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Lump of Coal For Markets

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      12-24-2002           High     Low     Volume   Adv/Dcl
DJIA     8448.11 - 45.20  8491.99  8443.65  .57 bln 1441/1593
NASDAQ   1372.47 -  9.20  2382.93  1372.38  .52 bln 1345/1781
S&P 100   453.27 -  2.79   456.06   453.12   Totals 2786/3374
S&P 500   892.47 -  4.91   897.38   889.48             
RUS 2000  388.12 -  1.61   389.73   387.95
DJ TRANS 2307.99 - 13.70  2321.86  2307.13
VIX        30.01 +  0.68    30.35    29.49
VXN        45.13 -  0.76    46.50    45.03
Total Vol   1,161M
Total UpVol   388M
Total DnVol   785M
52wk Highs   143
52wk Lows    149
TRIN        2.23
PUT/CALL    0.55

Lump of Coal For Markets
By Jim Brown

Santa delivered a lump of coal to the markets on Tuesday in the form of the Durable Goods Orders. He was not alone as the North Korean grinch helped steal Christmas spirit as well. Despite the negative news the Dow managed to close right on support one more time.

Dow Chart - Daily

Nasdaq Chart - Daily

The biggest hurdle for the markets at the open was a huge drop in Durable Goods by -1.4%. Analysts had been expecting a +0.5% gain. New orders fell by -1.3%. This wiped out almost the entire increase for October and prompted worries that the weak recovery bounce was failing. Orders for computers fell by -3.7% which calls into question any future semiconductor sales numbers. Despite this very negative economic news the Dow managed to rebound off the opening lows and was showing some growing strength until the grinch showed up.

Even weak retail sales numbers, which showed only +0.1% growth for the week failed to make a significant impact on traders. Most have been hearing the bad news about the holiday sales for weeks now and the bad news should already be priced into the market. However, the news is going from bad to worse. The analyst community is now beginning to claim that this is the worst year for retailers since 1991. Profits are expected to be dismal and all eyes will be on next weeks reports to see if the last minute shoppers helped pull the sector back from the brink.

Adding to the negativity was the Monthly Mass Layoff report which showed an increase to -240,028 jobs lost in November from -171,088 lost in October. There were 2,150 mass layoffs announced in November, which was significantly above the 1,497 in October. The continuing rise in the rate of unemployment and the drop in durable goods bodes ill for the 4Q GDP and any early recovery in 2003.

One additional indicator of overall weakness is a rash of earnings warnings from video game manufacturers. This sector is typically the last to be hit since teenage boys are the predominate buyers and are relatively loose with their money. The lack of sales across this sector should have the same impact as the earnings warnings from Lance snacks. The snack giant who depends on vending machines for a large majority of their sales warned that they would miss 4Q earnings a couple weeks ago. These extreme low-level indications of weakness are even more troubling when added to unemployment and the larger trends.

The final straw for the markets was the arrival of the grinch in the form of North Korea, which warned on Friday of an "uncontrollable catastrophe" if Washington failed to back off the current hostile policy towards them. They said the confrontation between the US and NK was escalating into an extremely dangerous phase. NK has intercontinental missiles and scientists have said they could have a nuclear bomb ready for delivery in as little as three months. It appears NK is taking advantage of the worlds distraction with Iraq and using the opportunity to engage in some brinkmanship in an effort to improve their global stature. Rumsfield raised the ante on Tuesday by saying the US could fight two wars at once if pressed and could win them both. The implied threat was directed at NK and was warning them not to pull on Superman's cape. He said they could swiftly defeat NK if pressed into a second conflict. This may be wishful thinking as NK is not as weak as Iraq.

The lack of positive movement in the markets during the holiday week are distressing for the bulls. This typically bullish period is slowly sinking in the quicksand of economic weakness and global events. If traders cannot pull a rabbit out of the hat on Thursday the outlook for an end of year rally will grow noticeably dimmer. The normal influx of end of year cash may be derailed into money markets instead of stocks. The markets are poised to close with losses for the third consecutive year, which has not happened since the depression. The Dow closed right on the top of current support at 8450. With only a 150 point cushion between today's close and disaster (a drop under 8300) the stage is set for the end of the year. If the bulls don't show up on schedule on Thursday we could easily see a serious trend change.

I would like to wish all our readers a very happy holiday. The newsletter will operate a reduced content schedule today and Thursday with no newsletter on Wednesday. Consider giving yourself a present that lasts all year with our annual renewal bonus. You will not be disappointed!

Jim Brown

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