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Market Wrap

Bush Bounce

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      11-04-2004           High     Low     Volume   Adv/Dcl
DJIA    10314.76 +177.70 10318.23 10127.98 2.25 bln 2510/ 742
NASDAQ   2023.63 + 19.30  2023.72  1992.07 1.85 bln 1858/1238
S&P 100   555.62 +  8.89   555.62   546.16   Totals 4368/1980
S&P 500  1161.67 + 18.47  1161.67  1142.34 
W5000   11371.20 +166.41 11371.20 11190.33
SOX       412.72 +  2.60   414.15   404.02
RUS 2000  602.13 +  6.80   602.13   591.77
DJ TRANS 3562.84 + 68.20  3565.73  3492.96
VIX        13.97 -  0.07    14.02    12.95
VXO (VIX-O)14.21 +  0.03    14.35    13.05
VXN        20.16 -  0.66    20.90    19.73 
Total Volume 4,460M
Total UpVol  3,274M
Total DnVol  1,108M
Total Adv  4967
Total Dcl  2252
52wk Highs  672
52wk Lows    80
TRIN       0.80
NAZTRIN    0.82
PUT/CALL   0.87

It appears on the surface a bull market has broken out and while many credit Bush it may be just a relief rally now that the election is over. Two days without constant campaign ads could make any trader happy but more than likely it is relief that there were no terrorist events and the election outcome was settled in only one day.

Dow Chart

Nasdaq Chart

The bull may be recovering his strength but his diet of economic reports has not been helping his fitness program. The Monster Employment Index this morning came in at 114 and exactly where it was in September. This could be a topping process as the index has been stuck in the 112- 114 range for the last three months. The 114 level is the highest reading for the year and is +21 points over last October's level. Job listings dropped slightly in eight of the nine regions. The numbers for the index were rescaled beginning in Oct and the 114 headline equates to a prior reading of 151.

Jobless Claims fell slightly to 332,000 to continue the EKG style volatility of the last ten weeks with alternating numbers 20,000 claims apart. This is a pre hurricane level but there is no indication that it will hold at this range.

Both of the above reports set the stage for tomorrows jobs report and the consensus is for a gain of +160,000 jobs. We have a consecutive streak of positive job gains dating back to September 2003 and Friday is not expected to disappoint. At least it is not expected to be negative. The whisper numbers have been less than exciting and if anything the expectations are for a consensus miss at +125,000. Friday's release is expected to set the stage for next weeks Fed meeting and the guidance that comes from that meeting. Nothing is expected to prevent them from hiking rates another 25 points but the guidance for the December meeting is the key. The Fed does not like to hike rates just before the holidays but will do it if forced. I suspect the weak economics and a weak labor market could put them on hold for December. Currently the Fed Funds Futures are only showing a 51% chance of a rate hike in December.

Productivity rose slightly more than expected at +1.9% but slower than the +3.5% average over the last three quarters and +5.1% over the last six quarters. This slower growth trend is encouraging because it shows a level of growth that can be sustained. On the down side unit labor costs rose +1.6% and the highest rate of increase since Q1-2003. There was talk about the slowing productivity suggesting longer term problems for the economy. Higher productivity suppresses inflation and rising wage costs increases it. This could be the beginning of a turning point. It was the smallest increase in productivity since 2002.

In stock news today the semiconductor sector took yet another hit with BAC downgrading some of the big names. KLAC and AMAT were cut to a SELL from neutral. BAC said a glut of chip inventory and strong overcapacity in the LCD market would depress earnings for quarters to come. AMAT, KLAC, LRCX, ASYT all fell on the news. The SOX struggled to breakout of negative territory despite the strong rally in progress. The SOX ended up only +2.64 points and refuses to move over 415.

