Option Investor
Market Wrap

All Over But the Counting

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      11-02-2004           High     Low     Volume   Adv/Dcl
DJIA    10035.73 - 18.70 10132.99 10011.18 2.03 bln 1664/1456
NASDAQ   1984.79 +  4.90  2002.93  1978.64 1.85 bln 1543/1543
S&P 100   540.67 +  0.17   545.51   539.25   Totals 3207/2999
S&P 500  1130.58 +  0.07  1140.48  1128.12 
SOX       414.23 +  0.50   417.92   407.88
RUS 2000  585.44 -  1.56   591.54   583.53
DJ TRANS 3449.62 - 54.50  3505.67  3436.41
VIX        16.18 -  0.09    16.32    15.21
VXO (VIX-O)16.85 +  0.54    17.02    15.56
VXN        22.97 +  0.36    23.06    21.66 
Total Volume 4,228M
Total UpVol  2,425M
Total DnVol  1,731M
Total Adv  3586
Total Dcl  3409
52wk Highs  411
52wk Lows    61
TRIN       0.98
NAZTRIN    0.53
PUT/CALL   0.76

By the time you read this tonight the early returns should be starting to trickle in and based on the exit polls on the Internet the edge is going to Kerry. The market had priced in a relief rally with breakouts to new highs across the board but once those polls began to break so did the market.

Dow Chart

Nasdaq Chart

SPX Chart

Wilshire 5000 Chart

The Dow gave back -100 points to drop from its highs at 10132 and come very close to 10,000 at the close based on the early election news. The Nasdaq had been trading over 2000 for the first time since early July but dropped to retest 1980 resistance turned support again at the close. With all the pundits telling us the markets would have a relief rally tomorrow regardless of who wins you now wonder how valid that assumption was. If a couple of leaked exit polls showing Kerry with a potential lead in 5-6 states can turn a soaring rally into a loss then what will happen tomorrow?

I am not going to hazard a guess because there are as many opinions as there are traders. Historically the markets don't care in the long run who wins and both parties can point to significant gains when their side is in power. However, because Bush was ahead in the polls for almost the entire race there is likely to be a Bush bias in the market. Institutions don't want to reallocate money unless forced and as long as there was a Bush edge in the polls many may have buried their head in the sand in hopes the problem would go away.

The early exit polls today shocked somebody back into reality and the selling was very sharp. It could have been funds that were planning on exiting at the close anyway to capture profits and a smaller sell program just snowballed in the light volume. I think it would be hard to make any case on the direction of tomorrows market until we actually get to tomorrow.

There is a running debate among traders on the validity of the post election rally period. Since funds normally invest long before any event the odds are good that most funds are already fully invested in advance of the election. They are hoping the directional traders who wanted to see a winner first will give their positions a boost. There is also those traders that feared a pre-election event of either a terrorist attack or a fatal case of foot and mouth disease by a candidate.

I am not going into a lot of discussion about historical trends or various comparisons of the candidates and their impact on the market. At this point it is a waste of breath or digital ink in this case. The real scenario will now appear and we will see the results for our self tomorrow. So far the armies of lawyers remain unemployed and there have been no real problems reported in the news. Heavy voter turnout and the race is still a dead heat.

Back in the economic world the Chain Store Sales fell once again at -0.3% for the third consecutive week of drops. Halloween traffic was reportedly strong but it could not push the numbers back into positive territory.

The Challenger Layoff report showed a loss of more than 100,000 jobs for the second consecutive month. Cuts had averaged -71,000 for the preceding seven months. When you realize that we are in the fourth quarter where jobs normally increase this is not a good sign. Long term the Oct-2004 numbers at 101,840 was -40% below the layoffs in Oct-2003 so the trend is still down in the longer view but up in the short term. Is this a leading edge of a problem or just a blip? In the first ten months of 2004 826,160 layoffs had been announced. This compares to 1,043,954 for the first ten months of 2003. The October Jobs report is due out Friday and it will be less critical now than before the election. The estimate is currently +160,000 jobs.

The Risk of Recession report continued its climb with a 27.4% reading. The low for this cycle was only a 3.2% risk as of Nov-2003 and we have seen a strong rise in recent months to the high of 28.3% in August. A fall in consumer confidence could be to blame as is the rise in oil prices. The drop in the market in October also contributed to some of the increased risk.

