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Market Wrap

Holiday Ends Early

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      12-26-2002           High     Low     Volume Advance/Decline
DJIA     8432.61 - 15.50  8565.01  8408.71  .87 bln   1781/1371
NASDAQ   1367.89 -  4.60  1392.58  1363.61  .80 bln   1744/1575
S&P 100   450.60 -  2.67   458.57   449.48   Totals   3525/2946 
S&P 500   889.66 -  2.81   903.89   887.48 
RUS 2000  389.40 +  1.27   392.21   388.12 
DJ TRANS 2316.44 +  8.50  2344.45  2307.17   
VIX        31.08 +  1.07    31.61    30.10   
VXN        45.36 +  0.23    47.17    45.36
Total Vol   1,781M
Total UpVol   858M
Total DnVol   869M
52wk Highs   145
52wk Lows    116
TRIN        1.05
PUT/CALL    0.71

Holiday Ends Early
By Jim Brown

Traders who were looking for a post holiday rally missed it if they slept late. The triple digit bounce to 8565 failed just before 11:AM and a -141 point drop followed. The Dow closed below critical support at 8450 and is threatening to retrace back to the 8328 levels from last week.

Dow Chart - Daily

Nasdaq Chart - Daily

The markets shot up at the open on the strength of the new Jobless Claims, which came in at 378,000. This was significantly below the consensus of 410,000 but as we have seen over the last few weeks holiday reporting has been sketchy at best. With last weeks number revised up +5,000 the odds are very good this number will be revised up as well. Even if it isn't that number in a holiday shortened week is significant. Many workers would likely have postponed filing for benefits and job hunting until after the holidays. The jobless claims will not return to normal reporting until the Jan-9th release, which should be critical for investor sentiment.

Another number that was under reported was the drop in mortgage applications. That number fell in the week ended Dec-20th by -8% and indicates a continued weakening in housing. Over the last five weeks only one week has shown growth in applications. Refi applications also fell -9%. The overall mortgage application level is still high but the decline has definitely begun. Once the Fed starts raising rates the decline should be dramatic. The impact on the US in 2003 should be mild but we can no longer count on the boom to hold up the economy.

Also failing to do their part in holding up the economy were the consumers. According to the Wall Street Journal this holiday posted the weakest growth in sales over the last 30 years. TGT, WMT, JCP and FD were among the top retailers that have already warned that sales would be at the low end of estimates. WMT announced on Thursday that same store sales growth would now be in the 2-3% range for December which is below their previous guidance of +3-5%. Even Amazon got pounded for a -1.58 loss on Thursday despite news that they sold over 56 million items since Nov-1st. This included 62,000 gift certificates purchased on Dec-24th by shoppers out of delivery options. Analysts were worried that the huge number of sales were done at a loss in order to gain market share. With free shipping offered until Dec-12th this additional transaction cost on 30 million items could have accelerated those losses. I discussed AMZN on the Market Monitor last week and the possibility for a coming sell off. It appears that has begun.

With holiday sales weaker than non-OIN readers expected there is likely to be a new round of earnings warnings next week. Historically the trend is for the warnings to be delayed until the first full week of the new year. The fourth quarter earning announcements begin in earnest until the week of Jan-13th. This leaves only two weeks for the majority of earnings warnings to occur. Considering the economic reports over the last couple of weeks this could be a very busy two week period. Corporate earnings for 2003 are dropping faster than pine needles this week. In July the earnings estimates for 2003 were for 20% growth for S&P companies. In October that was cut to +17.8% and in December they were cut to 14.2%. First Call is now saying they anticipate an additional cut to 11% once the January warnings begin. Other analysts are expecting only 8-9% for all of 2003. This is exactly the same scenario we saw for 2002. Remember the anticipated second half rebound for 2002? Now those same forecasters are repeating their bullish forecasts for 2003. "Strong second half rebound in corporate spending will lead to strong profits." Time will tell but a survey of 65 analysts was released this week and only two were expecting the markets to close lower in 2003. The bullishness is rampant for the long term but for the near term it is looking grim.

The volume today was the lightest full day of the year with the NYSE only trading 716 million shares during regular trading. Volume is never high the day after Christmas but there is normally a sellers strike as well. Sellers were not on strike on Thursday and showed up in force when the Dow rose to 8550 just after the open. Besides the reasons mentioned earlier there were continued geopolitical concerns. Oil rose to $32.65 a barrel and gold hit a new high as the US and Britain attacked Iraq in retaliation for shooting down the observation plane.

The very light volume makes it difficult to apply too much credibility to the sell off but the trend has not changed. For a normally bullish week we have seen three down days for a -80 point total drop. There were strong rallies on Monday and Thursday but both failed completely after hitting 8550. The lack of follow through in a bullish holiday week has prompted me to change my outlook. I had been expecting the Dow to retest 8750 before January 1st but now I think that is not going to happen. I am concerned now that the lack of follow through is an indication that we could retest the 8328 low from last week or even lower. We are obviously entering a very volatile period and there is nothing on the immediate horizon to provide the bulls with the hope needed to power a rally. There will be additional tax selling and portfolio balancing over the next three trading days and the outcome is far from certain. Be very careful with short term positions over the next couple weeks.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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