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Market Wrap

Markets Fears Pink Slips

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      08-05-2004           High     Low     Volume   Adv/Dcl
DJIA     9963.03 -163.50 10129.09  9955.73 1.69 bln  864/2308
NASDAQ   1821.63 - 33.43  1859.77  1820.21 1.57 bln  830/2230
S&P 100   530.19 -  8.30   538.52   529.79   Totals 1694/4538
S&P 500  1080.70 - 17.93  1098.83  1079.98 
W5000   10472.27 -173.52 10649.56 10466.40
SOX       402.39 -  4.40   412.22   401.86
RUS 2000  532.36 - 10.31   542.74   532.09
DJ TRANS 3054.83 - 64.60  3120.41  3054.21
VIX        18.32 +  2.11    18.41    16.17
VXO (VIX-O)18.12 +  2.34    18.20    15.84
VXN        26.19 +  1.14    26.25    24.96 
Total Volume 3,539M
Total UpVol    433M
Total DnVol  3,035M
Total Adv  1868
Total Dcl  5019
52wk Highs   43
52wk Lows   234
TRIN       2.67
NAZTRIN    2.18
PUT/CALL   0.86

There were multiple reasons given for the market slide today and fear of a disastrous Jobs report on Friday was one of them. Given the current environment of daily terror news, oil at new highs and election polls changing leaders daily the last thing investors want to worry about is losing jobs in a weak economy.

Dow Chart

Nasdaq Chart

It was a day that started out ugly and got worse. The Jobless Claims came in -4,000 below expectations and -11,000 from last week and that was the best news for the day. Last weeks number was revised up +2,000 to 347,000. The Jobless Claims have been volatile over the last several weeks and the slight dip today did nothing to assure traders that the jobs report on Friday was going to hit estimates. The higher trend on Jobless Claims is said to be due to temporary layoffs in the auto industry as they retool for 2005 production models. Tomorrow at 8:30 AM we will know for sure.

Another leading indicator for Jobs was the Monster Employment Index which fell from 136 to 134 for July. This was a very minor drop and 136 was the recent high. A summer slow down from those highs was to be expected. There are no seasonal adjustments to the Index so the number was likely better than any adjusted number as the Nonfarm Payroll will be. The larger companies continued to increase their listings but postings from medium to small companies fell slightly. This is a very broad sample gathered from over 1500 websites in addition to Monster.com.

Friday's Jobs report is expected to show +220,000 new jobs and well over the +112,000 created in June. The markets have been expressing some fear that this will be a disaster of a report based on anecdotal reports of an economic slowdown. Recently the actual economics have been mixed and about as consistent as Forrest Gump's box of chocolates. The June Jobs report itself showed a drop in jobs for the second consecutive month and a drop in manufacturing payrolls for the first time since January. The whisper numbers for tomorrow are running about 260K to 280K on the high side and well under 100K on the low end. This sets up the potential for a volatile trading day. Any number over 200K is sure to produce an immediate bounce from our very oversold close on Thursday. The market was pricing in the risk of jobs miss and based on the closing drop they must have been afraid of a potentially negative number.

Also hurting the market were July Chain Store Sales that came in at +3.1% and slightly better than June's +3.0%. Considering all the negative press on consumer weakness I would have thought traders would have cheered the positive number. Instead they dumped retail stocks once again. The +3.1% number was about half of the first five months average and despite the firming at the lows the sector was depressed.

Helping to fuel that depression was another new high on oil at $44.55 and the feeling that consumers were going to be pouring money into the gas tank rather than in the stores. This was a 21 year high for the crude contract and a complete reversal of the selling seen on Wednesday. The sharp jump in oil came from a news report from Russia that officials have decided NOT to allow Yukos to spend any money and their oil production was again in danger. Adding to the fear was increased concerns about terrorist attacks on production/transportation facilities in Saudi Arabia in front of our elections.

There is also an increasing fear that we are reaching Hubbert's Peak in oil. In 1956 M. King Hubbert, a geophysicist working for Shell Oil predicted oil production in the U.S. would peak in the early 1970s. Nearly everyone on the planet disagreed with him until the prediction came true in 1970 and U.S. oil production has declined ever since. Basically all the easy money has been made and every oil find since has cost more money to find and produce with finds becoming smaller and harder. This has since been referred to as Hubbert's Peak. There are two recent books on this subject with predictions for a decline in world production much nearer than previously thought.

The last big oil field, 87 billion barrels, was found in 1960 in Ghwar, Saudi Arabia. With 45 years of fevered searching since then the number and quality of finds has continued to decrease. At our present rate of consumption a find of another field of that size would only push the eventual peak out by 2-3 years assuming it could be extracted almost immediately. With oil demand escalating sharply and proven reserves slowing the general scientific consensus for the peak in global production is estimated to be around 2007. This may come as a shock for most readers and it will be a huge shock for most Americans when oil prices pass $50 before the decade is out. Heck, they could pass $50 before the month is out if the trend continues.

