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Market Wrap

Up For The Year

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      01-02-2003           High     Low     Volume Advance/Decline
DJIA     8607.52 +265.90  8608.27  8342.38 1.54 bln   2521/ 719
NASDAQ   1384.85 + 49.30  1384.91  1336.98 1.28 bln   2321/1064
S&P 100   459.50 + 14.75   459.50   444.75   Totals   4842/1783
S&P 500   909.03 + 29.21   929.03   879.82 
RUS 2000  392.58 +  9.49   392.60   383.09 
DJ TRANS 2372.75 + 62.80  2372.75  2305.45   
VIX        28.52 -  3.51    32.98    28.37   
VXN        47.05 +  0.11    49.53    46.58 
Total Volume 2,999M
Total UpVol  2,737M
Total DnVol    221M
52wk Highs  141
52wk Lows    44
TRIN       0.22
PUT/CALL    .76

Up For The Year
By Jim Brown

Surprise, surprise! The markets reacted with shock after the ISM numbers came in much stronger than expected. The Dow rebounded to strong resistance with a +265 point gain and the Nasdaq brought back memories of the 2002 open with a +49 point gain. On Jan-3rd 2002 the Nasdaq spurted to a +65 point gain. Unfortunately the high for the year was only four days later.

Dow Chart

Nasdaq Chart

The ISM report got 2003 started off with a bang with a 54.7 headline number compared to estimates of only 50. This was the highest number in six months and the first positive after three months in the red. Unfortunately it takes more than a one month aberration to break a trend. There is a good possibility this was a simple dead cat bounce prompted by inventory depletion from the last five months of dismal performance. Eventually your shelves will go bare and you have to order to stay in business. You may not order much but with the current drought any increase is easy to see. The markets rallied on strong short covering as this data was exactly opposite what traders expected. There is a very good chance we will see a correction in the January ISM next month.

The next most important number was the new Jobless Claims which also came much higher than expected. Unfortunately that is not the same good news direction as the ISM. The jobless claims jumped to 403,000 from 378,000 the prior week. The 378,000 number was also revised up to 390,000. Considering prior week was a shortened holiday week it is surprising that the new claims neared 400,000 again. Considering the trend to put off applying for unemployment until January this spike in the last two weeks numbers are troubling. I would expect to see a much higher level next week. The four-week moving average rose to 418,750 from 407,500. The nonfarm payroll report next Friday is not likely to show any increase in the overall jobs numbers due to the rising jobless claims.

The ISM numbers also caused traders to ignore a survey by Goldman Sachs that predicted trouble ahead. Goldman surveyed chief investment officers in December and they now expect a further decline in corporate spending in 2003 instead of the previous outlook for 2% to 3% growth. They said the survey's outlook for long-term growth also dropped -2% to an all time low of 5%. In the survey 66% of the respondents expected cuts in their budgets and 43% were not expecting any increase in spending until 2004 or later. Goldman warned that earnings for the March quarter were at risk for the technology sector. According to the survey the areas that will see the most gains in spending over the next 12 months were security software, security hardware, switches and routers, wireless LAN, storage software, Windows Desktop 2000/XP software and midrange storage arrays. The list was in descending order. Symantec and Microsoft both soared over $2 on the news. VRNT gained +11% as well.

Earnings warnings began today and will accelerate substantially over the next two weeks. PMTC, ADVS, CDN and HD headed the warning list on Thursday. Not all news was bad with FRX and PFCB raising guidance but the majority of guidance changes were down. Brokers were busy with downgrades on stocks like CSCO, FHCC, LTD, TOO, MANH and others. These are just a whisper of the flood we will be seeing next week. With the Goldman Sachs survey echoing the same outlook as the SG Cowen survey from last week there will be more tech downgrades ahead.

Thursday was a good day but it was just a day. Followers of the "first five days" trend indicator should be excited. The idea is that the trend for the first five days will be the trend for the year. Considering the first five days were up strongly in 2002 you can see how well that indicator works. It is more of a superstition than an indicator. There was a parade of "technicians" on stock TV today with mixed outlooks. Ralph Acampora returned to CNBC as a forecaster and said the next couple of months could be "jittery" but the second half of the year would be strong. I suspect "jittery" is a new technical term for unstable with weak days ahead. He said we could see a correction but he would advise buying the dips. A successful market timer, Arch Crawford, who was rated the number two market timer by Timer Digest the last six months, said he expected a drop by March that would break the October lows. He felt we would rally off the lows but fall back again in the Oct/Nov time frame but a new bull market would begin with a rebound in November. Arch has been pretty accurate as of late. He was rated #1 timer for the first six months of 2002 by Timer Digest.

Both of those forecasts and $4 will get you a cup of coffee at Starbucks, which coincidentally said their same store sales were up +7% in December. Now we know where everyone went when they were supposed to be shopping. Friday is a tossup. I see strong resistance above us from 8650 to 8950 and that should limit any further gains. We could see a gap and crap where the market bounces at the open only to fail shortly thereafter. It is also possible we could see the inflow of new money from end of year retirement contributions power the indexes even higher but the general consensus of opinion is just like last year. An early rally followed by a couple weeks of worry as warnings prepare us for the 4Q earnings parade. Just like you can't determine a football game by the first possession we cannot draw too many conclusions by the first day of trading. The markets were very oversold coming into the holidays and we were due for a bounce. The ISM just caught many shorts off guard and the rest is history. Volume was still weak although it was strongly positive. Friday could see a return of volatility which was noticeable absent on Thursday with the VIX dropping -3.51 to 28.52. Also expected to be a factor at the open is the TRIN which closed at an obscenely low .22 and the lowest close since Oct-28-1997. This extreme overbought indication will be working against traders at the open. Either way, do not apply too much importance to Friday's outcome. Next week is when the real work starts.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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