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Finally Over 8800

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      01-14-2003           High     Low     Volume Advance/Decline
DJIA     8842.62 + 56.60  8843.37  8746.35 1.65 bln   1948/1307
NASDAQ   1461.01 + 15.00  1461.12  1442.63 1.49 bln   1936/1356
S&P 100   474.31 +  3.48   474.31   468.55   Totals   3884/2663
S&P 500   931.66 +  5.40   931.66   921.72 
W5000    8793.17 + 47.50  8793.17  8706.82
RUS 2000  398.72 +  2.27   398.45   395.11 
DJ TRANS 2382.72 -  4.70  2388.94  2369.74   
VIX        26.55 -  0.97    27.78    26.55   
VXN        41.92 +  0.18    43.75    40.94 
Total Volume 3,281M
Total UpVol  2,283M
Total DnVol    937M
52wk Highs  232
52wk Lows    67
TRIN       0.85
PUT/CALL    .70

Finally Over 8800
By Jim Brown

Fear of Intel sent the bears into short covering mode just before the bell and the Dow made its first close over 8800 since Dec-2nd. After more than a week of breaking and then falling below that number the average finally managed to make it stick. The key now is how long will it hold.

Dow Chart - Daily

Nasdaq Chart - Daily

The headline economic numbers this morning came from yet another look at retail sales for December. The last look at the December numbers showed that sales overall were +1.2% including autos. Without the auto gains sales were flat for the month. Sales at auto dealers and parts stores soared +5.5% for the month on top of a +2.6% rate the prior month. This shows consumers were taking advantage of their home refinancing bonus by purchasing cars and accessories. The consumer is still holding up the economy but unemployment and risk of war is slowing the broader pace.

The Richmond Fed Survey came in at -3, down two points from last month. This shows that manufacturing activity remained weak in November. The new order component remained flat at 4 and but the order backlog improved slightly. This is not a signal that the risk of a double dip has passed but it also does not indicate that the economy is plunging headlong into the abyss either.

The economic reports were ignored due to heavy rumor activity. There were so many rumors flying the commentators had to list them in order of appearance to keep them straight. There was the rumor that Russia was going to allow Saddam to flee in exile to avoid a war. Libya was also rumored to be accepting $3 billion to allow Saddam to take up residence in that country. Egypt was also reported to be making preparations for his arrival. All of these were eventually denied but the possibility of an exile to prevent the war helped lift the markets.

There were also comments by Hans Blitz that they had found weapons in Iraq. Then is was refined to be that Iraq had smuggled weapons. Later it was said that these weapons had disappeared then it was said it was the same weapons the inspectors had known about 10 years ago. Literally there was a different version of all the rumors pounding the market about every 15 minutes. There were several rumors that Iraq had told the inspectors to leave the country. There were rumors that the U.S. had told them to leave by Feb-12th. All denied. By the end of the day the general consensus of opinion was that Blitz had found them in violation of the directives on several counts. News programs ran countless sound bites of President Bush on the verge of losing his temper and complaining about being "sick and tired" of Iraq's games and that time had run out. Add to that the new pictures of ships and troops leaving for the gulf and the bullish morning was quickly crushed. Other challenges were a bomb found in a Paris cathedral, a plot for a car bomb at JFK and several more attempted terrorist arrests in Europe. Still nothing could keep the market down.

Worse than the Retail Sales report was news that Kmart would close another 326 stores and terminate up to 37,000 more employees. Remember Kmart? The low cost, no frills cross between Sears and a dime store said they were going to keep 1500 stores open and still employ 168,000 if the bankruptcy plan was approved. Martha Stewart's main outlet may not be done. They said more cutbacks could be needed in order to compete with Wal-Mart. Kmart closed 283 stores last year and fired 22,000 workers. Sounds like a duel is in order. We need the WMT and TGT CEOs to sit down at a table for one game of stud poker. Winner gets Kmart, loser gets MSO.

The market traded in a very narrow range most of the day. It was not until the end of the day that fear of an Intel surprise caused the bears to cover. Intel did beat the street by two cents but the reaction was far from exciting. Buried in their guidance was a drop in capital expenditure spending to between $3.5 and $3.9 billion and well below the $5 billion whisper number analysts had expected. The chip equipment makers suffered in after hours as a result.

The outlook was inline with estimates for revenues to be flat or show a slight decline in the 1Q. The weakness is seasonal and not a problem. However, CFO Andy Grove was far from bullish in a TV interview. He said Intel benefited from better than expected sales of high end processors in the 4Q with strength coming from overseas. He said the 1Q was going to be seasonally weak but twice he said he "saw no signs of a recovery at all". Business was still moving but he saw no improvement. The stock dropped initially on the capital expenditure changes but recovered to close up slightly in after hours trading.

That leaves us with earnings from three other major tech stocks on Thursday. MSFT, IBM and SUNW will announce after the close. With Intel, the primary piece in the PC food chain, saying there are no signs of a recovery the chances for those companies to produce a major upside surprise is slim. We already have serious indecision between the bulls and the bears. What the bulls heard tonight should not give them much cause for hope in the short term.

The very flat trading range is a problem for analysts. Professional traders want to see strong volume with good follow through on rallies. We did not get that. We have been running in place for a week while we wait for the earnings. Only the short covering prior to the close powered the Dow over 8800. We have now seen the leading edge of the tech sector say there was no recovery in sight. The bulls lost one leg of their support and will now find it harder to rally buyers for the long term.

Make no mistake. Closing over 8800 was a key point, just possibly not key enough. The 200 EMA is lurking just above at 8853 and the 200 SMA is 8919. Both should be strong resistance. Futures are positive at 8:PM and odds are good we are going to get a positive open as long as there are not any negative news events overnight. What will be key is the holding power of any gains. If we end up back below 8800 at the close on Wednesday then I would be extremely wary. We don't need to add triple digit gains every day to keep the rally going. Just knock off one resistance level at a time until we break 9050 and the party could begin. There are a lot of roadblocks between 8842 and 9050 so don't start counting your chickens just yet. With every earnings report bulls will lose another reason to buy. The short term reasons to buy will diminish more with every "no recovery yet" guidance statement. It is critical the bulls capture as much high ground as possible this week and then fight like heck to hold it. If we did get negative guidance from one of the big three on Thursday things could get grim. Instead of the bulls playing king of the mountain they are going to feel like Custer with a mountain of Indians riding down to visit at Little Big Horn. Got your ammo ready?

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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