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A Lump Of Coal For Retail Investors

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12-23-2002                High    Low     Volume Advance/Decl
DJIA     8493.29 - 18.03 8554.04 8462.64  1081 mln  1703/1514
NASDAQ   1381.69 + 18.64 1384.29 1358.29  1162 mln  1855/1500
S&P 100   456.06 +  0.60  459.28  453.64    totals  3558/3014
S&P 500   897.38 +  1.62  902.43  892.26
RUS 2000  389.73 +  2.85  390.05  385.41
DJ TRANS 2321.73 -  2.49 2330.70 2301.92
VIX        29.33 -  2.14   31.44   29.33
VIXN       45.89 -  2.62   49.83   45.89
Put/Call Ratio 0.58

A Lump Of Coal For Retail Investors
By Kent Barton

Mall parking lots across the country were jammed to the gills today as Holiday shoppers scurried to make some last-minute purchases. Anyone who braved the crowds and long lines would probably attest that retail business is humming along just fine. Unfortunately for investors within the group, there's a whole lot of evidence to the contrary.

The broader market opened flat this morning as traders digested another round of economic data. Durable goods purchases bounced back with a 1.9% gain in November, following the previous month's 1.3% decline. A large portion of the gains was attributed to strong auto sales, which had been dropping from Q3 levels. New car purchases also helped to push personal spending to a 0.5% gain, which was in-line with analyst estimates. The University of Michigan, one of the key gauges of consumer sentiment, came in at 86.7, one tenth better than expectations.

Conventional wisdom dictates that strong consumer spending is absolutely crucial if the economy is going to avoid a double-dip recession. Today's numbers don't indicate any reduction in spending, but you have to wonder how well those lagging indicators reflect the current situation. Monday's news out of the Wal-Mart camp paints a far more bearish picture. Shares of the retail behemoth hit a new relative low after the company said that it expects December same-store sales to come in at the lower end of its 3%-5% growth forecast. Adding insult to injury, Federated Department Stores (the parent company of Bloomingdale's and Macy's) said they would probably miss their November/December sales targets. The company said that sales didn't increase as much as they had expected during the third week of December. After-hours news wasn't much better for retail bulls. Citing weak sales of sporting goods and apparel, Target (TGT) said that same- store sales had fallen well below expectations for the third consecutive week.

Hmmmm...Slower-than-expected holiday sales for the two largest discount retailers and a frigid December for one of the leading department stores. If you're getting a distinctly bearish vibe from the entire sector you're not alone. The retail index has been in a steady decline for several weeks and today's news pushed the RLX.X to new relative lows. Wall Street, which is always looking forward and trying to factor in future economic developments, seems to be pricing in a decline in consumer spending. The fact that Americans aren't enthusiastically whipping out their pocketbooks during the Holiday season doesn't bode well for first quarter of 2003.

Annotated chart - Retail Index

With WMT leading the way lower, the Dow Jones was hard-pressed to remain in positive territory. A morning rally that took the index above its 50-dma (8525) quickly petered out near 8550. The final two hours of trading had the Dow trading in a small range without any clear direction. Small gains in MSFT and INTC helped to keep the Industrials above short-term support in the 8350-8400 region but news that Moody's has downgraded MCD due to their first quarterly loss in 47 years and the press release from Citigroup for its $1.3 billion charge did their best to make it hard on the bulls to get any momentum.

Annotated chart - Dow Industrials:

Tech stocks as a whole faired better, as the semiconductor index moved through resistance and finished in the green by 2.7%. The SOX.X has trended higher over the past three sessions and looks poised to test its 50-dma at 312. Looking at the broader tech sector today's 18-point gain in the NASDAQ wasn't anything to write home about, it's interesting to note that the index was able to break above its 50-dma, which acted as resistance on Friday. This level roughly coincides with the 38% retracement from the October low to December high.

