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Market Wrap

Caught In-Between

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12-11-2002                  High    Low     Volume Advance/Decl
DJIA     8589.14 +  14.88  8625.89 8487.53   1815 mln  1175/621
NASDAQ   1396.59 +   5.83  1407.15 1377.71   1587 mln  1279/289
S&P 100   460.69 +   0.20   463.87  456.44    totals   2454/910
S&P 500   904.96 +   0.51   909.94  896.48
RUS 2000  393.88 +   0.41   395.36  391.41
DJ TRANS 2348.06 -   5.32  2352.65 2327.57
VIX        31.40 -   0.27    32.46   30.81
VIXN       51.62 -   0.13    52.89   51.24
Put/Call Ratio 0.76

Caught In-Between
by Steven Price

We continue to see consolidation after the recent sell-off, but are starting to see signs of a support for a rebound. How far that rebound takes us is unclear, as we're getting a lot of intraday drift, but we seem to be setting at least a short-term bottom. The markets took a dive this morning, following the seizure yesterday of a North Korean ship carrying fifteen Scud missiles, 15 conventional warheads and 23 containers of nitric acid, that was believed headed to the Middle East. However, Yemen stepped up and said the missiles were intended for their armed forces. Yemen previously denied the shipment belonged to them during the ship's tracking, which began when it left North Korea several weeks ago. The U.S., reasonably convinced the missiles would not eventually wind up in Iraqi hands, released the shipment and the fear in the markets seemed to drain out with a 130-point Dow rally.

The significance of the morning drop was the point at which it stopped. The low of the day in the Dow was 8487, which is approximately the same point it bottomed the last three days. After last week's drop, there was bound to be some consolidation before a rebound and it appears that this could be that consolidation point. If that level fails, then there is significant support just below, in the 8300-8400 range. That daily support coincides with the bullish support line on the point and figure chart. The recent pattern of lower intraday highs and lower lows was reversed the last two days. However, this morning's drop back through 8500 threw a kink in what appeared to be a series of higher intraday highs and higher lows. We got a higher high and a higher low than we did for the day yesterday, but not a convincing one, as intraday support at 8500 failed. The intraday trend of the last couple days remains up, although not overwhelmingly so. As we head into the end of the year, volumes should continue to drop off, making large momentum moves less likely. Today's volume was only 1.2 billion shares on the NYSE and 1.4 billion on the Nasdaq. The best broad market plays may come on a bounce from the Dow 8300-8400 range, or a failed rally around 8800.

Intraday Chart of the Dow

Daily Chart of the Dow

The fly in the ointment for a continued rally was the activity in the bond market today. While we normally we a drop in bonds when cash moves into the stock market, we saw no such action today. In fact, we are seeing a consistent trend of buying over the last several sessions in the five, ten and thirty year notes, which is more consistent than the schizophrenic action we see in stocks. Combine that with the low equity volumes and the bond market is sending bearish signals. All three of these treasuries are up against descending trend lines and bullish traders should keep an eye on those trend lines for a breakout. If bonds do break out to the upside, then long positions could be in danger.

Chart of the Five and Ten Year Bond Futures

Last week's drop has also weakened the bullish percentages, with those of the Dow, OEX and NDX all reversing into a column of "O" that has yet to reverse back up on the minor rally of the last couple of days. This indicates the high percentage of stocks that were giving point and figure buy signals has been reduced significantly and remained at lower levels. After these percentages reached overbought territory, above 70%, on the rally up to Dow 9043, SPX 954 and NDX 1155, the risk to long positions increased significantly. Bullish percentages can remain in overbought territory for long periods of time, during rallies, but once they get over 70% they throw up a red flag. That certainly turned out to be the case this time, and they haven't given any signal that the rollover into bearish columns has reversed.

The Nasdaq actually broke above the 1400 level on the mid-day rally, but also failed the mark, eventually falling to a close of 1396.59. The rally came in spite comments from Intel Chairman Andy Grove that it may be too early to forecast a rebound in the semiconductor sector. On the positive side, a report on the spot price of the 256-megabit chip showed the first price increase since last month. It was attributed to a rush of short-term demand from the U.S. and European markets, coupled with low inventory. That would seem to confirm the added demand that was noted by Taiwan Semiconductor last month and as recently as last week. This morning also saw raised guidance from Cymer, which makes laser products for the semiconductor industry. The company also said it expects its book-to-bill ratio for the quarter to come in at or above 1.0, indicating at least as many new orders as those currently being billed. Some of that increase can be attributed to seasonal demand for PCs, but it is still a positive sign for the industry. There is usually a downturn after the holidays and the depth of that drop-off should set the tone for the first half of 2003.

The Semiconductor Index (SOX) actually tested resistance at 329- 330 today and failed that level, finishing up only +0.86 on the day. The SOX has given up 18% since topping out at 393 on the Monday after Thanksgiving, and appears to have also settled in above previous support in the 300-310 area. It will most likely take a decisive move back above 330, or below 300, to get any momentum in one direction or another.

Chart of the Semiconductor Index (SOX)

We saw the first major IPO in a while, when disk drive maker Seagate (STX) sent shares to market. This was the largest tech IPO of 2002 and it was a disappointing debut, highlighting the reluctance of investors to roll the dice on new issues. The stock was originally slated between $13 and $15, but instead wound up priced at $12. By the end of the day, that price failed to hold up and the stock closed at $11.52. I think back on the days a few years ago when stocks often doubled in value on their IPO date and realize just how much has changed. There has been a lack of IPO and M&A activity over the last 18 months and this is a good example of why.

It is hard to take anything significant from such a low volume day and low volume time of the year. We are entering a traditionally bullish trading period, but doing so after a failed rally that was turned back with significant speed. Bond activity looks bearish for equities and war fears are hanging over the market. The last couple of days look bullish and we appear to have built a base around Dow 8500. So what can a trader take from the current circumstances? We are getting bearish signals in a very short-term uptrend. Bulls can enter positions for a bounce, but need to be very nimble and quick to close positions if things turn around. Shorts have the ammo, but not the current trend. If we do get a failed rally around Dow 8800, then the odds favor short plays if treasuries continue upward. We are mid- support/resistance right now, so there simply are not a lot of high percentage plays in the broader markets. This is the type of market in which I favor playing small and taking quick profits when they are present.

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