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Market Wrap

SOX Shock

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      09-09-2004           High     Low     Volume   Adv/Dcl
DJIA    10289.10 - 24.30 10337.33 10269.49 1.70 bln 1943/1271
NASDAQ   1869.65 + 19.00  1875.39  1849.37 1.67 bln 1985/1105
S&P 100   543.89 +  0.77   545.47   541.78   Totals 3928/2376
S&P 500  1118.38 +  2.11  1121.30  1113.62 
W5000   10879.99 - 20.17 10919.16 10827.26
SOX       370.98 + 18.90   374.10   352.06
RUS 2000  566.18 +  8.39   567.73   557.79
DJ TRANS 3193.81 +  5.00  3207.11  3181.10
VIX        14.01 -  0.05    14.41    13.70
VXO (VIX-O)13.75 +  0.05    14.39    13.34
VXN        20.58 -  0.07    21.36    20.29 
Total Volume 3,662M
Total UpVol  2,560M
Total DnVol  1,015M
Total Adv  4429
Total Dcl  2747
52wk Highs  229
52wk Lows    74
TRIN       0.94
NAZTRIN    0.45
PUT/CALL   0.91

Semiconductor bears woke up to an unpleasant surprise as bad news from Texas Instruments sent chip stocks soaring. The reversal of fortunes sent the Nasdaq higher but mixed economic news failed to impress the Dow and the decline continued.

Dow Chart - Daily

Nasdaq Chart - Daily

Jobless Claims dropped a much larger than expected -44K to 319,000 for last week. The huge drop was likely due to holiday and weather related delays in filing for claims and the number will probably rise again next week. The July-4th week saw a comparable -40K drop to 309,000 and those claims rebounded right back with the next report. The -44K drop was the largest one-week drop since Dec-2001 but as an anomaly it is not relative. The market celebrated with an opening spike but it was short lived.

Import and Export Prices soared in August by +1.7% but the majority of the increase was related to oil prices. A +9.6% jump in oil prices pushed import prices higher while export prices fell -0.5% due to a decline in agricultural prices. Import prices ex-oil only rose +0.4% in August and have increased only +3.2% over the past year. If you don't use energy, inflation is still tame but for the rest of us the cost of living is still rising.

Wholesale Inventories also soared +1.3% and almost twice the expected rate. Wholesale Sales only rose +0.5% and this pushed the inventory to sales ratio to 1.16. Still not high but the third consecutive month of growth. The bottom line here with the sharp rise in inventory is a lack of equivalent demand. We are in the traditional holiday build phase and we should see some inventory building but there should also be sales as well or companies are going to be stuck holding this excess.

Also impacting the market was an unexpected draw down in gasoline stocks of -2.5 million barrels for the week ended Sept-3rd. Traders were expecting a gain, not a loss. Oil also saw a loss of -1.5 million barrels. This sent crude oil prices soaring +1.80 to $44.57 and the short covering was heavy. This could have had some impact on the Dow but the Nasdaq was unfazed.

The biggest shock for the day was not oil but chips. Texas Instruments warned last night that Q3 revenue would be below expectations due to weaker than expected demand and excess inventory at customer locations. They also said earnings would be slightly higher but not because of new manufacturing processes, cheaper components or higher prices to its customers. Earnings would be better because its tax rate would be less and TXN would not have to put as much money into the employee profit sharing plan. Neither of those factors should have influenced chip buyers. They had nothing to do with the ongoing business.

Today TXN soared +2 (+10%) to $20.75 on the news. It appears the news was not as bad as traders had expected. With the gloom and doom in the semi sector over the last month the whisper number must have been much lower. One analyst said the news from TXN was good except for the reduction in sales and the aggressive inventory reduction currently underway at its customer locations. Duh! That is like saying I had a wreck on the way to work this morning but at least I hit a police car and not a school bus.

Helping the TXN rebound was positive news out of Nokia, TXN's largest customer. Nokia said it saw strong volume in mobile devices. Also helping was a similar earnings report from National Semi. NSM met previously lowered results and warned that revenue for the current quarter would fall between -8% to -10% due to excess inventory levels at customer locations. NSM said the current inventory correction was very aggressive and sharper than in previous cycles. NSM gained +1.38 to $13.47 on the news.

SOX Chart - 60 min

You would expect the SOX reaction to both of these chip warnings to be negative. If you did you were wrong. Welcome to the club. The SOX jumped +19 points, +5.4%, on the negative announcements. The conventional wisdom tonight was a tremendous short squeeze in progress. Just yesterday JPM said there was still 25% to 30% risk in the sector and the SOX closed right at the 350 support level. Chip bears saw the TXN jump with Nokia's help and then the NSM earnings added fuel to the fire. Shorts were run out of town by a lynch mob of buyers based on the concept that the worst of the correction was almost over. That is a big leap of faith but one many made on Thursday. It just proves that once the spring is compressed to the breaking point the resulting rebound can and does surprise everyone on a routine basis.

