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Market Sentiment, Sunday, 10/12/2003

Earnings Upon Us
By J. Brown

The first week and a half of October has come and gone and the traditional seasonal weakness is no where to be seen. The preceding weeks of positive prognostications for Q3 earnings have lifted the markets and now it's finally show-and-tell time. Will profits be as good as everyone expects? Will corporate guidance support the lofty expectations for Q4 results? The answers will dictate market direction even if we do see some profit taking on the initial announcements.

The bulls are firmly in control but the burden now comes down to proof that all this enthusiasm was warranted. General Electric, the second biggest company by market cap, failed to uphold its part of the bargain and only met market estimates when it reported earnings on Friday. Normally the company has a history of beating the numbers by a penny. However, more damning than just reporting in-line was their future guidance. GE, once thought of as a proxy for the market due to their widespread and diverse number of businesses, actually suggested that Q4 and full year results may come in at the low end of current guidance. That's definitely not want the markets want to hear yet somehow major indices remained docile closing near unchanged on Friday.

The bulls are also faced with another hazard to strong future gains. The rapid rise of crude oil from $26.50 to $32 a barrel in just three weeks could quickly become a brake on this expanding economy. When this price surge eventually filters to the gas pumps it will act as an unofficial tax on consumers who will have less discretionary money to keep the feverish GDP growth alive. To a lesser extend we should see it begin to weigh on the airlines, who despite the rise in oil, have been exceptionally strong. The XAL has been hitting a string of new 52-week highs and only slipped lower on Friday due to some analyst downgrades.

Influencing the global market place is the ongoing deterioration in the U.S. dollar. The greenback dropped to yet another fresh three-year low against the yen on Friday at 108.55 and hit another low against the euro. The rumor mill is suggesting that the Japanese government is not likely to intervene against the dollar by selling yen until after President Bush's trip to Japan next week. Of course this would be ironic since one of the purposes of his trip is to lobby against currency manipulation. This has speculators pointing to a potential drop next week to 106 yen vs. the dollar and $1.20 against the euro.

Additional warning signals continue to flare up despite the market's strength. It's not all that often that the NASD actually issues a warning and on Friday that's what happened. Concerns for a return to the bubble mentality gathered some strength when the NASD reported that margin debt had ballooned to $26 billion. This surpasses the $21 billion record at the bubble's top in March of 2000. A sharp retracement could force a stronger wave of selling as investors face margin calls. This in turn could ignite another round of margin selling as the cycle spins out of control. Another bubblesque caution signal is news that volume in bulletin board stocks, one of the most speculative markets, has surged to 41 billion shares. A strong rise in speculative trading for penny stocks is a classic sign that the market is generally near a top.

Yet another contrarian indicator is the bullish sentiment as measured by the Investors Intelligence survey. Currently, 60% of those surveyed are bullish while only 22.5% are bearish. The good news is the bearish sentiment is slowly rising.

I fully realize that the ongoing comments about the low volatility indices, the extremely high bullish percent data, the ballooning margin debt, the incredibly high penny stock volume all sound like a wounded bear doing his best chicken little impersonation. I am not predicting a market crash and I am more than happy to play the trend, which is currently up. However, we need to be aware and make note of each and every warning flag that the market gives us. One of the most basic fundamentals of trading is recognizing that stocks and markets move in cycles, both short-term and long-term. Right now the short-term cycle is very overbought and we need to see some profit taking to bring us back to a more healthy entry point for another leg higher.

The wild card in the mix right now is earnings season. We've been hearing so much for so long about how good the Q3 numbers should be that we're likely to see the markets trade sideways as they wait for the results. This week alone we're going to hear from hundreds of companies with 113 of them as S&P 500 components. Throw on top of the mix a rash of economic reports and options expiration and it could be a rather dangerous week.

Trade carefully.

Market Averages


52-week High:  9768
52-week Low :  7197
Current     :  9674

Moving Averages:

 10-dma: 9541
 50-dma: 9415
200-dma: 8739

S&P 500 ($SPX)

52-week High: 1048
52-week Low :  768
Current     : 1038

Moving Averages:

 10-dma: 1025
 50-dma: 1008
200-dma:  937

Nasdaq-100 ($NDX)

52-week High: 1418
52-week Low :  795
Current     : 1404

Moving Averages:

 10-dma: 1364
 50-dma: 1325
200-dma: 1160


The new VIX continues to hover near multi-year lows and the VXN took
a 4.2 percent dive on Friday.  Investors continue to show no fear,
which from a contrarian stand point, is not a good place to be making
big bullish bets.

