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Market Wrap

Measured Pace Continues

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      08-10-2004           High     Low     Volume   Adv/Dcl
DJIA     9944.67 +130.00  9944.67  9815.47 1.50 bln 2343/ 880
NASDAQ   1808.70 + 34.10  1808.70  1782.26 1.48 bln 2202/ 893
S&P 100   528.77 +  6.35   528.77   522.42   Totals 4545/1773
S&P 500  1079.04 + 13.82  1079.04  1065.22 
SOX       392.96 +  5.30   393.08   387.44
RUS 2000  529.83 + 11.45   529.84   518.38
DJ TRANS 3044.87 + 74.80  3044.87  2971.10
VIX        17.47 -  1.42    18.86    17.25
VXO (VIX-O)16.90 -  1.56    18.50    16.90
VXN        26.52 -  0.93    27.59    25.90 
Total Volume 3,263M
Total UpVol  2,600M	
Total DnVol    616M
Total Adv  5048
Total Dcl  2119
52wk Highs   43
52wk Lows   292
TRIN       0.60
NAZTRIN    1.33
PUT/CALL   1.03

The markets waited on pins and needles for the Fed news and once it came they realized there was no change. The morning rebound faltered for a few minutes while everyone waited to see who would blink first and then charged ahead. Is it a real rally or just an oversold bounce?

Dow Chart

Nasdaq Chart

SPX Chart

The morning opened with second quarter Productivity and Costs with productivity rising +2.9% and well over the consensus estimates of +2%. Some analysts had suggested we could even see a drop in productivity. The increase came on a very weak +0.8% increase in hours worked. The manufacturing sector saw a huge jump of +7.5% with the primary gains in nondurable goods. This was a strong report but suggests a weakness in future hiring. When productivity rises there is less need to add new workers.

The Richmond Fed Manufacturing Survey came in at only six compared to 14 in June. This was the second monthly decline in the headline number from 22 in May. However, several of the components showed a marked improvement with New Orders rising from 1 to 13 and the six-month outlook jumping to 33 from 10. That is the highest six month number since the recent high of 44 in December. The outlook had been declining all year with last months 10 the cycle low. A rebound to 33 is very strong and would seem to suggest things are beginning to look up again. The only negative component was order backlog which at -3 was still better than the low for the year last month at -12. Overall the headline number is the lowest level of expansion for the year but internal components suggest July could have been the bottom. The qualification is that it only relates to the Richmond area.

Of course the big news of the day was the Fed and it turned out to be no news at all. The Fed went ahead and raised the rate +25 points as expected. They also failed to calm nerves by suggesting in their statement that they were willing to back away from their pace of measured increases for the rest of the year. The Fed continued their position that rates are accommodative and need to be brought back into line to prevent future inflation. The Fed said that except for energy prices inflation has been tame and the current spike is due to those transitory energy prices. The only bone they threw to investors was "The economy nevertheless appears poised to resume a stronger pace of expansion going forward." They acknowledged the slowing growth and weak job market but kept their bullish stance.

The markets pulled back slightly just after the news but a strong buy program helped push shorts to cover just before the close and pushed the Dow to a +130 point gain. The Nasdaq added +34 and the SPX +13. It appeared to be a bullish day but I believe it was mostly due to short covering before Cisco earnings. We had a strong tech decline and buyers were hoping for the Fed to take a pass and for Cisco to beat the street and raise guidance. In retrospect they only got one out of their three wishes.

After the bell Cisco reported earnings that beat the street by a penny. They always beat by a penny so this was expected and not outstanding news. Cisco also said inventory levels were rising just as Intel said with their earnings. Cisco claimed it was not yet a problem but it was the second quarter of rising inventory levels. Cisco then said earnings would be flat to only slightly higher for the current quarter. Chambers said CEOs were only seeing modest growth ahead. Cash flow was tight and the increase in inventory reminded investors of the massive $2.5 billion write off of inventory during the last business cycle. If inventories are rising and sales are slowing it is not a good sign and CSCO fell under $19 in after hours trading.

Also disappointing tech bulls after the close was an earnings warning from National Semi (NSM) which said revenue would fall on lower than expected demand. This was disappointing since NSM had previously said revenue would rise. The company said orders were expected to decrease in August but the decrease had been much more significant than originally expected. They blamed the weakness on slower growth rates for flat panel display products and lower than expected demand from wireless handset manufacturers.

It was a tough night for tech company earnings with Computer Sciences (CSC) beating the street by a penny and affirming guidance. CSC was still knocked for a loss to $42 from its $44.20 close.

Oil broke over $45 intraday but pulled back to close at $44.50 as traders took profits. The outlook is still bearish with higher prices ahead but stocks appeared to be ignoring these new levels. Our vaccination to high oil must be kicking in but I bet the first touch of $50 will be a knockout. If you remember my comments about Hubbert's Peak last week those same comments were echoed by Boone Pickens in an interview on Monday. I realize he is a wildcat but his thoughts that production had peaked forever at 83 million barrels per day did agree with my comments last week. Evidently the stock market has elected to ignore oil as old news after only two weeks of running in panic with every quarter jump in price.

The rest of the week has a barrage of economic reports but only Friday has anything of importance with the PPI. I believe it is not economics we need to fear the rest of the week but instead the buildup to the opening ceremony for the Olympics on Friday night. This kicks off two weeks of event risk and the markets really have no coming events to offset that risk and draw investors back into the market.

The Dow rebound over 9900 today was exciting for the bulls but the odds of it sticking are slim. The SPX rallied to 1078 but stopped right at the 200 week average. This should be strong resistance and with the three major techs reporting earnings after the close and taking sizeable hits the odds are good it will open well below 1078 tomorrow.

I am not going to spend a lot of words rehashing the risk for the next three weeks but it still exists. Overhead resistance still exists and I believe today was an oversold bounce, short covering and betting on Cisco. I could be as wrong as the next guy but I believe the markets will have a tough time moving higher until after Labor Day. More likely we will either move lower or trade in a range under Dow 10K until the threat passes. Investors should take advantage of any dips over the next three weeks to nibble at good stocks being taken down with the rest of the market. I said nibble, not back up the truck. Normally we see strong dips in Sep/Oct but in election years September can be bullish. Let's hope this is one of those years.

Enter Passively, Exit Aggressively.

Jim Brown
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