Two brokers came out today with lowered expectations for the PC sector in the 4Q. Bear Stearns lowered their Q4 estimates slightly to only +13% growth from the prior +14% growth. The analyst said rising energy prices was depressing the consumer market. Merrill said the inventory levels were increasing in expectation for holiday sales but as of yet those sales were mediocre. The analyst said the battle for retail shelf space continued to be brutal but Gateway with its eMachines product had taken about 10% share away from H-P and Compaq since April. According to Merrill HPQ currently held 48% of retail desktop shelf space. eMachines is expected to flood the market over the holidays in an effort to capture share at lower price points. Tough business for HPQ trying to hold their high end tactics while the consumer is pressured for buying power.

For those not avid watchers of the chip space you might be surprised to look at an AMD chart. The company has come back from a rumored demise in August at $11 to very close to a new 52-week high at $18. Suddenly you can find AMD chips in places you would not expect and Intel is cutting back on new projects on almost a task a week rate.

Unfortunately the chip outlook is still weak. Chip makers at the Reuters Semiconductor Summit in San Fran this week were still hopeful but the cloud is still descending. Without a robust holiday cycle the outlook consensus was grim for inventory reductions in time for a 2005 rebuild. The Semiconductor Assn will update their forecasts on Wednesday and expectations are for a drop in their outlook. The EVP for Cypress Semi said the industry was about to pay the price in coming months for overbuilding production capacity. He said there was currently 20% overcapacity compared to 50% in 2000. Currently the association does not expect growth to return until 2007. NSM warned on Monday that sales were going to fall between 18-19% for Q4 compared to prior estimates of a drop of -10%. The SOX ignored all the bad news and neared 420 today and a three month high before the end of day selling appeared.

A sector on a permanent high was oil but even that bull run failed to gain traction today. With oil data due out at 10:30 on Wednesday and pipeline explosions in Iraq you would have expected oil to rise again. It went the opposite direction with a close at $49.20 and well below the $55.65 high from last week. There were various reasons given but I expect it was due more to rising stock prices and the end of the election cycle that sent the prices lower. There was no terrorist event as was predicted to send prices higher into the election and penalize Bush. Also, with the election over and a post election rally expected many funds were probably dumping oil bets to raise cash to chase the post election equity market. The morning bounce in stocks only increased the expectations for the post election bounce. The afternoon drop probably shocked some of these funds enough to keep them on the sidelines until a victor has been named. One interesting side note the Euro spiked higher when Kerry was said to be ahead. That should tell you that a Kerry administration would be more friendly to Europe and let bygones be bygones. The dollar also fell compared to the Yen on the news.

The Dow had traded to a three week high at 10132 early in the day and then faded into the early afternoon. The Dow bounce failed at the 100dma at 10134. That 10134 level was decent resistance with 10250 much stronger and not that far overhead. The drop back to 10000 at the close put us right back at support for the last week and a logical place to wait. Should we actually get a post election rally that 10250 level will be a key level to watch to determine if the rally has legs. A failure there could restart the entire down trend discussion. That 10250 level is the down trend resistance from early in the year. Should the market not like the election returns then 9900 is the key level on the downside. A break there again could cancel any November rally and return us to the worry about the market predicting another recession.

The Nasdaq hit strong resistance at 2000 and has already broken above its February down trend at 1965. The Nasdaq was on track to challenge the next resistance level at 2050 should a post election rally breakout but the news drop took nearly -20 points off the optimism. The 1965- 1985 level is strong support that was built over the last week. As long as those levels hold on any negative election news then the overall market should remain sound. The SOX holding above 400 and the Russell over 580 should continue to provide support for the Nasdaq base.

Russell Chart

SOX Chart

Tomorrows economic reports including the ISM Services, Factory Orders, Mortgage Applications and Oil Inventory should not matter to the market. It is all about the election now and the bets that funds have already placed and are ready to place tomorrow. The stage is set and the investment community is waiting for the play to begin. All the posturing, mudslinging, predicting and threatening will all be behind us and real life will begin again. According to the latest reports there are no events that should keep us from having a winner declared tonight but then until the votes are counted nothing is guaranteed.

I am not going to take any more of your time today because what I say or any market analyst says tonight has no bearing on our direction tomorrow. Trade the trend tomorrow and keep your stops loose as the volatility could be very high. Buy any dips to the levels I mentioned above and hope the post election rally fable comes true.

Enter Passively, Exit Aggressively.

Jim Brown


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