Option Investor
Market Wrap

Ready, Set, Shop!

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       WE 12-21         WE 12-14         WE 12-07         WE 11-30
DOW    10035.34 +224.19  9811.15 -238.31 10049.46 +197.90  -108.15
Nasdaq  1945.83 -  7.34  1953.17 - 68.09  2021.26 + 90.68  + 27.39
S&P-100  586.41 + 14.03   572.38 - 19.40   591.78 +  6.98  -  8.47
S&P-500 1144.89 + 21.82  1123.07 - 35.24  1158.31 + 18.96  - 10.89
W5000  10644.93 +201.37 10443.56 -301.81 10745.37 +213.92  - 64.95
RUT      484.02 + 12.73   471.29 -  9.92   481.21 + 20.43  +  2.36
TRAN    2605.23 + 28.13  2577.10 - 51.16  2628.26 +116.48  - 23.12
VIX       23.29 -  2.68    25.97 +  1.08    24.89 -  1.25  +  1.36
VXN       50.96 -  1.83    52.79 +  2.61    50.18 +  1.73  -  2.36
TRIN       1.08             1.06             1.18             1.19
TICK      +1184             +388             +828             +852
Put/Call    .69              .72              .78              .63     

The heading for this article was directed at the male population and I should have actually said ready, set, BUY. As everyone who has been married for sometime knows, the males of the species are not adept at shopping. They are "buyers" not "shoppers' and will only venture into a retail environment after they have completely made up their mind OR are forced to accompany their better half on a "fun and exciting shopping experience." The other trigger that can send males into a buying panic is the last shopping day before Christmas. No longer able to procrastinate the task they are forced to join the other hordes of last minute shoppers to find just the "perfect" gift among the scattered remains of the billions of dollars of merchandise that "early" shoppers picked over or already returned. With the good stuff already gone or consigned to out of the way boutiques, places males would not be caught dead visiting, the "perfect" gift for that special someone more often than not becomes something that the someone wishes they could return the day after but can't because "dad/husband/ boyfriend" bought it for them. Surely he spent days researching and shopping for this present and I could not be so heartless in returning it. Just because it does not fit, is the wrong color and 20 years out of my age bracket, I can't return it! It is the thought that counts and he was so sweet to spend all that time and effort picking it out. (If they only knew!)(Actually my wife knows and that is why I am in the office writing at 11:PM Friday night and she is closing store after store always mindful of the next store with a later closing schedule.)

The economic reports on Friday came in bullish and the markets jumped at the open and held their ground all day. The Consumer Sentiment number surprised analysts and jumped up to 88.8 for December which was a large increase from November's 83.9. The index is still below last summer's levels but rebounding strongly and indicates consumers are comfortable with the current environment. This was the third month of increase and the expectations index rose almost six points indicating they were encouraged about the future. Only slightly below the 9/11 levels it shows that the impact from the attacks has almost completely dissipated.

The rise in consumer confidence is somewhat confusing since personal income declined in November. Spending was down as well by -.7%. Consumers earned less, spent less and were happier about it. Something is wrong with this picture. We have heard the term cocooning for three months and this economic data is clear evidence of that impact. Consumers worked less, stayed home and saved their money. Fears of impending layoffs and terrorist attacks kept a lid on the economy. The positive consumer sentiment is a sign that they may be starting to come out of their cave again.

That same cocooning was seen in the GDP revision which was revised downward to -1.3%. The bright side to this entire set of reports is simply a consumer that is reviving, at least for the 4Q, and the prospect that the recession could be limited to one quarter is good. We may still be in a recession but nowhere near the -1.3% suffered in Q3. Some analysts are speculating on -0.5% for Q4.

All this bullish economic news was offset by some not so exciting news in the semi book to bill report. New orders in November were only 73% of billings for orders shipped. In English this means orders are still falling at an alarming rate. It appears that the sector has yet to hit bottom. The percentage number was up slightly from the prior months but the new bookings dropped to a new low of $612 million. To put this in perspective shipments in April were $1.654 billion. The bookings have stabilized for the last three months at just over the $600 million level but do not show any signs of growth. Considering the long lead times for new chips it could appear that any recovery in the 1Q is out. Once those orders start coming in, real signs of progress should appear over the following three months.

In the markets on Friday there was mostly good news and even the warnings were ignored. Caterpillar said it was cutting 900 jobs to increase efficiency and close a plant. Even with the job cuts and $55 million charge they affirmed previous profit estimates. Those estimates were for up to a -15% drop in profits but the good news was they did not lower them again. Honeywell announced that it would take a $540 million charge but it was on track for achieving $1.3 billion in savings from 15,800 job cuts and closing 51 facilities. Excluding the charge HON said it was on track to post earnings in the range of .54 to .56 and well within analyst's estimates of .50 to .56 cents.

Those press releases didn't hurt the Dow and even a warning from Nortel failed to blunt enthusiasm. Nortel warned that they would post a loss in the 4Q but it will be less than the 3Q loss. It will be bad but not as bad as analysts feared. NT gained +.77 on the news and had a beneficial impact on several other stocks in the sector like RSTN which jumped over $2. JNPR and CIEN also gained ground.

