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Market Wrap

Bowflex Bulls

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      10-05-2004           High     Low     Volume   Adv/Dcl
DJIA    10177.68 + 38.90 10221.11 10158.07 1.76 bln 1579/1637
NASDAQ   1955.50 +  3.10  1960.90  1946.86 1.71 bln 1413/1729
S&P 100   544.48 -  0.26   546.17   543.13   Totals 2992/3366
S&P 500  1134.48 -  0.69  1137.87  1132.03 
SOX       404.57 -  0.43   408.53   399.48
RUS 2000  587.34 -  1.75   590.09   586.64
DJ TRANS 3335.60 + 17.00  3342.76  3310.28
VIX        13.95 +  0.54    14.19    13.51
VXO (VIX-O)13.27 +  1.22    13.92    13.20
VXN        20.02 +  0.41    20.26    19.59 
Total Volume 3,741M
Total UpVol  1,877M
Total DnVol  1,797M
Total Adv  3342
Total Dcl  3713
52wk Highs  401
52wk Lows    63
TRIN       1.44
NAZTRIN    0.54
PUT/CALL   0.84

Fresh off their Bowflex workout the bulls continue to hold the indexes at their highs. Pumping iron would be an easy task compared to holding up the Nasdaq at these levels but the bulls are making it look easy. For two days the buyers have refused to let the Nasdaq vary more than a ten point range and support at 1950 is building.

Dow Chart

Nasdaq Chart

Earnings warnings, high oil and negative economics failed to weaken the six day old rally and more traders are now wondering if the next move will be to bypass profit taking and blaze higher. The bulls do not appear to be afraid of the calendar or the news.

The negative economics began with the Challenger Layoff report which showed job cut announcements surged to a new eight month high impacting 107,863 workers in Sept. Also down were new hires with only 16,166 new job openings compared to 132,105 in August. The layoffs were 41% more than the level in September 2003. For the entire third quarter there were 251,585 announced layoffs, +20% more than the second quarter. Computers, transportation, telecom and consumer products surged to twice as high as prior months. Despite all the doom and gloom we need to remember that job cuts increase towards the end of a quarter so this may not be a pattern that will continue. The general consensus for the jobs report on Friday is for overall gains for September in the range of 160,000 jobs.

The headline number on the ISM Services fell to 56.7 for September from 58.2 in August. This was well below the expected rise to 59.3. This was the second straight month under the 60% level considered as decent growth. The headline number at 56.7 was the lowest level since May-2003. New orders were flat and inventory fell slightly but employment rose more than +2 points to 54.6. The strong employment component further suggests we could have a decent jobs number on Friday. With the mixed internals it is very hard to build a case for a strong economy. It may still be expanding but the pace is continuing to slow. High energy prices continue to produce a drag on consumer spending and the service sector was not immune.

The mixed messages from the Challenger Report and the ISM put further emphasis on the Friday Jobs report. Coming just before the next presidential debate the report will be key for the economic picture and both candidates could find ammunition to use against the other depending on the outcome. Also due out on Friday is the revised estimates for the jobs for the last quarter. These revisions could amount to a gain of +288,000 additional jobs according to one analyst. If the revision comes to pass as well as the +160,000 consensus estimate the Bush position would be much stronger. Should we see a strong upward revision I would not put it past Kerry to question administration numbers and motives for announcing the data in advance of the second debate. While we all know the revisions are a matter of course each quarter the voting public could easily be led astray by the apparent timing.

Oil continued to rise and finally broke the mental $50 barrier that has held us for a week and jumped to close at $51.09. Despite the jump there was no material impact to the equity markets. Impacting prices today was a report that 25% of the Gulf of Mexico production was still shut in due to hurricane damage. Wednesday afternoon we will get the weekly oil and gas inventories and a decline is again anticipated. Home heating oil and natural gas prices are continuing to explode and consumers are not going to be happy when holiday shopping rolls around and wallets are empty.

AMD warned today that revenue would be lower due to reduced sales in its flash memory business. Prior guidance for a modest gain in Q3 was erased but they did say earnings would be inline due to strength in the processor business. Earnings are due out on Thursday and the stock was down only -2 cents in regular trading. Intel gained +19 cents on the news and closed at a new five week high. Current resistance is the 50dma at 21.55 and August resistance at $22.

Pulte Homes got whipped for another -3.88 drop to $52 after warning that sales would be weaker due to a sales slowdown in Las Vegas. The company said they raised prices too fast in Vegas with increases of up to +100% in the last year. With the housing market so tight there homes were being bought months in advance of being built. The feeding frenzy has cooled and PHM was forced to cut prices about -$70,000 per home (-18%) to move inventory. Toll Brothers fired back today that growth was still expected to be +30% with 20% or more growth in 2006. They were also seeing -5% cancellation rates in Vegas but felt it was consistent with market averages.

After the bell today Amerisource Bergen (ABC) warned on revenue and earnings saying price increases were less than expected. Delphi (DPH) warned that it would post a larger than expected loss. Ford and GM said they were cutting production for Q4 early last month. Those production cuts and rising commodity prices put the squeeze on Delphi. Zoran (ZRAN) warned after the close that its chip sales for consumer electronic devices would be less than expected. Open Text (OTEX) fell -17% after warning as well. OPNET (OPNT) also warned. Not everything was negative with RCKY and SALM guiding slightly higher.

The earnings calendar begins to hspeed up as the week progresses and turns into a flood next week. For Wed we have DNA, MON and WWW. Thursday sees the first Dow component report with Alcoa, who has already warned, and AMD, AMHC, COST, MAR and ATYT. With Friday's Jobs report we will also get earnings from GE. Next week more than 250 companies report and although we have seen some warnings this week it has been much less than most analysts expected. This lack of news could be giving the markets additional lift as investors begin to build on hopes that Q3 is not going to be as bad as originally thought.

After two very strong days of gap open surges we saw Tuesday turn into a consolidation day for the Dow. The Dow support is currently 10167 and the 100dma and we held there all afternoon. This 10167 level is right in the middle of the range we have seen over the last two months. This is neither a bullish or bearish level and should be considered a neutral zone as we face the typical October challenges. The upper side of this neutral zone is strong resistance at 10300-10350. The 200dma awaits at 10298 along with downtrend resistance from January.

The Nasdaq is much stronger with the bounce to 1960 holding despite numerous tech warnings still appearing. The AMD warning failed to produce any negativity and the mixed economics caused barely a blip. As long as the SOX remains over 400 the tech bulls do not need to worry about protecting their flanks. Tech investors see that SOX strength and become encouraged. The SOX has put in higher highs and lows since the bottom at 350 in September and with the historical end of October rebound ahead nobody is taking profits. The Nasdaq is chipping away at the 200dma resistance at 1965 and any good news could easily break through that level.

The VP debate hits the airwaves tonight and Cheney will try to repair some of the problems created by Bush last week. Cheney is a strong public speaker but as a trial lawyer so is Edwards. Odds are good we will see a verbal brawl and the outcome is far from assumed. Tomorrow we have no material economic reports but will have to deal with oil inventories at 10:30. The markets need to hold their gains for the rest of the week to put bearish fears to rest. It may not be an easy task with economics intensifying on Thursday and Jobs on Friday but it is possible. The bulls climbed a significant wall of worry to get here and they are enjoying a well deserved rest but loftier heights await.

Enter Passively, Exit Aggressively.

Jim Brown


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