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[TTHQ Staff]

BEING STREET SMART
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Sy Harding

MARKET RISES – REMAINS IN TRADING RANGE! July 30, 2004.

After five down weeks in a row, at least the market finally put in a positive week this week. Yet the moves in both directions continue to attract no following, no panic selling in the declines, no enthusiastic buying in the rallies. In its five straight down weeks, the S&P 500 lost only 4.3% total. It was enough to bring it down only to the lower limit of the narrow trading range that has prevailed all year. Its rally this week keeps it in that narrow trading range, in which it has strayed no more than 3.4% both sides of 1120 for the entire year.

It’s been going on for a long-time now, long enough to have individual investors, and many professionals, bored and paying little attention, and therefore positioned to be significantly surprised in one direction or the other.

It has created an atmosphere of gloom on Wall Street for sure. July was a down month for mutual funds and money-managers, while with the lack of interest on the part of investors, brokerage firms can’t make any money from commissions, performance fees, or anything else. Even short-term traders are frustrated by the lack of movement, without which they also can’t get any traction in either direction.

There wasn’t really anything in the earnings or economic news to account for the rally this week. In fact there was more bad news than good. But market technicians had been noting for a couple of weeks that the market had become short-term oversold to a degree that usually results in at least a technical rally off the oversold condition.

It may have also been partially a relief rally, that one of the three expected big targets for terrorist attacks this summer, the Democratic National Convention, was taking place without incident. But then I’m not sure why Homeland Security expected the convention, which was obviously going to have unprecedented security, would be a more attractive target for terrorists to create fear across the U.S., than say any large gathering at weekend sporting events. It also would seem that if the terrorists are interested in seeing President Bush defeated in November, as is their stated goal, it wouldn’t make much sense to bring chaos to his opponent’s convention. It would seem to make even less sense to target the Republican convention, since that would more likely bring sympathy to the Republican party, as well as make voters more reluctant to change leaders in the midst of strife.

Meanwhile, there was further evidence this week that ‘event fear’ continues to be a large factor in the market. The market did rally with each day that passed without incident in Boston. Then on Friday morning, as the market was again showing some positive action, news spread of two coordinated terrorist bombings near the U.S. and Israeli embassies in Uzbekistan, a U.S. ally in Iraq, and the market rally fizzled and began giving up its gains.

Until then it had been able to shrug off the Commerce Department report that economic growth (GDP) slowed to a 3% pace in the June quarter, and the rise in crude oil prices to new highs above $43 a barrel. But event risk, even in far off Uzbekistan seemed to get its attention.

Meanwhile, those high crude oil prices have the same effect of taking spending money out of consumer’s pocketbooks as would an increase in income taxes. And the size of the decline in June quarter GDP surprised economists, who had expected a slowdown in economic growth, but only to a 3.7% pace. So analysts continue to struggle with whether Fed Chairman Alan Greenspan was right in saying last week that the economy had only hit a temporary “soft patch” in June, and would be back to strong growth in the current quarter and for the rest of the year.

But the market doesn’t seem to care one way or the other about the economy. It just can’t seem to focus on either terrific economic news, as it was receiving earlier in the year, or the potentially bad news it’s receiving now, but lumbers on in its lackluster sideways path. Several times this year it has had investor hopes high that it was breaking out of its narrow trading range to the upside. Each time instead it came back down to the lower limit of the trading band, raising fears then that the bottom was about to drop out. But for this week anyway, it caught itself again and didn’t fall off the edge.

Was it just a dead-cat bounce, or the beginning of another move back to the upper limit of the trading band that has confined it all year? Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.