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Market Wrap

Holiday Sentiment Fades

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       WE 12-12        WE 12-05        WE 11-28        WE 11-23 
DOW    10042.16 +179.48 9862.68 + 80.22 9782.46 +153.93 -140.15 
Nasdaq  1949.00 + 11.18 1937.82 - 22.44 1960.26 + 66.38 - 36.38 
S&P-100  531.78 +  8.27  523.51 +  2.77  520.74 +  8.97 -  7.24 
S&P-500 1074.14 + 12.64 1061.50 +  3.30 1058.20 + 22.92 - 15.07 
W5000  10464.48 +111.88 10352.6 +  0.38 10352.2 +253.34 -145.78 
RUT      547.59 +  8.58  539.01 -  7.50  546.51 + 20.58 -  7.03 
TRAN    2983.41 + 72.83 2910.58 - 10.65 2921.23 + 75.91 - 82.32 
VIX       16.41 -  0.68   17.09 +  0.79   16.30 -  2.68 +  2.04 
VXO       15.95 -  1.39   17.34 +  0.63   16.71 -  3.18 +  2.26 
VXN       25.86 -  1.19   27.05 +  1.44   25.61 -  3.47 +  2.92 
TRIN       1.02            1.86            1.04            1.04  
Put/Call   0.75            0.84            0.69            0.80  

Holiday Sentiment Fades
By Jim Brown
Click here to email Jim

Bah Humbug! That may not have been the sentiment expressed in the Friday morning report but it was definitely how traders felt when the report was released. That did not prevent the early holiday bargain shoppers from rushing to buy the dip and hold the Dow over 10,000 for the weekly close.

Dow Chart - Weekly

Nasdaq Chart - Weekly

Wilshire-5000 Chart - Weekly

The Consumer Sentiment was not the only report that surprised on Friday. The PPI for November was well below the estimate of +0.2% with a headline number of -0.3%. Minus 0.3%! Much of the decline was due to a fall in energy prices. The core rate excluding food and energy declined only -0.1%. This was the first decline after five months of increases. Also impacting the headline number was a drop in the price of autos. On the surface it would appear inflation is not a problem but the internals showed that prices for intermediate and crude goods continued to rise in November just like they have been doing for the last several months. With commodity prices soaring off the charts the odds of a continued rise in the prices of producer goods is very likely. Friday's report should not be seen as confirmation of the Fed's no inflation outlook although I am sure they were pleased.

The International Trade deficit rose to $41.8 billion in October and that was slightly higher than expected. Imports rose +$500 million more than exports for the period. The strong growth in both numbers indicates increasing demand both in the US and abroad. The weak dollar makes US exports attractive and depresses growth in imports. This report was neutral for the markets on Friday but a slight positive for the continued recovery.

The Federal Budget Balance came in at -$43 billion for Nov and the second month in the 2004 fiscal year and very close to the OMB estimate of -$44 billion. This was well under the street consensus of -$52 billion. The street was high because the October budget deficit was $69 billion and they were looking for a repeat. This brings the deficit for the first two months of fiscal 2004 to $112 billion. Multiply that $56B per month average by 12 months to see why there was little demand for treasury notes by foreign banks this week. Foreign investors are worried that the US deficit could run over a trillion dollars a year for the next two years and this causes conservative thinkers to ponder repayment.

