Option Investor
Market Wrap

Quiet Before the Storm

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        WE 8-27         WE 8-20         WE 8-13         WE 8-06 
DOW    10195.01 + 84.91 10110.1 +284.79 9825.35 + 10.02 -324.38 
Nasdaq  1862.09 + 31.07 1831.02 + 73.80 1757.22 - 19.67 -110.47 
S&P-100  540.88 +  4.84  536.04 + 15.32  520.72 -  1.11 - 15.84 
S&P-500 1107.77 +  9.42 1098.35 + 33.55 1064.80 +  0.83 - 37.75 
W5000  10755.02 +106.22 10648.8 +344.09 10304.6 -  3.18 -393.81 
SOX      382.34 -  3.66  386.00 + 19.35  366.65 - 20.23 - 29.55 
RUT      551.67 +  3.75  547.92 + 30.53  517.39 -  2.26 - 31.64 
TRAN    3108.80 + 17.93 3090.87 +123.95 2966.92 +  0.84 -145.61 

Friday morning continued the pattern set on Thursday and was Boring with a capital B. Volume was non existent and reports from the NYSE compared it to a ghost town. The bad news bulls were still circulating with rising support just under the bid but there was no interest in chasing the price. Actually there was no interest in any trading. Buyers waited patiently for dips and sellers were absent along with the volume.

Dow Chart - Daily

Nasdaq Chart

SPX Chart

SOX Chart

Russell Chart

Friday started slow with a GDP report that came in as expected with a drop to +2.8% for the second quarter. This makes it the weakest quarter since Q1-2003 which only grew +1.9%. The headline number does not show the positive internal changes with consumer spending moving higher from the initial report to +1.6%. Still not strong but better than expected. That is the lowest gain in household consumption since the end of 2002. Business Spending and Personal Expenditures both rose sharply from the initial report. Dragging down the headline number was exports and a dramatic slowdown in auto production.

The GDP revision underlines the strong drop after three quarters of strong growth. We did however managed to show continued growth despite the weak quarter end. This would suggest Q3, not normally a strong quarter anyway, will follow in the footsteps of Q2 with sub 3% growth. With corporate America holding their breath until the election is over the 4Q is likely to be power packed in Nov/Dec and that will produce something near +4% growth to close the year. The challenge remains the high oil prices and their dragging impact on the economy. If oil does move lower with the resolution of some fighting in Iraq and additional Russian production then the worst may be behind us.

The Michigan Sentiment final came in at 95.9 and up sharply from the initial reading of 94.0. This is still down from July's 96.7 but the rebound from the initial reading is moving in the right direction. Expectations declined to 88.2 from 91.2 but present conditions rose to 107.9 from 105.2. Analysts felt consumers were more optimistic when gas prices did not go higher when oil was hitting $48. There is a perception that gas prices today should reflect the current oil prices and in reality there is a significant lead time before the high oil reaches the refineries and then the gas stations. Either way consumers felt better about current conditions and the lack of any terrorist event in Athens probably helped that feeling. Obviously an event in New York would be significantly depressing to sentiment.

The New York City area has been putting terrorist plans in place for the convention for over a week with street closings, random vehicle searches and setting up for checkpoints into the city and convention area. The NYSE has disaster plans in place and the floor will only be manned at half staff or less with half the traders working from remote locations. One desk with 30 traders is reportedly only going to operate with only eight from the NYSE floor. There is significant fear and caution in NYC that was not reflected in trading as we closed the week ahead of the convention.

The attendees at the Jackson Hole Conference probably wish they could stay there for all of next week to avoid the extreme security and the risk for some of returning to NYC. However, they may be feeling a little stressed after the Greenspan speech today. He opened his speech expressing concern about the elderly dependency ratio. That is the number of older adults to younger adults. That ratio has been rising for the last 150 years and is about to spike sharply higher. The growth of the working age population is currently +1% per year but is expected to slow to only 1/4% by 2035 according to Greenspan. During that same time the percentage of the population over 65, currently 12%, will expand to 20% by 2035. He went on to discuss the impact on various economies but his real target was social security and the problem ahead.

His premise was that the disability factor for people over 65 was dropping rapidly as people reaching 65 were healthier and more active than in the past. He said workers were working smarter and not harder and their bodies were not wearing out as quickly as when we were primarily an agricultural society where manual laborers composed 75% of the workforce. With the population rapidly aging, with baby boomers heading into retirement, the system was going into fiscal arrest in the very near future. Workers are retiring sooner and living longer thereby requiring more contributions from younger workers to support them. This is nothing new to most investors and as Greenspan himself ages he tends to talk about the problem more.

His two solutions for this problem were allowing more immigrants into the country to inject liquidity into the social security system AND/OR raising the retirement age to prevent a system bankruptcy. He also suggested the Federal government begin saving money instead of spending it but we all know how likely that is. He suggested making the decision to change the retirement age quickly so those facing retirement shortly will have time to plan for additional years of employment and a higher rate of savings to offset the loss of benefits from social security.

