Option Investor
Market Wrap

A different kind of triple witch, record closing highs on DOW, NASDAQ, S&P.

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        WE 12-24         WE 12-17         WE 12-10         WE 12-03
DOW     11405.76 +148.33 11257.43 + 32.73 11224.70 - 61.48  +297.27
Nasdaq   3969.44 +216.38  3753.06 +132.82  3620.24 + 99.61  + 72.82
S&P-100   795.56 + 21.63   773.93 + 10.44   763.49 -  3.99  + 13.91
S&P-500  1461.44 + 40.39  1421.05 +  4.01  1417.04 - 16.26  + 16.68
RUT       477.94 + 11.73   466.21 -   .50   466.71 +  2.13  +  5.64
TRAN     2887.70 - 30.72  2918.42 + 43.48  2874.94 - 53.86  + 19.64
VIX        23.12 +   .11    23.01 +  2.09    20.92 +   .10  -  2.13
Put/Call     .47              .43              .45              .49

A different kind of triple witch, record closing highs on DOW, NASDAQ, S&P.

I would not in my wildest dreams consider Santa Claus a witch but after ringing the opening bell on the NYSE this morning it appeared the markets were under his spell. The three major indexes, DOW, S&P and Nasdaq all closed at record highs after a flood of economic reports. The Dow soared intraday to a new high of 11443.07 and closed at 11405.76, well over the previous closing high of 11326. Only four Dow stocks failed to take part in the rally. MSFT, T, GE and MCD were only down fractionally while previous Dow under performers HWP, AXP, JNJ, MRK and EK all scored good gains.

The S&P-500, a much broader view of the market than the Dow, also closed at a new record high of 1461 showing a slight broadening of the market. The Nasdaq went on another record romp and traded briefly over the magic 4000 level. A close there was not to be and the index sold off on profit taking just before the close. Still the Nasdaq nailed the 13th record close for December and the sixth consecutive in a row. The Nasdaq express will eventually slow but the odds of stretching the string into next week are very good. A Santa Claus rally normally begins in the last five trading days of the year and continues for the first two days of the next.

The rally today was different than the gains over the last week. The advances actually beat the declines by a margin of +1200 stocks across all exchanges. New lows were still ahead of new highs by 3:1 but that number is improving. Analysts say the new lows are caused by tax selling of losers that are already at their lows for the year.

The economic reports today showed the economy still running strong and consumer confidence at very high levels. The Durable Goods orders came in at +1.2% for November with the majority of the gains in electronics which posted a +9% gain. Personal Income increased only +0.4% and was the slowest rate of increase since August. Personal Spending rose +0.5% and was inline with analyst estimates. The personal spending component for December could be a real problem. Preliminary numbers for December are astronomical and could dramatically impact the Feds stance on interest rates in February. The December numbers will be announced the day before the February Fed meeting. A +1.0% increase would be very disconcerting to the Fed process. Jobless claims rose by +14,000 to 281,000 and was the eleventh week under 300,000 which is a key level for measuring unemployment.

The market took the numbers in stride and charged off at the open even with bond yields soaring to 6.49% intraday. The market just refuses to accept the fact that February is going to be a real challenge to the current bull rally. That is ok in my book as long as investors understand that storm clouds are brewing in the future. There were many positive factors in today's rally. Some of the losers are starting to show signs of life. The beaten down sectors are starting to attract money away from the techs. Stocks like KR, CVS, GD, GDT, EK are posting gains while stocks like EBAY, AMZN, LCOS and DCLK, which have been strong recently are declining. This rotation is good and welcome as the rally continues. The market continues to power forward on the tide of liquidity. For the five days ending 12/22 more than $10.4 bln came into stock funds and this was on top of $11 bln the previous week. Estimates for December are now over +$25 bln and continue to be above normal. Considering the cash still held on the sidelines by Y2K holdouts and the normal January fund inflows there will be a lot of cash to float the market for the next several weeks. Considering investors were more interested about N4K (Nasdaq 4000) today than Y2K, the buying interest is still extremely strong. The breadth widened to include computer stocks, DELL +2.38, HWP +5.69, telecoms, WCOM +4.50, and drugs, WLA +2.56, BMY +3.50, MRK +2.56. Even with the +202 points for the Dow today the index only managed a +148 for the week compared to +216 for the Nasdaq.

