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Market Wrap

Chips In Charge

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      09-23-2004           High     Low     Volume   Adv/Dcl
DJIA    10038.90 - 70.30 10108.74 10031.16 1.59 bln 1441/1746
NASDAQ   1886.43 +  0.72  1894.67  1883.32 1.39 bln 1409/1614
S&P 100   534.20 -  2.64   536.84   534.12   Totals 2850/3360
S&P 500  1108.36 -  5.20  1113.61  1108.05 
W5000   10820.90 - 40.73 10863.33 10816.24
SOX       383.79 +  2.10   397.03   387.80
RUS 2000  565.80 -  0.09   567.76   564.91
DJ TRANS 3173.97 - 20.70  3197.82  3173.75
VIX        14.80 +  0.06    15.08    14.61
VXO (VIX-O)14.87 +  0.30    15.47    14.62
VXN        21.17 +  0.11    21.35    20.90 
Total Volume 3,280M
Total UpVol  1,307M
Total DnVol  1,891M
Total Adv  3262
Total Dcl  3807
52wk Highs  134
52wk Lows    84
TRIN       1.52
NAZTRIN    0.75
PUT/CALL   0.92

After only one day of declines the chip sector fought to move back higher and single handedly kept the entire market from a serious disaster. The SOX finished up +2.05 and that kept the Nasdaq in positive territory and the Russell only fractionally negative. The dog was the Dow once again as traders fled from big cap internationals in fear of potential warnings.

Dow Chart

Nasdaq Chart

SOX Chart

Economic reports started off bearish and continued to disappoint as the morning progressed. Jobless Claims jumped back to 350,000 after a couple weeks at lower levels but the jump was blamed on timing related to the hurricanes. Those busy doing cleanup work put off filing until the home chores were done. For future weeks we could see a pickup in temporary hires to do longer term rebuilding but also a pickup in layoffs as those in buildings seriously damaged will have to cut workers until new quarters can be acquired or rebuilt.

Evidence of economic weakness came from the Chicago Fed National Activity Index, which fell from 0.53 in July to only 0.19 in August. Production growth slowed as it appeared the July rebound was short lived and another decline is approaching. Remember June's drop to -0.16 from 0.63 in May and analysts were hanging their hat on the July rebound and that rebound has already lost traction. With energy prices rising along with interest rates the economy is facing an uphill battle.

The Conference Board Leading Indicators fell for the third consecutive month and the -0.3% decline was larger than expected. The index is now up only +0.7% for the last six months and very close to losing that ground. The index has not lost ground for three months in a row in over 18 months. With oil prices rising, housing permits slowing and Fed rates moving higher the odds are good this indicator trends lower for the rest of the year.

The best news of the day came from the Monthly Mass Layoffs which showed only 69,033 worker layoffs were announced in August compared to 253,929 in July. This is definitely moving in the right direction. The sector hardest hit was still manufacturing with a loss of -17,698 jobs. Four states, California, Florida, New York and Pennsylvania accounted for 56% of the total layoffs. With the holiday season just ahead we should not see any material increase until December.

The most negative report for the day actually occurred back in August. The FOMC minutes for the August meeting were released today and the tone was positively bearish toward rates. They believed the economic weakness was short lived and inflation would remain abnormally low. The hawkish rate statement killed all the bullishness about the positive economic comments.

"Given the current quite low level of short-term rates, especially when judged against the recent level of inflation, members noted that significant cumulative policy tightening likely would be needed to foster conditions consistent with the Committee's objective for price stability and sustainable economic growth."

Bonds immediately sold off and yield on the ten-year jumped +39 basis points to 4.029%. The time spent under 4% this week could be measured in hours not days and the prospect of falling rates was seriously dashed. If the Fed is planning on a "significant cumulative tightening" that could be a long period of measured pace hikes. Back in 1994 the Fed raised from 3% to 6% to blunt the economic boom and inflation chances. They have assured us repeatedly over the last few months they were NOT going to repeat the 1994 scenario that sent real rates back to 8%. Watch their lips move but read the minutes to see the real story. We can kiss lower mortgage rates goodbye based on these minutes.

