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Market Wrap

Tension Mounting

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      11-09-2004           High     Low     Volume   Adv/Dcl
DJIA    10386.37 -  4.90 10427.81 10368.59 1.83 bln 1812/1409
NASDAQ   2043.33 +  4.10  2049.77  2034.41 1.76 bln 1740/1372
S&P 100   556.90 -  0.40   559.45   556.06   Totals 3552/2781
S&P 500  1164.08 -  0.81  1168.97  1162.48 
SOX       415.80 -  2.80   419.52   413.79
RUS 2000  606.64 +  4.56   607.00   601.27
DJ TRANS 3587.71 +  5.70  3599.37  3576.59
VIX        13.61 -  0.19    13.96    12.89
VXO (VIX-O)13.64 -  0.28    14.18    13.49
VXN        19.19 -  0.03    19.50    18.84 
Total Volume 3,895M
Total UpVol  1,854M
Total DnVol  1,958M

Total Adv  4023
Total Dcl  3189
52wk Highs  449
52wk Lows    63
TRIN       1.10
NAZTRIN    1.46
PUT/CALL   0.68

After three days of trading at the highs but seeing no forward motion there are quite a few traders beginning to worry that the bounce is failing. The Dow continues to spike over 10400 but cannot seem to hold the high ground. The SPX has posted three lower highs on its attempts to break 1168. Is this a breakout waiting to happen or a breakdown in progress?

Dow Chart

Nasdaq Chart

Economically there were no reports to add to the high excitement from Friday's Jobs Report. The Job Opening and Labor Turnover Survey (JOLTS) showed no real change in hiring. However this report covered the September time frame and was trumped by the later period Jobs Report for October. However, because this jobs data comes from a different survey the lack of confirmation from JOLTS does cause some concern. This less positive picture showed an increase in separations that were not matched by increased hiring trends.

The Richmond Fed Manufacturing Survey showed a slowing of manufacturing in the region to the slowest pace since July. At 14 the headline number still indicates growth but well below the 22 posted in September. The order backlog was -5 and only a minuscule improvement from the -6 in September. New orders at +3 fell from +8 to move very close to negative as well. Shipments fell to a three month low at 14 from a six month high of 22 in September. However, the six month outlook jumped to 35 from 21. Amazing that all the production indicators can fall substantially but the outlook was raised. There was no hiring in the region and the avg workweek fell.

Wholesale Trade rose less than expected at +0.5% and well below the +0.9% from last month. Inventories also rose +0.5% and less than the +1.1% in August. This was the first time in five months that inventory expansion failed to keep pace with sales. Inventory to sales remains at 1.15 as it has for the last four months. The inventory component fell but is not expected to be a drag on GDP until 2005. There seems to be a common theme in the various reports that 2005 could be an economic challenge.

While the economics were mixed to weak most investors were not focused on the boring reports. If anything they were focused on the FOMC meeting tomorrow and the lack of a breakout after such a great post election start. There is a 100% chance of a 25-point rate hike that will bump the rate to 2.0%. The outlook statement is more of a key than the rate hike unless they bump it up +50 points. Because of the strong jobs report there is some concern the Fed could raise the stakes with their statement or even vote for a 50 point hike tomorrow. Almost nobody expects more than 25 points but there is always the fear. The next meeting is on Dec-14th and there is an 81% chance of another hike to 2.25% at that meeting. There are two meetings in Q1-2005, Feb-1st and Mar-22nd. There is nearly a 100% chance of a hike in February and a 25% chance of a hike in March. If jobs remain strong that could put us back to 2.75% in March. Almost everyone expects the hikes to quit in 2.50-3.00% range and all eyes will be on the statement to see if this expectation has changed.

The fear of the Fed in light of the blowout jobs report has put the bulls back in the corral. The major indexes all screeched to a stop at critical resistance and have failed to continue the monster bounce. In all fairness they have failed to sell off as well but worry is beginning to weigh on the indexes.

SPX Chart - Daily

SPX Chart - Weekly

The most visible is the SPX which finally broke the 50% bear market retracement level at 1161. Unfortunately it came to a dead stop immediately after it crossed that level. Beginning on Friday the SPX has now tried three times to break through 1170 to no avail. There have been two lower highs below 1170 but 1162.50 has held as solid support. Considering the very strong gains and the critical levels reached this is a very good sign. 1172-1176 was the resistance high for all of 2002 and this is very strong resistance. When taken together the 1160-1175 range is the highly visible line in the sand that must be crossed for the rally to continue and both sides know it. This would be the key level to predict a failure if a failure was in the cards.