The Dow took a hit early as Pfizer was slammed on comments in a Canadian newspaper that 14 people had died while taking Celebrex. Pfizer fell -2.50 on the news before the Canadian equivalent of our FDA said there was no relationship between the deaths and Celebrex. Pfizer also fired back that there was no proof in any form of a relationship, was misleading and not supported by clinical facts. Pfizer repeated that historical long term studies on more than 30,000 patients had shown no cardiac risks for Celebrex. If they are lying or misrepresenting the facts it would put them out of business. I believe they are being painted with the same Merck brush and at $29 this is a buying opportunity. Merck on he other hand is in serious trouble. A FDA study posted yesterday showed that VIOXX raised heart attack risk +370% over those patients on Celebrex. Also, news continues to suggest that Merck has known this and kept it quiet for at least four years. With 30 million people having taken VIOXX the outlook for Merck is not good. We have been holding puts on MRK in the editors play section since October 10th at $30.35. MRK closed today at $27 and I am looking for it to drop into the teens once they slash the dividend to pay for litigation and settlement expenses.

A major component to the equity rally today was a strong drop in oil prices with a close at $48.85, -2.05 for the day. I have been saying in this column for months that I expected oil prices to fall after the election but only on a temporary basis. The risk of a terrorist attack designed to disrupt oil before the election has passed and oil inventories rose +6.3 million bbls on Wednesday. Saudi cut prices on two grades of crude due to falling demand. Need I say more? The speculation event is over and we could just wander until we see what the winter brings in terms of weather. A cold winter could put the pressure back on and a mild winter could keep supplies intact and prices on hold. This is only a temporary dip and should be used as a long term buying opportunity for oil stocks. Fred Bergsten with the Intl Institute of Economics said today that we would likely be seeing $60 to $70 oil soon based on long term demand and current production trends.

Yassar Arafat died this morning at a hospital in France but was resurrected after lunch. News stories abounded all morning that he had died. Even Bush was asked during his morning press conference how he felt about Arafat's death. Later in the afternoon a carefully worded statement from the hospital said Arafat had not died but was in a grave condition. Rumors were flying that he was brain dead and being kept clinically alive on life support until arrangements for transfer of power had been made. The hospital said they made the statement at the request of his wife, "with respect to the discretion demanded by his wife". Another quote from a high-level Palestinian official tonight says "Arafat is unconscious and has undergone a general systems collapse. He is being aided by respiratory machines and his condition appears irreversible, but reports of his death are not true." Obviously we are all subject to the rumors in the press and we will not know the real story until it plays out but I think we can read between the lines.

Google was knocked for a loss and traded down to $180 based on current expiring lockups, evaluation concerns and a downgrade from UBS. UBS cut GOOG to a sell and set a price target of $160. 39 million shares will come out of lockup on Nov-15th and that will triple the current shares available to trade. GOOG traded to a high of $201 on Wednesday.

None of the above events slowed the post election bounce and resistance levels were breaking across the board. The Dow rallied to close at 10314 and a gain of +177 points. Resistance at 10200 and 10250 were bowled over with hardly a sign they were crossed. The longer term down trend from February is in danger of breaking and opening the way for a much stronger move higher. While it is far too soon to be projecting new Dow highs for the year or a multi month rally ahead it does look promising. The Dow has a first test of out of trend resistance at 10350 and we could easily reach that level tomorrow. Should that level be broken the next really significant resistance range is 10450-10550. That is only a days trade away from our close tonight if we could tack on one more triple digit move to the current string of gains. Unfortunately the current nine-day rebound from 9708 has added +605 points in a very short period of time. That could be stressing the realm of potential for this week.

The SPX has managed an even more impressive feat of rebounding from its 1090 low on Oct-25th to close only -2 points from a new high for the year. This is a major move and we have seen multiple resistance levels fail to make this happen. While I am very bullish on the outlook for the market as represented by the SPX I still have concerns about tomorrow. Just hitting a new high for the year at 1163 would be resistance enough but the 50% retracement level for the entire bear market drop is 1061. That is EXACTLY where the bounce on Thursday stopped. This is a major resistance point and a breakout here would be huge with no real resistance between the current level and 1250 other than a speed bump at 1075 for the 2002 resistance highs. I can't stress enough how important this resistance test will be. It is like the final hurdle in a race and having nothing but open track remaining to the finish line. Let the sprint begin!