For a normally light volume day the Nasdaq still managed to trade over 1.25 bln shares and the NYSE over 938 mln. Volume is typically light during the pre-holiday week but this week did not conform to the rules. Again, the buying is rampant. Financial companies like funds and brokerages were reported today to have dished out $13 bln in bonuses so far in December. The majority of this money justs continues to be reinvested in the market. In November margin borrowing rose +42% as investors eager to buy even more stock leveraged themselves in to larger positions. This broad market bullishness coupled with the increasing cash flow should continue into next week. The next challenge will be January. After the huge gains made by the Nasdaq this year of +80%, or +182% if you count from the October 1998 low of 1419 last year, the chance of a quick bout of profit taking is very good. Funds are waiting for January to lighten up their positions and move the tax consequences into 2000. The convergence of tax advantaged selling and January cash inflows should make for very interesting trading. The question is not now will the Fed raise rates on Feb 2nd but will it be +.25% or +.50%. Greenspan is not prone to big increases but the pressure is building. Logically the markets should have a serious bout of profit taking before this meeting.

The Santa Clause rally, the January Effect, the Y2K melt up, whatever reason you give to the current euphoria the result is the same. Increased buying with no hint of a pull back even at grossly extended levels. More than one user sent me a lump of coal by email this week after I suggested spending more time with families, shopping and relaxing this week instead of trading around the uncertainty of the Fed meeting. When the normally light volume week turned into a feeding frenzy after the Fed blessed the rates, the critics were out in force. Complaints were in the vein of "how can I make any money shopping with my family when the Nasdaq is up +127 points". Guys and girls, as much as you want to depend on someone to call the market flawlessly for you 250 days a year, it is still your decision. If you find somebody that can call it correctly every day, then send me his address and I will follow him too. Until then, it is your job to read everything you can find, analyze charts, check the news, weigh the possibilities and then decide if you are going to jump out of bed in the morning ready to trade or turn the alarm off and go back to sleep. I stood on the sidelines Tuesday just like you did, amazed at the market reaction. I did not lose any money because I was out of the market but when we are watching those missed profits move into five digits it is always frustrating. This is not a small operation. We are not three guys working out of our dorm room. Almost 70 people work for OIN and contribute to each newsletter. We compare research, argue about market technicals, fundamentals, and often times fail to agree on the forecast. Still we strive to present this information to you in a form that allows YOU to make a decision that YOU can live with the next day. When you trade, how you trade and what you trade is ultimately your responsibility. If you want to blame someone when the market disobeys the rules, go right ahead. We put our heart, minds and soul into producing the best newsletter possible and we are proud of the results. We hope you are too.

The letter you receive tonight will be much larger than a regular Thursday newsletter. Surprise, that is because it is really the Sunday newsletter two days early. Since the market is closed on Friday we are publishing the weekend edition tonight. THERE WILL BE NO NEWSLETTER ON SUNDAY

I would like to take this opportunity to wish everyone a very happy holiday. Enjoy this quality time with your family. When you are gone they will not say "I wish they had spent more time in front of the PC." Very seldom does the market give you a three day vacation and after they open night trading sessions next year you will have even less time for friends and family. You can't store, multiply or trade for more time on this earth. Spend it wisely.

Jim Brown

Reminder for our male readers: Shop now! Friday is the official shopping day for males. The stores will be expecting you. Your wives, mothers and girl friends have all completed their shopping and have cleared out of the malls to make room for us. Two things I have found to be important in the past.

1. Kitchen appliances are NOT good gifts for your spouse. Hand tools, flannel nightgowns and beef jerky are not normally met with enthusiasm either.

2. It is possible you mis-remembered the correct size, shape, color or request. Remember to keep the receipts. Don't feel bad if they want to take your gifts back. You actually did them a favor by giving them an excuse to shop again.

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