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Market Wrap

Escaping July

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      07-29-2004           High     Low     Volume   Adv/Dcl
DJIA    10129.24 + 12.20 10163.01 10084.84 1.84 bln 2258/ 963
NASDAQ   1881.06 + 22.80  1885.01  1867.62 1.70 bln 2043/ 992
S&P 100   537.28 +  0.82   539.64   535.28   Totals 4301/1955
S&P 500  1100.43 +  5.01  1103.71  1095.42 
W5000   10663.45 + 12.45 10691.29 10541.91
SOX       411.19 + 11.70   414.04   399.49
RUS 2000  549.83 +  8.63   549.90   541.20
DJ TRANS 3129.42 + 43.10  3135.05  3086.33
VIX        15.68 -  0.47    16.12    15.42
VXO (VIX-O)15.46 -  0.42    16.24    15.22
VXN        23.99 -  0.88    24.79    23.82 
Total Volume 3,838M
Total UpVol  2,865M
Total DnVol    888M
Total Adv  4879
Total Dcl  2222
52wk Highs  104
52wk Lows   151
TRIN       0.94
NAZTRIN    0.61
PUT/CALL   0.65

It is almost over, July that is. So far it has run true to its historical election year norm with weakness leading up to the convention and disappointment over summer guidance. The good news is our sentence to this purgatory of a market correction may be about over as the July calendar expires.

Dow Chart

Nasdaq Chart

SPX Chart

The economics this morning were unimpressive and the market lost its overnight excitement early as oil began to rebound from its dip. The Jobless Claims rose to 345,000 and +5K over estimates and very close to the 350K inflection point. Continuing claims rose again and at 2.96M are very close to breaking back over the three million mark. Investors were not impressed.

The Help Wanted Index dropped to 38 and only +2 points off its historical low of 36 reached last year. The recent high was 40 in February and it has been trending slightly lower ever since. Prior to the recession the index peaked at 92. Only 31% of newspapers surveyed indicated help wanted ads were increasing. While the headline numbers are not likely to increase to numbers of yesteryear with the advent of online search firms the actual movement of the index remains important. The movement has not showed any gains since February and that is a strong negative for current job growth.

The Employment Cost Index rose +0.9% for Q2 and only slightly less than the +1.1% jump in Q1. The majority of the increase was related to benefit cost increases and only a minor amount was due to wage increases. This still suggests the labor market is soft and there is strong competition for available jobs. Since benefits increase regardless of wages, employers continue to be faced with job cuts as way to reduce expenses.

The Jobs picture will come to a head next week when we get the Nonfarm Payrolls once again. The current consensus is for an addition of +215,000 compared with only +112,000 jobs added in June. That is a very strong number for a summer month. We are also nearing that time of the month again where the major economic reports seem to converge. Friday begins with the Q2 GDP, NAPM and PMI and Monday has the ISM for June. These reports lead off the August schedule and will serve to set the tone for the next couple weeks.

As we move out of July traders will breathe a sigh of relief. According to ISI the markets lost -$900 billion in market cap since July 1st. The Dow gave up -5% since June 30th to the July 26th lows. The Nasdaq lost -11%, SPX -5.7%, Russell -6.8% and a whopping -20% on the SOX. Using the Nasdaq and SOX numbers we have seen a real correction in the markets and it is time for more than just a relief rally. Coincidentally the convention is over tonight. Nice how that worked out.

Seriously, we are due for a real rebound next week and it could begin as early as tomorrow. For the last three days we have seen attempts to rebound in the afternoon but fear of convention darkness always held us back from a real rally. The volatility has been very strong, relative to the last three months and volume has picked up significantly. Tuesday and Wednesday we had over four billion shares traded and today came very close at 3.85M. Up volume has increased strongly and most of the indexes have seen a double bottom retest of support over the last four days.

The Dow tried for three days to break and hold 9950 and the bears could not manage it. We have now seen two higher lows since Monday and we went out near the highs of the day in anticipation of the convention closing successfully. The Nasdaq pushed down to 1830 on Monday and Wednesday and barely dipped below 1870 today. It held its gains and went out near the highs of the day.