CBOE Market Volatility Index (VIX) = 18.82 -0.36
Nasdaq Volatility Index (VXN)      = 28.84 -0.32

Put/Call Ratio Call Volume Put Volume Total 0.93 464,009 431,180 Equity Only 0.70 392,661 274,963 OEX 1.28 20,331 26,028 QQQ 2.96 17,525 51,951
Bullish Percent Data Current Change Status NYSE 73.2 + 0 Bull Confirmed NASDAQ-100 77.0 + 0 Bear Confirmed Dow Indust. 83.3 + 0 Bull Correction S&P 500 79.8 + 0 Bull Confirmed S&P 100 79.0 + 0 Bull 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-Day Arms Index 0.99 10-Day Arms Index 1.01 21-Day Arms Index 1.13 55-Day Arms Index 1.07 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 1450 1417 Decliners 1357 1661 New Highs 322 251 New Lows 6 6 Up Volume 670M 835M Down Vol. 659M 559M Total Vol. 1350M 1452M M = millions
Commitments Of Traders Report: 10/07/03 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 After two weeks of little movement we're beginning to see commercial traders edge toward a more bearish position. Looking at the small traders we see a reduction in short positions and they remain overall net bullish. Commercials Long Short Net % Of OI 09/09/03 418,958 486,209 (67,251) (7.4%) 09/23/03 395,123 397,858 ( 2,735) (0.0%) 09/30/03 395,713 397,577 ( 1,864) (0.0%) 10/07/03 390,232 402,964 (12,732) (1.6%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 18,486 - 6/17/03 Small Traders Long Short Net % of OI 09/09/03 176,401 81,444 94,957 36.8% 09/23/03 139,482 87,981 51,501 22.6% 09/30/03 144,681 96,801 47,880 19.8% 10/07/03 138,644 88,018 50,626 22.3% 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 We're definitely seeing a small trend in the commercials' positions in the e-minis. Long positions have jumped strongly, outpacing new short positions, and the overall net short attitude is dwindling. Retail traders remain heavily net long. Commercials Long Short Net % Of OI 09/09/03 370,909 237,610 133,299 21.9% 09/23/03 109,417 204,026 ( 94,609) (30.2%) 09/30/03 163,828 218,991 ( 55,163) (14.4%) 10/07/03 212,273 225,377 ( 13,104) ( 3.0%) 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 09/09/03 59,692 130,270 (70,578) (37.1%) 09/23/03 175,750 62,558 113,192 47.5% 09/30/03 131,698 65,259 66,439 33.8% 10/07/03 134,990 63,560 71,430 36.0% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 We're still not seeing much movement in commercials willing to commit one way or the other in the NDX. They're currently net short but the margin is fading. Small traders haven't changed much either and remain net long. Commercials Long Short Net % of OI 09/09/03 44,677 62,369 (17,692) (16.5%) 09/23/03 32,648 42,565 ( 9,917) (13.2%) 09/30/03 33,571 42,993 ( 9,422) (12.3%) 10/07/03 33,253 40,861 ( 7,608) (10.3%) Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 09/09/03 28,788 13,370 15,418 36.6% 09/23/03 17,862 9,880 7,982 28.8% 09/30/03 19,803 9,917 9,886 33.3% 10/07/03 18,182 9,688 8,494 30.5% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL It's the same story here in the DJ futures. There is little change between the commercials or the small traders over all positions. Commercials Long Short Net % of OI 09/09/03 25,807 10,756 15,051 41.2% 09/23/03 15,911 9,123 6,788 27.1% 09/30/03 16,561 8,932 7,629 31.5% 10/07/03 16,277 9,528 6,749 26.2% 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 09/09/03 7,429 13,796 (6,367) (30.0%) 09/23/03 7,505 7,779 ( 274) ( 1.8%) 09/30/03 7,578 8,125 ( 547) ( 3.5%) 10/07/03 7,392 7,910 ( 518) ( 3.4%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 8,523 - 8/26/03


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