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Market Wrap

Tape Painting Eases

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      10-28-2004           High     Low     Volume   Adv/Dcl
DJIA    10004.54 +  2.50 10044.95  9952.48 2.04 bln 1632/1555
NASDAQ   1975.74 +  5.80  1980.36  1959.57 1.81 bln 1514/1544
S&P 100   539.48 +  1.70   541.16   535.67   Totals 3146/3099
S&P 500  1127.44 +  2.04  1130.67  1120.57 
W5000   11049.24 + 13.39 11077.04 10981.23
SOX       412.36 +  1.50   415.91   408.86
RUS 2000  585.63 -  1.55   587.19   581.72
DJ TRANS 3484.45 +  9.30  3484.45  3440.22
VIX        15.39 -  0.33    16.05    15.36
VXO (VIX-O)15.46 -  0.67    16.64    15.37
VXN        21.25 -  0.27    21.87    20.88 
Total Volume 4,217M
Total UpVol  2,385M
Total DnVol  1,774M
Total Adv  3608
Total Dcl  3532
52wk Highs  347
52wk Lows    92
TRIN       0.98
NAZTRIN    0.72
PUT/CALL   0.68

Mutual fund tape painting eased on Thursday despite a drop in oil and a strong IPO market. Volume remained high but at 4.2B shares it fell short of the 4.75B shares traded on Wednesday. That number was a multi- month high.

Wilshire Chart

Dow Chart

Nasdaq Chart

Economic news was light and failed to impress traders but it also failed to dim any outlook. The Jobless Claims jumped to 350,000 once again and continue to confuse analysts expecting them to fall as we enter the holiday season. Estimates had been for only 338K and inline with the low summer averages. The only guess from the Labor Department was lingering impact from the hurricanes.

In conjunction with the rising Jobless Claims the Help Wanted Index fell back to its cycle low at 36 and has declined in eight of nine U.S. regions over the last three months. Only the Pacific region has remained stable at 31 and well below the average. The headline number reached a cycle high of 40 in February but that was well below the pre-recession reading of 90. This is an index of newspaper advertising and the growth in Internet job searching has depressed this expensive medium. However the cycles still remain valid although numbers may never return to prior highs. This suggests hiring is still weak and the economy is not gaining speed.

A surprise quarter point (+0.27% to be exact) rate hike by China knocked oil and commodities for a loss today on fears that China would actually slow down. Oil fell to close at $50.92 and well below the $55.65 all time high just yesterday. China oil imports have grown +61% since last year and a slowing of that demand was seen to be a relief for oil prices. Steel and copper prices as well as stocks dealing in those commodities also fell.

This was great for the market today but I seriously doubt it is going to last. Several analysts suggested this was a token rate hike made as a thank you gift to the U.S. for Colin Powell's comments yesterday. He said Taiwan was NOT a separate country. This was a major policy comment that lends credibility to China's attempt to control the Taiwan discussion. This was the first rate hike in nine years and it will not have any material impact. It was also seen as an effort to move ahead of the U.S. rate hike due Nov-10th to be seen as a leader not a follower.

China cannot afford to slow down from its current +9% growth rate. Every month two million rural Chinese flee the poverty of the vast countryside and move to the cities in search of work and a better life. If China fails to provide infrastructure, housing and jobs for these migrants then social decay, civil unrest and crime will soar. The +61% increase in oil imports over the last year is only the leading edge of a tidal wave of oil that will be needed to continue the growth. Upgrading just the coastal 1/3 of China to the economic level of Korea would increase China's oil imports from the current six million bbls per day to nearly 20 mil bpd. This would be another +233% increase in imports of oil and continue huge increases in hard commodities. 20 mil Bpd is nearly double the output of Saudi Arabia today. Will it happen? Absolutely, only the timing is unknown. Over the last year their raw iron imports have jumped +21% and processed steel +11%. They already consume a large portion of our building material output for things like plywood, sheetrock and insulation. Should the market be worried about a quarter point rate hike in China and the potential for their economy slowing? Not in my opinion!

Oil fell below $51 and the markets did not rally. What happened to the connection between oil and equities? I believe that the connection has been broken for quite a while and the talking heads on TV have been trying to keep it alive. A trader only needs to look at the transports currently at a five year high with oil over $50 to see this disconnect. Sure we got a reaction bounce on Wednesday with the first break in oil prices but the equity bounce was related more to year end tape painting by mutual funds than the drop in oil.

