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Jobless Traders Buying Stocks?

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       WE 01-10        WE 01-03        WE 12-27        WE 12-20 
DOW     8784.95 +183.26 8601.69 +297.91 8303.78 -208.22 + 78.16 
Nasdaq  1447.75 + 60.67 1387.08 + 38.62 1348.46 - 14.59 +  0.63 
S&P-100  470.41 + 11.21  459.20 + 16.14  443.06 - 12.40 +  3.65 
S&P-500  927.57 +165.21  908.59 + 33.17  875.42 - 20.34 +  6.28 
W5000   8758.43 +165.21 8593.22 +287.59 8305.63 -169.60 + 48.97 
RUT      396.44 +  6.13  390.31 +  6.15  384.16 -  2.72 -  1.10 
TRAN    2393.67 + 28.73 2364.94 + 73.28 2291.66 - 32.56 +  5.75 
VIX       27.13 -  0.85   27.98 -  6.17   34.15 +  2.68 -  0.65 
VXN       42.28 -  3.43   45.71 -  1.00   46.71 -  1.80 -  2.41 
TRIN       0.80            1.32            3.60            0.66 
Put/Call   0.75            0.76            0.94            0.88 

Jobless Traders Buying Stocks?
By Jim Brown

An amazing thing is occurring on Wall Street. Fundamentals do not seem to matter any more. Wait, that is not so amazing since that has been the trend for the last four years. Silly me. Three years of a bear market seems to have given traders a thick hide and a tolerance for bad news.

Dow Chart - Daily

Nasdaq Chart - Daily

That bad news came in the form of the Jobs report on Friday. December lost -101,000 jobs, far worse than the gain of +37,000 jobs that had been expected. Need more bad news? The November number was revised downward from -40,000 to -88,000 and the October gain of +86,000 was revised down to a gain of only +69,000. That represents a loss of -204,000 jobs since September. This represents a major change in the current economy but bulls ignored it and charged ahead. Considering the economy lost -1.1 million jobs in 2002 and 20% were in the last two months you would think the outlook and market reaction would be worse. That wall of worry must be attracting hordes of thrill seeking traders.

Manufacturing lost another -65,000 jobs in December and remains the sector with the most losses. Airlines were also at the top of the list and news this week show that the bloodbath is not yet over. Retailers are still thinning the ranks with JCP announcing on Friday another layoff of -2,000 with the closing of their catalog business. Overall the unemployment rate did not change at 6.0% because many workers just quit looking and receiving benefits and that drops them off the rolls. The bean counters tried to throw some camouflage netting over the -101,000 number saying it was the result of a seasonal adjustment. They claim they had overestimated the potential new jobs at retailers and retailers only hired about half as many as expected. Ok, read between the lines. The gvmt fudged the earlier number by guessing that 162,000 Santas helpers would be hired but retailers said bah-humbug and only hired half the normal seasonal staff. Ok, no problem said the gvmt because that means there will be fewer layoffs in January. Makes sense to me. Fewer new hires means fewer layoffs but isn't the bottom line still more unemployed?

Not that anybody is listening but the dire forecasts for the 4Q GDP have already begun. The shrinkage to only +1% growth from 2-3 weeks ago is now starting to fall into the negative column. Yes, major economists are now saying the GDP for the 4Q could be negative. Don't worry, the bulls will ignore it. The administration is already starting to prep the public for dismal results. VP Cheney said on Friday that failure to pass the new tax cut plan quickly "might well" trigger another economic turndown. Yes, it is a jab at the democrats but it is also a disguised attempt to place blame for the current quarter if things don't go well. Lay the groundwork ahead of time so you can point to it later if needed. I suspect they would not use scare tactics that might put fear back into the market if they thought there was no risk. (All of this is just supposition on my part but may not be far from reality.) Critics have already claimed that the tax cuts would be too little aid and too slow to have any material impact on the current market. Obviously, the battle for 2004 is already taking shape. Historically that is a good thing because since 1939 the 3rd year of every term has been bullish.

The economy may not be falling any further but it is far from healthy. Of the guidance we have received so far there have been 77 inline affirmations, 40 negative warnings and 23 positive upgrades. That is almost 2:1 negative over positive for those not inline with estimates. When you consider the continued falling unemployment there is the possibility corporations could be cutting costs enough to make estimates one more time. Eventually this process of making earnings will stall with no employees left to cut.

On the global markets OPEC has scheduled an emergency meeting to decide if they should pump more oil to avoid further increases in oil prices. As oil prices rise the urge for companies to explore farther and dig deeper is strong. This puts pressure on future oil prices and takes away the OPEC ability to keep prices high. I expect them to open the spigots only slightly in anticipation of Venezuela resolving their problems soon.

