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Index Wrap

Analysts Catch Their Own Tails

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       12-13-2001           High     Low    Volume Advance/Decline
DJIA     9766.45 -128.36  9889.20  9745.07  1.4 bln   1065/2053
NASDAQ   1946.51 - 64.87  1985.79  1945.29  2.0 bln   1305/2316
S&P 100   570.60 -  9.77   580.37   569.85   Totals   2370/4369
S&P 500  1119.38 - 17.69  1137.07  1117.85
RUS 2000  468.67 -  6.64   475.31   468.67
DJ TRANS 2554.08 - 26.20  2580.46  2552.33
VIX        26.75 +  1.23    27.16    25.65
VXN        51.95 +  3.86    52.37    50.66
TRIN        1.04
Put/Call Ratio       .79

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It wasn't but three weeks ago that I noted an interesting phenomenon. I referenced a story relayed by hedgefund manager, Bill Fleckenstein. I'm paraphrasing here, but he stated that stocks were clearly on the rise, and rhetorically asked, "Why is that?" The answer was that earnings are going to get better next year, and obviously since the market leads earnings, stocks are rising in anticipation. Rising stock prices are thus proof that earnings will recover in 2002! Thinking about this for just moment, that means that earnings will rise because stock prices anticipate it, and stock prices are rising because earnings will return. "If that sounds like a cat chasing its tail, it is!"

Today, the analysts finally caught their own tails as the biggest single-month decline ever in retail sales rocked the markets, along with warnings from battered technology giants, Lucent (LU) and Ciena (CIEN). Many "Bottom-is-in" analysts are in disbelief that retail sales and technology earnings are headed in the wrong direction if we supposedly hit bottom last month - blunted horns, tattered hooves all over the place. If earnings and retail sales aren't so hot, that leaves 2002 recovery in jeopardy. Just maybe current rising equity prices are not justified???

That's the gist of it. The specifics are that retail sales declined 3.7%, the biggest one-month drop ever, when "only" a minus 3.1% was expected (as though if it came in a minus 3.1%, that would be just fine - reminds me of the Black Knight in Monty Python's "Holy Grail" who after losing both arms and legs in a sword fight say's to his unscathed opponent, "Let's call it a draw."). If there is any silver lining to the report, it is that ex-auto, the decline was "only" 0.5%, whereas a gain of 0.1% was expected. Translation: consumers stopped buying cars in November even though 0% interest was extended in some cases, which supports the theory that incentivized car sales front-loaded the 2002 sales year. Don't look for this to improve much until at least spring.

If there was any good news, it's that jobless claims for the week of December 8th amounted to 394K new cases. While that was a major improvement compared to anticipated 465K, it is important to remember these numbers are often revised with little fanfare so that next week, revised numbers could show closer the 465K figure after all. And while the initial number is lower than expected, continuing claims continued to rise another 36K, which says that job losses are not as rapid as in recent months and may be bottoming.

LU also warned prior to the market's open this morning along with CIEN. LU said they expect losses to be in the $0.23-$0.27 range instead of the loss of $0.17 analysts originally had in mind. Revenue targets fell too to $3.1-$3.3 bln from the company's former guidance of $4.43 bln. Oops! Just a bit under thrown! Frankly, the writing on the wall was clearly visible when JDSU "affirmed" on Monday that it would lose 10-15% in Q over Q revenue while analysts still believed they would actually gain 4.5% - some affirmation, and a clear signal that others would soon come to confessional. It won't be long before NT utters the same words. Count on it. CSCO, JNPR, AVNX, VTSS, PMCS, and AMCC won't get out of this without some collateral damage either.

While all this may sound awful, remember it was just a short week ago that the market was breaking out on huge volume, the bottom was in, indexes had broken major resistance levels, and the market cared not a wit about bad news. Anybody suppose that sentiment has undergone some change to the downside since last week? It is certainly evident on the technical charts, which have indicated that downside is in store. Let's take a look.

(Meanwhile I see on CNBC that Ron Insana's Shop Talk topic is, "Will the bull market continue?" Hello, Ron? 3400 NASDAQ points lower than March 2000 when you could have legitimately asked that question, the topic now should be, "Will the BEAR market continue?" Sheesh! I used to like the guy for what I thought was his intelligence [and perhaps for our similar hairstyles]. But I don't think he has a clue right now.)

Dow Industrial chart (INDU):

There is much similarity on all these charts, so I'll keep this part brief. Weekly chart stochastics rolling over on the 533 and edging that way on the 1053. Daily chart is in dive mode with ascending trendline broken along with support at 9800. While oscillators are clearly bearish, lower Bollinger band support and 9700 horizontal support are not far off, which may lend some near- term support. However, displaying further weakness, 60/30 charts have not seen overbought stochastics in days - bulls unable to get any traction this week at all. Silver lining to dark cloud: given six days of selloff, we may see a reflexive bounce tomorrow (Friday) should shorts want to cover in anticipation that Osama has his much-awaited date this weekend with new bombshell sensation, Daisy Cutter.

NASDAQ-100 chart (NDX):

Same story with the NASDAQ-100 except that technical damage today was a bit more severe. NDX fell below the 200-dma and is completing a neutral wedge. While wedges can either way, the downward-pointed stochastics suggest more downside in store. No lower Bollinger band or 50-dma to catch it right now. 60/30 charts here too are not showing much strength. A reflexive bounce at this level is possible at the open, but look for the daily chart to guide the 60/30 down. Short-covering not as likely here since the profit opportunity for doing so looks bigger that other broad market indexes.

S&P 500 chart (SPX):

Ditto here too. Weak stochastics across all timeframes; broke ascending support. Next support is at 1100. However, the candles have already hit the lower Bollinger band at 1119, with the 50-dma not far off at 1112. Stochastically speaking, the 60/30 can't get out of its own way; the oversold condition from six days of declines could spark a reflexive bounce. It won't likely affect the daily chart, but a cycle up to oversold in the 60/30 timeframe is not out of the question.

VIX is still inconclusive, but gaining some strength at 26.75 as more fear enters the market.

For tomorrow, the Dow and the SPX have a good chance of trading slightly up thanks to perhaps some short-covering and the possibility of a reflexive bounce following six days of losses. Not every day will be a loser and the 60/30 charts in oversold are begging to visit overbought again. NASDAQ, however, has some room to fall before finding support and may not fare as well. I'd be looking for a mixed day perhaps beginning with a drop and pop for a fast bullish daytrade (expert gunslingers only - keep your hands where I can see 'em!). Of course, pop and drop is not out of the question either, but much less likely. The time for a daytrade put entry has probably passed unless we see said pop and drop. Otherwise, choppy action looks to be the order of the day with downward earnings warning bias doing battle with short-covering, with downward favored for the NASDQ.

There, that's brief isn't it? See you at the bell!

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