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To Stimulate Or Not To Stimulate...

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        12-19-2001        High      Low     Volume Advance/Decline
DJIA    10070.50 + 72.10 10088.30  9919.80 1.45 bln   1528/1643	
NASDAQ   1982.80 - 21.90  2007.76  1971.07 1.90 bln   1605/2059
S&P 100   588.72 +  5.34   590.25   580.10   totals   3133/3702
S&P 500  1149.56 +  6.64  1152.44  1134.75           
RUS 2000  482.07 -  3.42   485.49   480.02
DJ TRANS 2644.66 - 12.61  2662.08  2632.30
VIX        23.57 -  0.59    25.01    22.90
Put/Call Ratio      0.61

To Stimulate Or Not To Stimulate...

That is the question. The political battle is heating up in Washington, as business as usual has replaced the love-fest of cooperation that existed in the wake of the September attacks. Partisan politics are back, and are serving to bog down approval process for the much-hyped economic stimulus package. President Bush spoke of a compromise, but Senate Majority Leader Daschle argued that a compromise had not yet been reached. So the waiting game continues.

On the economic front, the Leading Economic Indicator provided the initial push to the upside this morning, as it came in stronger than expected (+0.5% vs. expectations of +0.3%). While this is encouraging for those counting on a recovery in the first half of 2002, it should be noted that the uptick was due entirely to factors already well known; namely the recent rally in the stock market, steepening yield curve and a decline in jobless claims. Good news, yes. But already priced into the market.

Energy and in particular Oil Service stocks were at the top of the leader board today following a news report that the U.S. intercepted an oil tanker in the Persian Gulf. The Oil Services sector (OSX.X) tacked on 4.6%, bringing it right back to the $85 resistance level that has kept a lid on each rally for the past month. Will the third time be the charm, or just another opportunity to buy puts? Whatever the outcome, it is likely there could be some profits in store for those that manage to guess the outcome correctly. My guess is that it is going to be another failed rally.

Regardless of what the underlying cause was, the DJIA managed to claw its way back over the psychologically important 10,000 level again today, and it looks like another test of the highs is in the cards for tomorrow. Financial stocks such as Citigroup (NYSE:C) and American Express (NYSE:AXP) led the charge with gains of 3.95% and 3.65% respectively. International Business Machines (NYSE:IBM) helped out too, closing at another 52-week high after trading as high as $124.70 in late-afternoon trading. Not to be left out of the bullish party, General Electric pushed back above $40 to close at its highest level since November 27th. The biggest drag on the Industrials came from Alcoa (NYSE:AA), losing more than 6% on the heels of the company's earnings warning last night.

So the battle continues with the bulls focused on economic recovery in the first half of 2002 and the bears gaining traction as the pace of earnings warnings accelerates into the end of the year. The winning camp is hard to pick right now, but the near-term bias is favoring the bulls. With the bullish bias that normally accompanies triple witching expiration, I would look for a retest of the recent highs before the end of the week.

The real problem is what to expect after that. The DJIA is once again nearing the 200-dma at 10109, with the 62% retracement of the May-September decline looming at 10,153. And that is just the beginning of the challenge for the bulls, as they then have to contend with A LOT of overhead resistance between 10,200-10,600. It was encouraging to see the participation from the Financials, particularly the Brokerage sector (XBD.X) today, which managed a 1.9% advance, closing right at resistance. But the internals are certainly not convincing, with decliners slightly ahead of advancers on fairly solid volume. Conviction isn't there, at least not yet.

After last night's trifecta of earnings warnings in the Semiconductor sector (SOX.X) from Motorola (NYSE:MOT), Micron (NYSE:MU) and Triquint Semiconductor (NASDAQ:TQNT), it was no surprise to see the SOX at the top of the loser list today. Weak right from the opening bell, the chip index dropped 5.2% by the closing bell, closing right at the low of the day and just above critical support at $536.50. This level has served as a price magnet for the SOX for over a month now as hopes for economic recovery are doing battle with the reality that all is not rosy in Tech-land.

I continue to focus on the SOX as an indicator of the health of the recent rally, as it typically leads any recovery in the broader Technology market. That recovery is now clearly in jeopardy, as demonstrated by the following chart.

Just over 2 weeks ago, pundits were falling all over themselves saying that the breakout over the 200-dma (grey line) and the long-term descending trendline meant that the bottom was in for the techs and the sky was the limit. The price action (not to mention the less-than-inspiring news) since then is casting a dark cloud over that bullish prediction. This is the second time in a week that the SOX has posted a steep decline, stopping right at the red support line. If this sector is going to remain in a leadership role, it has to hold above support. The battle lines are drawn, and the outcome is likely to determine the fate of the broader NASDAQ, at least over the near term.

So what's the outlook for tomorrow? Initial Jobless Claims are out before the opening bell tomorrow, with expectations of 440K vs. the last report at 394K. Anything near the consensus is likely to be a non-event, but lookout for a blowout in either direction. A drop in claims could be just what the bulls need to test recent resistance, while a sharp increase could have the bears sharpening their claws ahead of the holiday weekend in anticipation of fresh ground sirloin on the menu.

All of the major indices are back over Jim's trigger levels of 9800/1950/1125 for the DJIA/COMPX/SPX, so cautious bulls should have already staked out their claims for the anticipated rally. Trade the rally as long as it lasts, but watch out for profit taking. The market is always right, so don't argue with it. Your trading account will thank you.

Mark Phillips
Research Analyst

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