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Market Wrap

Great Debate

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      09-30-2004           High     Low     Volume   Adv/Dcl
DJIA    10080.27 - 56.00 10142.94 10038.90 2.16 bln 1917/1289
NASDAQ   1896.84 +  2.90  1902.25  1887.68 1.67 bln 1766/1347
S&P 100   534.86 -  1.70   537.20   533.10   Totals 3683/2636
S&P 500  1114.58 -  0.22  1116.31  1109.61 
W5000   10895.48 +  9.59 10913.66 10845.90
SOX       384.20 +  3.60   389.69   380.62
RUS 2000  572.94 +  1.87   574.71   569.33
DJ TRANS 3243.51 +  3.90  3249.20  3220.73
VIX        13.34 +  0.13    13.67    13.20
VXO (VIX-O)13.44 +  0.63    13.68    13.10
VXN        20.48 -  0.19    20.91    20.21 
Total Volume 4,129M
Total UpVol  2,472M
Total DnVol  1,579M
Total Adv  4195
Total Dcl  2973
52wk Highs  314
52wk Lows    96
TRIN       0.92
NAZTRIN    0.86
PUT/CALL   0.86

No, not the one between Bush and Kerry tonight but the debate over market direction over the next two weeks. The markets struggled to move higher over the last few days and were it not for the end of quarter window dressing the Dow would be under 10K instead of over tonight.

Dow Chart

Nasdaq Chart

SPX Chart

What a busy day! This could turn into a novel tonight but I will try to keep it flowing. Starting with the flood of economic reports we continue to see a mixed picture for the future. The Jobless Claims soared to 369,000 and the highest level since the 375K last Dec 6th. This was mostly due to the rash of hurricanes and I mentioned this might happen last week. The states with the most claims were Florida, North Carolina and California. California always ranks near the top due to population. Florida had 8,400 claims specifically related to the hurricanes but probably many more were indirectly related. This should not be a market problem because traders are always looking for an excuse to ignore bad numbers.

Personal Income rose +0.4% and inline with estimates despite an impact from - hurricanes. Yes, the hurricane excuse is alive and well and will probably turn up in every economic report for the next couple quarters and in the earnings reports for companies. You can't take out electricity, retail, transportation and communication in five states impacting millions of consumers without a serious economic ripple. Fortunately that ripple will turn into a wave in Q1 as rebuilding and refurnishing efforts in Q4 are felt through the various supply chains. Auto sales to replace all the flooded vehicles, building materials, furniture, appliances, clothes, bedding etc, anything not taken to high ground has to be replaced.

Elsewhere the NY-NAPM showed continued growth in the New York economy although growth was slower than in prior months. The region has been in a strong uptrend since August-2003 and the last index low at 221.7. The September headline number was 310.4 and illustrates how strong the recovery has been. The last two months have seen slowing but definitely nothing to worry about.

The PMI jumped to 61.3 from 57.3 in August and was much stronger than expectations at 58.5. It was also a large gain over the 57.3 number for August. This should mean a strong jump in the ISM on Friday which is currently expected to be 59.0. Most impressive was the jump in new orders to 68.7 from 58.0 however inventories also rose over the last two months by the fastest pace in nearly two decades to 64.2 from 55.3. This suggests that producers may have gotten ahead of themselves in anticipating the recovery and sales slowed over the last couple months. Fortunately the jump in new orders this month should give them an opportunity to balance the inventory flow.

The Help Wanted Index came in unchanged for August at 37 and suggests there is not a serious employment boom in progress. Internet job sites have reported an increase in openings but they are also not seeing any large jump in jobs. Because tomorrow is the first day of the month we have to wait until next Friday for the Jobs report and the current estimate is only 165,000 and right in the middle of the recent ranges. The only comments I have heard have been negative and expecting lower than the official estimates. After the ISM on Friday we should start to hear more chatter about jobs.

Up, down, up, down, more gyrations than a windsock in a thunderstorm. Of course I am talking about oil which hit $50 on Tuesday and then declined to $48.50 on a build in inventories and the cease fire in Nigeria. Well you guessed it oil traded over $50 several times on Thursday and closed back up at $49.65. No specific challenges were noted but prices are creeping back up once again. T. Boone Pickens headlined the dozens of oil analysts hitting the airwaves and his quote of $60 before $40 is the sound bite of choice. The more analysts talk the more the real facts are coming out. Multiple experts claim Saudi Arabia can only produce 9.3-9.5Mbpd and their claim of 11mbpd is strictly smoke. Pickens related the Hubbert's Peak scenario and gave it much credence. He said the two million barrel Alaskan pipeline was down to only 700,000 per day and that is the same challenge felt around the world. Existing wells saw decreasing production and not enough new wells coming on to cover demands 2-5 years from now. I will get off the soap box but I am putting together a top ten energy stocks for long term investors for November release so stay tuned.

