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Market Wrap

Like Moths to a Flame

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      12-02-2003           High     Low     Volume Advance/Decline
DJIA     9853.64 - 45.40  9900.45  9837.27 1.77 bln   1582/1608
NASDAQ   1980.07 -  9.80  1996.08  1978.23 1.78 bln   1580/1696
S&P 100   524.71 -  1.89   527.02   523.85   Totals   3162/3304
S&P 500  1066.62 -  3.50  1071.22  1065.22 
W5000   10441.68 - 29.40 10492.66 10432.96
RUS 2000  553.60 -  0.99   557.42   553.28 
DJ TRANS 2936.36 - 25.20  2964.24  2935.45   
VIX        16.27 -  0.50    16.89    16.17
VXO (VIX-O)16.42 +  0.45    16.90    15.99
VXN        26.72 +  0.43    26.94    25.81 
Total Volume 3,824M
Total UpVol  1,496M
Total DnVol  2,270M
52wk Highs 1106
52wk Lows    23
TRIN       1.31
NAZTRIN    1.33
PUT/CALL   0.71

The bulls gravitated to overhead resistance at 9900/2000 again and like moths dodging a flame they were careful to stay just out of touch. The Dow just nicked the 9000 level by .45 of a point right at the open and then wandered lower but within reach the rest of the day. The Nasdaq traded less than four points from 2000 before getting its wings singed by a sell program that could have been triggered by a proximity fuse.

Dow Chart

Nasdaq Chart

The day started out on a bad note after the weekly Retail Sales dropped -0.1% despite two of the strongest sales days of the year. Not a good sign in my opinion. There were all kinds of excuses about weather, inventory shelving and competition but the bottom line was weaker than expected sales. All the smoke about the improved employment picture suddenly cleared and analysts saw that the change of 200,000 jobs over the last couple months did little to give consumers cash to buy gifts. Yes, the trend has changed but not strong enough to produced a new wave of broad based employment. Consumers are still hoarding cash. While the news reports were full of early bird specials on Friday the rest of the weekend was tame in comparison. 31% of consumers surveyed said they were going to spend less this year. Only 22% said they were going to spend more. 35% said they were going to wait until the last two weeks of the holiday season. Wal-Mart fell to a new five-month low of 53.02 on the disappointing news.

That employment picture continued to improve with the November Challenger Layoff report showing a drop of 40% in the numbers from October. In November there were 99,452 job cuts announced compared to 171,870 in October. This was encouraging but the number was still well above the 60-70,000 levels from last summer. The elevated levels still show that companies are trying to cut costs rather than staff up for the recovery. We will get another look at employment on Friday with the November Jobs report. The estimate is for a gain of +140,000 jobs compared to +126,000 in October. This will be a critical report. If the number falls but remains positive it may not be disastrous but a negative number would be a disaster. Also, we need to watch for a revision of the number from last month. The November whisper number is nearing +200,000 and is way out of line in my opinion. This is setting us up for a serious disappointment.

If we get a blowout number then the FOMC meeting on Tuesday will be a major market event. A strong jump in jobs would insure a removal of the "considerable period" statement and possibly a change in the bias to tightening. A drop in the number of jobs to +50K or so would keep the recovery on a tentative basis and the Fed may feel more comfortable in leaving things alone. This is a critical report and the outcome will directly impact the Tuesday Fed meeting. This puts the markets on notice that things could change quickly and could stimulate some cautionary selling.

The Auto Sales data was mostly positive today with only Ford posting negative numbers for the month. GM posted a +22% gain in overall sales and +30% gain in trucks. DCX showed a minor +3% gain with Nissan up +15%. Ford fell -2% for the period. Cadillac was a strong GM performer with a whopping 40% gain. GM raised production targets by 10,000 units for the quarter. Incentives are also creeping up with the average expected to be +$4000 in December. The automakers were mostly optimistic about coming quarters and are looking forward to strong sales in the 1Q boosted by the next $150 billion in tax stimulus to consumers.

Another fund was hit with charges today but unlike the others vowed to fight the charges. Invesco Funds said they had done nothing wrong despite the charges levied on them for late trading and market timing. The war of words flew both directions all day and Invesco posted a strongly worded rebuttal on their website. They said they had done nothing wrong and the charges will be "vigorously contested". They claim they never participated in late trading and that their market timing trades were permissible and not contrary to the best interests of the shareholders.

The Dollar plunged again on the currency markets and with the drop in the dollar came the rise in gold to a high of $407 and a close at 404.80. All commodities continue to rise on the recovery hopes and in some cases terror threats. Oil rose over $30 a barrel once again after a three day dip under that technical level. Cold weather also helped jack up oil prices but new terror threats continue to put strain on potential availability of future supplies.

The markets today were very cautious. The initial Dow tick to 9900 triggered some light selling that pushed the index back to support at 9850 and it spent the rest of the day between 9850-9890. Well within striking distance of 9000 but maintaining a cautious distance away. The Nasdaq struggled to within 4 points of 2000 around 2:PM and after lingering in the area for about 15 min a very strong sell program triggered that knocked it back to just above 1980.