Annotated chart - NASDAQ:

Rebalanced trading in the NASDAQ-100 commenced today. Former tech high-flyers such as AMCC, CHTR, VTSS, and PMCS have been cast off in favor of companies that are actually turning a profit. ROST, EXPD, XRAY, LAMR, WFMI, FHCC, PETM, PIXR, APCC, FAST, CHRW, PTEN, RYAAY, HSIC and GNTX are the additions. Mutual funds still have a few days left to make adjustments, so we may see some added volatility in those stocks for the duration of the week. Speaking of fallen angels in the tech sector, Inktomi (INKT) shot higher by 36% today after Yahoo (YHOO) announced that it would buy the software company for $235 million, or $1.65 per share. Sharp- minded traders might remember that INKT topped out at a whopping $241 per share in early-2000. Today's investors seemed to be pleased with the deal - YHOO finished the session with a 3.7% gain.

After the closing bell this afternoon, a federal judge ruled that Microsoft's Windows operating system would have to include Sun's Java programming language. SUNW posted a gain of roughly 10% in after-hours trading. We'll see how this plays out tomorrow, but thus far it doesn't look like this news will weigh too heavily on Mr. Softee. Shares finished the extended session with a loss of only 10 cents.

Over on Capital Hill, life began to return to normal (relatively speaking...we're talking about Washington D.C. here) following Trent Lott's resignation as Senate majority leader on Friday. Sen. Bill Frist was officially chosen as his replacement this afternoon. The GOP, and the White House in particular, can be very pleased with how things turned out. In contrast to Lott, who initially opposed Bush's candidacy in 1999, Frist has close working relationship with the Administration. This will give the President added leverage in pushing through his agenda, including larger tax cuts.

Crude oil futures (cl03f) hit a new multi-month high today after OPEC decided not to increase output until their price benchmark remains above the $22-$28 range for 20 trading days. The cartel seems to view the current Venezuelan labor strike (which has entered its fourth week) as a temporary problem that has artificially reduced supply. As it stands now, the country is only exporting 10% of its previous output. The current stalemate has President Huge Chavez (who thus far has maintained military support) pitted against a widespread opposition that includes several high-level oil executives. A resolution of the strike would likely take a few dollars of premium out of crude futures.

Of course the longer-term worry for OPEC is the United States' looming war with Iraq. Continued hawkish rhetoric from the White House and extensive military exercises in Kuwait make an invasion appear inevitable. At this point it's hard to imagine that crude will retest its November lows anytime in the near future. The steady beating of war drums may be helping to keep a lid on the major market indices as well. Wall Street loathes uncertainty, and nobody knows how an invasion of Iraq would play out. A quick victory could send stocks sharply higher. Investors were so sure of success during the first Gulf War that the market actually rallied when the initial air campaign began. The current situation is quite different. The ouster of Saddam Hussein will entail a takeover of Baghdad. Fighting in an urban environment against a motivated Iraqi army protecting their homeland, U.S. forces could face a much more difficult task than the relatively straight-forward desert warfare that took place in 1991. A prolonged, expensive war in Iraq would have a disastrous effect on the market. These are just some of the concerns that Wall Street has to contend with. In any case, continued high oil prices will not have a positive impact on the economy.

The dearth of any noteworthy economic data or earnings reports for the rest of the week will put the focus on these geo-political situations. But short of any major developments, tomorrow's abbreviated trading day will most likely see extremely thin volume. The last time the Dow posted a loss on the day prior to Christmas was in 1997. What exactly gives the market this bullish bias during the holidays? Institutional traders go on vacation, leaving their less experienced counterparts in charge with one basic command: "Don't screw anything up." Without the major players taking large positions and pushing the market around, retail investors have an abnormally large influence. On a whole this group tends to trade with a sharply bullish bias. Throw in a little seasonal cheer, and you've got a recipe for a Santa Claus rally. Of course there are no guarantees, and the Grinch (dressed in a bear suit) might be eagerly awaiting another failed rally. Those who aren't taking a well-deserved day off tomorrow should pay attention to the aforementioned short-term resistance levels.

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