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Tightrope Act Leaves Investors Confused!

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       WE 12-14         WE 12-07         WE 11-30         WE 11-23 
DOW     9811.15 -238.31 10049.46 +197.90  9851.56 -108.15  + 92.72
Nasdaq  1953.17 - 68.09  2021.26 + 90.68  1930.58 + 27.39  +  4.61
S&P-100  572.38 - 19.40   591.78 +  6.98   584.80 -  8.47  +  5.20
S&P-500 1123.07 - 35.24  1158.31 + 18.96  1139.45 - 10.89  + 11.69
W5000  10443.56 -301.81 10745.37 +213.92 10531.45 - 64.95  +109.73
RUT      471.29 -  9.92   481.21 + 20.43   460.78 +  2.36  +  7.11
TRAN    2577.10 - 51.16  2628.26 +116.48  2511.78 - 23.12  + 37.53
VIX       25.97 +  1.08    24.89 -  1.25    26.14 +  1.36  -  2.39
VXN       52.79 +  2.61    50.18 +  1.73    48.45 -  2.36  -  4.23
TRIN       1.06             1.18             1.19             0.70
TICK       +388             +828             +852             +976
Put/Call    .72              .78              .63              .61     

The markets rallied slightly from their oversold conditions but came to a stop exactly on critical technical levels. The rally came on rumors that UBL had been captured or killed. While just a rumor the shorts did not want to hold positions over the weekend and be faced with a patriotic bounce at the open on Monday should the rumor be found true. After the close a defense dept briefing was held and the rumor proved to be untrue.

Other than the rumor bounce it was a very slow day. You can tell just how slow when the three biggest news stories were on McDonalds, Home Depot and GE. Not normally news drivers they shared the spotlight as traders struggled to maintain interest a week before Christmas.

McDonalds said they were on track in their recovery program but they would come in at the low end of estimates and a penny below consensus. The European business was recovering from the mad cow scare but the Japanese unit was now suffering the same fate after three cows have tested positive since September. Weak Asia/Pacific economies were also weighing on their business. Still on a slow news day McDonalds "soared" +1.16 or +4.5% on the announcement. Are you excited yet?

Home Depot "rocketed" +1.81 on news that holiday shoppers were spending money on home improvement items and stores were seeing heavier traffic even though normal holiday retailers were facing slowdowns. I know this is exciting stuff but please try to control yourself while I wade through this market moving news. It appears Lowes and Home Depot actually added some merchandise that would appeal to shoppers as impulse gifts such as coffee makers, crock pots, home electronics and Christmas lights. Wow! A major marketing breakthrough! Stock what people will buy, I wonder if it will catch on in the entire retail sector? This novel approach to retailing caused HD to post the biggest gain of any Dow component. I told you this was an exciting news day!

I hope your sitting down because you may need a drink after this next paragraph. At least that is what the liquor industry hopes. GE component NBC opened the spigot on allowing advertisements for hard liquor on national television. The decades old informal prohibition will come to an end with a spot for Smirnoff vodka which will air on Saturday Night Live. The advertising market has gotten so bad that it appears past taboos may become prime time gluts. Once the door is opened to liquor ads all the major brands will have to ratchet up their campaigns and throw massive amounts of money at the major networks. The change in status could provide a replacement for the tobacco ad revenue which disappeared many years ago. GE "spiked" the markets with a +.60 gain.

I told you it was slow. Even the economic news was dull and uninspiring. The Industrial Production number came in at -0.3% which was much better than the -0.6% decline that was expected. Still it was the thirteenth month of decline in the last fourteen months. Capacity utilization fell to 74.7% and the lowest level since 1983. The good news was that five of the twenty industries that make up the manufacturing component showed gains and new orders are beginning to show signs of improvement. This indicates that growth over the next two months will likely remain negative but it is starting to get better.

Business inventories fell -1.4% which was twice the consensus and the inventory-to-sales ratio fell to 1.39, the lowest level since June 2000. Many analysts believe the inventory correction is becoming so overdone that the rebound off the bottom will be very strong. Once inventory reaches maintenance levels orders will have to be processed to maintain those levels and not slip into shortage territory. Once this maintenance level is reached and manufacturing stabilizes then analysts will feel more comfortable about predicting future trends.

The Consumer Price Index continued to gyrate and posted a flat month when analysts had expected a drop. The Fed was expecting more drops in inflation and the zero change in the rate was probably a shock. One month does not make a trend but any resiliency in the core price inflation will undermine support for further rate cuts. Of course there are not many rate cuts left in the Fed's arsenal anyway. What could happen would be a rush to take back those rate cuts if the inflation monster starts to shadow us again. The calendar for next week is very light with the only major report being the 3Q GDP on Friday. Friday is triple witching option expiration day and coupled with all the year end portfolio shuffle the volatility could be dramatic.

The biggest problem we will face next week is not the economic calendar but the tax selling calendar. Most funds will want to be done before the holidays which means we could see more selling before Santa arrives. The bounce at the close on Friday was simply short covering in case the Eastern Alliance serves up a well known turban on a platter for U.S. troops. The major indexes rose up to rest exactly on support, now resistance, of 9800 (9811) 1950 (1953) and 1125 (1123). You probably recognize those numbers as my entry- exit points from the last two weeks. Could that many traders really be reading my material? Just kidding. I obviously did not pull those numbers out of my hat since they have now become something of a battle ground between the bulls/bears. Since the indexes came to a stop exactly on the edge of a breakout/breakdown we need to look a little closer at the market movers to decide what direction next week might take. To do this we can look at all the Dow stocks to see which are likely to go up or down.