Airlines gained ground early after an UBS Warburg said in a research note that those stocks could rise +80% to +200% over the next two years. The euphoria was short lived when Moody's Investor Service announced later they were cutting the debt ratings on UAL and CAL from junk to worse than junk. Earlier this week they cut AMR and DAL as well. Sometimes you just can't get a break.

The nice gains we saw on Friday were motivated in part by options expiration and a rebalancing of the Nasdaq-100. The expiration was quiet on Thursday but provided some of the volume at Friday's open. The Nasdaq rebalancing helped the stocks going in and hurt those being dropped. (duh!)

Stocks being dropped for non-representation (read that as too cheap) were ARBA, BVSN, CMGI, CNET, COMS, INKT, LVLT, MCLD, MFNX, NOVL, PALM, PMTC and RNWK. Stocks being added included IMCL, CHTR, CDWC, SYMC, SEPR, IVGN, ESRX, CEPH, ICOS, CYTC, PDLI, IDTI and SNPS. Those being added saw sharp volume spikes, and I really mean sharp, in the last 15 min of trading. CYTC for instance sometimes trades less than a million shares a day and almost eleven million shares traded on Friday, much of it in the last hour. I am really surprised the Nasdaq finished in positive territory considering that several of the big cap Nasdaq stocks finished down. CSCO, SUNW, ORCL and the others were only fractionally positive. INTC, +.43, MSFT +.78, DELL .00, JDSU +.25 and WCOM +.45.

Other than the tame affirmations and the Nasdaq rebalance the news was pretty mild. Traders were heartened by the consumer sentiment numbers and started placing bets in front of the "expected" Santa Claus rally. (sure going to be a lot of people disappointed if it does not happen) Remember, we trade what we get. There has been a lot of conflicting information about the expected rebound and if the facts start showing that it is nowhere n sight investors will move back to the sidelines. Things like the semi book to bill, which in my mind was bearish, were glossed over with holiday sentiment.

Retailers are reporting a wide mix of good news/bad news. While sales are ahead of estimates "officially", those estimates were already lowered. Unofficially, there is a war on in the retail market place. Retailers get 40% of their annual sales between Dec-18th and Dec-31st. 40%!! Many stores are having 30-50 even 75% off sales to get consumers to buy their merchandise with little success. Sure the malls are full three days before Christmas but retailers are giving away merchandise to draw them in. When the numbers are released in January it could be a bloodbath.

One retail analyst said this has been the worst holiday season in a decade and the first quarter was shaping up as a serious disaster. Retailers are pulling out all the stops to coerce people to buy in December and they are compressing the available sales into this quarter. Consumers who are buying are reported to be putting most sales on credit cards which will come back to haunt them in January. More rounds of layoffs are expected in January as well as companies start a new year and look back over the scorched financial statements from 2001. Remember the consumer income above dropped last month. According to TrimTabs tax collections from paycheck deductions in December are already more than 10% behind last December. There is a significant and growing problem that many investors are overlooking. I personally think that the markets are walking a very thin tightrope over these problems and as long as investors don't look down until we get to the recovery we will be ok. Until then I expect the markets to become more volatile the higher they climb.

Now, let me come out of my bear cave for a minute. Everyone wants to rally into the new year. Good, no complaint there. Everyone knows that markets perform best when they have to climb a wall of worry. No complaint there, we got one in front of us that looks more like a bed of hot coals than wall. Most institutional investors feel there is little downside. I really can't complain with that concept. I think the 9/11 event was a pretty convincing washout and I can't imagine returning to those levels. So the case I am building here looks like this. We are likely to rally next week because, big investors think there is little downside and that should put a floor under the market. Retail investors think stocks are cheap, relatively, and have been conditioned that the week after Christmas is a good time to buy. Mutual funds are faced with a flood of new retirement cash over the next several weeks and they have to put it to work somewhere. Almost $10 billion has come into stock funds already in December. (Somebody out there must have gotten a bonus although they are said to be 50-60% below last years.) Volume on Friday was the best in recent memory with 1.7 bil on the NYSE and almost 2.3 bil on the Nasdaq. Tax selling is not over and can hit any stock at any time. Funds holding winners could be waiting for that last pop up next week before selling. Keep those stops close.

The scenario as I see it is a positive week ahead as bulls trade on emotion. That emotion could push the indexes back up to test resistance once again. That resistance for the Dow is just above 10150, Nasdaq 2050 and S&P 1175. Those levels will not be broken without a lot more than emotion behind the bulls. HOWEVER, should we get an upside surprise a break above those levels next week could trigger the mother of all short covering rallies since most technicians believe it is impossible. Based on the sentiment I think the plan is to go long until the market tells us otherwise. I am going to raise the exit points to Dow 9950, S&P 1135 and lower the Nasdaq to 1900. Stay long above these levels and go flat if they are broken.

Monday is only a half-day of trading and for obvious reasons we will not be publishing a end of day newsletter. The market monitor team, led by Jeff Bailey, will be hard at work however until the market closes. The intra-day alerts will be limited to market hours. That leaves a good 3-4 hours for the male population to get all their shopping done!

Happy Holidays To All!

Jim Brown
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