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Market Wrap

Brought to You By the Letter "E"

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      08-31-2004           High     Low     Volume   Adv/Dcl
DJIA    10173.92 + 51.40 10173.92 10074.22 1.38 bln 2257/ 992
NASDAQ   1838.10 +  1.60  1842.15  1819.62 1.31 bln 1782/1240
S&P 100   538.77 +  2.22   538.79   533.79   Totals 4039/2232
S&P 500  11-4.24 +  5.09  1104.24  1094.72 
SOX       371.02 -  2.60   373.66   363.61
RUS 2000  547.93 +  3.37   548.45   541.96
DJ TRANS 3105.46 + 20.10  3108.80  3084.50
VIX        15.29 -  0.15    15.85    15.28
VXO (VIX-O)14.98 -  0.13    16.09    14.92
VXN        22.92 -  0.22    23.66    22.91 
Total Volume 2,945M
Total UpVol  1,734M	
Total DnVol  1,182M
Total Adv  4556
Total Dcl  2567
52wk Highs  146
52wk Lows   106
TRIN       1.14
NAZTRIN    1.89
PUT/CALL   0.71

Today's market action was brought to you by the letter "E". Elections, earnings, extremists, energy, economy, employment and events all seem to have played a part in the early negativity and the ending rebound. Add in the "E"nd of month window dressing and play list was complete.

Dow Chart

Nasdaq Chart

SPX Chart

SOX Chart

It was a busy day economically and that is as good a place to start as any. The Chain Store Sales fell again by -0.2% for the week and that theme was carried over in the later reports as well. The Consumer Confidence for August fell a whopping -7.5 points to 98.2 from the 105.7 multi year high for the year in July. Consumers continue to flip flop on sentiment and confidence but the pattern is clear. They are not supporting the economy by buying more goods and services. We know this is based on future election unknowns and a drag on spending due to higher gas prices.

The biggest decline was in the expectations component which dropped from 105.3 to 96.6 for August. This nearly -10 point drop was the biggest decline since February's drop to 91.9 from 105.3. After that drop we struggled back to the triple digit level for June and July but the bottom fell out again last month. The present situation component also fell from 106.4 to 100.7. Those consumers planning on making major purchases of an appliance, car or home declined sharply. Jobs appeared to not be a concern as the numbers reflecting jobs were nearly unchanged. The Sentiment numbers today were much worse than the Confidence numbers last Friday which were slightly better than expected but still down for the month at 95.9.

Monthly Mass Layoffs rose to 2,094 events that impacted 253,929 workers, an +88% increase. This was the second consecutive major increase from the low of 988 events and only 87,501 workers laid off in May. Today's number was a +12% jump over July of last year. This is the first month that was higher than the 2003 levels since Jan-2004. For the year the number of workers laid off is -11% fewer than at this point in 2003. Manufacturing was again the leader with 42% of all the layoffs. This jump in announced layoffs does not bode well for the Jobs report on Friday. They are not directly connected but there is always some trending in play.

The Chicago PMI came in at 57.3 and was significantly less than the expected 60.5. This has been a volatile number of late after posting a high for the year at 68.0 in May. It has been trending down for the last three months despite a spike in July. Production fell to 61.8 from 69.5 and New Orders fell more than -10 points to 58.0. Backorders fell -8.6 to 51.6. The most serious challenge was the nearly +10 point jump in the prices paid component to 86.6 and a 15 year high. This suggests that inflation is beginning to appear on a broader basis as high energy prices filter through the order flow pipeline. Inventory rose to the highest level for the year at 61.3 and when coupled with the huge drop in backorders suggests a further slowdown ahead.

The PMI is important but its biggest claim to fame this week is as a leading indicator for the ISM due out tomorrow morning. If the ISM fell off as badly as the PMI then any future rally would have as much chance as a snowflake in August. The only upside to the PMI and possibly ISM slide is the potential for the Fed to back off their current rate hike program. Bonds have risen for the last several days on concerns that the economy is continuing to slow. Futures are now pricing in only one more hike before year end.

The NY-NAPM posted another gain to 307.1 and although the gain was a minor +4.6 points it was another new high for the year. NYC continues to pull out of its 9/11 slump and conditions are still strong. However, the same problems are beginning to show in the NAPM as in the other manufacturing indexes. The current conditions component fell to 59.3 from 73.2 in July. The six-month outlook fell a whopping -18.5 points from 78.5 to only 60. While the headline number did post a minor gain the internals suggest this could be the last month for this index to set a new high. Odds are good we are about to see conditions in NYC follow the rest of the country into a pre election slump.

We are quickly counting down the days until Intel updates its quarter on Thursday night. The dog pile continued today with multiple brokers downgrading not only Intel but semis in general. SG Cowen told investors to AVOID Intel and semis as a sector. They said slowing demand and increased supply in 2005 would depress earnings for the sector. According to SGC channel checks with Taiwan component makers suggests notebook sales were especially weak over the last month. Merrill Lynch told customers to avoid Intel despite the sharp dip in price. They think the current margin estimate of 60% is too high based on softness in multiple chip components. Flash memory, cell phone chips and processors are seeing some aggressive price cuts as suppliers fight for market share. In Intel's case AMD is still fighting the good fight and becoming a stronger competitor in the current price conscious markets. Morgan Stanley cut Intel saying current sluggish demand was going to result in "negative gross margin surprises" in the coming quarters. JPM cut Intel's revenue by -$100 million for the current quarter. Prudential said channel checks were showing the back to school bounce was later than normal and the inference was a weaker bounce as well. With all this negativity it is no wonder Intel dropped to a new 52-week low just under $21 before rebounding slightly to $21.28 at the bell.

