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Market Wrap

1175, The End or The Beginning

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      11-11-2004           High     Low     Volume   Adv/Dcl
DJIA    10469.84 + 84.40 10486.65 10386.95 1.73 bln 2352/ 870
NASDAQ   2061.27 + 26.70  2061.40  2039.74 1.80 bln 2036/1091
S&P 100   560.18 +  4.64   561.02   555.54   Totals 4388/1961
S&P 500  1173.48 + 10.57  1174.82  1162.91 
W5000   11504.42 +105.38 11511.71 11399.04
SOX       414.26 +  8.50   415.08   405.76
RUS 2000  616.30 +  6.69   616.30   609.29
DJ TRANS 3623.30 + 48.90  3627.42  3572.59
VIX        13.04 -  0.04    13.12    12.64
VXO (VIX-O)13.32 -  0.31    13.65    12.80
VXN        18.92 -  0.49    19.45    18.61 
Total Volume 3,825M
Total UpVol  2,838M
Total DnVol    958M
Total Adv  4970
Total Dcl  2264
52wk Highs  640
52wk Lows    65
TRIN       0.91
NAZTRIN    0.52
PUT/CALL   0.74

The markets finally broke out of their range and moved higher despite the lack of economic reports and the bond market being closed. The Dow inched up into very strong resistance over 10450, the Nasdaq sprinted over 2050 but the SPX came to a dead stop at 1175. This is very strong resistance and was the high for late 2001 and all of 2002. Is it the end of the rally or just the beginning?

Not much happened in the news world on Thursday with the government closed for Veterans Day but while nobody was watching a stealth rally broke out. Oil prices fell again after a Nigerian court ruled there could not be an indefinite general strike against oil companies. This knocked oil back down to the low for the day at $47.05 with only a minor rebound to close at $47.42 and -1.42 for the day. Stocks celebrated and gains were seen across the board. I do not expect this decline to continue and believe it is the result of election risk premium being removed from oil. I also believe funds are shifting dollars from oil investments they made over the summer when the equity markets were weak. The 100-day average on crude is $45 and that could be the bottom for this cycle.

Crude Oil Chart

Money continues to pour into the markets with $7.4B in inflows over the first seven trading days of November. This +$1.1B per day of inflows plus the asset allocation out of oil pushed the indexes past resistance today and we may not be done.

The Dow had been stalled at 10430 with every attempt to move over 10400 promptly slapped back down to rising support. That support had been slowly rising since the first attempt back on the 5th. Each day was a slightly higher low but still locked in the sub 10430 range. That range broke today with a breakout to 10486 and a hold at the close very near the highs for the day. The 10485 level is critical and will be the focal point for the Dow on Friday. This is the June high and a break above this level will be a double confirmation of the broken downtrend and sequence of lower highs dating back to February. The first material lower high was the September high at 10363 and we saw a week long pause over the last week when that level was broken. Just getting over 10485 is only going to be the start of a major resistance battle. The 10450-10550 range was the resistance highs from April-June and those highs may not willingly step aside as the bulls wander through.

Dow Chart

The Nasdaq finally broke a major barrier today with the fall of 2050 and the June highs. 2075-2090 is the next major battle as the Feb-Apr highs. The Nasdaq finally broke out of its trading range of 2035-2050 without any help by the SOX. This is an amazing show of strength and should the SOX decide to join the party we could have a blowout. The SOX did tack on +8.50 points but only made it back into the middle of its congestion range that has held for the last three weeks. Chip stocks are continually getting downgraded and even the bargain hunters are avoiding the sector. Until the SOX moves over 420 with conviction the Nasdaq will be stuck dragging the SOX anchor on any future climb. The Nasdaq stepping-stones from here are 2075, 2095 and 2150 with a break over 2150 setting a new high for the year and a high that dates back to June-2001.

Nasdaq Chart

SOX Chart

The hero for the day was still the Russell. It did not post the strongest gain of the indexes but the Russell did breakout to a new all time high at 616.30. It was a banner day and there was no weakness on the way. Just a nice slow ramp from the open into the close and it closed only .29 from the high of the day. This is strong confirmation that mutual funds are putting new money to work in the market. The Russell is the index of hope and where funds perceive they can get the best bang for the buck. In times of market stress funds will put money into highly liquid big caps so they can exit quickly if disaster strikes. Once they make the commitment to put money into the small caps they are there for the long term. They can't just jump in and out at will because of the size of their positions. With the Russell closing at all time highs it gives notice to shorts everywhere that funds are going long. With the Russell in blue sky territory determining resistance is an art more than a science but the nearest potential targets are 620 and 640 with a year-end target neat 700. This would be a monster move and I would seriously doubt it coming to pass. I would love to see it but that would be a +14% gain from here and we have already seen a +19.6% move from the August lows. The main point to make here is that the bulls are loose and any move higher could create a stampede.

