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Market Wrap

Holiday Cheer

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11-25-2002                High    Low     Volume Advance/Decl
DJIA     8849.40 +  44.56 8868.87 8756.02  1930 mln  1205/714
NASDAQ   1481.90 +  13.16 1486.94 1461.13  1906 mln  1378/424
S&P 100   476.95 +   1.92  478.88  471.87   totals   2583/1138
S&P 500   932.87 +   2.32  937.15  923.31
RUS 2000  404.85 +   4.85  404.85  399.24
DJ TRANS 2326.94 +  12.96 2336.99  2300.11
VIX        26.95 +   0.22   28.26   26.82
VIXN       45.68 -   0.81   47.98   44.95
Put/Call Ratio 0.59

Holiday Cheer
By Steven Price

It certainly feels like a holiday week. We saw quite a bit of sideways movement today, with no real trend development. However, we did see some developments that leave me still feeling bullish in the short term. Any rally will have its pullbacks and the measure of whether that rally can sustain itself is a series of higher highs and higher lows. The broader market indices saw a minor pullback, which stopped considerably higher than the previous one. After the big bounce on Wednesday and Thursday last week, some consolidation can be expected. The key is where that consolidation occurs. One surprise today was that there was actually a decent amount of volume, which should trail off over the next couple of days. The NYSE traded 1.5 billion shares and the Nasdaq traded 1.9 billion. As traders got their positions set for the holiday week, we got a clue as to just what to expect for the short term. Rather than take profits ahead of the slowdown, the picture looked bullish, staying over 8800 in the Dow and 1460 in the Nasdaq. The internals showed a 55/40% advance decline ration in the NYSE and a 60/40% advance decline in the Nasdaq. The Russell 2000 also closed on its high of the day, indicating broad market buying. This could be a result of bullishness ahead of Tuesday and Wednesday's economic data, as well.

First let's take a look at the Dow. The industrials established a new recent intraday high of 8830.89 on Friday. Today's pullback stopped at 8756.02, establishing the third higher low in the recent rally. This week is historically bullish, so I'll lean in that direction, as long as the market supports that lean. So far it hasn't done anything to change my mind.

Chart of the Dow

One of the things we need to be aware of, however, is that the tech indices are approaching some significant resistance, following the recent run. The market usually moves as a whole, and the Dow will not be achieving new highs without some articipation from the techs. I don't mean to sound bearish on the tech sector. If these stocks were able to shrug off the earnings warnings, lousy IT spending environment and poor turnaround visibility, then there are plenty of institutions that think they were undervalued to begin with. Last week's guidance increase from Taiwan Semiconductor only served to keep the sector fire lit. The Nasdaq Composite (COMPX) is quickly approaching the 200- dma of 1500, which will also be round number resistance. We are likely to find sellers there and it will be a real test of buying conviction to break through. We have to remember that we have just seen a 33% increase in value of the COMP since October 9, so just how much fuel is left in the tank remains to be seen. Have we finally reached values where these techs aren't considered undervalued? Have the shorts covered from the breakout above the August high of 1426? We may find out by the end of the week.

Chart of the Nasdaq Composite

One of the sectors that seem immune to downgrades recently has been the chip stocks. The Semiconductor Index (SOX) continues to achieve new relative highs, with hardly a pullback. Intel was downgraded this morning, but had little affect on the chip sector. There was also a report that the company will be raising flash memory prices 20-40%, beginning in 2003. This reflects a positive outlook on the memory sector and may lead other suppliers to hike prices, as well. Investors saw the possible price hike as a bigger factor, and the SOX once again reached new relative highs. The current point and figure bullish vertical count is 412 for the index and coincides closely with the 200-dma of 410.93. While some pullback can be expected between now and then, the group has shown no signs of slowing down and 400 may not be that far off.

Chart of the SOX

Last week's data gave the housing market a scare when it was reported that there was an 11% drop in new home construction for the month of October. However, those fears were somewhat dashed today, as existing home sales showed a 6.1% increase, to an annual rate of 5.77 million units. This was the third highest sales rate ever and lent credibility to the most recent week's 21% increase in mortgage applications. It was also above expectations of a rate around 5.42 million. The median home price is up 9% in the past year, which is the fastest one-year appreciation since 1987. With mortgage rates still at all-time lows, it appears the housing market is not yet seeing a bubble effect, and that is good news for disposable income heading into the holiday season. While it is widely expected that retailers will suffer from less than ideal numbers this holiday season, decent home sales usually means a high number of refinances, as well. Taking this a step further, Alan Greenspan said recently that, "roughly half of equity extractions are allocated to the combination of personal consumption expenditures and outlays on home modernization." Personal consumption expenditures mean bigger gifts and better retail sales come Christmastime, so keep your fingers crossed.

The Market Volatility Index (VIX) continues to remain at relatively low levels, indicating a lack of downside fear to the market. At worst, the low VIX would indicate consolidation at the current levels and at best a continuing rally. It bounced slightly today, tacking on 0.22 by the end of the day, but remains under 27. The slight bounce was most likely the result of an oversold condition after Friday's end of the day selling by weekend premium pirates. Those sellers look to collect time decay not only over the weekend, but heading into slow holiday trading. That led to a sell-off into Friday's close and market makers pulling down the bids to avoid getting longer over the weekend (thus a lower VIX reading based on the reduced average bid/ask of OEX options). Once the markets re-open on Monday, traders have the opportunity to make the premium work in their favor once again and are willing to take the bids back up a little. Still, readers need to be aware of the time decay factor heading into Thanksgiving. Wednesday afternoon before the holiday, most trading floors are vacant, leading to little market movement. With the market closed on Thursday and a half day Friday, followed by the weekend, long option holders are looking at 4-5 days of time decay, affecting December options more than any others. Those long option holders with profits in out of the money December options may want to think about taking some profits early in the day on Wednesday, before the traders start to head home and those left in the pits bring down the bids again ahead of the decay span.

The next couple of days bring the release of a good deal of economic data. So we may get some movement before Wednesday afternoon. Tuesday brings the release of new home sales and initial jobless claims. On Wednesday we get personal income and spending, Chicago PMI, durable goods orders and the University of Michigan revised Consumer Sentiment. The spending and sentiment numbers should have a pronounced effect, as they will be another indication of just how willing consumers will be to open their wallets as we head into the holiday shopping season. Today's Investor Optimism Index rose slightly from record lows in October, so we'll see if that trend will continue. This month's spending and confidence trends are particularly important, since it will come out just before the shopping season officially begins following Thanksgiving. The initial jobless claims will come in comparison to those in a four day week, when government offices were closed for Veteran's Day. Therefore, we should see an increase, but the rolling 4-week average will be the key.

The trend of bad loans seems to be continuing in the banking sector, and is something to keep an eye on. After a number of banks cited under performing loans as a possible weight on future earnings several weeks ago, the sector took a dive. The recent rally has overcome those concerns, but comments from Bank of America this morning highlighted a pattern that has the potential to re-open the Pandora's Box. BAC cited a pattern of lending money to executives whose companies and personal fortunes have declined in value. Private Banking, or loans to high net worth customers, is a significant function in most large banks that we haven't heard much about. Most of the warnings have come in regard to business lending, so we could be seeing the beginning of a new wave of concerns, albeit less expensive than the business loan problems.

For the time being, the broader market trend remains up. However, as we close in on resistance in the Nasdaq, make sure to tighten up those stops and not let recent profits slip away. It has been quite a month and those P&L statements should look pretty good for the first time in a while.

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