Dow 30 Stocks

AA   Alcoa            $37 trending down, support $35
AXP  American Express $32 trending down, support $30
T    AT&T             $16 trending down, support $15
BA   Boeing           $37 trending up, resistance $38
CAT  Caterpillar      $50 trending down, support $48
C    Citigroup        $47 trending down, support $45
DIS  Disney           $21 trending up, resistance $23
KO   Coca Cola        $46 flat - no risk
DD   Dupont           $41.5 trending down, support $40
EK   Kodak            $30.5 trending down, support $29
XOM  Exxon Mobil      $37 trending down, support $36
GE   General Electric $37.6 flat - resistance $38
GM   General Motors   $47.5 trending down, support $46
HD   Home Depot       $50 trending up but at strong resistance
HON  Honeywell        $32 trending down, support $30+
HWP  Hewlett Packard  $21 trending down but at support
IBM  IBM             $121 flat, resistance 122, support $119
INTC Intel            $33 flat, resistance at $34
IP   Intl Paper       $39 flat, at support
JPM  JP Morgan        $36 trending down, support $35
JNJ  Johnson&Johnson  $56 trending up, resistance at $57
MCD  McDonalds        $27 trending down, support $26
MRK  Merck            $58 trending down, at support
MSFT Microsoft        $67 trending down, support $66
MMM  3M              $115 trending down, support $114
MO   Phillip Morris   $46 flat, resistance $46, support $45
PG   ProctorGamble    $80 trending up but overextended
SBC  SBC Comm         $39 trending up, resistance $40
UTX  United Tech      $61 trending up, resistance $62
WMT  WalMart          $54 trending down, support $52

The bottom line from all the Dow analysis above is that there are 17 down trending stocks, 7 up trending and 6 flat. The difference between current prices and support on the down stocks totals slightly more than $22.50. Using an average weighting of seven to get Dow points you arrive at a downward risk of -157.50. That would put us at 9656 but it also does not take into account the up trending stocks. The stocks moving up have a total of $7 between them and resistance which equates to +49 Dow points. You cannot draw any specific point conclusions since on any given day some stocks will be up and some down.

The conclusion you can draw is that the Dow is heavy. That means that it will require more effort to produce a rally than it will to cause a drop. With down trending stocks outweighing stocks moving up by better than a 2:1 margin the odds are better for another drop or at least no major gains. This analysis is only good for a couple days since the internals for each Dow stock will change daily based on hundreds of factors.

The top Nasdaq stocks breakdown like this. I added the percent of the Nasdaq for each stock.

DELL $28, trending down, support $26 - 2.46%
CSCO $19, trending down, at support  - 4.49%
ORCL $14, trending down, at support  - 3.08%
MSFT $67, trending down, support $66 - 11.1%
INTC $33, flat, resistance at $34    - 6.94%
QCOM $56, trending down, support $49 - 4.56%
WCOM $15, trending down, at support  - 1.41%
SUNW $12, trending down, at support  - 1.58%
PSFT $38, flat, at support           - 1.48%
MXIM $57, flat, at support           - 2.31%
AMGN $56, trending down, support $55 - 2.65%

Notice anything? With 42% of the Nasdaq represented in the eleven stocks above, there are zero stocks trending up. With the exception of QCOM however there is only $6 between their current prices and support. While there are no winners there are no losers either other than possibly QCOM. This means that the Nasdaq is stronger than the Dow and could wage a tough battle here at 1950 before giving up ground.

The low prices, and I am not talking about PE ratios, of the stocks on the Nasdaq compared to where they started 2001 could draw more tax sellers. HOWEVER, since the techs always lead the market out of bottoms there is likely to be a lot of buyers as well. These buyers, $4.5 trillion in cash on the sidelines, have been waiting for a sign and a failure to fall any further next week after posting huge gains since the attack could be that sign.

That sign may not be seen on Monday/Tuesday. After doing the Dow/Nasdaq analysis above I went back and scanned my top 1000 stock charts. It was not a pretty picture. Many, and I repeat many, of the stocks were completely broken down. Many had fallen to support and were showing signs of failure. Chemical stocks, networking, chips, materials, banks, there were very few leaders. This appears to be a case of the soldiers getting crushed while the generals are struggling to hold the high ground. If the trend spreads next week that sign of end of year strength I spoke of above will only be wishful thinking. It is entirely possible we could see another washout drop if earnings warnings pick up speed before the holidays. In my opinion that would be the best scenario. Clear the desks, take profits, close the tax books and let the next bull market begin.

Everyone knows we are in a recession. Old news! Everyone knows that a recovery will likely appear in the second half of 2002, give or take a quarter. Our task is to avoid losing money while waiting for the next move up to begin. This is really a very easy task. Instead of wondering each day if this is the day, we only need to watch the technical entry points. We do not need to worry if there will be tax selling. Or about the possibility of a Santa Claus rally or even when the January Effect really appears. We only need to worry about our planned entry point.

Our job became only slightly more difficult on Friday as the markets came to rest exactly on those entry/exit points. Some of us went long when the markets rallied over the entry points on the Laden rumor and then saw those indexes fall right back to the entry point at the close. We should not agonize over this and simply keep to the plan. If we dip below those levels next week then simply go flat and wait for the numbers to be crossed again. The numbers I am referring to are Dow 9800, Nasdaq 1950 and S&P-1125. Stay flat below them and go long above them. So simple it is scary!

Enter Very Passively, Exit Aggressively!

Jim Brown
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