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Market Updates

Inflation remains tame

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As earnings season heats up and begins to draw focus from traders, economic data released this morning shows little sign of inflation at the manufacturing level.

The Labor Department reported that the producer price index (PPI) for finished good was unchanged in December after falling a seasonally adjusted 0.4% in November.

The core rate of inflation at the wholesale level, which strips out the more volatile food and energy components, fell 0.3% in December and equaled November's 0.3% decline.

Both the PPI and core PPI numbers were below economist's forecast as economists looked for the PPI to edge up 0.3% and for the core rate to rise a fractional 0.1%.

For 2002, the PPI rose 1.2%, the largest year-over-year gain since September 2001. In 2001, the PPI fell 1.6%, but rose 3.6% in 2000. The core PPI fell a record 0.4% in 2002 after rising 0.9% in 2001 and 1.3% in 2000.

In a separate report, the Commerce Department said that businesses added to their inventories for a seventh straight month in November as business inventories rose 0.2%. Despite the 0.2% gain, inventory-to-sales ratio remained tight at 1.36, which is just above the record low of 1.35 reached in August.

The above economic data, combined with a plethora of earnings announcements released yesterday afternoon and then this morning has traders looking at a flat open as equity futures trade just above today's fair value.

S&P futures (sp03h) currently trade up 1.4 points at 930.70. NASDAQ futures (nd03h) are higher by 5.5 points at 1,097.50, while Dow futures (dj03h) track higher by 10 points at 8,820.

Fair value for the S&P 500 today is $0.22. That price will not change during the session. HL Camp & Company has their computers set for program buying at $0.52 and set for program selling at $-1.82. Fair value for the NASDAQ-100 today is $2.40.

Later today at 02:00 PM EST time, the Fed's Beige Book will be released. This is a report that is published eight times per year where each Federal Reserve Bank gathers anecdotal information on current economic conditions in their respective districts. The report is populated by bank and branch directors and interviews with key business contacts, economists, market experts and other sources.

Bullish % updates

While we post the Bullish % readings in both the premierinvestor.net and OptionInvestor.com "Market Sentiment" section of the newsletter, not every subscriber reads this sector, or even knows it exists. Traders and investors will note that the Bullish % data is just under the VIX, VXN, put/call ratio readings. In last weekend's "Ask the Analyst" column we talked about the put/call ratio, and last Friday morning's 09:00 Update we discussed the VIX.

Currently, all of the bullish % data are back into a column of X, except for the S&P 500 Bullish % (500 stocks, each stock's p/f chart is equally weighted as to represent .002%), which as of last night was currently reading 62.4% bullish, and needs a reading of 64% (needs a net gain of 1.6% or 8 stocks to show reversing p/f buy signals) to have this Bullish % reversing back higher.

What I want to point out here is more specific to the NARROWER Dow Industrials Bullish % (just 30-stocks), S&P 100 Bullish % (just 100 stocks) and NASDAQ-100 Bullish % (just 100 stocks) and "field position" as it relates to the area between 30% and 70%. These three bullish %, which are more "narrow" tend to move "quicker" and have a greater tendency to reach levels above 70%, which are deemed more "over bought" and fall to 30% or lower, which is deemed more "oversold."

While the bullish % are signaling the building of strength from the market internals and ability of stock to reverse prior sell signals and generate new "buy signals" the FACT that the reversals up in the NASDAQ-100 Bullish % and S&P 100 Bullish %, while bullish, are seeing the reversals at the upper-ends of a 30-70% type of range.

Should the S&P 500 Bullish % ($BPSPX) be able to reverse back into X's, I do think the major indexes will test their early December highs, and perhaps take out those highs.

While the levels found from January-March of 2002 will most likely not be seen, its is the "pattern" similar to that found in the major indexes during the January-March 2002 period that the bullish % charts are hinting of.

For example, in January of 2002, the Bullish % for the Dow Industrials reached 70% about the time the Dow itself reached a relative high of 10,200. Then a reversal lower in the Bullish % was found almost immediately after and fell to 50% (darned near the same that we just witnessed) and the Dow fell to a February 2002 low of 9,650. Then the Dow bullish % reversed back up and this indicator reached a high of 76%, which found the Dow Industrials themselves reaching highs just above 10,500.

While history is no guarantee for the future, the bullish % charts, if not the major indexes themselves, look very "similar" now to the February-March 2002 time period.

We have a great "mix" of subscribers. Some are trading various "wave theories" that forecast a much lower stock market in the months to come. Some have asked me why I don't talk about "wave theory."

It is NOT that I don't believe in wave theory, but I have grown accustomed to trading the various "cycles" that the bullish % tend to show. I think it would be GREAT if "wave theorists" combined that theory with the bullish %, perhaps looking for the bullish % to confirm what wave theory is to foretell.

Over the past couple of months, I have gotten e-mail from multiple subscribers with various "wave theory" levels and many of these theories have some very compelling reasons "why" the markets will head lower, as they have yet to complete a final wash lower.

My point in this commentary is that REGARDLESS of what "theory" or "scenario" you the trader may be trading, just be cognizant that just as the markets were able to achieve a March 2002 relative high above a January 2002 high, that didn't keep "wave theory" from proclaiming that it ended up being March's relative high that then found the next wave lower (not the January 2002 relative high as some had thought).

While "wave theory" was perhaps correct from the March 2002 highs of a wash lower, it did little good of bears had OVER LEVERAGED their accounts in puts with February or March expiration, or that shorts were full positions short the Dow Diamonds (AMEX:DIA), S&P SPDRS (AMEX:SPY), or NASDAQ-100 Index Tracking Stock (QQQ).

Sometimes, I get the feel that a trader/investor feels like he/she is part of a club (bear's club, bull's club) and that they won't reduce risk in their account as any trade goes against them and begins creating some severe damage, only because they feel that they have "got" to stick with the trade because everything will eventually pan out.

I am NOT saying that the bullish % are "always right." No sir. But we can follow the market internals on a day-to-day basis to measure the internal strength weakness from this indicator.

As the New Year begins, try to browse around your web site and get a feel for its contents. You pay good money for your subscription, and once you browse around and find your "favorite" areas that holds information you deem most important, book mark those areas in the "favorites" part of your browser.

If you've got a question regarding something on the site, maybe it deserves an e-mail to the author that wrote it, or even becomes a topic for the weekend "Ask the Analyst" column.

While the staff at OI can't get back to all questions, if the questions aren't even asked, then they may never be answered. If you don't get a reply to a question, then ask it again, and again if you want. Again.... many of us get 200 e-mails per day and we can't answer them all. Put something "catchy" in the subject area of your e-mail that has pertinence to your question.

Point and figure X's and O's always catches my eye.

Jeff Bailey

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