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Market Wrap

Dividend Play

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01-06-2003                   High    Low     Volume Advance/Decl
DJIA     8773.57 +  171.88  8800.59 8602.10   1698 mln  1369/316
NASDAQ   1421.32 +  34.24  1428.65  1390.09   1528 mln  1262/249
S&P 100   469.74 +  10.54   471.41  459.20    totals    2631/565
S&P 500   929.01 +  20.42   931.77  903.07
RUS 2000  397.00 +   6.69   397.77  390.31
DJ TRANS 2421.71 +  56.77   2425.83 2365.02
VIX        27.41 -   0.57    27.76   26.45
VIXN       43.45 -   2.26    46.91   43.45
Put/Call Ratio 0.67

Dividend Play
By Steve Price

The January effect still remains in tact, with the markets exploding for another leg up today. The big market mover was the release of the President's economic stimulus plan, which turned out to be twice as much as previously expected. The plan now calls for elimination of tax on all dividends, instead of the previously planned 50% reduction. This translates into $600 billion of relief over 10 years, instead of $300 billion and had investors scooping stocks that pay significant dividends. The President's plan, along with a new beginning of the year in-flow to mutual funds appeared to get the ball rolling and on a day without significant volume, there was little to stop it.

That action was enough to lift the markets, in spite of a worse than expected ISM services report that came in almost two points below predictions (54.7 versus 56.6). An ISM reading over 50 still shows an expansion in the services sector. The growth rate slowed in December, but backlog was up 1.1%, so expansion should continue into the near future. After the ISM manufacturing index expanded more than expected in the last reading on Thursday, investors shrugged off this report, instead focusing on the Bush plan.

The other economic news came from the Challenger report that showed a drop in layoffs from November to December. Companies said they would cut 92,900 jobs and while that number is still high, with an annual rate of 1.46 million, it is nevertheless a 41% improvement from November when the number was 157,508.

We have now rallied 531 Dow points off the December low of 8242 and traders are undoubtedly wondering whether this is simply a blow-off rally before another leg down to lower lows, or whether we are really headed toward a breakout to new highs. We did see a number of technical resistance levels fall today, as the SPX headed high enough to take out the September and November highs at 925. That is significant in that shorts at those levels would have been overcome on an intraday basis. However, the Dow and OEX have yet to break those highs in the 8800 and 472 range. If traders looking to enter short are picking a top, failure in all three averages would have been more reassuring. From a bull's perspective, there is still resistance to overcome, with a big resistance level looming above at the August/December highs. Those December highs sit at Dow 9077/SPX 954/OEX 487.94.

Today's high in the Dow came at 8800 and bears will point out the possible formation of a bearish head and shoulders formation. If that is the case, we could be seeing a very big drop in the near future. However, before we start piling on short, it would be nice to see some evidence of a rally failure. While we saw failures at resistance today, we also saw resistance failures on Friday and wound up 2% higher on the day today. The fact that the SPX took out the resistance that would have coincided with a right shoulder in the Dow at 8800 is also a red flag for bears, as noted above. Right now we are seeing a series of higher highs and higher lows, but the rally is extreme and looks unsustainable. While some type of pullback is due, we have to ask what it will mean if it comes above Dow 8600. In that case we may simply be seeing a higher low after Friday's late day bounce from 8550. That doesn't mean that we shouldn't go short on a breakdown from this level, waiting for a neckline all the way down at Dow 8200, but tight trailing stops are prudent to avoid a bounce from a higher low. Most after-hours announcements were positive and we could see another gap open in the morning.

