Option Investor
Market Wrap

It is put up or shut up time for the Santa Claus rally.

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       WE 12-25          WE 12-18         WE 12-11        WE 12-04
DOW     9217.99 +342.17  8875.82 + 85.22  8821.76 -194.38  -318.94
Nasdaq  2163.03 +119.15  2043.88 + 34.52  2029.31 - 26.15  - 13.29
S&P-100  608.91 + 25.30   583.61 +  8.49   574.68 -  5.47  - 10.97
S&P-500 1226.27 + 46.31  1179.96 + 18.02  1166.46 - 10.28  - 15.87
RUT      405.56 + 11.78   393.78 +  3.93   395.37 -  3.96  -  3.72
TRAN    3044.08 + 73.44  2970.64 +100.82  2929.51 -119.89  - 25.56
VIX       22.04            28.07            28.46            24.95
Put/Call    .52              .47              .66              .65

It is put up or shut up time for the Santa Claus rally.

Much has been said about the yearly post Christmas rally and now we get to see if it is real or just the ghost of Christmas past.

Last year we were coming off the October/November drop and the Nasdaq jumped +5% and the Dow, S&P and Russell gained +4% in the next five trading days. This would equate to about +370 points for the Dow and +108 for the Nasdaq. The S&P would post about +50 and the Russell about +16. I know, past performance is no guarantee of future results but the market is definitely in rally mode and the stage appears set. All that remains is for the curtain to go up Monday morning. The Dow is only -157 points away from its recent all time high and the Nasdaq and S&P are there already.

The traders like to see markets setting new highs across the board. The volume has been good but the advance/decline line has been weak on year end selling and portfolio restructuring. Funds took in two billion in new cash last week but that is only a trickle compared to the expected flood of year end and first quarter contributions. 401k and IRA deposits normally balloon with year end bonuses and matching contributions. The next 90 days is the heaviest influx of cash for the year and managers have to put that money to work.

As I stated in the market wrap on Thursday the shortened session was a yawner but several things bear another mention. The Internet stocks mostly held their ground with the exception of UBID and MZON which are not front line companies anyway. AOL traded down as low as -2.50 but was recovering at the close and is expected to trade up strongly next week. Current estimates for index fund purchases of AOL this week exceed 50 million shares. AOL will account for approximately .7% of the S&P-500 starting Jan-4th. With an average daily volume of 10 million shares the addition of another 50 million in the next four days could have a substantial impact. AOL held on to the +$21 gain from Tuesday and shows no signs of giving it back. Americans' personal income registered the largest increase in nine months and unemployment applications hit a 17-month low. This suggests the U.S. economy will enter 1999 with enough power to resist the drag from economic slumps abroad. Income increased by a seasonsally adjusted +.5% in November. This was the most since February. This follows respectable gains in Sept/Oct as well. Wages and salaries rose by +.6% in November. Unemployment claims fell by -13,000 to 287,000 last week.

The Russian parliament voted initial approval Thursday for the austerity budget intended to pull the nation out of its grim economic crisis. Lawmakers said the situation was too dire to delay approval. This should help free the IMF funding and help boost confidence that Russia will make the reforms necessary to rebuild the lagging economy. Not that Russia will have any impact on our market now but the strong steps help boost the global view and is beneficial in an overall context.

Just because analysts expect our market to go up next week does not mean that every stock will go up. There will still be some false starts and some drops due to news or portfolio restructuring. We have many new readers this weekend and I thought it would be helpful to reprint (below) the "trading bus" article from a previous newsletter. If you have read it you should still read it again. We tend to get focused on the current plays in out portfolio and want to hold them until they "recover." The key here is - some never recover! Reread the article!

I also included the Top-10 rules again. We have had several requests for them since the website changed.

We have a lot of great new features starting after the first of the year and we know you will "profit from it." (Sorry CNBC - I could not resist!) The OEX Trading Pit should kick off on the 4th. The Options 101 education section will begin on the 3rd. The details on the managed account program will be out the week of the 10th and we are very excited about this program.

The "Hedge Section" is changing names and content starting next week. It will be called "Market Sentiment" and will focus on changing trends in the market to enable you to capitalize on them before the herd can react. The "Failed Rally" section will be moving into the enhanced "PUT Section." (boy did we need that!)

Use the rest of the weekend to plan your trades for next week. Pick entry points AND exit points. Murphy's law is alive and well so expect some not to turn out the way you expected. On Monday morning, sit down in front of your PC and fasten your seatbelt. This could be a very exciting week! A word to the cautious, with the Dow up +437 in the last six trading sessions there is always the possibility of profit taking. Also seven positive sessions in a row has been the longest run in quite a while. Technicians will be pointing this out on CNBC Monday for sure. While this has no technical impact the psychological impact will be a cloud starting Tuesday. Wed/Thr are the most likely "PT" days.

Good Luck

Jim Brown

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