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Market Sentiment, Sunday, 07/04/2004

Mixed Emotions
By James Brown

All the traders not yet on holiday with the extended Fourth of July weekend can breathe a sigh of relief. Despite an incredibly busy week where the markets endured the Russell 2000 reshuffling, the Iraq handover of power, the two-day FOMC meeting and decision on interest rates, the Friday non-farm payrolls report and a wave of disappointing economic reports, stocks remain widely stuck in their month-long trading range.

Yes, it was rather anticlimactic. We endured all of these "market moving" events and yet the markets didn't move - not just for the week but for the year. The NASDAQ and the S&P 500 are marginally up for the year while the Industrials are negative but less than 200 points from their 2003 close.

Looking ahead it's hard to judge investor sentiment. There are conflicting factors for both short-term and long(er)-term time horizons. Short-term the broader NASDAQ and S&P 500 are near the bottom of their trading range and technicals look bearish. The Industrials are actually just under the bottom of its month-long trading range. Technically the ARMS index or TRIN is showing a bullish/oversold reading on its short-term 5-dma. Yet volatility indices remain near their lows indicating traders are too bullish for stocks to mount any sort of extended rally. Plus the sudden rise in oil has damaged expectations for a future drop in fuel prices to ease inflation and boost consumer discretionary spending. Hopefully the recent two-day drop in the stock market and the rise in oil is merely investor fear and/or speculation over a terrorist event during the long holiday weekend. If the weekend passes peacefully then oil may slip lower again.

Short-term one might expect traders to gear up for what should be a strong Q2 earnings season. Unfortunately, investor confidence has took a beating on this one with a rash of painful earnings warnings. Yet on the positive side the beginning of July is supposed to see retirement money inflows from the recent quarter end filter into stock prices. I think we haven't seen that yet because of investor caution ahead of the weekend. July also happens to be the best month out of the third quarter for stocks in general. On the flipside July may be the best month out of the third quarter only because August and September are historically that much weaker. As I mentioned in the wrap on Wednesday July begins the worst four months of the year for the NASDAQ.

Longer-term investors should be encouraged that the economy has been able to maintain its trend of growth. The U.S. economy is working on its 12th consecutive quarter of growth. Businesses have added more than one million jobs since last August. It was only a few quarters ago that the pace of growth hit 20-year highs. Of course therein lies our problem for the second half of 2004. Growth was so strong in the second half of 2003 that earnings comparisons are going to be extremely tough to beat. That's why this Q2 earnings season may be challenging. Corporations are expected to easily surpass last year's numbers but their guidance going forward will be the determining factor for the second half of July and probably all of August.

One point of view I heard on Friday made a lot of sense. The markets have already accepted a rising interest rate environment. Investors expect rates to rise because the economy is improving. Yet what if the economy isn't improving. We've heard and seen a number of reports that show growth has been slowing. The rate of job growth has also been declining for three months in a row. Now we're moving into the third quarter a.k.a. the slowest quarter of the year. If you view the market from this point of view there isn't a lot of eagerness to buy stocks.

This isn't a new idea. Jim has been discussing lower earnings expectations and weaker comparisons for the third and fourth quarter for weeks. If earnings growth slows down it's only natural to see the stock market slow and/or decline. Earnings have always been the main market driver and that's why you hear so much lately about how "quality" stocks will be the winners in the second half. But don't start looking at those January put options yet. Job growth is expected to pick up again as we move deeper into the second half. Plus, I mentioned on Wednesday that the S&P 500 historically rises an average of 8% in the first six months after the Fed begins a tightening cycle on monetary policy. Plus, we have the historical trend for stocks to perform well in the last seven months of an election year. Of course this last trend may be challenged. There is so much uncertainty regarding the 2004 elections that stocks might be stuck in wide trading range through Thanksgiving.

Enjoy your long weekend, your hard won freedoms and say thank you to the men and women in uniform who help defend it!