After the bell chip makers ISIL and ATML warned that revenues would miss estimates and both dropped sharply after the news. I guess the rebound is over.

Also after the bell today EDS announced it was cutting 20,000 more jobs over the next two years in an effort to cut another $3 billion in costs. Currently EDS has 138,000 employees after cutting 5,000 in the prior round of layoffs.

Alcoa also warned that they would miss estimates for the quarter by a mile. Analysts had expected 52 cents and Alcoa is now guiding to 30 to 35 cents. Alcoa said they were plagued by labor problems and they were going to close some plants rather than deal with the problems. Alcoa also said they were closing plants due to over capacity, softness in automotive, packaging and overseas markets as well as higher expenses in energy and ore.

Probably the most significant news after the bell was a court ruling in the ORCL/PSFT battle. A judge ruled that government could not block the Oracle bid to buy PSFT. Oracle was quick to issue a call for PeopleSoft to meet with Oracle, redeem their poison pill and accept the Oracle offer. Oracle claims their $21 offer is a premium of +17% over Thursday's closing price of $17.95. The battle is not yet over as the EU still has to rule on the deal and PSFT is adamant that their poison pill defense will stand. ORCL jumped about 30 cents in after hours but PSFT jumped to $20.40, a gain of +2.45.

The hurricane excuse is now official. Companies are racing to warn faster than leaves in a hurricane claiming that the Florida storms have hurt their earnings. We all know that many of these are very valid comments but you can bet the farm there will be those companies trying to use the storm clouds as cover would have warned anyway. Some valid companies that used the hurricane excuse today were Brinkers, Ruby Tuesday, Royal Caribbean, many retailers and several airlines have already warned.

Friday is the last trading day before the 9/11 three year anniversary. Homeland Security has been very quiet as well as the press. However, there was a new video from Al Qaeda today with Zawahri ridiculing the U.S. and claiming continued attacks will end our age of security. Officials point out that this is a pattern for Al Qaeda of releasing videos just before 9/11 to remind everyone of their accomplishments. In the past the release of tapes also came immediately before some other attacks and have been claimed to be trigger signals for those attacks. For me this puts additional risk on the market for Friday and Monday.

Tomorrow we also have the PPI and International Trade but I would be surprised if either told us anything we did not already know.

For Friday we could start out with a negative bias due to the Alcoa warning and the two semi warnings after the bell. The Dow pulled back on Thursday to rest on intraday support from last Friday at 10275. The end of day rebound was only successful in moving the Dow off the lows but was unsuccessful in moving very far off those lows. We are slowly ticking days off of the September calendar and so far we are following the script very closely. I would think the Alcoa warning and nearly -2 point drop in after hours could begin a break of that 200 dma support at 10275. Should that support break the next support level is about 10150-10175. This would be a retracement of the Sept-2nd pre Jobs report bounce.

Dow Chart - 15 min

The Nasdaq was successful in rebounding off support at 1850 solely on the back of the short covering in the SOX. It closed the day right at the same overhead resistance that has held all week. This was a very strong bounce considering the Dow was negative all day. The SOX rebound was helped by a day long series of buy programs in the Russell that kept the Russell over 560 until 12:45 then spiked it well over resistance at 565. This was a very strong set of market supporting programs. I am sure some of this was prompted by institutional shorts in the SOX but there was a lot of broad based buying in the Russell. The breadth of the Russell rally pushed the volume across all the indexes to the highest level since August 11th.

Russell Chart - 2 min

The volume ran dry about 3:PM and the indexes began to crumble. The Russell held firm and managed to hold most of its gains despite the Dow moving back to near its lows. This is a very strong show of conviction and turns tomorrow back into a coin flip with the SOX doing the flip. It will all boil down to whether the SOX can hold its gains. If the SOX rolls over then you can bet the rest of the market will fall as well. The SOX rebounded to resistance just under 375 and held 370 into the close. With ISIL and ATML warning tonight we will get to see if the bounce was just short covering or do the chip buyers have some real conviction.

The way I see it Friday could be a pivotal day for the September market. If we can overcome the warnings and the 9/11 anniversary event risk then we will have a major milestone in place. If we lose traction at the open and it turns into a skid then the September roadmap will come back into play and we could see some cautionary selling. The put/call ratio has been high for the last couple weeks and that indicates there is a lot of hedging activity and probably a lot of speculative put buying. The VIX hit a low of 13.70 today and is at the same levels seen on July-14th and June-23rd, both cycle highs in the Dow. It sure looks like to me we are setting up for the perfect storm but events like the SOX rebound today and the Russell buy programs tend to throw a kink in that outlook. I would continue to suggest caution as we ease farther out on that September limb.

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Jim Brown


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