The problem with North Korea escalated by one giant step as they withdrew from the nuclear nonproliferation treaty. This drew a strong round of complaints by the world powers as NK is a seller of weapons to other countries. Remember the SCUD missiles to Yemen last month. If they start selling nukes you can bet there would be an instant reprisal. With NK desperately seeking money to feed their population a few hundred million may seem like a fair trade for a boatload of nukes for some oil rich country. NK said if the UN issued any sanctions against them for backing out of the treaty they would consider it an act of war. Pretty tough talk for a country that can't provide electricity for its people. It did however ratchet up the attention on the world stage. Bulls ignored it.

Iraq was pushed to the back burner by the NK news and the Jobs report. It is not expected to be a headliner until the Jan-27th meeting unless the inspectors stumble over some hidden weapons. 7,000 more marines headed for the gulf on Friday with three ships out of Virginia. The pentagon said another 35,000 could receive orders to leave at any time. Turkey and the US signed a pact, which would allow the US forces to survey Turkey's bases to decide which one they would like to use for any attack. They did not get explicit permission but that is expected soon.

All eyes will be focused on the earnings calendar next week. The big guns start lining up beginning on Tuesday with Intel, LLTC, TER, PMTC. Wednesday has AAPL, ADP, QLGC, RBAK, SYMC, YHOO. Thursday has AMD, ABT, ASML, ONE, CREE, EBAY, FCS, FRX, GM, IBM, JNPR, MSFT, RATL, SUNW, UTX. The biggie for Friday is GE. These are far from all of them but you can see that techs are well represented with INTC, IBM, MSFT, SUNW.

With very few warnings this quarter it would appear the majority of companies are either going to hit the lowered estimates or just take the heat with a miss. With estimates so low a kids Kool-Aid stand could hit them it puts the warning process in an entirely new light. With companies like SUNW expected to be flat to -2 cents there is plenty of room to the upside but not much chance of a material downside surprise. Most of the majors would warn if there was any risk as they have the most to lose in terms of credibility if they produce a negative surprise.

I think you can see the reason for the current bullishness. There is new money coming into the market from retirement accounts and after a three year bear market the risk appears to be minimal to most investors. 98% of forecasters are predicting a higher market at year end so retail investors are positively giddy with bullishness. Still they have not been able to provide enough power to break that Dow 8800 resistance. They are chipping away at it one attempt at a time but so far every attempt has fallen short.

There is still significant resistance at 8800 and at the 200 EMA at 8854. Should that resistance be broken with some bullish earnings there is even stronger resistance at 9000-9050. The bulls have a wall of worry to climb but the bears have been unable to push them off the wall in 2003 with the Dow up +5% gain for the year already. That wall of worry is rising unemployment, war (Iraq, NK), oil, terrorists, earnings and lack of a recovery. Gone is the specter of corporate governance problems from 2001. Knock off a couple more of those problems and the market could shift into overdrive. We are starting to see very slight indications of buying as evidenced by the EMC and SAP news from last week. Also, EXTR and FDRY both said sales of enterprise switches and routers were strong. Somebody is starting to buy equipment and tech traders have picked up the scent. These are niche markets for each of those four companies and not necessarily indicative of a broader trend.

The Nasdaq is making very strong gains and added to Thursday's close over the 200 DMA. Some would claim that it is emulating one of those auto crash test where they run the cars up to speed just to crash them into a barrier. That barrier for the Nasdaq is the INTC, MSFT, SUNW and IBM earnings this week. With expectations so low it may be possible for the index to blast through that barrier on good news. If the news is not good and guidance is lowered yet again then the outcome may not be pretty.

Next week should prove to be litmus test for the markets. Considering the rebound from the Jobs numbers today there may not be much that can stop the bulls but we all know that when things look most bullish problems tend to appear. The Dow's +5.3% 2003 gain and the Nasdaq's +8.4% gain is the strongest first week of trading in the last 16 years. Is all the bad news priced in? Sure looks like it. Actually the news has been so bad that the chances of getting the tax cut package through in record time are good. This should have the bears running in circles this weekend.

Make no mistake. If we broke Dow 8850 and then 9050 I would become the head cheerleader. Until that happens I simply feel that committing a large portion of your portfolio to long positions could be risky. Most retail traders tend to buy at the top and sell at the bottom. If the bottom is already -1600 points (22%) behind us then where are we now?

Regardless of the market direction for 2003 I am sure you want the staff at Option Investor to be around to explain the road map as we climb the hills and slide down the valleys. If you want to subscribe at the lowest possible rate of the year and get a ton of freebies in the process then you only have ***** 2 **** days left to take advantage of the annual renewal package. Do not delay, Monday is the very last day. https://secure.sungrp.com/03renewal/

Enter Very Passively, Exit Very Aggressively!

Jim Brown

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D. Rockefeller (John's descendents are about to see a lot more pleasure)

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