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Bull's pop the cork as New Year starts to bull's liking

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A better than expected ISM Index reading of 54.7%, which was above economist's forecast of 50.1% and a reversal of November's 49.2% reading has the major indexes holding their best levels of the session as stocks start the year off on a bullish note.

The Dow Industrials (INDU) 8,563 +2.65% holds its best levels of the session with a 221-point gain, and at this point, bulls will say that 2003 is getting off to a good year. Last year, the Dow put together a 50-point gain on the opening day of the New Year and was hoped to have signaled a reversal of fortune for 2002.

All 30 of the Dow components are showing gains, with Intel (NASDAQ:INTC) $16.51 +6% the leading gainer on percentage basis, while Phillip Morris (NYSE:MO) 40.61 +0.19% lags the Dow gainers, which ironically carries the largest dividend yield of the Dow components.

Sector action is broadly positive, with all of the sectors in the green except for the Gold/Silver Index (XAU.X) 76.25 -0.66%. But here again, is something we've noted in past sessions, where daily bullishness in the broader markets finds the gold index down 2% or more early in the session, only to be bid back near unchanged levels, if at least not recovering from their lows, and only to find the major indexes lower in coming sessions.

Upside sector action has the Fiber Optic Index (FOP.X) 48.13 +7.76% leading today's sector winner list, with Networking (NWX.X) 138.92 +6.28% not far behind. Sector bellwether Cisco Systems (NASDAQ:CSCO) $13.52 +3.20, which has close ties with both sectors is today's most actively traded stock at 39 million shares traded. This morning, UBS Warburg said that its analyst Niko Theodosopoulos had cut his earnings outlook for CSCO's January quarter to $0.13 from $0.14 EPS and cut revenue estimates to $4.7 billion from $4.76 billion, on belief that a reduction was due based on the belief that the enterprise networking market is shaping up to be weaker than expected this quarter.

The PHLX Semiconductor Index (SOX.X) 303.75 +5.03% has edged back above the 300 level after Arnie Berman of SoundView Technology Group said that 2003 may surprise investors and that his bullish tone runs counter to the prevailing view of another dismal year for technology, while admitting that his bullish view requires "the occasional leap of faith" to be bullish on both the sector and broader technology.

Berman's top proclamation is that technology investors will enjoy positive returns this year and should that happen, will be the first time since 1999. Berman points out that over the last half decade, when the market gains ground in January, the full-year return has been positive 90% of the time. But when the market was down in December, as it was, and up in January, the market is "always" up for the full year. Obviously, Berman is looking for a bullish January.

Berman also believes that the pervasive uncertainty of 2002 and desire by corporate CEO's to postpone form if discretionary capital spending will also come to an end in 2003 and give way to willingness to invest in "basic infrastructure." Berman believes that component companies should benefit from this trend.

If this is the case, then I (Jeff Bailey) will look for the Morgan Stanley Cyclical Index (CYC.X) 461.38 +2.6% to be one of the stronger technical sectors in the market in the early going this year. Perhaps there is some early hint of this, as this is one of the few sectors currently trading above both its shorter- term 21-day SMA (452) and 50-day SMA (448). It is notable that the 50-day SMA on the CYC.X is at least trending higher, while the major market indexes, are somewhat rounding out.

The NASDAQ Composite Index (COMPX) 1,373, while trading below its 50-day SMA (1,384) does have a still trending higher 50-day SMA.

As such, if I'm going to be a market bull, then the cyclicals are where I still want to be. There is nothing "new" in this statement that what I've been saying since October of 2000 as it relates to some type of bullish sector action in the early stages of economic recovery. It's these big cyclicals that have the IT budgets that will eventually spend on technology. It's my belief that the spending will only come when the bottom line (earnings) look stable and begin to grow.

With the holiday season now complete, we have seen volume pick up again as NYSE and NASDAQ volume are both over the 700 million mark as half the trading session is complete. Last week, some full days of trading were lucky to see daily volume at these levels.

In our 11:00 intra-day update at OptionInvestor.com I made some observations as it related to some "tax-loss" and "tax-gain" selling perhaps being in play as it relates to the 52-week high and 52-week low observations. As the session progresses, we're starting to see some more new highs achieved, while new 52-week lows remain near the same numbers found at 11:00. On the NYSE we're seeing 44 stocks hit new highs versus 11 new lows, while NASDAQ shows similar action with 41 stocks hitting new highs versus 19 stocks trading new lows.

On a broader scale, total breadth is positive at both the NYSE and NASDAQ. The big board has advancers outnumbering decliners by a 3 to 1 margin, while NASDAQ breadth has gainers outnumbering advancers by a 2 to 1 margin.

Today I've also put together a couple of "benchmarking portfolios" using the portfolio" tool in my q-charts trading station. In the last couple of sessions we've talked about "Dow Dog" theory. Here's a way that traders can follow the 10 "Dow Dogs." Note that I've separated the "Little Dogs" (the 5 lowest priced) from the "Big Dogs" (5 higher priced).

Dow Dogs for 2003 - Benchmarked from 12/31/02 close

I've subtotaled the "Little Dogs" and also subtotaled the "Big Dogs." One thing we may be able to observe from this with time is any thought of "value" continuing to play out in the markets during 2003.

I've also labeled the 4 "dogs" that showed some type of relative strength, which we can follow as time passes to see if RS is helpful in identifying stocks that might "outperform" their peers.

I've also put together a "benchmarked" portfolio of various baskets of Treasuries, Gold and U.S. Dollar and various baskets of equities as depicted by the Dow, S&P 500 and NASDAQ-100. I'll discuss these "benchmarked" portfolios in a later update and make some observations as to the past "Beetle's Benchmarked Fund" I started back in late July of last year.

Jeff Bailey

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