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Market Wrap

Santa Losing Steam

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       12-27-2001           High     Low    Volume Advance/Decline
DJIA    10131.31 + 43.17 10147.23 10080.87   .9 bln   2084/1066
NASDAQ   1976.42 + 15.72  1982.73  1962.12  1.2 bln   2156/1519
S&P 100   590.87 +  3.37   590.87   587.31   Totals   4240/2585
S&P 500  1157.13 +  7.76  1157.13  1149.37
RUS 2000  492.62 +  2.43   493.28   490.19
DJ TRANS 2637.25 +  7.03  2647.19  2625.43
VIX        22.28 -   .65    23.05    22.04
VXN        47.46 -  1.60    49.03    47.35
TRIN         .77
Put/Call Ratio       .62

For the second day the markets closed higher but the outcome was in question as late as 3:PM as both the Dow and Nasdaq flirted with negative territory. The opening bounce was powered by better than expected holiday sales at Wal-Mart and Target. The discounters stole the show with positive comments about the holiday period but the real retail shoe will drop next week. The expectation that the majority of retailers will post the worst sales in over a decade kept a lid on the major averages.

The gains were broad based with the emphasis on the smaller stocks. Only two Dow components posted more than $1 in gains, IBM and UTX, but only eight Dow stocks posted losses. Despite the late day brush with negative numbers the markets were showing surprising breadth. New highs beat new lows by almost the same numbers on the NYSE/Nasdaq. NYSE 124 hew highs, 24 new 52-week lows. Nasdaq 113/25. Advancers beat decliners by almost 2:1. So why were the major averages drifting lower for most of the day.

Santa is tired. The markets have posted strong gains since the September attacks, Santa is struggling to lift the load. The bullish sentiment is fading and worries of another post New Years crash like we saw in 2001 are growing. Despite the good news from Target and Wal-Mart it is feared that clothing retailers, jewelry stores, auto dealers and other big ticket stores will post losses for the season. This is the recession reality that is overhanging the markets and the economy.

The Help Wanted Index for November fell to 45 and a low not seen since the 1960's. To put this in perspective it was around 90 at Y2K. Job advertising is continuing to fall and the technology area is the hardest hit. The rate of decline is slowing but we will not see the proof of a recovery until companies begin hiring again. The ABC News/Money Magazine consumer confidence survey showed the biggest drop for the week ended 12/22 in the last six weeks, almost doubling the prior weeks number. Their survey showed that confidence weakened most among higher income adults. This drop explains why big ticket retailers are suffering so much this holiday season.

Other factors in the drop in confidence included rising mortgage rates and falling mortgage loan applications. Applications have dropped to half of their November levels. The 30-year fixed rate is now 7.39% and the trend is up. This incentive to refinance or buy a new house has finally waned just when the first signs of a recovery were starting to show. Homebuilders, which have soared on the low interest rates, should start to struggle as demand slows. This will produce a ripple down effect and slow any fledging recovery. This impacts feeder industries like furniture, appliances, carpets, glass and raw materials.

Investors are hoarding money just like consumers. In the last five day period, ending on Wednesday, funds saw an outflow of -1.579 billion dollars. Not a good omen when this is normally a positive cash flow period. By comparison the two week period ending on Jan-4th 2000 saw a +$20 billion inflow of money into funds. This is not the boom times of 2000 as we all know but you would expect at least a positive cash flow into funds if the trillions of dollars in money markets were convinced the rally was for real.

Granted you cannot draw any conclusions from the markets over the last two days since volume was minimal. The NYSE failed to break a billion shares either day and the Nasdaq traded under 1.3 billion both days. The resolve of the bulls will be tested on Friday. The economic calendar is huge. Jobless claims, delayed from Thursday, Durable Goods Orders, New Home Sales, Existing Home Sales, Consumer Confidence and Chicago Purchasing Managers Index (PMI). There is ample opportunity for the market to rally or crash depending on those reports. All of these, with the exception of Jobless Claims, cover periods as far back as November which could distort the current picture. Next week we get the Payroll Report for December.

The economy is likely to suffer another blow on Friday if OPEC cuts production by 1.5 million bbls as expected. The drop in energy prices has been a free economic rate cut for which the Fed is no doubt grateful. If this comes to pass as expected then the free energy lunch for manufacturers will start disappearing. Another factor is the coming Japan crash. Argentina was truly priced in since we saw no materially adverse impact of their problems last week. Japan is not yet in the mix. We have been hoping they would pull out of their current spiral for years but it just does not appear it will happen. The situation is becoming worse as each day passes. As individual investors we could probably care less about Japan but it will weigh on our markets if they fall.

What does all this mean to us today. The Dow is struggling the closer it gets to strong resistance at 10167. On a positive note it did close above its 200DMA of 10094 on Thursday. That had been a successful ceiling since August. Still with the Dow losing momentum the closer it gets to resistance we will need much more than wishful thinking to break that level. The Nasdaq struggled to remain positive on Thursday and appears weaker than the Dow. Tech stocks, led by chips and networkers, are still showing no increase in orders. Even an upgrade of AMD by Merrill Lynch did very little for the SOX or the Nasdaq. The Nasdaq has strong resistance at 2000, only 24 points away. With negative money flow in a normally positive period we are faced with a tough road ahead.

As traders we need to stay in the markets as long as they remain positive but we need to tighten up those stops to prevent any surprises. If the Nasdaq rolls over on Friday it will be the fourth lower high since Dec 6th and another bearish signal. 1950 would be my exit point for Nasdaq stocks. Stay long above, flat below this level. Should it fail we will look for a new entry point in the 1900 range. The Dow looks stronger but I would start looking for an exit if it breaks 10075. This number is pretty "tight" since 10,000 is the probable first stop should the Dow roll over. I am just being cautious ahead of next week. This is definitely an important week for investors and one we should watch closely, especially if we have open long positions.

Enter very passively, exit aggressively!

Jim Brown
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