Oil soared again today as reports hit the wire that there was more damage than previously expected in the gulf and oil would not be back up to speed for days or even weeks. Oil hit $49 intraday but sold off into the close after the Department of Energy said they were considering opening the strategic petroleum reserve and loaning oil to several refineries to offset the hurricane loss. This may have slowed the jump in oil prices but it really heated up the political war. The democrats immediately called the move politically motivated despite Kerry severely deriding Bush for not doing it as late as yesterday. So, if Bush didn't open it he was a bad guy and if he did open it he was a bad guy. Only in politics.

The Dow opened up in the red and stayed there all day due in part to the $49 oil. However the biggest problem for the Dow is fear more Dow components will warn. MMM has fallen from $85 to $79 over the last two weeks on warning fears. UTX, JNJ, BA, CAT, IBM, etc have all fallen from their highs on earnings worries. For those invested in big caps this is frustrating but for those who are looking for entry points for any end of year rally this is a long awaited event. The Dow traded as low as 10031 today and right on the verge of breaking the 10K level once again. It closed near the low of the day at 10039 as proof bargain hunters are not yet ready to rush into the dip.

The Nasdaq struggled to keep its head above water all day but it managed to keep afloat by standing on the SOX. The lack of a drop may only be temporary as the Nasdaq is facing very strong overhead resistance. Should the Nasdaq cave in the next stop could be in the 1850 range. Remember the Nasdaq dropped -35 points on Wednesday tech bulls picked up some chips on the dip. The SOX is the amazing sector with a gain despite the broader market weakness. The SOX bounced off 390 on Wednesday and again today and while it did not manage to mount a serious rebound just holding the high ground was admirable. According to my count over the last week we have had two sector upgrades for chips and one for techs in general. This is definitely a change in trend and there are obviously a few buyers who think we are not going lower.

Over the last 10 months the Nasdaq has seen four major rallies. The December rally gained +12%, March rally +9.5%, May +9.7% and August +9.0%. Each rally eventually failed and the Nasdaq made a lower low. Eventually this trend will break but that is not the point I want to make. Each time we saw a consolidation period at the top and then a sharp break to the downside once it became obvious we were not going higher. The Nasdaq may be setting up for this trend to break. A clear signal would have to be a higher low on whatever profit taking pullback is ahead.

TrimTabs.com said cash inflows slowed for the week ended on Wednesday to $1.7B from the $2.6B the prior week. The positive cash flow is nice but it is not enough to really keep the markets afloat at the highs. Granted there are a lot of funds with massive cash hoards at present but inflows are still the key to forward progress.

Oil companies did not benefit from the oil bounce today because Deutsche Bank downgraded XOM and Shell citing high valuations across the group. Yes, we know oil companies are high but so is oil and the prospects of it being cheap again soon are very slim. Oil seems headed for $50 despite the SPR oil release and the reason is the current event risk. There are 40 days left before the election and the terrorist window for influencing our election is slowly closing.

Another window not yet closing is the earnings warning window and it is doing a thriving business. I won't bore you with all the individual details but the odds are the numbers will increase before the quarter is over. Major companies across all sectors are quoting various reasons for the shortfall but the key point is they are all warning. This is not good for the bull's case but the bulls have the election trend on their side. It is going to be a volatile next two weeks as we close the quarter. Given the lack of a material drop in September there could be some funds sitting on cash they will need to invest before the end of the quarter. This also complicates the outlook.

For Friday the only material reports are Durable Goods and Existing Home Sales and neither are expected to be market movers. Oil, earnings and event risk are the prime movers and volatility should continue. It is built into the calendar and I do not believe we can count on the pre election bounce. We have never had an election in a post 9/11 terror environment and we do not know what the next 40 days will hold. In reality we could be treading on very thin ice and anything is possible. For Friday we could see further weakness but there is nothing we can point to for confirmation. The SPX closed under its 100dma at 1109 but futures are trading up as I type this. I suspect Friday would be a good day to watch instead of play in traffic.

Enter Passively, Exit Aggressively.

Jim Brown
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