The October tape painting is a historically recognized event. Mutual funds shuffle their portfolios over the first three weeks of October to eliminate the losers before their October year end. Once the losers are dumped they pour huge amounts of money into the stocks they are keeping over the last week of the month to produce the most positive picture possible for their year end statements.

Historically this has produced a significant jump in the indexes over the last week of October. It also helps that the dumping of losers in early October pushes those same indexes to significant support levels that make a good launch point for the end of month tape painting. Over the last ten years the last week of October has shown gains ten out of ten times even in 2001 and during the bear market.

Ten Year Table of October Last Week Gains

Today is the 75th anniversary of the Black Tuesday market crash in 1929. Over two days the Dow lost -24% and it took a very long time to recover that loss. I doubt that had anything to do with today's performance but I am sure more than one money manager did a quick fact check to assure himself that conditions were not building to another similar event in the near future.

At present the only major event the markets will be watching is the election next Tuesday. The current surveys continue to predict a dead heat and that should work to slow any further market advances. The electoral count shows 191 hard for Bush and 149 for Kerry with 270 needed to win. 36 votes are leaning to Bush and 58 are leaning to Kerry. 104 votes are currently considered a toss up. Using the current statewide surveys to predict the results Bush would have 220 votes to Kerry's 207 with FL, OH and PA the 68 votes that would swing the election. The bottom line is the election is still too close to call and the lack of a clear leader should keep any market gains over the next two days to a minimum.

For the Dow we have seen a +300 point jump in three days from the 9708 low on Monday. The Dow closed at 10004 today and to put it in simple terms the easy points have already been captured. Moving over 10100 and 10200 is probably going to have to wait until after the election. The Dow has made a very nice sprint and it was especially nice after the three weeks of losses but it is showing signs of being winded. Today saw a bounce to near 10050 before consolidation began to appear. Market makers, fund managers or both managed to close the Dow at just over 10000 for the second consecutive day and I believe it represents the level they want to hold tomorrow and the last day of their accounting year.

The Nasdaq also managed to consolidate its gains and move slightly higher to 1974 and hold over its 200dma at 1957. The early October resistance highs were just over 1970 and today's close eclipsed those levels. The Nasdaq managed to close at four-month highs and even if it was only by a couple points traders should be excited. You can see the Saturday papers now, "Nasdaq at Four Month Highs as Bull Market Returns." Of course that means they have to hold the line on Friday.

The SOX is also at a three month high just over 410 and it is clear that funds shifted some of their money into chip stocks despite the general bad news from the sector. You have to buy stocks when nobody else wants them to be successful long term and they did exactly that in October. The SOX is up +5% for the week.

The Russell has also rallied off its October lows and is nearing all time resistance at 600. Resistance at 587 has slowed the advance for the last two days but the lack of any selling suggests a new sprint ahead. A move over 600 should produce a stampede.

The Wilshire-5000 closed at 11042 and barely 100 points away from the June and October resistance high at 11164. A breakout here along with a break over 600 on the Russell would be bull heaven.

Earnings are nearly over with 377 of the S&P-500 already reported. Current earnings have averaged +15.5% with revenue up +11.1%. This compares to earnings of better than 25% in each of the prior two quarters. It is also better than some of the dire estimates of +13-14% to as low as +10.8% over the last month. According to Thompson Financial the final number will be in the +16.4% range based on current company guidance from those companies not yet reported. It also assumes no major misses. 63% of companies have beaten the mostly lowered estimates, 20% have missed estimates and 16% have reported inline.

The slowing of the earnings flow and the current hard estimates leaves little to excite the market from the earnings standpoint. Now that we are at month end the economics will increase sharply and Friday is the first major reporting schedule in this cycle. We will see the GDP, Employment Cost Index, NAPM, PMI and Consumer Sentiment. You can bet the numbers will immediately be turned into campaign fodder and hurled vehemently from side to side. This does have the potential to upset the current market consolidation we saw today. I would look for traders to be cautious but funds have a vested interest in maintaining Dow 10,000 so selling could be contained. I would be careful going long ahead of next Wednesday because Monday could turn into a day of window undressing after the fund year end and ahead of the election. A legal battle over the election results could also poison market sentiment. Patience is the key here. We have endured many months of being bombarded with campaign mudslinging and the finish line is just ahead. These last three trading days should pass quickly.

Enter Passively, Exit Aggressively.

Jim Brown
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