The biggest challenge for the economy is not the flurry of hurricanes but the chance that oil will remain high. A very good chance. The various economists are starting to be heard about the prospects for the future and it is not pretty. Retailers are seeing a slowing in buyer activity not specifically in quantity but in cost. Talbots warned today that sales would be off due to the hurricane. Surprise, there is that excuse again! If you read the fine print they also say consumers are becoming more budget conscious. They specifically said their September sale had not performed well and had not driven the historical increase in regular priced merchandise sales. That means consumers came in to buy the sale merchandise and did not buy the profitable items that were not on sale. Talbots said same store sales could now be in negative numbers instead of their prior forecast for positive growth. This warning follows warnings by other retailers including the Federated chain of department stores. With heating oil more than doubled over last year and still rising the amount of money available for spending by those in the northern climate zones is going to be significantly less.

You can't talk about today's market without talking about Merck. The sudden withdrawal of Vioxx from the market cut a $2.5 billion hole in Merck profits and shocked the drug sector. Merck took a -$25 billion cut to its market cap and dropped -$12.07, -26.8% to an eight year low. MRK volume at 145 million shares was nearly a tenth of the volume of the NYSE and we are talking a $33 stock. This was nearly 30 times normal volume. Funds bailed on fears there would be legal problems due to suits similar to the Fen-Phen recall several years ago. Other drug companies have had similar problems in the past but the magnitude of the potential problem is extremely large. Wyeth has spent nearly $17 billion on the Fen-Phen recall and only six million people took the drugs. For Vioxx over 84 million people have taken the drug and the potential for billions in claims is very strong. Any person who had a cardiac event and took Vioxx will be jumping on the litigation bandwagon even if they ate two big Macs every day for the last ten years, smoked and drank a quart of whiskey per day. Their lifestyle will have nothing to do with the event, it had to be Vioxx that caused their heart problem. Several analysts even questioned if Merck would be able to survive the storm. They have taken multiple potential products out of the pipeline over the last couple years and they are widely seen to be lacking any wonder drug to rescue them from this money pit.

Despite the nearly -90 point hit the Dow took from the MRK drop it rallied back to close down only -56 points. Support held at 10050 and the Dow is poised to rally off a positive ISM tomorrow. However, there are several roadblocks to that possibility. Before the MRK drop window dressing had added +175 points since the Dow's low of 9977 on Tuesday. Today that window dressing effort was far less of a factor with only a small afternoon rebound.

The Nasdaq was able to rebound back over 1900 twice on Thursday but could not hold on either attempt. This is strong resistance that even a positive SOX could not break. The SOX turned in a very strong effort just closing in positive territory after Micron missed earnings and multiple chip stocks have warned this week. This was a definite symptom of window dressing in my opinion. Funds had to put cash into stocks to show they were intelligently investing your money.

This window dressing fought an uphill battle today. Volume was very strong on the NYSE and it was not just related to the MRK disaster. This was the first time the NYSE has traded over two billion shares (2.212B) since July-21st. I believe that window dressing met distribution today and they battled to a tie. Up volume on the NYSE was slightly higher than declining volume at 3:2 but there was no conviction among the stocks that saw any gains. The market felt heavy all day and the closing spurt could not correct it.

The market is facing several challenges. First is the Bush-Kerry debate tonight. The market has priced in a Bush victory and the debate will be watched for signs of a change in that status. If Kerry pulls a rabbit out of his hat and scores major points or if Bush gets foot in mouth disease then the fragile lead could dissolve in an instant. The market would be quick to remove any Bush premium and that could be painful. Gail Dudak said she felt the a Kerry win would subtract -1000 points from the Dow. That number may be high but you get the point. Conversely should Bush win the debate in a convincing manner then the market "could" celebrate some more.

Secondly the end of quarter window dressing is over. As much as the bulls would like to see it continue for another week the quarter is behind us and October looms large. Earnings warnings are the story and it is rare that a company gives positive guidance. In short we are entering a typical October with conditions about as bad as possible. Oil at $50, hurricanes, election fears, terrorist fears, earnings less than half the prior quarter and projected to be only +7% for all of 2005. While I think this will resolve itself quickly there is strong risk for the bulls. Historically we should see a ramp into the election as long as there is a clear leader. October is also year end for many mutual funds and portfolios are reshuffled faster than a blackjack deck in Vegas and that normally leads to substantial volatility. Remember the VXO hit a new eight year low on Wednesday so the volatility bomb is ticking.

For Friday we have the next major economic hurdle the ISM Index. A positive report there could go a long way towards warding off the October bears. Vehicle data for September is also due but nobody expects cars to be rolling off showroom floors in any large numbers.

The quarter that ended today was dismal for the markets with the Dow losing -3.0%, S&P -2.4%, Nasdaq -7.5% and the chip sector -25%. This swoon has put us right back where we started the year near 1112 on the S&P. Nine months of trading to end flat just before the election. In fact this has been called the tightest trading range since 1994. It was the worst quarter for the Dow since Q1-2003 and the worst for the Nasdaq since 2002. It has been called the most confusing election year market in the last 100 years. That may be a little before my time but if you are like me you have probably found the last several months very hard to trade. Fellow traders this is about to come to an end. October is normally very volatile but it is known as the bear killer month because the dips are normally bought and bull markets emerge. I don't know about you but I am counting on it.

Enter Passively, Exit Aggressively.

Jim Brown
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