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Market Wrap

Consumer Confidence Explodes!

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       WE 12-28         WE 12-21         WE 12-14         WE 12-07 
DOW    10136.99 +101.65 10035.34 +224.19  9811.15 -238.31  +197.90
Nasdaq  1987.26 + 41.92  1945.83 -  7.34  1953.17 - 68.09  + 90.68
S&P-100  591.75 +  5.34   586.41 + 14.03   572.38 - 19.40  +  6.98
S&P-500 1161.02 + 16.13  1144.89 + 21.82  1123.07 - 35.24  + 18.96
W5000  10818.57 +173.64 10644.93 +201.37 10443.56 -301.81  +213.92
RUT      493.62 +  9.60   484.02 + 12.73   471.29 -  9.92  + 20.43
TRAN    2643.05 + 37.82  2605.23 + 28.13  2577.10 - 51.16  +116.48
VIX       22.33 -   .96    23.29 -  2.68    25.97 +  1.08  -  1.25
VXN       45.94 -  5.02    50.96 -  1.83    52.79 +  2.61  +  1.73
TRIN        .73             1.08             1.06             1.18
TICK      +1098            +1184             +388             +828
Put/Call    .69              .69              .72              .78   

Consumer confidence exploded in December as worries over terrorist attacks dwindled. The bullish mantra on Wall Street that a recovery is coming must have trickled down to Main Street in December. The Conference Board's numbers at 93.7 blew by consensus estimates of 83. The rebound powered the index back to near pre-attack levels of 97. The expectations index soared from November's 77.3 to 91.5 as consumers expressed confidence that conditions six months from now will be better than today. The news sparked the markets with the Dow gaining +56 points to 10184 at the open. The bears rushed to sell the rally and by 11:30 the Dow was trading in negative territory again. Buyers trying to position themselves for any New Years rally pushed the Dow back into positive just before the close.

The consumer confidence surprise which powered the Dow above resistance at 10167 should have caused shorts to cover if they thought the rally had any staying power. Instead bears were quick to sell the rally and force the index back down. Is this a sign of things to come?

The increase in the consumer confidence numbers may mean that the consumer is no longer afraid to come out of their cave but it does not mean they, a) are willing to spend money, or b) have a job and money to spend. Analysts cited the recovery in the markets and the apparent success in the Afghanistan war as the stimulus for the big jump. This jump in the confidence numbers is a key to any recovery hopes. Every time a survey says consumers are doing better the consumers who hear it automatically feel better. It is a self fulfilling prophecy. The index is not likely to make any further leaps until after the annual January job cut cycle passes.

The Chicago PMI remained flat for December but much of the depression was caused by struggling auto production. Jobless claims remained flat at 392,000 but should spike up again in the next two weeks as seasonal employees are cut. New home sales, riding the crest of lower interest rates in November, soared to a 934,000 rate and well over the 880K estimates. A rising interest rate picture like we are currently seeing will slow this rate of increase. New homes have been on a record pace for the last year and the market is becoming saturated. Existing home sales also spiked upward again in November and may cause 2001 to be a record year.

Durable Goods Orders, a strong indicator of the health of the economy, fell -4.8% in November after jumping +12.5% in October. The October spike was caused by defense spending and after taking that out of the November number capital goods orders actually rose +4.8%. Orders for semiconductors and computers rose +2.4% and +2.7% respectively. The gains were anemic but a welcome change to the -16% drop for semiconductors in October. Communications equipment fell again in November.

All this positive economic data may have had a momentary impact to the markets on the upside but it had a negative impact on future Fed action. The Fed funds futures are now showing only a 25% chance of a 25 point cut at the Jan-30th meeting. Nobody really expected a cut prior to today but there was the lingering hope that we could get an "insurance" cut in January. This will not happen after today's economic numbers without a significant change in reports in January. The next round of speculation will be when the first rate hike will be announced instead.

