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Market Wrap

Quad Witching Approaching

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      09-14-2004           High     Low     Volume   Adv/Dcl
DJIA    10318.16 +  3.40 10340.13 10303.41 1.53 bln 1549/1677
NASDAQ   1915.40 +  5.00  1917.74  1901.77 1.51 bln 1430/1645
S&P 100   546.93 +  0.82   547.82   545.83   Totals 2979/3322
S&P 500  1128.33 +  2.51  1129.46  1124.72 
SOX       393.50 +  0.40   393.97   387.75
RUS 2000  570.96 -  2.14   573.10   567.74
DJ TRANS 3225.00 +  1.80  3227.05  3219.58
VIX        13.56 +  0.39    13.89    13.50
VXO (VIX-O)13.55 +  0.15    14.01    13.29
VXN        19.49 +  0.35    19.85    19.13 
Total Volume 3,273M
Total UpVol  1,767M
Total DnVol  1,450M
Total Adv  3440
Total Dcl  3726
52wk Highs  191
52wk Lows    49
TRIN       0.86
NAZTRIN    0.73
PUT/CALL   0.93

For a quadruple witching week the volatility has been very calm. The Dow traded in a very narrow 37 point range and continued to hold right below significant resistance. The market is slowly digesting the last four weeks of gains and passing time as pages tick off the calendar.

Dow Chart - Daily

Nasdaq Chart - Daily

The markets started off negative after Retail Sales for August came in lower than expected at -0.3%. The consensus estimate was for a drop of -0.2%. This was another case of sticker shock and a lack of internal understanding. Ex-autos Retail Sales actually rose +0.2%. The auto-manufacturing sector is throwing money at incentives to attract buyers but the number of consumers left who don't already own a late model car are slowly dwindling. Sales also fell at furniture and department stores and restaurants. The challenge facing retailers is the very high comparisons from this period last year. The tax rebate plan was in full swing and products were flying off dealers shelves.

The U.S. Current Account balance fell to another new record low at -$166.2 billion. High oil prices and a slowing in exports produced the large deficit. This was the largest deficit relative to GDP on record. Foreign purchases of both debt and equities fell and purchases of foreign equities by U.S. residents increased. Net foreign portfolio outflows increased +$13.8 billion to $30.3 billion for the quarter. Net purchases of foreign equities almost doubled to $40.2B. This should be a clue to many that our budget deficit could eventually be a serious problem if money flow continues to be negative.

The Richmond Fed Survey saw a strong jump with the headline number hitting +18 after a dip to only +6 in July. The only material component that slipped was employment along with a small drop in the six-month outlook. Backlogs hit the highest level in four months but that level is only +1. Backlogs dipped to -12 in June and have been rising since.

The SOX gave up some ground at the open on the LSI warning from last night and then struggled to return to positive territory for the rest of the day. In the end the SOX ended in the green by a miniscule +0.40 but a warning by XLNX after the close could apply more pressure tomorrow. XLNX is in the same sector as ALTR but their warning was much stronger than the ALTR warning last week. XLNX said revenue would drop -5% to -7% for the quarter and ALTR warned only that sales would be flat. XLNX echoed the same sector refrain that there was a serious inventory correction in progress and orders from the Asia Pacific region were weaker than expected. XLNX had initially given guidance for +2% to +4% revenue growth. Margins were also expected to erode. XLNX lost over a dollar in after hours trading.

Celestica (CLS) also warned that Q3 revenue would be light because of "order reductions from some of its largest communications and IT customers." They said revenue would drop to $2.05B to $2.15B down from prior estimates of $2.25B to $2.4B. Earnings are expected to drop to 7-11 cents from 11-17 cents in the prior forecast. This double hit from XLNX and CLS pushed the SMH lower in after hours but not materially. The Nasdaq futures were trading down only -3.50 points. This could change by morning but it appears the bad news is already priced into the sector.

The Gartner Group said today that the chip sector was still very over rated and far too many companies were competing for the available business. They said they expected a 40% consolidation in the sector over the next ten years as the little fish were either consumed by the sharks or driven out of the market.