According to experts current world oil demand as of April was 80.9 million barrels per day. That is about 2.5 BILLION barrels per month. With demand rising and supply slowing the future is clear. Searchers cannot find new supplies of 2.5 billion barrels per month indefinitely. The challenge is not going to be the day where we run out of oil as that could be decades away. The challenge for the U.S. and the world is rising demand and shrinking supplies will continue to push prices higher. Prices may retreat once this current rally ends on higher production by OPEC but it will only be temporary. Companies who depend on oil for their products are starting to feel the heat and it will not be long before earnings reports start to be revised down from higher energy prices. $50 oil may be here much sooner than expected and while consumers may have become accustomed to $2.00 gas they may dream of that level by 2010. I may have gotten a little carried away in this explanation but traders need to know the facts behind the current oil bubble may be real and the bubble may only shrink temporarily and not burst.

So, with oil hitting new highs, news of terror arrests in the U.S. and other countries, suspicious packages in two airports, mixed economics, earnings warnings and fear of the jobs report it is no wonder the markets sold off once again. Add in the fear of the Fed next Tuesday and the start of the Olympics next week and investors fled to the safety of the sidelines. We also saw a survey today that said 32% of affluent investors were moving to the safety of cash on the sidelines during August. This was up from only 22% for July. 29% of investors were planning on keeping new cash off the playing field completely compared to 26% in July. As if that was not enough we are faced with the normal -30% lower volume in August compared to July. We all know how bad volume was in July and a -30% drop from those levels suggests volatility could be extreme.

That volatility hit today with the VXO jumping +2.34 to 18.12. That is the highest level since May but long time readers realize that it is still low by historical standards. The Dow lost -165 points on Thursday and closed back below 10,000 at 9960. Still well above the May lows and slightly above the 9913 low from last week. This was the biggest one day drop for the Dow in five months.

The Nasdaq fell -33 points to 1821 and the lowest close since September 2003. Multiple levels of resistance have been broken and 1800 is now the next potential support. Tech stocks have seen negative cash flow from mutual funds for the last 27 straight weeks. The SOX, normally a directional leader for the Nasdaq did not set a new low and closed at 402 and a surprising performance considering the implosion in the other indexes. After the bell today NVDA missed earnings by 12 cents and did not have positive things to say so the SOX may be a little weaker tomorrow. The Russell, also a contributor to the Nasdaq was a detractor today with a drop to the May and July lows at 532. The Russell suffers from a liquidity drain during summer months and this year it is compounded from event risk.

Despite all the negatives above there was no real fear in the market. That is surprising considering the down volume was nearly 9:1 over up volume and the jump in the VXO. I am basing this on the tame put/call ratio at 0.86. This is just a normal reading of late and shows no panic to buy puts. It also suggests investors have already positioned their portfolios and are waiting on the sidelines for fall. There are simply no buyers. I have mentioned before that many mutual funds are sitting on hoards of cash approaching +30% in some cases. I saw an interview yesterday with a Wyndam manager who said he was 80% in cash. I was expecting some of this cash to be put to work this week with the Democratic convention behind us. That plan was shredded on Monday with the announcement of the NY terror plans against financial institutions. Chalk up another historical trend fallen by the wayside and a casualty of a news event.

SPX Chart - weekly

For Friday we have the Jobs report hurdle at 8:30 and a strongly positive number could give us an oversold rebound. A miss is already priced in but a negative number could really be earth shaking. Tuesday the Fed will likely hike rates again and the surprise there would be no hike. They could get away with it based on the oil price inflation. Back to Friday, I would be satisfied just to see us escape another new low on the Dow and S&P. I have pointed out several times that the real support for the market is 1068-1070 on the SPX and we are really close with our 1080 close. Another very important support line is the 200 week moving average on the SPX at, you guessed it, 1080. All the indexes have lower highs in place from last weeks bounce and could easily continue downward. However, the retest of the May/July lows today could be seen as a successful double bottom in some cases and a launch point for a temporary trading rally. I say temporary because of the multiple high risk events should keep a lid on any rebound.

The game plan from last Sunday was still to remain long over 1100 and short/flat under 1100. I would change that today based on the multiple support tests. I would look to be long over SPX 1080 and short below 1068. Don't get married to your positions because this is a pure trading environment. For traders this is a great environment for profits. We may be getting close to a bottom of this correction and new bargains are being created every day but it is too soon to buy and hold. Set your sights a little lower and let's see if we can steal some bargains over the next four weeks.

Enter Passively, Exit Aggressively.

Jim Brown


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