The Dow is facing a much smaller battle at 10400-10420 and compared to the last two months of Dow declines the Dow is doing a very good job of holding the high ground. The Dow has run nearly +700 points since the 9708 lows back on Oct-25th. +700 points in nine trading days is a very strong run that leads to very overbought conditions. Those conditions appear to have led to a consolidation in place instead of a profit taking dip.

The Nasdaq is facing a task similar to the Dow at 2050. This is the resistance high from late April and June and while decent resistance it is not as critical as the SPX is currently facing. The Nasdaq is actually showing more of an uptrend over the last three days than the Dow/SPX. The Nasdaq is not being supported by the SOX with that index hovering in a flat line around 415 and not showing any indications of moving higher. No uptrend help there but 410 is strong support that should keep the Nasdaq from imploding.

SOX Chart

Russell Chart

The Nasdaq is gaining significant uptrend support from the Russell. The Russell closed at an all time high today at 606.64. This is above the 2000 bull market highs and should be a clear sign the rally is still alive. This high was only a quarter of a point over the prior record so it is not a resounding breakout. Still it is a clear sign mutual funds are moving into the market while we wait on the Fed.

TrimTabs.com said today that $2.4 billion came into U.S. equity funds for the first week in November. $1B flowed into global funds and a whopping $3.6 billion was added to exchange traded funds. The +$7B in new cash helped produce our post election rally and we are still seeing new cash flows hitting the small caps. At least it was today.

After the bell Cisco reported earnings inline with estimates at +0.21 cents and said inventory problems were beginning to ease. This should have been good news but Cisco's outlook was less than exciting and revenue was slightly lighter than expected. Orders trailed shipments and Cisco said competition was growing. They said revenues would increase only +1% to +3% over last quarter but that was below current analyst estimates. Cisco only managed to report inline with estimates due to better than expected cost savings and continuing stock buybacks. Cisco said there was a growing impact by low cost Asian competitors. Despite the cautious comments and outlook Cisco still generated $1.5B in cash for the quarter and raised their cash account to $17.7 billion. That is nearly -$2 billion lower than last quarter due to the aggressive share buy back program. Margins are continuing to fall as a result of more sales in the lower priced products. The company cut orders to suppliers for Q4 by -$106 million because of their reduced outlook. Cisco also announced they were increasing their current share buyback program by $10 billion. They must really expect Q4 to be a strong challenge and need to drop the outstanding shares by a bunch. Most analysts and probably most investors would rather see them spend $10 billion on acquisitions that would grow them out of their rut.

The current earnings cycle is nearly over with Dell and HPQ the only two major techs left to report. Dell reports on Thursday and HPQ reports next Tuesday. The running total for the 90% of the S&P that have reported is +15.1% earnings growth and +11.9% revenue growth. It the remaining 10% of the S&P reports inline the total for the quarter will be +16.7% earnings growth.

Crude Oil Chart

The Cisco earnings tonight tanked the futures but the dip was brief. They rebounded after Cisco said revenue could rise slightly and it appeared to be a case of expectations being worse than even the lukewarm results. This suggests we could have yet another mixed session at the open as we await the Fed statement at 2:15. Oil prices have imploded with a $47.17 print overnight and a nearly -$2 drop intraday. The falling oil prices should be helping equities but stocks could not break out of their range today. With Cisco behind us and the Fed almost a footnote we could see the bids begin to pick up again.

I remain bullish on the market but fully aware we could see profit taking at any time. However, the last two days would have been prime opportunities for sellers to appear and they were conspicuously absent. I still advocate buying the dips and should a breakout over SPX 1170 appear I would not hesitate to go long there as well. The official target for the year-end is SPX 1250 but what happens if we get there early is still a guess. Mutual funds are very worried but it is not about the weak dollar, oil prices, trade deficit or rising interest rates. They are worried they will miss the rally and get beaten by somebody else in the great returns race. We are facing true performance anxiety and I believe that will provide the eventual end of year rally. I believe it is a breakout waiting to happen and funds will not allow us to breakdown. So far this year most funds are just barely positive and they need to collectively juice the tape to produce gains everyone can feel good about advertising.

Enter Passively, Exit Aggressively.

Jim Brown


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