Russell Chart

The NYSE Composite Index ($NYA) also broke out of its range and ran for a new all time high at 6950. This is confirmation that the NYSE stocks are being bought and the Dow is a definite lagging indicator. The Dow only had six stocks in negative territory today any the biggest loss was PFE at -.32. Bullish sentiment is alive and well but there was no rush out of the corral due to the low volume. Despite the low volume it was better than 2:1 in favor of advancers and up volume was better than 3:1 over declining volume.

Offsetting this bullishness was a drop in the VXO to close at 13.31 and while not at the September lows at 12.50 is suggests the bullish bias is reaching extreme levels. During breakout rallies this index can reach abnormal lows and I don't think it is time to worry yet. This low volatility allows traders to protect long positions with puts at a very inexpensive price. A break under 12.50 could be the sign the bull is peaking.

The most critical index for the day was the SPX which came to a dead stop at 1175. This is monster resistance that dates back to the post 9/11 bounce which failed at 1176 and the high for all of 2002 at 1174. This is major long term resistance but I think it will be broken. The rebound is gaining strength after four days of consolidation and I believe it is about to make another leg higher. If the SPX does break over 1175 on strong volume and the ER continues higher at the same time then it is lights out for the bears. This is a key level that I cannot stress enough. If it breaks then the Dow congestion from 10450-10550 should be only a soft patch and quickly overcome.

SPX Chart

After the bell tonight Dell reported earnings that were inline with estimates at 33 cents and guided inline with prior estimates for +24% growth for 4Q earnings. Initially Dell traded down about -50 cents but ended the late session at $38.02 and a new four year high. The CFO reiterated their current outlook of hitting their $60 billion a year revenue target in FY2006 a year earlier than previously expected. Notebook sales jumped +35% and double the industry rate. Growth was still stronger overseas than in the U.S. Dell said it was only seeing normal seasonal growth for the 4Q and no real increase in IT spending.

Pixar also reported blowout earnings of 38 cents and well over estimates of only 24 cents. They raised estimates for the full year by 15-25 cents and were very positive across the board. At one point PIXR was up +4 in after hours but ended up +2.68.

BEAS also beat the street by a penny and guided slightly higher BUT said they were not seeing any pickup in IT spending for the 4Q. Normal seasonal patterns had returned but no real jump in demand.

In another development Dell CEO Kevin Rollins said Dell was considering using AMD chips in some of its high end servers because "some AMD products are more advanced". He quickly said the decision had not been made and they were still a 100% Intel shop but the news had already escaped. The comment puts the Intel train at risk of a derailment if Dell decides to split the shop. Dell is the only manufacturer that has not broken from the Intel fold. AMD was up strongly for the day and up slightly in after hours. Ironically Intel was also up in after ours.

Microsoft announced their new search engine today at MSNSearch.com and the reviews were weaker than most had expected. MSN has only indexed 4 billion pages where Google has over 8B. The current MSN search engine is the first phase of an attack on Google and Yahoo and according to Microsoft it will evolve rapidly. The less than spectacular showing gave GOOG a boost as traders had expected the worst. One CNBC interview with the WSJ new products tester Walt Mossberg gave GOOG a +4 point bounce before the interview was even over. Walt said the MSN search engine would be good but it was currently no Google and mentioned several other points that relieved investor fears. GOOG ended up +15 for the day at $184.50 after trading as low as $167.57 earlier in the day. Shorts got crushed again but what else is new?

For Friday volume should return and the overnight futures have lost their initial negativity and are suggesting we will open higher. Economics will again come into play but they are expected to take a back seat to bullish sentiment. For tomorrow there is Retail Sales, Business Inventories and Consumer Sentiment but the real key is SPX 1175. Once we move over that level on real volume the economics will be forgotten. Should we get a dip I would see it as a buying opportunity. One word of technical warning. All indications point to a continued rally BUT we are very overbought. It would be easy to make a case for a small pullback but the strong bid underlying the market just won't go away. Just be aware a sharp dip could come at any time so you won't be surprised when it eventually appears.

Sell too soon!

Jim Brown
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