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Market Wrap

Bulls Ring In The New Year

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      01-02-2002          High     Low     Volume Advance/Decline
DJIA    10073.40 + 51.90 10074.02  9935.70 1.18 bln   1649/1541	
NASDAQ   1979.25 + 25.85  1979.26  1936.56 1.48 bln   1984/1697
S&P 100   588.98 +  4.70   588.98   579.44   Totals   3633/3238
S&P 500  1154.67 +  6.59  1154.67  1136.23             
RUS 2000  487.19 -  1.31   489.85   479.20
DJ TRANS 2619.98 - 20.01  2651.65  2606.16
VIX        23.92 +  0.70    25.26    23.69 
VXN        48.20 +  0.94    50.41    48.05
TRIN        1.02 
Put/Call    0.63

Bulls Ring In The New Year

After early weakness, stocks traded higher into the close to start the new year on a bullish note. Technology stocks led the late-day rally. All eight of the technology sectors I track finished higher Wednesday. The leaders included Networking (NWX), Hardware (GHA), Fiber Optic (FOP), and the Semiconductors (SOX). The four sectors helped the Nasdaq-100 (NDX) to a 2.11 percent gain on the day. For its part, the NDX finished back above the 1600 level.

The 1600 level is more psychologically significant than technically. The technical area to monitor in the short-term concerning the NDX is between the 1560 and 1575 levels. The index continues to attract buyers in that area as it did again Wednesday. While the bounce was positive for the bulls, it didn't hide the fact that the NDX remains in a descending short-term tend that has been in place since early December. For the series of lower highs to be broken, the NDX would need to trade above 1640, while the descending trend line currently sits at the 1620 level.

Whether the short-term descending trend in the NDX is a consolidation of the recent rally or signals an end in the trend remains to be seen. The economic and industry reports released Wednesday morning were more conducive to the former and a continuation of the rally in technology shares.

The ISM index, formerly known as the National Association of Purchasing Management (NAPM) Index, came in at 48.2 percent for the month of December, which was well above November's reading of 44.5 percent. December's reading came in well ahead of the consensus expectation of 45.6 percent. The December number was not only better-than-expected, but it also marked the second consecutive month in which the index rose. While a reading below 50 percent still signals contraction, the rate at which the index is rebounding is encouraging for the progress of the economy. The overall index reading remained below 50, but two components, new orders and production, rose above 50 during December, which indicated expansion in those two categories. The better-than-expected ISM number had several economists calling for an end to the Fed's interest rate cuts. The FOMC is scheduled to meet next at the end of this month.

The Semiconductor Industry Association (SIA) offered its own bullish news. The SIA reported that worldwide sales of chips reached $10.6 billion in November, which was a slight increase over October's total sales. In addition, World Semiconductor Trade Statistics said that worldwide DRAM demand grew by 17 percent in November, bolstered by demand for PCs thanks to Microsoft's (NASDAQ:MSFT) new Windows XP operating system.

The analyst commentary that accompanied the data releases was not as bullish as the data itself. Several of Wall Street's sell-side members said that while it appeared that the chip business had bottomed, semiconductor stocks remained richly valued and were due for a pullback in the first part of this year. The market disagreed with the analyst community as the Philly Chip Sector Index (SOX) tacked on 4.45 percent. In the process, the SOX moved back above the 545 level, which had previously acted as resistance. Follow-through into Thursday's session could place the SOX back above the 550 level, which would be a bullish short-term development for technology as a whole.

Thanks to the SOX and the rest of technology, the S&P 500 (SPX) edged into positive territory Wednesday. Technology and financial are the two largest industry groups in the S&P 500. It was because of the weakness in financial, as well as energy and healthcare, that the SPX under performed. Without participation from at least two of the three aforementioned industry groups, the SPX will have difficulty advancing past its 200-dma, which currently sits overhead at 1166. The 200-dma of the SPX is one of the biggest indicators I'm currently monitoring. I think an advance above the 200-dma would bode very well for the continuation of the '01 Q4 rally.

After briefly dipping below, the Dow Jones Industrial Average (INDU) closed above the psychologically significant 10,000 level. The Dow was carried higher by solid gains in Hewlett-Packard (NYSE:HWP), Intel (NYSE:INTFC), Disney (NYSE:DIS), AT&T (NYSE:T), and General Electric (NYSE:GE).

Treasuries finished measurably lower on the positive ISM index number. The benchmark 10-year Note (TY02H) dipped 0.79 percent to 104.100, while its yield rose to 5.16 percent. The trading in Treasuries will revolve around additional economic data in the coming days.

The Labor Department will release jobless claims for the week ended December 29 on Thursday morning, in addition to the payrolls and jobless rate on Friday morning. The employment report is expected to reveal a 5.8% unemployment rate. The number will impact the retail sector as it relates to the consumer and could influence trading in the broader market. While most are expecting the Fed to ease off of the accelerator, the employment report could sway Greenspan & Co. one way or another. Obviously a worse-than-expected number would argue the case for another rate cut, while a better-than-expected number would point to a rebound in consumer confidence and less of a need for another rate cut.

But the Fed's action or inaction later this month will take a backseat to fourth-quarter earnings season, which begins in earnest in about two weeks. That also means that if company's are going to warn on fourth-quarter earnings, they will need to do it in the next few weeks. Preliminary data reveals that warnings thus far are much lower than in the same period a year ago. That's good for the bulls.

Further confirmation of a return in corporate earnings combined with the recent positive economic data would reinforce the notion that the economy is indeed on the mend and better times lie ahead. From a price action standpoint, the major averages discounted a rebound last fall and into the end of the year. The recent sideways trading is a natural consolidation process of the rally seeing how the averages have held support levels. As long as the averages continue to trade sideways, and don't breakdown, then a continuation of the rally is probable, especially if things like the SPX advancing above its 200-dma start happening.

In addition to the upcoming earnings season, traders will have to operate around tax-related issues for another week or two. Wednesday's market saw some of last year's best performers trade lower, such as the housing stocks, retailers, and biotechs. The tax-gain selling impact could pressure 2001's leaders this week and possibly into next week.

Eric Utley
Option Investor

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