Market Averages


52-week High: 10753
52-week Low :  8871
Current     : 10284

Moving Averages:

 10-dma: 10373
 50-dma: 10250
200-dma: 10169

S&P 500 ($SPX)

52-week High: 1163
52-week Low :  960
Current     : 1125

Moving Averages:

 10-dma: 1134
 50-dma: 1119
200-dma: 1099

Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1204
Current     : 1481

Moving Averages:

 10-dma: 1489
 50-dma: 1452
200-dma: 1443


CBOE Market Volatility Index (VIX) = 15.08 -0.12
CBOE Mkt Volatility old VIX  (VXO) = 15.21 +0.13
Nasdaq Volatility Index (VXN)      = 19.89 -0.17

Put/Call Ratio Call Volume Put Volume Total 0.81 559,886 453,271 Equity Only 0.71 459,413 325,758 OEX 0.69 22,288 15,544 QQQ 3.10 32,169 99,994
Bullish Percent Data Current Change Status NYSE 67.1 + 0 Bear Confirmed NASDAQ-100 50.0 + 0 BULL ALERT Dow Indust. 70.0 + 0 Bear Confirmed S&P 500 65.6 + 0 Bear CORRECTION S&P 100 67.0 + 1 Bear CORRECTION Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend
5-dma: 1.62 10-dma: 1.28 21-dma: 1.11 55-dma: 1.10 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points.
Market Internals -NYSE- -NASDAQ- Advancers 1725 1423 Decliners 1092 1522 New Highs 118 84 New Lows 30 39 Up Volume 470M 317M Down Vol. 807M 838M Total Vol. 1292M 1187M M = millions
Commitments Of Traders Report: 06/29/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 It would appear that no one wanted to make any big bets this week with the Iraq handover, the FOMC meeting and the Jobs report. Commercial traders remain slightly bearish and small traders remain bullish. Commercials Long Short Net % Of OI 06/01/04 406,665 421,681 (15,016) (1.8%) 06/08/04 397,294 452,904 (55,610) (6.5%) 06/15/04 428,905 444,197 (15,292) (1.8%) 06/22/04 407,842 415,462 ( 7,620) (0.9%) 06/29/04 405,273 413,351 ( 8,078) (0.9%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 23,977 - 12/09/03 Small Traders Long Short Net % of OI 06/01/04 137,100 79,583 57,517 26.5% 06/08/04 158,373 92,794 65,579 26.1% 06/15/04 169,595 115,336 54,259 19.0% 06/22/04 124,985 89,934 35,051 16.3% 06/29/04 129,978 94,535 35,443 15.7% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Commercial traders have tempered their bearishness a bit but they remain very bearish on the e-minis. Likewise small traders are still very bullish. One group is going to be terribly wrong here and odds are in favor of the big traders. Commercials Long Short Net % Of OI 06/01/04 325,865 325,274 591 0.0% 06/08/04 367,191 409,246 (42,055) (5.4%) 06/15/04 440,867 522,546 (81,679) (8.5%) 06/22/04 229,290 446,974 (217,684) (32.2%) 06/29/04 258,443 447,505 (189,062) (26.7%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 133,299 - 09/02/03 Small Traders Long Short Net % of OI 06/01/04 111,484 90,625 20,859 10.3% 06/08/04 140,191 84,649 55,542 24.7% 06/15/04 216,759 147,247 69,512 19.1% 06/22/04 243,444 58,389 185,055 61.3% 06/29/04 236,492 47,780 188,712 66.3% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders are relatively neutral on the NASDAQ-100 with a small bullish bias. Meanwhile small traders have turned a bit more bearish on the group. Commercials Long Short Net % of OI 06/01/04 59,944 34,784 25,160 26.6% 06/08/04 64,747 41,178 23,569 22.3% 06/15/04 78,542 54,341 24,201 18.2% 06/22/04 40,397 37,413 2,984 3.8% 06/29/04 41,078 37,194 3,884 4.9% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 25,160 - 06/01/04 Small Traders Long Short Net % of OI 06/01/04 9,755 30,025 (20,270) (51.0%) 06/08/04 9,716 29,594 (19,878) (50.6%) 06/15/04 15,794 35,880 (20,086) (38.9%) 06/22/04 9,311 9,950 (639) ( 3.3%) 06/29/04 7,437 11,904 (4,467) (23.1%) Most bearish reading of the year: (20,270) - 06/01/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Not much change for the commercial traders. They remain bullish on the Dow Industrials. Small traders have turned a little more bearish on the index. Commercials Long Short Net % of OI 06/01/04 23,397 24,393 ( 996) (2.0%) 06/08/04 24,636 25,821 (1,185) (2.3%) 06/15/04 30,438 24,766 5,672 10.3% 06/22/04 26,808 19,752 7,056 15.2% 06/29/04 27,278 20,512 6,766 14.1% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 06/01/04 9,000 6,021 2,979 19.8% 06/08/04 8,325 6,431 1,894 12.8% 06/15/04 13,942 20,953 (7,011) (20.1%) 06/22/04 5,626 7,798 (2,172) (16.2%) 06/29/04 4,930 7,682 (2,752) (21.8%) Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03


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