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Market Wrap

Profit taking on low volume provides another entry point!

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        12-26-2000        High      Low     Volume Advance/Decline
DJIA    10692.40 + 56.80 10701.20 10597.60  804 mln   1747/1172
NASDAQ   2493.52 - 23.50  2548.75  2436.19 1.56 bln   1706/2320
S&P 100   687.00 +  2.77   690.35   679.52   totals   3453/3492
S&P 500  1315.19 +  9.24  1315.79  1301.64           49.7%/50.3%
RUS 2000  466.63 +  3.64   467.00   462.45
DJ TRANS 2839.59 - 10.34  2851.27  2824.30 
VIX        32.54 +  1.02    33.56    31.28
Put/Call Ratio      0.95

On a very slow news day a continued trickle of year end tax selling as well as profit taking from Friday's big gains held the Nasdaq to a loss but overall the results were very acceptable. Considering the recent massive selling into every rally the very fact that the majority of the gains from Friday held was very good news. Sure there some losers but compared with the gains from Friday they were only bruised not battered. For example JNPR only lost -5.50 of the +$29 it gained on Friday and I am sure investors holding JNPR would take those ratios every day. After an opening rally to +33 the Nasdaq fell intraday to a low of 2436 or -79 points before bargain hunters started nibbling. Volume picked up into the close as traders started breathing easier that maybe Friday was going to hold.

The only material tech warning today went to NTRO, a broadband and wireless access system producer, said orders from major customers had slowed, primarily from Lucent. This caused some selling in the sector on stocks like RBAK but it was not significant.

JDSU was downgraded by DB Alex Brown today and traded lower most of the session but pulled back into positive territory near the close. This was a bullish sign and we should thank D.B.A.B. for another entry point into CIEN, which dropped -$11 off its high before recovering into the close. CIEN was cited in several industry articles today as a compelling value in the sector.

With holiday retail sales numbers being cussed and discussed all day by the various analysts it appears that the season was marked by huge discounts and price wars to unload the huge inventory of goods. Retailers order product about nine months in advance and the retail picture was much better last Feb/Mar than it is today. Retailers stuck with billions in excess merchandise had been discounting heavily since Thanksgiving. This week retailers do as much as 10% of their yearly sales and analysts are concerned what they can do to top -50% off pre-Christmas sales. Margins are sure to suffer and Wal-Mart took the first high profile hit today. After WMT said sales were weaker than expected JP Morgan downgraded estimates for the retailer. WMT dropped -$3 to $49 on the news but recovered some by days end. Expect more of the same of others as the reporting of seasonal sales continues. Federated (FD) slipped slightly on a warning as well.

Online retailers pinned their hopes on YHOO which said online sales were twice as strong as last year. YHOO jumped +$5 on the news but sold off on worries that even that would not be enough to pull others like AMZN and EBAY out of their slide. YHOO gets most of its revenue from advertising, not product sales, but the increased sales could not hurt. Still, the buy the rumor, sell the news, trend is alive and well and Internet retailers are likely to trend down now that their year is over.

The Nasdaq has only three days left to gain +149 points to prevent posting its worse year ever. Currently down -39% for the year it is beating 1974 as the worst year ever. The Nasdaq needs to close above 2640 to avoid setting a new record. With the volume picking up into the close and bargain hunters feeling a little more confident, we have a good chance to better that number. After the close today there were no major warnings and most of the big caps gained in after hours trading. CSCO, SUNW, MSFT, JNPR, CIEN, INTC all gained ground slightly from their close.

The key here is still volume and you could definitely tell traders were shopping instead of trading today. With only 1.5 billion shares on the Nasdaq and only 800 million on the NYSE it would be very tough to forecast any real trends from today's action. Still, only losing -23 on the Nasdaq should count as a win in our book after the very strong +177 point gain on Friday. In these market conditions only a -12% retracement of the Friday's gains is a win!

For the rest of the week we can look forward to much lighter tax selling since most of the major sellers are done. Only the holdouts still in denial are left on the fence. With the Santa Claus rally a no show, traders are now focusing on a real January effect for a change. In recent years the January effect had been front run into November and December by eager traders attempting to capitalize on fund buying as the retirement cash flowed in January. Without a Nov/Dec pre-rally we could see an accelerated bounce over the next week or two. Funds that have been sitting on cash in anticipation of possible redemptions will now start to put that cash to work. The conditions are ripe for a rally. The Fed is on our side with the next move expected to be a rate cut. The Nasdaq has hopefully put in a bottom and the Dow has held 10300 numerous times. The only fly in the ointment is the expected rash of warnings next week. Historically over 40% of 4Q warnings occur in January but with the almost 800 pre-warnings for this quarter already it remains to be seen who is left of consequence. We still have SUNW, CSCO and IBM as front runner candidates but those expectations are already factored into the market to some extent. Traders are going to be holding their breath as the 2000 clock runs out on the markets.

Like a severely lopsided football game with the winners in possession at the two minute warning, the losers are just trying to hold the line and prevent another penetration and score from adding further insult to injury. Traders just want to get out of 2000 alive and with the Nasdaq over 2400. A close over 2640 to avoid Y2K going into the record books as the worst year ever for the Nasdaq is immaterial. One only needs to look at their trading account to know it was a tough year and that is the only record book that counts. The bright side continues to be future. As traders we are all smarter, quicker and more resilient than we were a year ago and we will be even smarter, quicker and more resilient when 2001 draws to a close. What does not kill us makes us stronger. I don't know about you but I am pumped! Let's get ready to rumble!

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Happy holidays!

Jim Brown

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