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Manipulative Markets

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        12-28-2000        High      Low     Volume Advance/Decline
DJIA    10868.80 + 65.60 10901.40 10774.70 1.02 bln   2101/ 832
NASDAQ   2557.76 + 18.41  2571.52  2514.56 2.19 bln   2602/1485
S&P 100   692.29 +  1.11   694.18   688.62   totals   4703/2317
S&P 500  1334.22 +  5.30  1335.93  1325.78           70.0%/30.0%
RUS 2000  494.03 + 14.73   494.03   476.85
DJ TRANS 2891.45 -  8.16  2898.12  2865.97 
VIX        30.17 -  2.14    32.37    30.15
Put/Call Ratio      0.60

Manipulative Markets

And the war wages on. The final trading day of the year is likely to bring more posturing and positioning by portfolio managers. The two end-of-year events known as window dressing and tax-loss selling will dominate trading tomorrow.

As my esteemed colleague, Matt Russ, wrote yesterday, institutions will be closing their books on 2000 by cleaning their portfolios of losers and dressing them with recent winners. So what does that mean for individual traders and investors?

For those looking to bottom fish in this year's big losers (LU, T, WCOM, CMGI...etc) it may be prudent to wait after tomorrow's final round of tax-loss selling hits before casting your capital in that direction. Even the big tech names such as CSCO, INTC and MSFT may experience continued selling tomorrow. That selling was clearly evident today in the big tech leaders: CSCO (-1.19), INTC (-1.69), MSFT (-1.89). Although there may have been some news-related items contained within the aforementioned losses, I do believe the lion's share was related to end-of-the-year tax-loss selling. However, the tax-loss selling may abate near the close of trading tomorrow as the bargain hunters begin to step in. Be on your toes if you're going fishing for bargains!

And although the big, liquid names on the Nasdaq suffered today, it was a different story for the less-liquid, high-flying names, which brings us back to a possible play on tomorrow's tape. A glance over today's biggest point gainers reveals an interesting story, which reinforces our premise of window dressing. A few of today's big winners included: JNPR (+10.50), NTIQ (+9.88), PDII (+7.13), BRCD (+6.59), QLGC (+5.94), TLGD (+5.69), CHKP (+5.22), CIEN (+5.13), MUSE (+4.94), NEWP (+4.56), EXTR (+4.38), SEIC (+4.31). Doesn't it seem a little strange that the Nasdaq Composite (COMPX) finished a mere 18 points higher yet JNPR enjoyed double-digit gains? We are likely to witness more of that strange action on the Nasdaq tomorrow as fund managers attempt to walk stocks up into the close of trading as a last attempt to repair the damage done to their portfolios this year. If traders are looking for an edge tomorrow, it may be worth while to take a look at some of the aforementioned names, among other high-flying four-lettered stocks, as they are likely targets of more artificial buying tomorrow.

Along with the traditional walking up of tech stocks, we're also likely to witness some buying in the cyclical names which have come into their own light over the last quarter. The likely targets in the cyclical space are numerous. We could see positioning in the papers, financials, insurance, tobacco and chemicals, among others.

And that buying of cyclical names helped to power the Dow Jones Industrial Average (INDU) higher yet again and further along its quest back to the 11,000 level. Since bouncing last Thursday from the 10,300 level, the INDU has charged higher by roughly 570 points, or 5.5% That's not a bad move in the space of five trading days! That said, tomorrow's action in the INDU will be a question of whether or not the window dressing buying will outweigh any profit taking that may take place. The key resistance level to watch for tomorrow will be the 10,900 mark, which after today's rollover, marks a triple top for the INDU. Should the profit takers prevail, we could see the INDU pullback to support at 10,800 - a site where the buyers might step in on the dip.

But despite the strong showing on the INDU, the Nasdaq Composite (COMPX) rotated around the flat-line. However, in the final two hours of trading, the COMPX did manage to find some bids and rally into the close of trading. Not by coincidence, the INDU began to falter in the final two hours of trading, which was a result of profit taking and resulted in capital flowing back to the COMPX. For its part, the COMPX needs to clear resistance at 2565 tomorrow, thereafter it's a clear shot to the 2600 level. The window dressing we've been ranting about may be enough to carry the COMPX up to that level tomorrow, but it will be difficult for the tech-heavy index to make much headway without help from the big dogs in CSCO, INTC, SUNW and MSFT. Those four stocks will be key telling signs tomorrow of how much upside potential the COMPX actually has. If the big dogs do falter watch for support around 2525 or lower near the psychological 2500 level.

Though the analyst crowd has been somewhat muted this holiday week, there were comments out this morning which were partially responsible for the weakness in INTC and MSFT. Analysts at Prudential cut their estimates on PC giants IBM and DELL. Prudential cited concerns of weakness in the PC market and the result that softness will have on revenue growth at IBM and DELL. When did we last hear that mantra? In a bit of sell-side twist, Wit SoundView came out with its own opinion on IBM, which was a bit more bullish. Analysts at Wit SoundView reiterated their Strong Buy rating as well as their $140 price target. With both the bullish and bearish sides presented this morning, traders chose the former and bid shares of IBM higher throughout the session after their gap down this morning. IBM finished fractionally higher by +0.56. Shares of DELL, on the other hand, lost -0.06.

Barring any major sell-side calls tomorrow morning (unlikely), we're looking to trade around the year-end positioning. Tomorrow's tape is likely to be filled with contradictions to current trends and wild movements in share prices. But where there's volatility there's profit potential for nimble traders. Whatever transpires during tomorrow's trading, it's crucial to remain disciplined and trade within your set strategies. If the window dressing theme plays out tomorrow as we're expecting, we're likely to witness big gains in the quarter's recent winners along with many of the easily manipulated over-the-counter names. But aside from the portfolio positioning tomorrow, we're are likely to see continued advances in the names that will benefit most from an ease in interest rates. The bulls have been running rampant in many sectors in anticipation of interest rate cuts and will continue to do so as the economy begins to pickup. For those looking for long positions, it's best to stick with what has been working. And the finance, insurance, paper, energy and other cyclical sectors have been working very well lately. Keep it simple, trade with the market and profit! Good luck in 2001!

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Happy holidays!

Eric Utley
Assistant Editor

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