I don't know about you but for someone planning on collecting at least some of the fortune I have paid into social security over the years the prospect of waiting until I am 70 is not pleasant. While I have never expected the government to support me in my retirement I would like to see some return for my 40+ years of contributions to date. Everyone reading this probably understands the problem but are not going to rush out and volunteer to forego their social security payments and work an extra five years just for the heck of it. Do I mention that you would continue contributing to social security while you continued working? I understand why Greenspan is constantly posing these tough economic questions but I seriously doubt any politician is going to make it part of their platform. They would get about as many votes as a leper with Aids on the Bachelorette would get roses. I doubt Greenspan's words fell on fertile ground but at least he did the right thing. That is he did not say anything about the market that would blunt the current uptrend. No news is good news in his case.

Monday was the lightest volume day of the year with only 2.75 billion shares traded. Friday was even worse with only 2.23 billion shares traded across all markets. As the lightest day of the year the potential for a real disaster loomed large all day but never came to pass. The underlying bid continued to grow despite volume being so slow watching charts paint was almost painful. All the indexes but the SOX finished positive for the week. Considering last weeks rally this was an almost impossible feat ahead of this weekends event risk. What event risk? I know, it appears the press are the only ones worried. The bullish undertones all week suggest there is little fear in investor minds. With the Democratic convention over and the Olympics finishing on Sunday and neither having any problems other than long lines at security checkpoints the event risk fear has left the market.

I have been expecting a post convention rally but I also expected some more weakness over the last two weeks. I suggested a couple weeks ago to buy the dips as we waited out the Olympics on minimal volume but reality definitely exceeded my expectations. It appears everyone had the same game plan and we closed not only at the highs for the week but the highs for the month right in front of the convention. The stock Traders Almanac says six of the last seven years has seen a down market the last five days of August. That string is about to be broken with only two days to go in the month. It appears the fear of the Olympics prompted those that wanted to exit to bail early and that broke the trend. The Dow traded down to strong support at 9800 and the risk takers stepped up to the table.

Now, if conventional wisdom is to be believed the next two weeks should be bullish assuming the convention concludes successfully. Since the market exists to confound the maximum number of traders on any given day it almost makes me wonder if we are not being set up for a big surprise. I don't know what would cause it because all the negatives are already known. It is almost the perfect storm in reverse. We know earnings are going to be weak for Q3. We know the Fed is still going to raise rates again on Sept-21st. We know the economy is creeping along at a snails pace. We know oil is not going back to $30 any time soon. We know chip sales are weaker than expected and retail sales are barely showing any gains. What is going to be the big surprise that trumps this bullish advance? I pose the question because I don't see one. The bulls have the perfect wall of worry to climb and no mountains in their path.

The setup is almost too perfect with the various indexes closing almost exactly on critical resistance. We were able to push right to the vertical limit but not quite hard enough to produce a breakout. The trap, I mean stage is set for a strong move but I feel like the mouse in this picture. The setup is perfect but I know there is a headache ahead somewhere.

For next week I plan on going with the flow. Monday could be erratic on even lower volume until the actual convention opens on Monday night. Tuesday could be a strong day if there are no problems Monday night.

Unfortunately Tuesday is where it starts getting tricky. This is a huge week for economic reports. That is fine if they are all positive but this is the week for the big guns. Tuesday is the NY-NAPM, PMI and Confidence. Wednesday has August ISM, Construction Spending, Semi Billings, Vehicle Sales and Mortgage Applications. Thursday has Chain Store Sales, Monster Employment, Jobless, Productivity and Factory Orders followed by the Employment Report on Friday.

Obviously the key numbers are PMI, ISM and Jobs but the entire week is a mine field of data. Adding to the jumble is the Intel update on Thursday. Is inventory still growing or did sales pick up? Only Craig Barrett knows for sure and he will tell us on Thursday. I believe if everything else is mildly positive investors will forgive any Intel sins on Thursday.

Make no mistake there is still strong resistance just overhead at Dow 10250, SPX 1120 and Nasdaq 1910. While the majority of factors are pointing to a positive week there is plenty of roadblocks up ahead. Lately bulls have been scaling them with ease and I would love to see that again for the third consecutive week but with the Dow gaining +400 points in just the last two weeks it makes me very cautious. Bullish but cautious.

That makes my game plan for the week look like this. I am going long over SPX 1111 (100 and 200 dma) and buying any dips back to support levels at 1104 and 1095. I am going to put on my helmet and be wary of any setups that appear to good to be true. I will be leery of an opening breakout over 1111 on Monday but will reluctantly tag along. I would feel much better about a long entry if I could see a little fear in the market and a decent dip to buy but the market seldom does what I want. Buckle those seatbelts and let's get ready for a ride.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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