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Bah Humbug

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      12-19-2002           High     Low     Volume Advance/Decline
DJIA     8364.80 - 82.60  8505.23  8327.78 1.58 bln   1448/1770
NASDAQ   1354.16 -  7.40  1384.58  1346.18 1.58 bln   1479/1886
S&P 100   449.12 -  3.66   456.97   446.81   Totals   2927/3656 
S&P 500   884.26 -  6.86   899.19   880.32 
RUS 2000  383.42 -  0.51   387.69   381.29 
DJ TRANS 2306.01 +  0.30  2336.37  2296.86   
VIX        30.81 -  0.59    31.86    30.38   
VXN        51.05 -  0.57    52.41    50.51
Total Vol   3,395M
Total UpVol 1,015M
Total DnVol 2,325M
52wk Highs   107
52wk Lows    186
TRIN        1.78
PUT/CALL    0.96

Bah Humbug
By Jim Brown

It may be starting to look a lot like Christmas in homes but not in the markets. It appears to be turning into a jobless holiday for more and more workers. Even more workers are expected to be paying the holiday bills with unemployment checks after the first of the year.

Dow Chart - Daily

Nasdaq Chart - Daily

The headline news that jobless claims for this week fell by -11,000 to "only" 433,000 was not met with cheers. Actually the numbers were worse. The 441,000 from last week was revised up to 444,000 meaning this weeks 433,000 was only a drop of -8,000 from the previously reported numbers. Using their logic any upward revision does not count and they might as well just report 250,000 each week and then upwardly revise it to 400+ the next week. That would always provide them with a strong drop in jobless claims from the "revised" number. Yes, I am griping about the number games. It is all scripted for the uneducated investor that happens to hear a sound bite on a news channel. OIN readers are hopefully more literate and can see through this smoke screen. A better gauge for the real numbers is the continuing claims which rose to 3,497,000 from 3,268,000 the week before. That +229,000 gain in the jobless rolls is a clear sign of trouble. Those who dropped off the list last week because their claim period expired are not reported which makes the +229,000 jump even more drastic. There is also a number of rumors of mass layoffs, which will be announced after the holidays. Stay tuned.

Another indicator of the lack of recovery was the Chicago Fed National Activity Index, which came in at -0.51. This is the fourth consecutive month the index has been below zero and indicating a pull back in economic activity. Specifically weak were the employment and production categories. Hiring at temporary agencies, which is a leading indicator of a rebounding economy, fell for the third month in a row. The extended weakness in the CFNAI for the last four months shows an increasing risk of the economy slipping back into recession. The year-end boost in production has passed and future production will require new and currently unseen demand.

Contrary to the two items above the Philadelphia Fed Business Outlook Survey for their region showed an increase from 6.1 to 7.2. This slight increase in their diffusion index indicated a very slight pickup in manufacturing in their area. However, shipments fell to a negative -3.4 and new orders fell from 11.0 to 9.3. Inventories rose to 13.9 from -6.1 but the gains came mainly from a drop in orders and shipments. Only 30% of the respondents said they were considering adding employees in the 1Q of 2003. The 1Q spending expectations component fell from 25.8 in November to only 9.1 in December indicating a significant drop in plans to spend money for any reason. The Conference Board's index of leading indicators also picked up very slightly in November from 111.5 to 112.3. This index has been very flat for the last eight months but may be showing early signs of improvement.

More of a serious challenge to Americans is the current rise in oil prices. With oil trading at $21 a barrel and not expected to drop over the next 30 days consumers are faced with an undeclared tax on almost everything they buy. For every $1 over $25 a barrel the US consumer will fork out about $7 billion more a month in energy related expenses. At $31 a bbl this represents a extra $42 billion monthly drain on the economy. Nobody is exempt since energy is required not only to heat our homes but in some form for almost every product we consume. This drain on the economy will drag on corporate earnings and eventually the stock market. With the war not likely to happen until February, after the Jan-27th report to the UN Security Council, this means oil could go higher. The situation in Venezuela is getting worse not better and there is no resolution in sight.

Tech stocks tried to rally at the open on the Oracle earnings news and the semi book-to-bill numbers. Oracle managed to gain +.37 cents on their news. The semi B-T-B number rose only slightly from 0.78 to 0.79 but orders were flat and shipments fell -0.9%. The flat headline number for November was likely related to last minute orders for rush holiday shipments for computers and cell phones. There are no indications that there are any new orders on the horizon and falling capital spending will continue to drag on the sector. The latest CIO Magazine Tech Poll in November showed more CIOs expected to cut spending than increase spending in the current quarter. This was the second consecutive month the trend was down. The long awaited upgrade cycle for Y2K computers may be coming but it is still too far in the distance to be seen.