What I believe we are seeing is fear of round numbers. That is fear of round number targets. Nasdaq 2000 is obviously a target that has been in trader sights since Jan-2002 when we dipped below that level. After nearly two years the Nasdaq is drawing back to that now strong resistance and there are a lot of investors that will be very happy to just get out alive when that number is reached again. They have been holding for this event to get even for two years. The last rebound over 2000 came on Dec-5th 2001 from the post 9/11 Nasdaq low of 1387. Euphoria was high and techs were soaring. They traded in the 2000 range for a little over a month before slipping back below 2K on Jan-15th. Traders were sure it was just a profit taking dip from the +600 point bounce and many held their positions until it was too late or too expensive to exit. Now two years later and after a dip to 1100 they are almost back to where they started. With memories of a +50% bounce failing at 2000 in 2002 they are probably plenty of fears of the current +81% bounce to 2000 in 2003 failing as well.

Many funds have accumulated huge profits with this bounce and they are probably very worried that somebody will blink before Dec-31st and start a cascade of profit taking. I have speculated that a touch of 2000 would trigger some sell programs from profit takers. When the Nasdaq stalled only 4 points away from 2000 for about 15 min this afternoon I suspect the pressure was too much to bear for whomever pulled the trigger on the big program. If you have been waiting for months for that target to be hit and your bonus is riding on your funds performance then cheating by four points makes sense to me.

Did that relieve the performance anxiety for the next touch of that level? I doubt it. The same thing has been happening at Dow 9900 but not in the same volume. The big programs are probably waiting for D10K and as long as we linger in in the 9850-9900 range they may not decide to adjust the triggers. The danger here is a perceived lack of progress. We have been stopped dead at 9900 on every attempt since November 3rd. 9900 is the down trend resistance since Jan 2000 and very strong resistance. However this is December and typically the second strongest month of the year. The economy is exploding according to most economic reports and investors are throwing money at mutual funds despite the scandals.

This scenario is setting the markets up for massive end of year confusion. Retail investors are buying and institutional investors, hedge funds and mutual funds are trapped in high flying stocks with no easy way out. With cash flowing into funds in near record amounts it is tough to justify selling winners. It is tougher to find a place to put the new money. Hedge funds may have large profits but are paid on year end results. They do not want to sell now unless they have to. What we have is a confluence of major buying pressure and major selling pressure with the calendar counting down to the year end deadline.

This has caused stagnation at the 52-week highs. There is not enough buying pressure to push us over 9900/2000 top. They are happy to buy the dip but they do not want to buy the top. The market is perceived as fully priced despite the exploding numbers. It is fully priced because the market expected the economy to recover. It expected double digit earnings growth in the 3Q and 4Q because all the analysts had been predicting it since January. It was the 3rd year they predicted it but that is another story. You could make a case for a stronger than expected gain due to the GDP but very few traders believe that number anyway.

This leaves us in serious confusion. Over the last 50 years the S&P has gained an average of +1% in December. Last year the S&P lost -6%, -80 points in December. The high for the month was set on 12/2. In Dec-2001 the high was set on 12/5 and then the S&P dropped -60 points into the middle of the month. In 2001 the high was set on the 11th and the S&P dropped -136 points by the holidays.

The bottom line here is that we have a recent historical trend that suggests the high for the month could be set early and then portfolio rebalancing, year end profit taking, etc puts pressure on the market. We definitely have profits to take. To be fair the prior three years for comparison were all bear market years. Somehow when traders look back to see prior seasonal patterns they tend to overlook the bigger trend.

While that bigger trend would work in favor of the analysts when just looking a the prior three Decembers there is a bigger trend that works against us. That is the downtrend from Jan-2000. It intersects at Dow 9900 and is serious resistance.

Dow Weekly Chart

I would also note that three of the last four Januarys have seen significant losses. 2003, nearly -900 points off its highs, 2002, nearly -800, 2001, -550. 2000 had two separate drops in January of -600 and -1050 points. A very volatile month.

I have gone to great lengths to paint the picture for the next six weeks. We have rebounded +80% on the Nasdaq and +34% on the Dow. The rebound has stalled exactly at strong downtrend resistance. There is very strong overhead supply at D10K and N2K. Portfolio managers are looking at the recent January trends and thinking "how much longer should I hold" or "how much farther can we go?" In each case they are risking a lot with very little upside left. I say very little upside because any move over 9900 will draw the D10K sellers that are getting out early.

In my previous commentaries I wrote that I expected a bounce to 9900 this week and then a slight sell off for a week or so, then a bounce into the holidays. That holiday bounce rarely reaches the prior highs for the month. I suggested that any breakout to 10,000 would be sold heavily. At present I am not seeing any catalyst to produce that breakout. We have ISM Services tomorrow but that is not a big report. After ISM Manufacturing the services number is assumed to be ok and traders look elsewhere. Friday is the big one with the Jobs Report. With the whisper number around +200K we could be disappointed. Add in the rate anxiety for next Tuesday and traders have more to worry about than they do to be excited about.

The prediction for the rest of the week is high risk. We could move up but I think the bulls are starting to weaken. They have over indulged on good news for weeks and the Jobs Report is the desert. The harsh reality of the FOMC meeting could be the heart attack that shocks them awake and begins the slim down diet. I would love to see them get their second wind and race off into the holidays and bust through 10,000 like a marathon runner through the tape but that only sets up another "what now" scenario. I would suggest we don't get our hopes too high and not be surprised if December is disappointing. Keep the faith until the red candles begin to appear but keep one eye on the exit.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
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