Surprisingly the SOX only lost -2.62 points or -0.7% to 370. This is only +10 points above the low for the year and could be very close to a double bottom forming. If the SOX can hold 360 and Intel does not trip on its announcement then year end relief may begin to appear. With all the analysts coming out publicly this close to the report Intel could surprise everyone by pulling a rabbit out of its hat. While I am not expecting it this would be very good for tech stocks struggling to hold over Nasdaq 1800.

September is the weakest month of the year and many Labor Day rallies turn into jumping off points for the October lows. This has apparently attracted new cash into the market with $2.3 billion flowing into equity funds for the last two weeks according to TrimTabs.com. Considering the very light volume prior to today that cash was still setting on the sidelines in hopes of a real pullback to enter.

We got the drop I was hoping for over the last two days and those hoping for an entry at the SPX 1095 I targeted in Sunday's commentary should be feeling better tonight. Low today was SPX 1094.72. The challenge with today's rebound is the way it transpired. Several buy programs hit back to back in the last 90 min of trading that helped the Dow rebound 90 points. This was clearly some month end window dressing by funds in an attempt to show less cash and more stocks on the books. Will it hold tomorrow? Obviously nobody knows but the general consensus of opinion was expecting a post convention bounce. Today's rebound could have stimulated buying interest but extreme anti-"Semi"tic (I know that means something else but it would work so well here) revulsion against chip stocks could impede any continued rally.

The bearish case is the easiest to paint today. The PMI and NAPM suggest the ISM tomorrow could be ugly. There is also another possible nail in the semi coffin with semiconductor billings scheduled to be reported. Add that to the fear of Intel on Thursday and the next two days have far more negative potential than upside potential.

This may just work in the bulls favor instead. All the bad news is already priced in with the two day pullback to strong support at SPX 985, Dow 10075 today. This profit taking deflated all the bullishness built into the market as of Friday and gave us a nice strong launch point for a potential post convention rally. They could not have scripted a better entry for the rest of the week. Stops have been cleared and sellers have exited the building. Of course a nasty ISM number could ripen a new crop of sellers in a heartbeat.

The election factor appears to be working in the markets favor with Bush pulling slightly ahead in the polls but it is still anybody's race. Regardless of your party the markets have a history of gaining ground once the final gavel is heard at the Republican convention. That expectation could prompt some bargain hunting over the next two days were it not for the ISM, Intel and Jobs report hurdles.

Just getting past the convention does not eliminate our event risk. Just ten hours after Bush speaks on Thursday night to close the convention the administration speaks on the state of employment with the August Jobs report. The consensus estimate is currently 150,000, up from 132,000 last week and the whisper numbers are starting to rise to challenge the 200K level. While a 150-200K number would be very positive for the market we are facing a greater potential for a monster disappointment. Should Intel warn and jobs disappoint we could go from the potential for a post convention, post Labor Day rally straight to new lows for the year.

We have a very tense market situation just ahead. The next three days could set the tone for the next month. With Septembers historical trend as the worst month of the year the only thing for sure is it will not be a boring month. We will either see a bear-b-que as a contrarian rally emerges or we will head south at a high rate of speed in a dip that will produce the best buying opportunity for the year.

Should a post convention rally miraculously appear amid the smoke and debris clouding our path it will run headlong into warning season in about two weeks. With Q3-2003 comps very tough the potential for a strong warning calendar is very high. According to those that track these things the number of positive announcements for Q3 are running well below the norm. We have not reached the point where we will start to see the stats on a daily basis but those days are coming.

The only sure thing is a solid wall of worry ahead and a very rocky road to November. The general consensus from the stream of analysts parading by on CNBC is to be fully invested before Halloween. The post election rally is one of the most recognized trends, regardless of who wins although republican victories tend to produce the best results. Even without the election November is the best month of the year for the S&P and the second best for the Dow since 1950, 3rd for Nasdaq since 1971.

This makes our road map very clear. We should be wary of any post convention bounce and keep looking for the normal end of September weakness when earnings warnings begin to appear. We should then use any Sept- Oct dip to establish longer-term positions. That may be far too much forward thinking for most traders just trying to find an entry/exit point for tomorrow but we need to always keep the long term roadmap in focus to help us plan our short term strategies. Right now I am just happy to see the dip to support at 1095/10075 and the strong rebound to clear the cobwebs. This provided the perfect setup for me and now all we need is a positive ISM to keep it alive. Did I mention that today's rebound failed to break the 100dma on the Dow at 10195? Nobody ever said the uphill road would be easy.

Enter Passively, Exit Aggressively.

Jim Brown
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