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Market Wrap

Get the Bug Spray

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  1/27/2005   High Low Volume Adv/Dcl
DJIA 10467.4 -31.2 10498.14 10429.94 1.98 bln 1761/1428
NASDAQ 2047.15 1.1 2053.94 2036.09 2.12 bln 1501/1568
S&P 100 562.36 0.58 563.59 560.01 Totals 3262/2996
S&P 500 1174.55 0.48 1177.5 1170.15  
SOX 403.67 3.6 404.18 397.59  
RUS 2000 616.9 0.33 620.39 614.33  
DJ TRANS 3554.12 16.7 3557.5 3523.96  
VIX 13.24 -0.2 13.57 12.96  
VXO (VIX-O) 12.78 -0.29 13.34 12.76  
VXN 18.58 -0.34 19.13 18.39  
Total Volume 4,351M        
Total UpVol 2,392M        
Total DnVol 1,915M        
Total Adv 3735        
Total Dcl 3414        
52wk Highs 246
52wk Lows 73
TRIN 1.22

The caterpillar ate the gains today and single-handedly turned the market sentiment back to negative. After the opening dip was bought and we started off on a second consecutive day of gains CAT earnings killed the rally. CAT lost -4.60 for the day and that equals well over -30 Dow points. Considering the Dow closed down -31 it was the difference between a gain or a loss for the index. Got any bug spray.

Dow Chart - 180 min

SPX Chart

Nasdaq Chart

Caterpillar blamed their earnings drop on higher material costs despite higher sales and higher prices on those sales. Over the last year steel has risen +105%, copper +37%, oil +33%, aluminum +25% and lead +40%. In is tough to be in the heavy equipment business with commodities rising so quickly. Considering 90% of every product they sell is made of steel a +105% rise in the cost of steel would be tough to pass on to customers. In retrospect CAT still had a respectable quarter and their only sin was missing analysts estimates by eight cents. Posting earnings of +$1.55 for the quarter should never be seen as a negative. Needless to say all the other equipment manufacturers regardless of sector felt the pain of investor flight.

On the economic front all the news was good and that added to the morning bounce. The Jobless Claims rose only +7,000 at 325,000 and only slightly over last week's abnormally low number. It appears the multi month low was the real deal and jobs are growing. This suggests we will see a strong Jobs report next Friday. It also suggests the Fed may be feeling the pressure to raise rates faster if jobs are strengthening.

The Conference Board Help Wanted Index rose to a six month high at 38 and a +2 point jump from the prior months cycle low of 36. This also suggests the jobs report could be stronger. This report is contrary to the Mass Layoff report on Wednesday that rose to announced layoffs of 161,271 for the December period. This was a strong bounce of +31,000 over November but we need to remember that December is a normal layoff month for seasonal workers.

Rounding out the economic picture was the Durable Goods number for December which posted a +0.6% gain and only slightly under estimates for +0.7%. November was revised up to +1.8%. Orders for communications equipment surged +17% in December and rebounded from their -39% drop in November. This sector has been very volatile of late with double digit swings. Computers and related products surged +8.8%. The only real weakness in the report was a broad based slow down in new orders.

These reports continue to paint a mixed picture of the economic recovery. One day we see the manufacturing surveys posting major setbacks and the next day all reports are positive. There is definite turmoil in the economy and real indecision as to the future. On Friday we will get the GDP for Q4 and the estimate is for a +3.4% gain. There are whisper numbers as high as 4.5%. Some analysts feel the Microsoft dividend could have added as much as +1% to the GDP and it is not being factored into the consensus estimates.

After the bell today move than 75 companies reported earnings with Microsoft the big name. Microsoft reported earnings that more than doubled over Q4-2003 and sales that increased +6.5%. MSFT beat the street by two cents but they way they reported it caused some serious volatility. Initially it appeared they missed estimates but after the smoke cleared and all the adjustments were made it was a clear win. The Xbox business is booming as well as software sales in both the consumer and corporate sales. Microsoft raised guidance for both earnings and revenue for the next quarter and the full year. Microsoft earned +$3.46 billion for the quarter. That is a serious chunk of change and a blowout quarter. While Microsoft was glowing about the gains you have to wonder how much of those gains were related to the PC sales spurred by the 2004 tax credit. That credit expired on 12/31 and those wishing to take it had to buy equipment before that deadline. Confirming that premise Microsoft server product sales jumped +18% in the last quarter. Given the weak economic conditions this was a huge jump.