Oracle announced earnings after the bell and beat the street by a penny on slightly less than expected revenue. They said they were comfortable with the 13 cents analysts expected for next quarter. However, the analysts consensus estimates were for 14 cents. Revenue was also quoted slightly below the consensus. It did not appear to impact the stock as ORCL rose slightly but some cautious statements at the end of the conference call pushed it back down to just barely positive. I doubt we will see any market impact from Oracle earnings. You are likely to see more impact from Larry Ellison's continued dumping of the stock. Since March-1st he has sold nearly $1 billion at the rate of a couple million shares per week. link

Oil continued to make headlines as prices hovered near $45. The various challenges included pipeline sabotage in Iraq and the shutdown of hundreds of wells in the Gulf of Mexico as Ivan rumbled towards land. About 25% of our oil comes from the gulf and a week long shutdown could pressure already weak supplies. The storm surge in the oil fields is expected to be between 13-18ft on the eastern side of the fields. This could cause significant damage not only to wells but distribution facilities on the coast. Many of these storms fail to live up to their advance billing but this one does appear to be on target to disrupt the oil patch.

OPEC meets tomorrow in Vienna and the pre meeting press claims they will approve a one million barrel increase in production to 27 million per day. The price of oil barely blipped on the announcement because OPEC countries are already producing over 30 million barrels per day. The production quotas mean nothing when oil is $45. Everyone that can pump more is doing so to capture the economic windfall. As news comes out of damage from Ivan we can expect the price to rise accordingly.

The markets continue to hold near their recent highs and according to TrimTabs.com it is due to new cash coming into the market. In the first seven trading days of September equity funds saw inflows of $2.9B. According to TrimTabs this is nearly as much as the +$3.5B of inflows for all of August.

The markets are doing amazingly well consolidating the last four weeks of gains without losing any ground. Bad news abounds but the levels continue to hold over 10300 for the Dow and over 1900 for the Nasdaq. The SPX has broken above 1125 and that prior resistance is now support.

While the current consolidation is turning many traders bullish there are still challenges ahead. The election fix appears to be in and the Bush expanding lead has prevented any September decline from appearing. Hopefully this euphoria will continue but there are some critical technical levels still ahead. The NYSE Composite ($NYA.X) is approaching the critical 6600-6625 level that restrained the markets back in June for the entire month.

NYSE Composite Chart - Daily

The SPX has similar resistance just overhead at 1130 that stretches all the way to 1145. Just getting over 1130 will not mean there is a breakout in progress. It will require more conviction on the part of the bulls than we have seen recently.

SPX Chart - Daily

The markets are facing a quadruple expiration on Friday. Most of the volatility normally associated with this event has been noticeably absent with recent lows in the various volatility indexes. Volume has been rising and the majority of it has been on the buy side. The complete lack of any material attempt to sell stocks since Sept-3rd is a very bullish point in itself. There appears to be no real effort on the part of the bears to stop this rally.

Of course the rally itself has been staggering forward more than surging ahead. Since the Sept-2nd buy program powered the SPX from 1110 to 1120 the index has gained only +8 points in seven trading days. Seven of those points were the direct result of the Friday afternoon buy program ahead of 9/11. Since that program pushed us out of our prior range we have traded in another narrow range between 1125 and 1130. Definitely not a bullish stampede.

SPX Chart - 30 min

For the rest of the week volume should slow as we near expiration Friday and enter the Jewish holiday period. Rosh Hashanah begins at sunset on Wednesday and ends Friday night. Many traders will be absent during this period. Add in the landfall of Ivan and the widespread uncertainties associated with a direct hit of a category five storm on the gulf coast and the rest of the week could be very slow. We also have a Fed meeting next Tuesday and the futures are showing a rate hike on two of the next three meetings. The hike is priced in but there is always some market instability ahead of the event. Nothing has changed since Sunday. Volatility is still low and the indexes have not moved. We are poised for a big move but the direction is still up for grabs. That could be the epitaph for the week.

Enter Passively, Exit Aggressively.

Jim Brown
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