Obviously these factors do not guarantee a positive market ahead but they are bullish signals. Earnings are literally exploding and may even beat Q2 when the smoke clears. This is very contrary to the prior estimates of mid to high teens for overall earnings. Current estimates are for +25% to +27% based on the strong performance by S&P companies. Granted Intel, MSFT, IBM and some others were not glowing about their future prospects but they still posted decent results. We are actually seeing estimates for Q3/Q4 rise slightly and this has surprised most analysts.

We also have the rising price of oil impacting our markets. After opening down today it did rise to touch $43 once again. Boone Pickens was on the radio today saying oil was headed for $50. This kind of talk had the markets running scared as well as the talk about shutting down Yukos. Guess what? Yukos was a power play as the game of brinkmanship continues and the Russian courts said today they never expected Yukos to stop selling oil. Also, oil supplies are rising according to a report today. The extra oil OPEC said they would begin pumping a month ago is starting to hit stockpiles and I believe the market price will reflect that soon. If oil prices begin to moderate then stock prices, down on the threat of oil, are free to rebound.

We also have the elimination of the convention risk. Tonight is the last night and is probably the most risky as it is the highest profile event. If the Kerry speech goes off without an incident and the attendees file out of the auditorium safely the city of Boston and the country in general will breathe a strong sigh of relief.

To make a long story short we have seen a sharp correction and we are due for a sharp rebound. The timing is right with a week devoid of events and only a few high profile economic reports to stimulate the conversation. This is a free week for traders to romp if they so desire. The following week we have another Fed meeting and possible rate hike and the news will begin to focus on the Olympics and associated terror risk in Greece. Still, as bad as it can be it is still Greece and not on U.S. soil and investors may feel a little better about being in the market.

Obviously nothing guarantees a rebound or the duration should a rebound occur. What we have is the perfect setup in an imperfect market. Money is still flowing into funds but that money has not made it into the market. As I related last week many funds are sitting on as much as 25% of their portfolio in cash. Should the market begin to rise those funds will begin to worry about missing a move and could put some of that cash back to work.

Historically the calendar is with the bulls. In election years the markets tend to rise in August as expectations about the winner begin to firm. Part of the recent sell off could have been an election slump as Kerry went into the convention ahead of Bush in the polls. Since the convention has been in progress Bush has pulled ahead again and the markets have begun to rise. It could be just a coincidence of timing but don't discount the polls completely.

Technically the Dow has rebounded from its 9914 low to the top of its down trend channel at 10150 and this is very strong resistance. It is also exactly where a breakout could produce a strong reaction. A breakout here would quickly run into resistance at 10200-10250 but without any immediate clouds on the horizon we could see 10400 again. I know, it sounds like I have been hitting the bottle and got a little tipsy but I am just telling you what could happen. The 200dma is 10225.

The Nasdaq is so far from real resistance that it could easily run for quite a few points. With the 1881 close today the 1900 level is the next key but a break there could see a quick bounce to 1950. I am not suggesting that will happen but just stating potential.

The SPX is still the key as I have been telling you for the last two weeks. It closed today exactly on the key 1100 level and ready to race off in either direction. The 200dma is near 1107 and a strong bounce could easily push the index back over that key level and remove some of the sell triggers from the reach of fund managers.

The bearish side of this analysis is the dead stop at key levels of Dow 10150 and SPX 1100. These are strong resistance levels and levels that could hold if even the slightest negative news appears. We can be watching for a rebound to appear but we need to be careful to also watch for the bears sneaking up behind us.

We had several positive earnings reports after the close with IM, ACS, ADPT, CYTC, GILD, KLAC and VSEA beating estimates. KLAC was somewhat bullish on the conference call and futures are up in the overnight session. The earnings calendar for Friday morning is very light but we have four economic reports that could spark the market. GDP, NAPM-NY, PMI and Consumer Sentiment will be released.

One negative event was announced today and that was a $5 billion withdrawal from Janus Funds. Janus announced that an unnamed investor was withdrawing $5 billion by year-end from Janus Funds. This amounts to nearly 4% of assets under management for Janus. This money will likely be reinvested in the market by a new fund of choice but we could see a negative bias at Janus as other investors hearing the news decide to liquidate as well. This could be a drag on the market over the next five months BUT remember we lost $900 billion in market cap over the last 21 days in July according to ISI. $5 billion may be a significant amount of money but over five months the withdrawal should be nearly invisible.

For Friday the instructions are the same. Remain long over SPX 1100 and short/flat below that level.

Enter Passively, Exit Aggressively.

Jim Brown
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