If the economy is recovering somebody forgot to tell Oracle. They announced on Friday that they were cutting up to 800 more jobs as they attempt to reduce costs and become more efficient. Tower Communications said they were cutting -215 jobs. This is the tip of the January iceberg as companies reviewing 4Q results will make the final decision to lower staffing again. This along with the final two weeks of earnings warnings will provide the wall of worry for the markets to climb.

Am I bucking the trend? After looking at hundreds of charts this weekend I am beginning to wonder if my words of caution over the last week were misplaced. There are so many bullish charts that it is positively amazing. Many are breaking out to new highs, passing prior resistance levels or rebounding off bottoms. Broad based bullishness is literally breaking out all over. Does that worry anyone? Advancers are beating decliners by wide margins and new highs are running 6:1 over new lows. Volatility is at pre- attack lows. The Wilshire-5000, or total market index, is threatening to breakout to a new three month high over 10873. Even the SOX, which has been beaten like a stepchild recently, is recovering lost ground.

Sounds like a recipe for a new bull market but we need to realize that much of this broad based rally has been due to year end window dressing and on very low volume. Tax selling this year was very light and can be attributed to the washout after 9/11. While I think the current optimism is slightly overdone I certainly do not want to sit on the sidelines and miss any rally even if I am wary of its staying power.

The majority of analysts think that corporations are vastly underestimating their earnings for 2002 to avoid having to keep coming back to the markets with further downward revisions. Still others think earnings are still dropping and will need to be revised lower. As investors you will have to choose side with one of those camps. As traders we really don't care. It would be nice to have a market bias that fit what the market was actually doing but somehow Murphy manages to confuse and confound all of us by causing the markets to do the opposite of what everybody expects.

I confess, I went into our Friday research meeting with a bearish perspective. I felt the markets struggle to stay positive the last two days on very weak volume was a signal that overhead resistance would hold and we would get a sell off next week. The instant selling after the opening pop on Friday was something I expected and confirmed my outlook. However, after looking at hundreds of charts I was forced to change my outlook. Maybe not change it but at least recognize that the current rally was broader based than I had thought. I think all of us should be forced to take a broader look at the markets at least once a week. We all run around trying to trade our bias even when it does not match the markets. You hear us say constantly, "trade the trend." "Trade in the direction the market is moving." "Trade what the market gives us." Still as traders we find ourselves attempting to pick entry points the very next day based on where we think the dip will stop or the rally will end depending on our market view.

It is commonly said that trying to time the market will cost you the majority of your gains. Long term investors have always said that 35% to 50% of a major move is in the first week and this is their rationale for staying continuously invested. The concept is that once you recognize a major move is underway it is already half over. I agree with this concept. This is why I have been urging everyone to stay invested unless our "market stops" are hit. This avoids trying to time the moves or jumping in and out constantly based on stock news. Those stops were not hit on Friday and remain 10075 and 1950 respectively. We are poised to capture any New Years rally and protect ourselves if it fails.

Now we need to decide how to use this to our advantage next week. To recap I think the Dow has serious resistance at 10167. That level has been tested three times in December and failed each time. The Nasdaq has resistance at 2000 and 2050 giving us only a 63 point upside range for the coming battle. The S&P-500 closed exactly on resistance at 1160 with the next levels at 1175-1185. Obviously we have our work cut out for us if this rally is going to continue. Not only do we have serious technical resistance overhead there are likely to be a flood of negative earnings announcements. The economic calendar starts out slow but ends the weak with the Nonfarm payrolls for December which could be a major market mover.

The negative problems we may face next week could be offset by new money flow into funds. Without a major dip since Dec-14th, fund managers holding cash then are probably still holding cash now. They will be faced with billions in new cash in their mail for the next several weeks. This excess liquidity is what powers January markets. The flood of retirement cash will meet the "bad news bears" head on next week. Hopefully it will be a flood and not a trickle, like we saw last week, and the bears will be washed down the liquidity river. Either way we need to be ready. Stay long above our market stops and go flat below them. Investing does not have to be complicated.

Happy New Year!

Jim Brown
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