Market Analysis for Aug 21st, 2003

The Dow and the Nasdaq have hit new recovery highs in the vicinity of 14-16 months. The S&P 500, interesting enough, which is the broadest index and the one the fund managers watch most closely, peaked today underneath both the July and June peaks of around 1014-15. That's a significant contrast to the other two indices, the narrow Dow and the tech-heavy Nasdaq.

So we're going to have to watch the broad index to see if it can break above the 1009-1010 area and crack 1015 to join the new highs of the Nasdaq and the Dow.

Having said all that, after the highs were made today in the first couple hours of the day, and the market had come off these highs, the Philadelphia Fed at noon Eastern time came out with data that was much better than expected. I'm not talking about just a little better. They'd been talking about an index level of 10 or 11, up from 8.3, and the Philly Fed came out at 20.8, which blew away the numbers. This suggested that the economy based on the Philadelphia area and their survey is getting much, much stronger. Also, the data series on prices paid was much higher than anyone thought it would be. So not only is the economy showing strength based on the Philly Fed, the inflation figures are showing some up-tick, and that is very important to what the Fed is trying to orchestrate here, which is a turn of inflation or reflation, so it can eliminate that threat of deflation.

What happened after that great data came out? The market took off, but every index failed to get above its prior highs, and that is very significant. After the 12 noon reading of the Philly Fed index, and the subsequent rally towards those highs, all the indices failed to break the highs. The power generated off the news failed to take the market to new highs, and, subsequently, the market sold off fairly strong.

The rest of the day I would characterize as distribution, which is to say that every rally was met by increasingly more selling pressure, and while the indices ended the session up on the day, they were well off their highs.

That's significant because not only did you make new highs today in the Dow and Nasdaq, you also had strong economic data, but the market couldn't sustain the highs from the early part of the day. Tomorrow, Friday, will be a very important session. If the indices fail to rally tomorrow and close on a weak note, I think we will have seen short-term or near-term peaks in the indices -- significant ones.

If that's the case then I think that the August upmove from the lows of August 5-8 into August 21 will suffice as another traverse of the trading range we've been in, and I think the markets will double over and roll back and at some point in September to test the August lows.