Microsoft just keeps getting hit with security problems with yet another warning today. Security holes in Windows XP make playing media files off the Internet very risky. The same flaw was found in WinAmp from Nullsoft, which is a unit of AOL. Both programs would allow for an attacker to disguise his program as a MP3 or WMA file with the same name as a popular music download. Once the user clicks on the file the computer belongs to the attacker and he could modify/delete anything on the PC without the user being aware. Windows XP does not even require a user to click on the icon. Just moving your mouse over it is enough to trigger the program. This makes music file sharing over the Internet even more risky. Both companies have posted fixes on their websites. MSFT is hugging support at $53 and AOL is still glued to $13.25. With multiple Internet companies running very high profile attack ads against AOL on national TV the odds are AOL will be looking up at $13 soon.

The market sell off on Thursday was primarily related to the "material breach" claim against Iraq. The news brought to reality what everyone knew was coming. We will be going to war against Iraq in February. I had thought this news was already priced into the market but obviously there were still some traders with their head in the sand. The next deadline is the Jan-27th report to the UN Security Council where the specific material claims will be spelled out for all to see. There is no doubt this will be played out in the media well in advance. The US has already stationed 60,000 troops in the gulf and authorized another 50,000 today. There are already enough men and equipment in the gulf to start a war since the first 30 days are expected to be a series of surgical strike air attacks. Those attacks will be carried out from air bases hundreds if not thousands of miles from Iraq and with assets already in place.

The markets on Thursday suffered from a series of attacks in the form of sell programs. They were repulsed only when the Dow neared last-ditch resistance near 8300. It was not a wave of carpet bombing that drove the index down but several lightning attacks by small sell programs that exploited the thin ranks of buyers. Each penetration to a lower level brought a rush of buyers to fill the gap but due to their limited numbers they were not able to repulse the attacks for more than a few minutes. The defensive lines at the 50 DMA of 8498 and the 100 DMA at 8408 failed. Only a valiant stand at the 38% retracement level of 8344 prevented the defenders from being overrun. The defenders were able to mount a weak counter attack in the last 30 minutes and managed to regain some of the ground lost earlier. The buyers continually ran out of volume and were frantically trying to induce others to join their cause to no avail. (I obviously should not write war novels.)

The bulls are counting on historical trends to save them. Since 1945 the Santa Claus rally has averaged a +10.6% gain in the Dow from the Nov/Dec lows to the highs in late December and early January. Since 1945 this string is unbroken. The smallest gain recent times was 0.86% in 1968-69 and the largest of +22.22% in 1974-75. The Nov/Dec low for this year was 8298 on Nov-13th. Using the average gain of +10.6% that would equate to a potential of 9177 on the Dow. Personally I think this is not possible in the current state of pre-war. Still only half of the average gain would put us back near 8750. While nobody can guarantee Santa will appear there is ample historical evidence to suggest traders will see some sort of bounce over the next couple of weeks. Since 1968 only five of the eventual highs occurred in December while 28 occurred in January. In our current bear market for the last three years the highs occurred on Jan 8th, 14th and 3rd.

In 1990 when the US was preparing for the gulf war the Dow sold off from its high of the year at 3010 to the October low of 2344. A it became evident that the US and the growing coalition was going to kick Iraq troops back to Baghdad the Dow rebounded over the December holidays to 2662 but fell sharply back to 2448 when the attack started. Within a week the Dow began to rebound and hit 3017 again by March. That +20% rebound began a new bull market that climaxed at 11,750 in Jan-2000. We know that economic conditions were almost the same this year as they were in 1990 and that our odds are significantly better in Iraq now than they appeared to be then. A casual observer would expect no further drops in the market due to war sentiment since the massing of troops tends to build patriotic spirit. Couple that with extreme oversold conditions and the Dow at strong support and I would say the potential for a Santa Claus rally is strong. That opinion and $4 will get you a coffee at Starbucks but that is the way I see it. I am still a buyer of the market below Dow 8450 with a stop at 8250. My sell target is 8750. That is where I think the economic issues will again take center stage.

Of note were the TRIN, which closed at 1.78 and the put/call ratio which closed at .96. Both are indicating a level of fear and oversold conditions which could produce a bounce at Friday's open. It is a quadruple witching Friday but most squaring of positions should already be complete. I expect some strong volume on the Nasdaq as the rebalancing becomes effective as of the close of business. Heavy selling in those 15 NDX stocks being removed should not significantly impact any chance of a Nasdaq bounce at the close because they are already nearing penny stock status.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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