Option Investor
Market Wrap

On The Verge of a Breakout?

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      11-18-2004           High     Low     Volume   Adv/Dcl
DJIA    10572.55 + 23.00 10585.26 10547.39 1.85 bln 1582/1609
NASDAQ   2104.28 +  4.60  2105.39  2089.48 1.93 bln 1477/1640
S&P 100   565.97 +  0.25   567.12   565.00   Totals 3059/3249
S&P 500  1183.55 +  1.61  1184.90  1180.09 
W5000   11608.55 +  7.67 11618.71 11572.94
SOX       445.64 +  5.80   445.94   433.36
RUS 2000  622.06 -  0.91   623.17   618.84
DJ TRANS 3612.22 + 11.80  3618.54  3598.74
VIX        12.98 -  0.23    13.29    12.96
VXO (VIX-O)13.95 +  0.31    14.52    13.87
VXN        18.79 +  0.29    19.03    18.44 
Total Volume 4,096M
Total UpVol  2,305M
Total DnVol  1,735M
Total Adv  3552
Total Dcl  3657
52wk Highs  330
52wk Lows    53
TRIN       0.94
NAZTRIN    0.49
PUT/CALL   0.62

As OpEx week comes to a close the SPX is poised to move higher after a week of moving sideways. Last Thursday we saw the SPX come to a dead stop just under resistance at 1175. Friday saw a breakout to 1183.50 and after a week of trading the SPX closed today at 1183.75. This completes the third consolidation pause for the current rally. That means Friday could be pivotal for market direction and with the rising underlying bid that direction may be up.


Nasdaq Chart

SPX Chart

The concept of a new leg higher may be in sharp contrast to the economics we saw today. There are some seriously conflicting views of the economy as we rush towards the year end. The Jobless Claims came in as expected and provided no economic jolt with the continuing claims slipping slightly and helping the outlook for new jobs are being created. We are about two weeks away from the November payrolls and the estimates have not yet begun to fly. After last months +337,000 gain it will be hard to beat but investors would be happy with anything in the 200K range or higher. 150K is the minimum acceptable new jobs level because that is the number of new workers entering the labor force each month. We need 150K per month just to break even.

Today's economic weakness began with the Conference Boards Leading indicators which fell for the fifth consecutive month. This was an October number at -0.3% and the September drop was revised down to -0.3% also making October the fourth consecutive month of -0.3% declines. This steady stream of progressively lower readings for five months is the first time since 1995 the indicators have posted a five month decline. There are several factors contributing to this meltdown. The ten-year treasury yield has fallen consistently despite the Fed rate hike cycle currently underway. Manufacturing employment numbers are also pushing the index down as hours worked decline and new orders decline. Remember this was an October number and pre election. There has been a spurt in hiring and investment since the election and the November report could show a significant reversal in the trend.

Another weak report came from the Philly Fed Survey at 20.7. This was a drop from 28.5 in October and well below the consensus of 23.5. The Philly Fed number has been very volatile recently with a drop to 13.4 in Sept and a bounce to 28.5 in Oct. The return to 20.7 is a continuation of the decline started earlier this year. All production components except for employment fell including New Orders, Shipments, Prices Received and Prices Paid. Delivery Times, Back Orders and Inventory levels all slipped into negative territory. The only component to show a major improvement was the Six Month Outlook which exploded from 27.6 to 52.1. Considering the drops in all the production components it appears just getting past the election has improved spirits dramatically.

There are no material economic reports on Friday and we will be left to trade on sentiment and stock news. That stock news will feature tonight's earnings from DIS, ADSK, MRVL, GPS and MSCC.

Disney beat estimates by a penny on a +24% rise in profits and projected double digit earnings growth for the next few years. Some say it appears Disney has turned the corner and could be about ready to break resistance at $27. ADSK beat earnings by +3 cents and announced a 2:1 split to kick off a +$4 gain in after hours. They also raised estimates for the current quarter.

The Gap announced earnings inline with estimates at 28 cents and said they were going to buy back $750 million in shares. MRVL beat estimates by a penny and projected +5% to +7% growth for the 4Q. DITC beat estimates by +8 cents and SRNA blew away estimates of 21 cents with a 35 cent headline number. That number did include some special items.

Not all the earnings were positive with ELBO beating by a penny but warning that revenue and earnings would be below estimates for the 4Q. ELBO dropped more than $3 in after hours but recovered much of it before the session ended.