SanDisk also reported blowout earnings of +42 cents when analysts were expecting only +27 cents. Shares jumped +$4 after the report. Given the recent flood of stories claiming over production and lower sales this was a very good report. SNDK did guide flat to lower for the current quarter as we wade through that excess inventory in flash memory products.

The real superstar was MicroStrategy. (MSTR) The company reported earnings of +$1.43 with analyst estimates of only 88 cents. MSTR has been a short favorite since its earnings in October caused a +$14 spike in the stock price. It held the majority of those gains for the quarter although we did see some profit taking over the last month. MSTR saw a +$3 gain today as some shorts took the safe route and exited before earnings. Those were the smart traders. After tonight's earnings MSTR jumped another +$15 and those traders still short are feeling the pain again. Profits more than doubled over last year and it definitely appears their problems are over. MSTR fell to $5 in late 2002 and was temporarily halted from trading on the Nasdaq under the MSTR symbol in August 2002. The low for 2004 was $30 and it is trading at $76 in after hours. I am sure everyone reading this bought a couple thousand shares at $5 back in 2002 and you are still holding it. What? You thought they were going bankrupt on the accounting scandals? I am sure quite a few traders are kicking themselves tonight for selling at the bottom.

Semi stocks were well represented tonight with quite a few announcing earnings. Broadcom was probably the best well known and they announced inline with estimates or a penny better depending on who you listen to. NVLS beat the street by +3 cents, CHRT +8, MSCC, ADPT and PMCS reported inline, VSEA missed by -6 and SANM by a penny. Semi stocks traded mostly higher in after hours.

The biggest loser of the day was Overstock.com. OSTK beat estimates by +5 cents but was killed in after hours dropping -$9. The company said margins were not likely to rise above 15% and any future savings would not be passed along to investors. The CEO said any future savings would be used to further the price war with Amazon. Both companies are chipping away at margins in an effort to hold market share.

Oil continues to hover just below $50 but is showing a little weakness ahead of the OPEC meeting this weekend. In an interview today the president of OPEC again said he did not expect a production cut at this meeting. China oil demand growth rates of +14% to +15% were again discussed and he tried to downplay that possibility. He was very elusive on prices but said he did not expect a material decline given the current demand growth and the various geopolitical factors. You can read between the lines there. He did confirm he expected a dip in prices as the heating oil demand in the U.S. slowed with the advent of spring.

The markets began the day mixed with the Dow in trouble from the start. It was never able to return to the 10500-10510 resistance level and fought to hold 10440 support. The Dow has what some are calling a head and shoulders with 10440 the neckline. If that is correct then another breakdown to 10400 could be the start of a significant decline. I would like to think 10440 will hold but it may be wishful thinking at this point.

Since January began the Nasdaq has not posted a three-day gain until today. Even with this minor gain the Nasdaq is still under downtrend resistance at 2055 and weak. The poor showing today could have been a direct result of earnings fear after the close with over 50 tech stocks reporting. While most were better than expected the guidance was mostly flat to down. There were highlights and lowlights but overall the outlook is still cloudy. For the last week we have been stuck in the 2020-2060 range and futures tonight are not suggesting a strong bounce tomorrow. I believe investors are very confused. They see these tech stocks post winning numbers but there is no improvement in sentiment.

The Russell led the bounce yesterday and today but took a beating this afternoon as several sell programs knocked off points. The Russell has been trading in the 605-625 range since Jan-5th and while it appears to be trying to form a bottom every major bounce is sold.

The SPX is still the weakest link as it cannot get back over my 1175 line in the sand. For four days now the SPX has attempted to break back over that resistance with no success. With stronger resistance at 1195 just breaking out from its current range will not confirm a new rally.

TrimTabs said tonight that U.S. equity funds saw outflows of -$747 million for the week ended on Wednesday. This was a reversal of the meager inflows of +$161 million the prior week. The month is not shaping up well and there is no reason to suspect a material rebound. As investors we need to not try and pick a direction while the market decides which way it is headed. We have already seen historical trends evaporate and trying to pick a direction in this range bound muck could be dangerous. My recommendations are still the same. Small long positions over SPX 1175 until the breakout confirms by moving over 1195. Flat under 1175 and short under 1160. Until a direction appears cash is still a position.

Enter Very Passively, Exit Very Aggressively!

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