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Index Wrap

Newsflash: Osama May Have Shaved!

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       12-18-2001           High     Low    Volume Advance/Decline
DJIA     9998.39 +106.42 10015.34  9892.59  1.3 bln   1975/1152
NASDAQ   2004.76 + 17.31  2010.91  1989.81  1.8 bln   2123/1589
S&P 100   583.38 +  4.41   585.07   578.97   Totals   4098/2741
S&P 500  1142.92 +  8.56  1145.10  1134.36
RUS 2000  485.49 +  5.55   485.49   479.94
DJ TRANS 2657.27 + 38.21  2658.87  2613.02
VIX        24.13 -  1.30    25.06    24.02
VXN        49.02 -  2.05    51.02    48.93
TRIN        1.00
Put/Call Ratio       .62

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That, plus housing starts and permits rose in November. We can mention now too that GE guided estimates nowhere by affirming what it had affirmed before. "We'll hit our numbers", said Jeff Immelt, GE's CEO, referring to Q4 and FY02 earnings guidance he had given previously. GE gapped open to well over $40 on the incredible news as investors remained impressed by its "cheap" stock price of 29 times earnings and 10% growth rate.

Pardon me while I remove my tongue, which was previously planted firmly in my cheek. There, that's better! Nonetheless, I offer that tidbit on GE as proof that this market remains in a bubble. Be that as it may, there was other news that put buyers in a buoyant mood today.

Best Buy (BBY) and Circuit City (CC) both reported strong earnings thanks largely to digital product sales - DVD, home entertainment, cameras, wireless phones. SEBL was a big beneficiary of a Banc of America earnings upgrade based on they perceive as improvements in the software maker's business. Finally, Lennar Homes (LEN) raised earnings estimates by 25% based on the surge of re-financing and relatively low interest rates that continue to allow Americans from sea to shining sea to borrow themselves rich. Oops, there I go again - pesky, rented tongue doesn't behave well sometimes.

But the housing data is interesting. The numbers really are spectacular. The consensus expectation was for 1.54 mln homes to get started in November. The reported number was significantly higher at 1.648 mln. Same story for new permits. Expected was 1.47 mln issued; actual was far better at 1.564 mln. Amazing that a little sunshine and good weather can catalyze economic stability. Yet, those numbers represent a trend that is very real - a trend that keeps consumers spending and the economy afloat.

Whether we like it or not the Fed has engineered a bubble on a mountain of liquidity in order to keep the economy from crashing harder than it otherwise might have. Some might argue that the bubble is better than the alternative, but I disagree. That mentality has bond owners on the run and signaling that inflation is soon to return with rates already on the rise. Price inflation with no growth? The prospect isn't pretty, but that is a real economic possibility. The Fed only prolongs the inevitable. Until then, we party on protected from economic reality that will be dealt with sooner or later. Personally, I'd rather take the harsh economic medicine and get it over with rather than carry debilitating, economic bacteria for the next few years. But that's just me.

That's the absurd background. Here is the trading environment. As we near the end of the year, triple witching is up on us and tends to buoy the markets in the process. Add to that the prospect of window dressing, and we have the makings of a bullish finish into year-end.

More to the point, institutional investors, mutual funds, and hedge funds (yes, they go long too) are sitting on stocks with phenomenal appreciation this year. There are not many, but there are a few equities that a manager would like to own for the portfolio by yearend. Expect them to buy if they don't already own them.

Furthermore, now that a manager is sitting on huge profits from a few issues, what is the likelihood of selling them before January 2nd? Pretty slim in my opinion. As noted above, they'll want to own them if only for a few days or weeks. Likely, they will wait until next year to realize the gains. Until then, funds will put the squeeze on each other competing for shares and driving up prices. January 2nd may prove the start of a long bout of unwinding profitable positions before poor earnings are announced, and pre-April 15th tax-selling ensues - perhaps even a mad rush to the exits just to beat the next guy out of the burning stadium. But until then, they buy, which will likely have us trading to the upside for the next two weeks.

What do the charts say? Despite lackluster volume, the past two days of gains have been impressive, once again keeping the bullish trend intact with a bounce up from a higher low. The Dow and the NASDAQ (COMPX) have recovered to the fulcrum point of bull vs. bear/support vs. resistance, which is at 10,000 and 2,000, respectively. Which way from here is anyone's guess. But the daily stochastic trends tell us that the prevailing market direction is up. Let's take a peek.

Dow Industrial chart (INDU):

The Dow closed up 106 points today on volume of 1.33 bln NYSE shares but spent only a few minutes above the 10,000 mark before falling back to close at 9,998 - right at the fulcrum of psychological support/resistance. Which way from here? Weekly charts are growing long of tooth and showing their age. The daily chart however shows a stochastic seeking to turn bullish as the index puts in a higher low while bouncing from its 50% retracement and ascending trendline - still bullish in my book. A break back over 10,000 with some conviction would set up the 200-dma to become the next point of resistance at just over 10,100. 60/30 min charts though have given no real good call entry opportunity, sputtering sideways while the candles marched north. As long as support at 9950 holds, a cycle down to oversold might make a decent call opportunity.

NASDAQ-100 chart (NDX):

Similar chart pattern here too as the weekly looks to be stalling and the daily has that bullish look about it with stochastics itching to turn up. Up only 17 points to close at 1657, volume here today though was as lackluster as its counterpart on the NYSE at 1.85 bln shares. The lethargic numbers belie the fact that this index bullishly jumped the track today rising notably above the confluence of its 200-dma, ascending trendline, 20-dma and descending resistance. Stochastics suggest the trading trend is up despite the disconnect from fundamentals - better pray that semis start getting some that business long-promised by analysts. The 60/30 charts are running flat while the candles move uphill. If NDX can maintain support at 1630 as the stochastics cycle to oversold, a decent call entry might be had.

S&P 500 chart (SPX):

The pro's choice, the SPX is a blend of both. Weekly chart is tired here too. The daily chart, however stymied it may be at the 20-dma, has a nice bullish stochastic going for it which suggests an upward bias for the week. Meanwhile, like its kids, the SPX is rising on the 60/30 charts without releasing to oversold, which would be much appreciated before taking a call entry. Note the bull flag on the 30-min chart, which suggests more short-term upward movement. How about that! Just like Austin said in the Market Pulse, bullish action consumed the last hour of market time as reflected by the candle breakout. While the final 30-min doji doesn't look that strong, previous action suggest that a pullback to the 1139-1140 area might make for a quick bullish daytrade.

As for the VIX, it had its lowest close since August - 24.13. Given the market tone (despite low volume), I would expect this to fall into the low 20's as a vocal minority of bulls convinces the wildebeests (see Austin's 12/17/2001 Wrap) they too should be charging. Instinctive fear is turning to instinctive greed as they watch prices rise. Only the unsuspecting wildebeests don't know that bulls have set a trap for all of them once the stampede to window dressing wears off and New Year's selling sets in.

All told, the bias for now appears up. But until the shorter-term charts can cycle down to oversold, bullish entries will be hard to come by. Personally, I'll await that opportunity even if the stampede appears to be happening without me. Given the gap up and flat-trading markets, I can't afford to roll the dice and hope that luck takes over. Entries are still important and if I miss the train, so be it. My chart will come if I am only patient.

See you at the bell!

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