SPX Chart

Russell Chart

Adding to this euphoria was a remarkable day by the Russell which closed at 601.63 and only five points from a new all time closing high at 606. This is a major breakout about to happen and a move over 606 will trigger the booster rockets for the current rally. Again, like the SPX this 606 level has been resistance for all of 2004 and was resistance at the top in 2000 as well. The all time intraday high was 614 in March of 2000 but 606 was the close. This is a major hurdle but I am more confident of the Russell trading higher than the SPX on Friday. Actually I would not bet on either until next week but I would happily be wrong.

I saved the worst for last with the Nasdaq tacking on a measly +19 point gain. The SOX weakness was a bitter pill for tech traders and soured their appetite for chip stocks. The Nasdaq has posted some big gains over the last month when the Dow was lagging but has failed to keep pace with the new highs of the Russell and SPX. The Nasdaq did manage to close well over 2000 and the next major resistance is 2050 with 25 point resistance increments above 2050. Nasdaq 2116 is the 25% retracement level of the bear market drop but we need another +100 points before we start worrying about that psychological trip wire.

SOX Chart

NYSE Composite Chart

One indicator of real market strength is the NYSE Composite Index. ($NYA) Because the Dow is only 30 stocks and can be significantly impacted by only one stock, like the +4.23 gain in MO today, the NYA is a better gauge of NYSE strength. The NYA closed at 6885 today and that is an ALL TIME HIGH for the index. Yes, higher than 2000, higher than any prior level. The prior high was 6812 back in Sept-2000. With the NYA in breakout mode the next resistance could be near 7100 and again at 7500. These numbers are air pockets more than real resistance based on the recent gains.

Also hitting resistance highs was the Wilshire 5000 at its 11371 close. This equals the high for all of 2004 and is also a three year high. Like I said, bullishness is breaking out all over.

Wilshire 5000 Chart

As a trader I see these resistance highs being tested across the board on the Russell, SPX and Wilshire and think logically that we should see some profit taking. One small fact always gets in the way. Logic rarely works in the markets. While I was cautious in the markets at the close today and took a winning futures position off the table I believe the risk is to the upside not the downside.

A contrarian factor was the low on the VXO this morning at 13.05. While this should have been a warning it was justified by the strong order flow to the upside. The A/D line was 6:1 advancers to decliners and the new highs hit 674 across all markets a number we have not seen since March 8th at 704. New lows were only 84. The internal strength was very strong and it was strong yesterday as well. It definitely appears a bull market rally has broken out as analysts expected. The VXO rose in the afternoon as the rally progressed and indicated traders were increasing their put buying and not entirely confident the bounce would stick. This is good news and represents a healthy market.

Oil is moving lower and terror concerns have passed with no attacks despite significant public events. Bush won and he was the market favorite for his tax cuts and business friendly positions. Traders on the floor clapped and cheered on Wednesday when news broke about the Kerry concession. Think what you want about the candidates but the market has clearly shown which it favored with the Kerry drop on Tuesday and the bounce once Bush won. A word of caution however, oil has rebounded from the 50 day average on every sell off for the last year. That average tonight is 48.70. The close was $48.75.

Crude Oil Chart

This market picture should produce some exciting days ahead. Whether or not Friday will be one of them is up for grabs. If we had a strong Jobs Report tomorrow I think the odds are good we could see some further moves higher. Even if it is weak I think the market would ignore it but a negative number could spoil the party at least for Friday. Next Wednesday is a Fed meeting but I doubt it will slow the buying. According to TrimTabs.com investors poured $1.8B into stock funds this week with $1B going into ETF stocks alone over the last three days. The fund inflows more than doubled last weeks numbers and money was coming out of bond funds and international funds. The bull is back and the bears have gone into hibernation. At least that is the way it looks tonight but two days does not make a post election market. Until the trend changes the game plan will be to buy the dips. Let's just hope the dips are small and the rebounds are strong.

Sell Too Soon!

Jim Brown
Editor



 
 



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