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Market Wrap

2001 Goes Out With a Whimper

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        12-31-2001        High      Low     Volume Advance/Decline
DJIA    10021.60 -115.40 10137.60 10019.10  954 mln   1615/1558	
NASDAQ   1950.40 - 36.80  1989.17  1950.40 1.39 bln   1945/1846
S&P 100   584.28 -  7.47   591.75   584.17   totals   3560/3404
S&P 500  1148.08 - 12.94  1161.16  1148.04           
RUS 2000  488.50 -  5.12   494.20   488.41
DJ TRANS 2639.99 -  3.06  2658.97  2636.63
VIX        23.29 +  0.79    23.41    22.27
Put/Call Ratio      0.63

2001 Goes Out With a Whimper

It was looking like another light volume, narrow-range trading session for most of the day on Monday, as the traders that bothered to show up today finished squaring their positions ahead of turning the calendar over to a new year.

Showing the quiet nature of the broad market, the internals were fairly balanced, with a nearly dead heat between up and down volume and advancers and decliners on both exchanges for most of the day. But the final hour was decidedly bearish. The DJIA had been bouncing around between 10,080-10,115 until the final hour, when the index gave up 60 points to close just above the 10,000 level. Up and down volume had been running nearly even all day, but in the final hour, almost all of the volume was on the sell side, with the closing ratio coming in at nearly 2:1 in favor of the bears.

The picture wasn't much different over on the NASDAQ, with the quiet and fairly even session seeing a surge of selling in the final hour (and continuing into the close). By the time the dust settled, down volume had swamped up volume by more than a 2:1 ratio as well, with heavy volume seen in the afterhours session in some of the big-cap Techs. There was unexpectedly heavy trade in the likes of Intel (NASDAQ:INTC), Cisco Systems (NASDAQ:CSCO), Oracle (NASDAQ:ORCL) and Sun Microsystems (NASDAQ:SUNW). All of these stocks sold off in the final half hour of the regular session, ending at the lows of the day. And that was followed by after-hours trading measured in the millions of shares for each of the above-mentioned stocks. It may mean nothing, but it could be a hint of further weakness in the Technology sector when we return in 2002.

Despite the lack of scheduled events today, that didn't mean that there wasn't some significant news for investors to deal with. The ongoing buzz about whether the FDA would approve Imclone's (NASDAQ:IMCL) application for cancer drug, Erbitux finally came to some sort of resolution on Monday. Much of the stock's recent rally from the mid-$40s to $75 was due to the anticipated approval of the company's new colorectal cancer drug, which was anticipated to be a blockbuster for the company. That enthusiasm began to get tempered earlier this month when rumors began to surface that there might be some problems with the FDA approval. Those concerns turned out to be well founded when the government rejected the application this morning, stating "Clearly , the submission didn't comply with the expectations of the agency."

Ouch! That isn't what IMCL wanted to hear, and IMCL investors were similarly displeased, knocking the stock back to close at $46.46 (-15.9%) after trading as low as $43.35 earlier in the day. This is a big setback for both the company and the stock, which has now given up all its gains accrued since July. The news sent the Biotechnology sector (BTK.X) reeling right from the opening bell, and the midday bounce had no legs, rolling over with the rest of the broad markets in the final hour to close more than 3.5% lower.

The weakness in the BTK is indicative of what I saw on many sectors this evening -- they are either sitting right on critical support or rolled over from meaningful resistance. The bulls are going to have their work cut out for them as we head into a new year. Trading volume will be picking up and earnings season is just around the corner. If the bears are right, those earnings (and the attendant forward-looking guidance) won't be enough to sustain the 3-month bull run.

It seems the government never learns its lessons. The past 2 decades have been a stark demonstration that the government doesn't handle private business concerns well. The focus of my ire for this evening is the ailing Amtrak concern and its connection to the latest government bailout. The government can't seem to run trains on time and show a profit, so rather than acknowledge that private industry does that sort of thing best, they are setting themselves up to play in the airline industry. Oh joy! In the wake of the 9/11 attacks, there are many carriers in financial trouble, and America West Airlines (NYSE:AWA) is the first to garner a direct government subsidy.

But that subsidy comes at a steep price (possibly for travelers as well as AWA investors). In exchange for a $380 million loan guarantee, the federal government gets the option to buy as much as 33 percent of the company's stock. That provision would ostensibly allow the government to profit if AWA regains its financial footing. If this scheme sounds familiar, it should. It is very similar to the government bailout of Chrysler in 1979. AWA isn't the only airline that is counting on Uncle Sam to provide an infusion of cash/loan guarantees to keep the friendly skies flying. What happens if this scenario is repeated at other carriers over the months ahead, the federal government could find itself embedded deeply in the airline industry. I sure hope they do a better job than they have done with Amtrak!

Back to the markets. The net result of the day's late weakness was that all of the major indices closed at their lows of the day, near major levels of support. The bulls' conviction will likely be tested on Wednesday, as the professionals will be back from their vacations and volume should return to normal levels. After 2 weeks of essentially directionless trade, it will be refreshing to get back to normal market action again. So let's see what the charts might be telling us to expect.

The DJIA has now failed to penetrate the 62% retracement of its decline since the May highs (10,153), and once again fell below the 200-dma (now at 10,091). With the daily Stochastics once again rolling over, I would not be surprised to see another test of the 50% retracement level near 9800 before the bulls are sufficiently energized to take another run at breaking out over recent highs.

We've got a similar picture here with the SPX, although I've drawn a different retracement. This one began with the September 2000 highs, and you can see that the bulls haven't been able to manage a breakout over this level. Of course, the 200-dma at 1167 is making that resistance level that much harder to crack. An interesting side note is what happens if you draw a retracement from the May highs to September lows. I haven't shown it here, but the 62% retracement lies at 1170, near recent resistance. So we have two separate retracements from different timeframes that reside within a 2-point range. My bet says the bulls had better build up a head of steam if they hope to plow through this level over the near term.

Earnings should start to trickle in next week, and I expect this process to be the dominant factor contributing to market action for the next couple weeks. Make sure to check earnings dates on any stock that you happen to be playing, so that you don't get caught off guard. With that being said, the bullish trend is still intact across the broader market. Play it as long as it lasts, but be ready to move to the sidelines or even the short side as market conditions change.

Now turn off your computer, and ring in the New Year with friends and family!

I'll see you next year!

Mark Phillips
Research Analyst

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