SIRI saw a spike of +$1 after it was announced that Mel Karmazin, former president of Viacom, is joining SIRI as CEO. With Karmazin and Howard Stern making the SIRI commitment the struggling satellite radio company is rapidly gaining respectability. Tough to use the words Howard Stern and respectability in the same sentence but in this case it applies.

GOOG dropped -4.96 after warning for the second time this week that revenue growth would probably decline in the fourth quarter because of intensifying competition and the "inevitable" slowdown as the business gets bigger. It also warned that ad revenue would slow as it removed online ads that generate low levels of interest. Two warnings in one week could be a sign that earnings are going to disappoint for the current quarter as the extreme projections generated during the IPO process and the thousands of pages of print hype are tested by reality. The $167 close was the lowest close since Oct-21st. 39.1 million shares were released for trading on the 16th and tripled the prior float of about 19m shares. Another 25 million will be released four weeks from now on Dec-16th, 25 million on Jan-16th and 179 million on Feb-16th.

Google Chart

Intel continued its upward march after CEO Craig Barrett said Intel was on track for much better operational performance in the first half of 2005 than 2004. This is a positive step up from the 3Q earnings guidance where Intel said 4Q sales would be only "seasonal" and with lower gross margins. Intel spiked +50 cents and helped power the SOX to new breakout highs at 445. Intel is pressing resistance at $25 and accelerating.

The SOX breakout to 445 the day after AMAT said orders could be down -35% is positively amazing. AMAT itself closed up +31 cents at $17.69 after dropping to $16.50 at the open. The bulls are back and bad news is being ignored once again. The SOX recovery after the AMAT news may be the final nail in the coffin for the bears. The SMH shares moved higher in after hours trading to $35 on news from MRVL, MCDT and MSCC.

SOX Chart

During today's session the Dow crept higher but stalled at 10585 and just under Wednesday's 10600 resistance high. We have a strong pattern of higher lows as the consolidation band narrows and the underlying bids move higher. A break over 10600 would target the high for the year and a three year high at 10750. With the historically bullish Thanksgiving week ahead the odds are good we will see that test soon.

The Nasdaq is also slowly pressing higher. The close today over 2100 puts it one step closer to the high for the year and a three year high at the January 26th close of 2153. All the interim highs since January have been surpassed and there is no slowing in the uptrend. We are not making 30-40 point moves but each day is another rung on the ladder. 2250 is the commonly quoted end of year resistance target.

The Nasdaq saw support from the SOX today and the new breakout high but the Russell closed negative after a bout of profit taking intraday. A morning sell program knocked the Russell back to 618 and -10 points from its 628 high on Wednesday. The Russell has had a great run and it is only normal to expect some funds to take some profits and shift the money into other issues. I suspect there was some money moving from small caps to chips on the strength of the SOX rebound.

With oil still holding at the lows and just over the 100day average at $45.75 there is nothing to keep traders from buying stocks. Yes they are overbought. Yes they are at or near the highs for the year and at key resistance levels but the race is on. The race for mutual fund profits is feeding cash to the markets at a frenzied pace. TrimTabs announced after the bell today that $5B in new cash flowed into funds for the week ended on Wednesday. TrimTabs said cash was flowing into funds at a pace not seen since the tax deposits hit the markets in April. Since funds have to put that money to work they have to keep buying stocks. They can't afford to sit on cash and have to tell their investors in January that they missed another +1000 point Dow gain because the market was overbought. (At least they hope it will be another +1000 point gain.) With 12500 the year end target taking shape in many analyst interviews there is still money to be made in their view.

This all assumes the greater fool theory is still alive and well. Everyone buying stocks at the highs for the year are hoping there will be somebody left to sell to in January. Next week is Thanksgiving and it is normally bullish through the Monday after turkey day. Then we move to the January effect rally which actually occurs the first two weeks of December. Normally this is when losing small caps get sold in the last two weeks of December for tax purposes and then bought again the first two weeks of January when new money hits the markets. However, in recent years this process is said to have moved to the first two weeks of December as everybody tries to beat the rush in order to buy the dip ahead of the Santa Claus rally. Confused? In reality the January effect has blurred over the last few years as all of December has turned into a bullish session. But, there I go worrying about the future when all we need to do is get through Thanksgiving rally first then worry about the next step. Those that really want to toss in their sleep tonight could worry if the Thanksgiving rally will appear or will the funds use that historical trend to take profits from the last three weeks. See, you can really drive yourself crazy if you start trying to outwit the market. In my case it is not a very long drive.

Sell too soon!

Jim Brown


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