Option Investor
Market Wrap

Eight Out of Ten

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      09-07-2004           High     Low     Volume   Adv/Dcl
DJIA    10341.46 + 81.30 10363.36 10261.45 1.47 bln 2356/ 881
NASDAQ   1858.56 + 14.10  1865.45  1848.30 1.32 bln 1923/1174
S&P 100   545.00 +  3.94   546.13   541.06   Totals 4279/2055
S&P 500  1121.30 +  7.67  1124.08  1113.63 
SOX       353.76 -  4.10   362.00   351.27
RUS 2000  562.93 +  6.69   563.02   556.24
DJ TRANS 3179.95 + 38.10  3180.29  3143.01
VIX        14.07 +  0.16    14.64    14.03
VXO (VIX-O)13.58 -  0.33    14.54    13.55
VXN        21.44 +  0.38    22.15    21.19 
Total Volume 3,070M
Total UpVol  2,115M
Total DnVol    905M
Total Adv  4809
Total Dcl  2387
52wk Highs  321
52wk Lows    89
TRIN       0.93
NAZTRIN    0.97
PUT/CALL   0.86

Today's market advance stretched the recent bullish streak of post Labor Day advances to eight of the last ten years. Unfortunately that trend normally precedes another trend of September being the worst month for the Dow and SPX since 1950. September normally begins with a gain but ends with a loss.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Daily

There were not a lot of economic reports today to distract the market and that may have been a good thing. The August Challenger Layoff Report showed announced layoffs rose +6.6% to 74,150 workers. This was the highest level in six months and the second consecutive monthly gain. This was still -7.2% lower than the prior August and not a real cause for concern, yet. The increase was minimal and was offset by an increase in planned hiring to 132,105 from only 26,880 in July. Challenger recently began collecting hiring data and there are no long term numbers to compare with the current trend. The majority of new job openings were in the retail sector. Challenger data looks out over the next 90 days and that puts us right in the middle of the holiday season. Projecting retail jobs prior to the holidays should not surprise anyone.

Tomorrow we have a few more reports due out but none are earth shaking. The biggest event for Wednesday should be the Greenspan testimony before the House Budget Committee. He is expected to continue the Fed's standard statement that the economic recovery is self sustaining and the Fed will continue to hike rates at a measured pace. They will want to quiz him about stronger growth ahead because it relates to future income. Because it is an election year somebody is sure to ask some campaign oriented questions about deficits and social security reform. This testimony is not expected to be a market mover but any time Greenspan speaks there is always a danger. In the current context any bullish comments could also provide a boost now that event risk fears have passed.

Oil provided a boost to the market with a drop of more than a dollar at the open. We spent most of the day under $43 after OPEC made positive comments about supply. Still we saw the price rise back to $43.30 at the close on short covering and disbelief anything had really changed.

Despite the high oil prices the Transportation Index came very close to a new post 9/11 high. The close at 3178 was very close to the June 30th close at 3204. This apparent logic conflict has the bears very confused. With oil in the U.S. budgeted in the $28-$30 range this rally on prices $10-$15 higher than expected is causing significant confusion. FedEx did hit a new post 9/11 high and an all time high at 84.20 after Yellow-Roadway raised their guidance. YELL said they were seeing a stronger pricing environment although shipping volume was about as expected. They raised guidance from $1.20-$1.25 to $1.30-$1.35. FedEx had also raised guidance about two weeks ago. This should be good news for the economy. If shipping companies have been able to raise prices and recover oil losses without losing customers it suggests business is healthy.

Having the Dow Transports nearing a new high at the same time the Dow is pressing higher is also bullish for those that see the transports as final confirmation of a longer term Dow move. Helping this confirmation is the soaring financial stocks. The BKX closed right at 100 and only THREE points away from an all time high. Further confirmation comes from the Dow Utility Index which is also at a two year high nearing 300. Bullishness is breaking out all over.

Dow Transports Chart - Weekly

Banking Index Chart - Daily

Tech stocks tried to rise after several tech stocks raised guidance. (Is it snowing in hell today?) Seagate Technology (STX) said sales and earnings would be above estimates. Seagate makes disk drives and they said the overall demand was stronger this quarter than last. VRSN raised estimates and said it's recently acquired Jamba business is performing significantly ahead of expectations. Cisco rose after CIBC upgraded the company to outperform.

Not all was rosy in tech world. Intel attracted another downgrade and fell under $20 again. Was this analyst in a coma all last week then the downgrade party was in full swing? Probably just wanted his day in the limelight. Lehman cut Intel to neutral but the sector to negative from neutral. Chips are not out of the doghouse yet with Texas Instruments slipping under $19 in front of their mid quarter update on Wednesday after the close. The SOX was the number one reason the Nasdaq failed to follow the Dow materially higher.

The SOX set another new 52-week low at 351.27 and barely moved off that low at the close. The SOX continues to be the weakest link and until all the major chip updates and profit warnings have passed it should continue to be the Nasdaq anchor.

SOX Chart - Weekly

The Nasdaq has topped at 1865 and refuses to move higher. Each attempt runs out of steam once it moves over 1860. Until this trend changes the Dow should find it hard to maintain an advance despite the help from the transports and utilities.

The Dow has downtrend resistance at 10350-10360 from the February highs and that is almost exactly where it failed this morning. It should be tough to move over this level without any help from techs. The calendar ahead is tough and any weak supporting index will make it even tougher.

So far the September roadmap is still intact. We are only seven days down the path but hugging the center line. Septembers normally start with a bullish bounce but earnings warnings end up dragging it down. For tomorrow we are going to start out with a warning from McKesson. MCK said it would earn between 75-80 cents for the first half. Since they earned 53 cents in Q1 that means they will post 22-27 cents in Q2. Analysts were expecting 50 cents. Confusing analysts was an affirmation of full year guidance of $2.20-$2.35 with no explanation. Considering the 50% drop in Q2 earnings one analyst called the full year affirmation laughable. That affirmation was the only thing that kept MCK from being crushed after the close. It did fall from $31.86 to $29.50 in after hours.

The technical viewpoint is mixed today. The Dow failed at the downtrend resistance but is still over both the 100 and 200 day averages. We are extended and approaching some very high risk levels. The SPX closed at 1121 and only +3 points above its average close for the year at 1118. It is also above its averages at 1110-1113 with resistance at 1125. On the bullish side a break of 1125 could easily run to much stronger resistance at 1140-1145.

For the rest of the week my bias is neutral. We could wander higher in the absence of any material earnings warnings because the real warning season does not begin for another week or so. We could also slowly decline in anticipation of those warnings and the Fed meeting on the 21st. We opened September as expected according to the historical trend. This week is where that trend begins to weaken IF we follow the historical norm. Given the strength in transports despite the high oil we may not be in a true historical cycle. The election could be skewing the outlook as well. Keep your eye on the trend and follow closely. Changes in direction could come quickly.

Enter Passively, Exit Aggressively.

Jim Brown


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