally that weak. If chip stocks can find a bid tomorrow then we may have seen the bottom.

With earnings for 300 of the S&P-500 already reported for this cycle the numbers are still decent. 206 have beaten estimates, 52 inline and 42 have missed their numbers. Q2 last year at this point were 254, 8, 38 respectively. The trend is definitely weaker but only because expectations were much higher. This trend will only continue to worsen as we move into Q3 and the very strong comparisons with Q3-2003. This does not mean companies will not be more profitable but they just have a higher hurdle to vault.

After the close today UTSI warned and was trading down in after hours. EDS cut its dividend from 15 cents to a nickel and also got knocked for a loss. PSFT missed estimates by a penny. None of these events are going to be positive for techs tomorrow.

Got cash? Then you may be one of the few considering an investment in the Google IPO. Google priced its IPO between $108-$135 and quickly priced itself right out of the market for most investors. There are so many reasons not to bid on the IPO that it would be hard to list them all. Just yesterday Google noted that revenue growth had slowed and future growth may not be as strong as previously thought. The competition for Google's market is growing daily with everyone from Amazon to Microsoft entering the search engine marketplace in addition to Yahoo and its clones already chipping away at its base. The nearly $3.2 billion expected to be raised will be used to cash out the founders at $100 million each and many of the officers and early investors. I have no problem with that because they built a great company but others may feel they are selling at the top. Only $1.66 billion, barely half of the IPO will actually go to the company.

The entire investment banker community wants it to fail so future companies will not take the auction route. Mutual funds as a group have already commented that the price was too high and most have no interest in bidding. In traditional institution supported IPOs the bankers give shares to their favorite funds at a low entry price knowing the shares will pop when opened for trading. The bankers get credit for "placing" much of the offering and the funds and high dollar individuals then get to flip the shares for an instant profit and everybody goes home a winner. Even the eventual shareholder is normally still in decent shape because the shares were undervalued initially to make sure the bankers could place all the offering and earn the highest fees possible. It may not be perfect but it has worked for years.

The appearance of Google shares coming to market way over priced is going to be tough to overcome. The actual valuation is inline with Yahoo but the initial share price is a stumbling block for most investors. Only 60 or so stocks currently trade over $100 and those high priced stocks tend to decline rapidly when pressured. Should Google's revenues decline again they could easily see a significant haircut that investors would like to avoid. There is already a strong short sentiment once shares are available. Hedge funds are drooling at the potential. The consensus I am hearing is "I will wait until they have some history and then decide if the price is fair." It will definitely be an interesting IPO.

The market rebound today was definitely not expected. I was looking for it on Thursday or maybe even Wednesday afternoon as convention risk lessened but not today. The general consensus was an oversold rally from strong support on better than expected economics. I have trouble buying that reason but I have nothing to disprove it. I believe it was an oversold rally when it started but once it began triggering buy stops on the upside the shorts began to get squeezed. As we have seen so many times in the past once the oversold rebound cycle gets started it tends to feed on itself into the close. This rebound was much tamer than it appears in the closing numbers. Much of it occurred after the 10:00 numbers then we moved sideways with a barely perceptible upward bias until a strong buy program hit at 2:30. That program triggered others and the shorts ran for cover. That 2:30 move accounted for about half of the days points but it only lasted about 45 minutes. The first buy program triggered the break over resistance and the dominos fell into place over the next 30 min.

We did not get a major sell off into the close but once the programs ended we did see closing weakness. The key will be the open tomorrow. The Dow stalled at 10100 today and decent resistance. If there is no follow through tomorrow that is strong enough to break that 10100 level at the open then we could see weakness the rest of the day. The Nasdaq stalled at 1870 and the SPX at 1096. Both are right below strong resistance. Using the SPX as our guide 1098-1100 is a strong hurdle and one that will take real conviction to cross. I expect that conviction will develop before Friday but I am not counting on it at the open tomorrow.

The key point I need to stress tonight is the potential for a post convention rally. We may get another buying opportunity before the rebound begins for real and we may not. We need to be prepared in the case there is no further weakness. I mentioned last week to use SPX 1100 as your guide. I would look to be long on any move over 1100 and remain long until the trend changes. Ideally I would love to see one more dip to strong support between now and Friday to give us a strong double bottom retest from which to launch a strong rally. Strong support for me would be SPX 1078-1080 with VERY strong support at 1068-1070. After today's rebound I doubt seriously we will see the lower range but we could easily see 1080 again. I would look to buy a rebound from those levels. Just to make myself clear, go long over 1100 on a breakout or buy any rebound off a dip to 1080 or below.

Enter Passively, Exit Aggressively.

Jim Brown
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