Chart of the Dow

Chart of the SPX

The Tech indices also saw a big rally today blowing through previous resistance levels and running into others. The Nasdaq Composite (COMP) took out resistance at 1400 like it didn't exist and the Semiconductor Index (SOX.X) ran through its 50-dma of 318 and horizontal resistance at 330. After reaching an intraday high of 335, it fell back to close above that resistance at 331, indicating we may now see support at that level. Chip equipment stocks jumped after Deutsche Bank upgraded the sector to BUY, saying that multiple delivery and order pull-ins would lead to quarterly growth of 15% to 20% versus than expectations of flat to 10 percent growth. The next level of resistance in the NASDAQ is 1426, which it broke on an intraday basis and put a cap on the index back in August. The COMP reached a high of 1428 intraday, before falling into the close to finish at 1421.33. The last time we broke through that 1426 level on the way up, the COMP didn't stop until it hit the December high of 1521. Of course the previous time it hit that level and failed to hold, we saw a sell-off of 100 points in the COMP. We are likely to see a continued rally in the COMP again tomorrow, following comments from storage giant EMC. The company pre-announced better than expected earnings for the fourth quarter, saying it expects a profit of $0.01-$0.02 per share, versus previous expectations of a loss of $0.02. It said customer spending was better than expected and revenues would come in above $1.47 billion, versus previous expectations of $1.27 billion.

Chart of the NASDAQ Composite

Chart of the SOX

The rally that follows a big news event, such as today's change in the dividend tax-cut plan, certainly would seem to indicate a short opportunity. However, this news event was one with direct stock market implications. Dividends suddenly got potentially much larger, as they could become tax-free vehicles, making stock investments more profitable and most likely bringing more 401(k) dollars back into the equity market. The other benefit to shareholders is that if companies are not taxed on dollars put into dividends, there will be a bigger incentive for cash-rich companies such as Cisco (with $21 billion in cash) to begin paying a dividend. That kind of potential could actually give a rally some legs. However, the Democrats have a plan of their own and it calls for tax incentives of far less than the $600 billion proposed by Bush. This is far different than an announcement regarding Iraq, which has shorter-term implications and the market may continue to react to developments in the negotiations between the two sides. One thing was clear from today's action, however, and that is that the stakes just went in stockholder's favor. If the President is going to start bargaining from a lower tax level, then the middle ground is likely to end up closer to a financial boon for bulls.

The Democrats outlined their plan this afternoon, which was a far more conservative economic stimulus plan at a cost of $136 billion and focused on a one-year economic boost. The democratic plan said nothing about dividend tax relief and instead focused on tax-rebates to individuals, extension of unemployment benefits and investment depreciation acceleration for businesses. Representative John Spratt said it was about helping the economy, not the stock market. The depreciation acceleration is also a part of the Bush plan. After the democratic statement, the markets hardly budged, apparently on the assumption that a President controlling both houses of Congress was the one dealing from a position of strength. The GOP was listening however, and said it would offer an extension of jobless benefits on Tuesday.

Another factor figuring into today's rally is the price of oil. After OPEC President Abdullah al-Attiyah said Sunday that the group would use its production power to keep the price of oil within its targeted range of $22-$28 per barrel, in response to the supply shortfall resulting from the Venezuelan strike. Venezuela is world's fifth largest oil exporter and the six week general strike has reduced exports from that country to 500,000 barrels per day, from an average of 2.7 barrels. The drop in Venezuelan oil has caused a 9 million barrel drop in U.S. crude oil inventories, reducing domestic supplies to near 26-year lows. "An increase could be anywhere between 500,000 barrels per day (bpd) to one million. It will depend on consultations," Attiyah said Crude Oil futures dropped almost a dollar per barrel and fueled stocks as the news signaled lower costs for almost all businesses. A look at the chart of Crude Oil futures has shown an inverse relationship to equities, as it reflected both operating costs and world events. If we get a continued sell-off in oil prices at the same time stocks can break out above August/December highs, then there may be hope that this bounce is the start of something bigger.

We have now reached yet another crucial level in the broader indices. If the Dow and COMP both break above the resistance levels highlighted above, then we may see a re-test of the December highs. There is more room for the techs to go before hitting those levels, so tech longs may have more room to run on a breakout in the Dow. Traders can watch to see if we get another leg up on the open through resistance tomorrow. If that is the case, then traders can either hop on the speeding train for a short ride to those December highs, or get out of the way if they are looking to enter short.

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