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Market Wrap

Holiday Cheers and Jeers

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      12-26-2001          High     Low     Volume Advance/Decline
DJIA    10088.14 + 52.80 10169.09 10034.93  801 K     2066/1074	
NASDAQ   1960.70 + 16.22  1983.84  1948.77 1.11 bln   2183/1494
S&P 100   587.50 +  2.31   592.84   585.19   Totals   4249/2568
S&P 500  1149.37 +  4.72  1159.18  1144.65             
RUS 2000  490.19 +  4.38   490.60   485.76
DJ TRANS 2630.22 + 24.65  2632.24  2602.44
VIX        22.93 -  0.28    24.56    22.38 
VXN        49.06 -  0.38    49.61    48.79
TRIN        0.93 
Put/Call    0.54

Holiday Cheers and Jeers

Post-holiday emotion and a rally in retail pushed the major averages higher early Wednesday. But a late-day report of a new bin Laden video appearance quickly reversed sentiment.

Stocks shot higher at the open due in part to the retail sector. UBS Warburg's weekly chain store sales index roes by 2.9 percent during the week ended December 22. The index is compiled using major discount, department, and chain stores including J.C. Penney (NYSE:JCP), Sears (NYSE:S), Target (NYSE:TGT), Kmart (NYSE:KM), Wal-Mart (NYSE:WMT), Federated (NYSE:FD), and May Department Stores (NYSE:MAY). Separately, the Redbook Retail Sales Average showed a less-then-expected decline during the first three weeks of December.

The heavyweight in the group, Wal-Mart, confirmed the upside surprise in retail sales. The world's largest retailer reported that bullish business in the days before the holiday carried December sales figures to the upper-end of previous forecasts. Wal-Mart said that it expected same-store sales to reach 6 percent during the period. Other discount retailers, such as Target, reported similar bullish sales figures, which reinforced the recent trend of consumers shunning high-priced department stores for the better values offered by major discount shops. For instance, Federated, parent of Macy's and Bloomingdale's, reiterated on Monday that it expected a decline in sales during the month.

The consumer's search for bargains played into the strength in the e-tailers Wednesday. Amazon (NASDAQ:AMZN) gained nearly 13 percent after an analyst said that holiday-related traffic to the company's site continued to show signs of strength. Yahoo (NASDAQ:YHOO) echoed the AMZN analyst's comments when the Web portal said that its sales volumes increased by about 86 percent over last year's figures. Shares of Yahoo finished 5 percent higher. eBay (NASDAQ:EBAY), another Internet/retail hybrid, traded well, tacking on $2.53, or about four percent. Although not components of the sector, the e-tailers added bullish sentiment to the broader group. The S&P Retail Sector Index (RLX) finished 0.86 percent higher. Wal-Mart contributed to the strength in the index with its $1.02 gain.

The RLX finished off of its day high, which was traced at 932. However, Wednesday's intraday high was about five points away from the RLX's 52-week high at 937. Interestingly, the RLX has rallied up to and subsequently rolled over from the 937 area on four separate occasions this year. The RLX has come a long way from its September 21 low at 670 -- 38 percent in three months! It therefore may be due for a period of consolidation near its 52-week high. Of course, the RLX could breakout to new highs. In either case, the RLX offers important insight into the consumer, who has kept the economy afloat during the downturn. I think a breakout would be a bullish development and bode well for the health of the economy and market. I'm not necessarily suggesting that a breakout should be bought. Rather, a breakout in the RLX could be incorporated into a bullish thesis for the market and economy as a whole. And a breakout, from where I sit, would occur with an advance past 940.

The averages were drifting sideways into the final hour of trading Wednesday when a new videotape of bin Laden aired on Al-Jazeera TV. Although bin Laden looked tired and weary, his mere appearance was blamed for the late-day rollover in the averages. The S&P 500 (SPX) shed about seven points in the hour following the release of the tape. Apparently there had been a bin Laden "neutralization" premium built into the tape. Or, bin Laden's appearance was simply a reason to book profits Wednesday afternoon. Whatever the reason, the price action in the final hour of trading Wednesday was seriously negative. However, volume was very light. With minimal liquidity and a lot of participants sitting the week out, it's difficult to read into the late-day sell-off too much.

The SPX is still between key support and resistance levels. The average is well above the 1135 support level that Jim highlighted over the weekend, which is reinforced by the 10-dma currently at 1138. Meanwhile, the 200-dma continues to lurk above current levels. The 200-dma now sits at the 1167 level. The SPX's day high Wednesday was set at 1159. A breakout above the 200-dma could spark another round of buying and the next leg higher in the broader market, while a breakdown could portend weakness over the short-term. The catalyst to spark either move is the unknown variable. Remember that Q4 earnings season is around the corner.

There's an interesting dynamic developing in the energy sector which could play into the strength and duration of the recovery in the market and economy. The cost of energy has been extremely low for the better part of this year due to the slowdown in demand obviously, but also because of the big build out in the last two years. The overcapacity in the energy space has kept the price of crude and natural gas relatively low, which has in turn kept inflation in check and put more money into the pockets of those who consume energy: businesses and consumers. But the trend of low energy prices may reverse.

Crude oil rallied back above $21 a barrel Wednesday in anticipation of another 1.5 million barrel per day production cut by OPEC. The cartel is scheduled to meet Friday, when it's expected to make an official announcement. The market has all but discounted another cut, which was reflected in a rise in gasoline and natural gas prices. The cold weather hitting the Eastern United States also added to the rally in energy.

While a rally in energy prices isn't the best development for the economy and consumers, it certainly helps the energy segment of the market. Specifically, the PHLX Oil Service Sector Index (OSX). It was the best performing sector Wednesday with a 3.78 percent gain. The OSX was beaten up earlier this year during the big slide in energy prices but appears to have put in a bottom in the last four months. The OSX flirted with a breakout above 90 Wednesday -- it missed a breakout by 0.15 points. The 90 level is a triple-top in the OSX and a breakout above that level could have the index set-up for an advance to its next resistance at 96 over the coming weeks. A six point move in the OSX is big and could lead to a substantial move in one of the stronger components of the sector.

Similar to the RLX profile, I'm not suggesting buying a breakout in the OSX at current levels. The index seems to have already discounted the production cut by OPEC this Friday and could sell-off on the news. However, if the recent rebound in energy prices continues, there's more upside potential in the OSX. It's only a matter of finding a favorable entry point, such as a pullback in one of the strongest stocks in the group, such as BJ Services (NYSE:BJS) or Noble Drilling (NYSE:NE). Both stocks gained more than five percent Wednesday.

The rise in the OSX Wednesday didn't necessarily indicate a return of inflation. The PHLX Gold and Silver Sector Index (XAU) finished lower for the day. If oil, retail, AND gold would've traded higher Wednesday, then I'd be more worried about inflation. But the lack of participation by the XAU told me that inflation will remain in check for the time being.

The bullish prognosis from the retail sales reports was definitely a positive for this market and economy. It was very encouraging to hear that the consumer is alive and well. We'll find out more about the current state of the consumer in the coming days. New and existing home sales are scheduled for release Friday morning in conjunction with the Conference Board's release of its December consumer confidence index. Economists expect new home sales to have remained at a high of 880,000 annual sales during the month of November. Existing home sales are expected to slip to 5.12 million annual sales. Consumer confidence is expected to have slightly risen during December to 82.7 from November's reading of 82.2.

Positive economic data could keep this week's positive trend intact and carry stocks slightly higher into the New Year.

Eric Utley
Option Investor

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