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Market Wrap

Markets Celebrate Holidays Early!

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       WE 11-23         WE 11-16         WE 11-11         WE 11-02
DOW     9959.71 + 92.72  9866.99 +258.99  9608.00 +284.46  -221.63
Nasdaq  1903.19 +  4.61  1898.58 + 70.10  1828.48 + 82.75  - 23.23
S&P-100  593.27 +  5.20   588.07 + 10.08   577.99 + 18.00  -  7.99
S&P-500 1150.34 + 11.69  1138.65 + 18.34  1120.31 + 33.11  - 17.41
W5000  10596.40 +109.73 10486.67 +189.46 10297.21 +280.40  -168.72
RUT      458.42 +  7.11   451.31 + 13.21   438.10 +  5.03  -  5.58
TRAN    2534.90 + 37.53  2497.37 +176.68  2320.69 + 74.03  -   .92
VIX       24.78 -  2.39    27.17 -  1.59    28.76 -  3.64  +  1.87
VXN       50.81 -  4.23    55.04 -  3.55    58.59 -  2.60  +  4.28
TRIN       0.70             0.99             0.90             0.92
TICK       +976             +750             +784             +701
Put/Call    .61              .50              .74              .70

The markets came back from Wednesday's lows to close right below resistance again. The Dow closed just above 9950 and appears poised to test 9975 again on Monday. The Nasdaq rallied back from the 1853 Wednesday low to close over 1900 again. The S&P-500 stopped dead on resistance at 1150 and closed within a point of the high of the day. Before you get too excited a quick glance at the volume would sow that the gains came on VERY anemic volume. The NYSE only managed 417 million shares and the Nasdaq 567 million.

News driving the markets on Friday was almost nonexistent. Russia held the hard line on oil with only a token 50,000 bbl cut dropping oil prices again. Drilling stocks were bucking the trend with gains as analysts pointing to increased non-OPEC exploration and production as lessening OPEC's clout in the market.

Amgen continued to power the biotech sector after raising guidance earlier in the week. Guidant also held its gains from Wednesday when a new heart device was shown to decrease the chance of death by 30% for heart attack victims compared to conventional treatment.

Storage stocks rallied again on the thought that they were very undervalued after the recent sell off. Storage needs are still expanding and will escalate into any economic recovery. On Wednesday an analyst suggested that Brocade was cheap at the current multiple but another downgraded them based on shipping delays on their new products. Still EMC, BRCD, SNDK, NTAP and STOR posted gains on Friday with STOR leading the league with an 11% gain.

The Dow was boosted by five stocks which rallied with strong gains. IBM rallied off the bottom of its trading range to gain over $1 to $115.25. Citigroup struggled back to resistance at $50 with a $1 gain. Alcoa rebounded $1 after its takeover bid for WMC Ltd of Australia was rejected. MMM gained +1.90 to highs not seen since June. GM also rallied after selling off on Wednesday for a $1.45 gain. The Nasdaq leader list was dominated by biotechs but the early news reports from the malls boosted COST and BBBY into that list as well. Only eight of the Nasdaq 100 stocks posted losses.

The early news from the malls was not good and could probably be our downfall for next week. Almost every report showed fewer shoppers and even fewer buyers. The fewer shoppers in the malls on the busiest day of the year was even more dismal due to the highly visible number of distress sales. Signs showing -30% to -50% off as well as monster newspaper ads proclaiming sales did not draw the crowds. There were exceptions but even as reporters tried to put a positive spin on TV spots the isles behind them were desolate. Surveys showed California the worst hit with shoppers claiming a budget of $385 for holiday shopping compared to the east coast claiming a $550 budget. These numbers are down from prior years but considering the huge sales they could actually bring home more merchandise. Toy retailers appeared to buck the trend with long lines and packed isles.

The problem for next week will be the perception that the consumer is not spending. The expectation that a normal holiday season was ahead may be replaced by a continued worry that unemployment and possible terrorist attacks will prolong the current recession trend. The rally on Friday should be ignored as an indicator of market strength. Although the advances beat the declines better than 2:1 the volume was simply bleak. The buyers had no power but there were simply no sellers. Up volume beat down volume 4:1 but on average the gains on a stock by stock basis were minimal.

Next week is the make or break week for the current rally. We are poised 25 points below resistance on both the Dow and Nasdaq and the week after Thanksgiving is historically very bullish. Part of the bullishness is usually based on positive weekend sales reports. As I wrote above those reports tried to put a positive spin on the news but short of a wave of buyers appearing over the weekend, there could be negative market impact next week. If the first round of huge discounts failed to bring in buyers then more discounts are ahead and this does not bode well for retail profits.

Another problem we will be facing soon is tax selling. If the markets can break above 10,000/2,000 then that selling should wait until later in December. If we fail again at these levels during a normally bullish period then sellers could decide to take profits early and start the 30 day clock on buying those shares back. Investors who bought the dip the week of Sept 21st have significant gains already with some stocks up over 100% from those lows. Considering that these same investors probably have large losses from earlier in the year the incentive to offset those losses and maximize tax savings will be huge.

As traders we need to be aware of all possibilities and plan accordingly. When the indexes are poised to breakout everyone is feeling bullish about their prospects. Just breaking 10K for the Dow is only the first step. There is heavy resistance all the way to 10500 and it will be hard fought ground. The rebound off support at 9800 on Wednesday gives us our trading rule for next week for the Dow. We should stay long over 9800 and go flat should that support level fail. The same bearish line on the Nasdaq is 1850. Should that level fail I would go flat again.

I am most encouraged by the S&P-500. If it can continue to trade over 1150 then the long term down trend in place since August 2000 will be broken. We are at the proverbial "inflection point" for the S&P and therefore the broader market.

As investors we need to stay invested above the levels I mentioned earlier and hope for the breakout to occur. Should the Dow break and close over 10,000 again it would be a very positive signal but not one that guarantees future success. 10,000 is just a number but one that is more important going up than going down. That means we may have a much harder time getting above it than we will in falling below it again. In short, be bullish but don't be stupid. Trade what the market gives us or don't trade at all!

Enter passively, exit aggressively!

Jim Brown
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