The biggest surprise of all was the Consumer Sentiment for December. This was the first reading for the month and analysts had expected 95.5 to 96.0, up from 93.7 last month. The 89.6 headline number shocked everyone and sent the street back to the drawing board scratching for answers. The majority of the decline came in the present conditions index and a drop from 102.5 to 93.6. Expectations also fell from 88.1 to 87.1. The excuses were quick to surface although none were conclusive. Some thought maybe the bounce in the Jobless Claims could have soured the expectations but that just came to pass this week. No sale there. Others thought the drop in the Jobs Report to only 57,000 from the 140,000 estimate could have started people worrying again. I would put more credence in that outlook. The Jobs Report was widely reported last week and could have depressed consumers. Maybe. Others thought the blizzard in the Northeast depressed shoppers by taking a weekend out of their holiday season. Come on guys, snow may close schools and work but shopping will always continue. Before you fire off the emails I know there were some stores closed in the Northeast but enough to spoil consumer sentiment? I think the problem was cashflow and the flu. Shoppers got their injection of extra cash over the summer and that cash is gone. They are now trying to make ends meet and buy for the holidays on budget money. Bonuses are going to be very light this year for workers and nearly nine million people are still out of work. Nothing spoils holiday sentiment any faster than unemployment worries and an empty wallet. With retail prices still dropping there will be plenty of bargains over the next six weeks to lift those spirits again. Retailers are going to be blowing out that inventory at record low prices if this holiday shopping season begins slowing any further. Mall reports from around the country claim good crowds and long lines so the sentiment numbers could be just a flu blip.

The main factor in the sentiment dip could be due to the flu stories making the rounds. Almost every newscast is not complete without a total of the sick and dead from the flu. The lack of any flu vaccine and the dire predictions from some could have easily depressed family sentiment. Tales of children dying all over the country and shock value stories of millions of deaths possible have prompted people to stand in line for remaining shots for hours. In one city reported on Friday, homeless people were getting in line earlier and selling their spaces for $20 to late comers afraid they were going to run out of the vaccine. Consumers are wearing masks to the malls in hopes of preventing infection. How confident in the current situation are you under these conditions? Before you start assigning too much value to the first reading of Consumer Sentiment remember it comes from only 250 households in a nation of 280 million people. It would only take a few pessimists to spoil the picture.

Challenger, Gray and Christmas, an employment research firm, said today that 50 million workers could catch the flu this season. They said more and more workers are reporting to work sick because of worries about their job. The actual numbers are at a 13 year high. A poll of Dow companies found that most offered flu shots to their employees, with as many as 50,000 workers accepting the offer at one firm.

The markets tanked on the news as traders recoiled in shock but the dip was quickly bought. Helping the Dow today were UTX and KO. UTX held an analyst get together last night and the stock was a favorite again today tacking on another +2.33 to $92.00. This rocket just keeps on flying. We had considered UTX as a candidate for the Top Stocks for 2004 Special Investor Guide but with the stock at an almost daily new high and closing in on $100 the options were grossly expensive. We tried to focus on stocks that will turn into a UTX and not those that are already out of sight. I like the company but it is just too expensive for most traders.

KO also rocketed to a new 52-week high on news they were buying back $2 billion in stock. The company has tacked on +$3 this week alone. GM continued to jump as the picture just keeps getting better in their pension outlook. PG rounded out the top four Dow gainers.

The Dow broke below 10000 at the open but the rush to buy the dip was very quick. Once back over 10K the buying pressure eased until the last hour. Traders are still not eager to buy the top but they jumped at the chance to buy the dip. About 3:PM we began to see some short covering as those with a bah humbug attitude were squeezed out of the market by holiday shoppers trying to front run any potential Santa rally. There was no rush into the market but there a constant bid. The Nasdaq was not as strong as the Dow with most of the day spent under water. The end of day rebound finally pushed it into positive territory but it failed to break resistance at 1950 once again.

The Nasdaq was handicapped by the annual rebalancing it announced for Dec-22nd. The Nasdaq announced the removal of eight stocks from the Nasdaq-100 putting those stocks under pressure. The eight being dropped include ADCT, BRCD, CIEN, ERICY, HGSI, ICOS, MNST and RFMD. Stocks being added to replace those above include MRVL, GRMN, CECO, LRCX, LVLT, ISIL, ATYT and RIMM. Two of those stocks are on the Top 50 Stocks for 2004 Guide. Considering there are over 400 global products and index funds that track the Nasdaq 100 there will be strong demand for those issues over the next week. Just remember that strong demand is relative because these stocks are coming in at the bottom of the Nasdaq and the index is market cap weighted. What will help is the tracking by individuals who tend to add these stocks to their portfolios whenever the Nasdaq makes a change.

Over the next two weeks the Nasdaq is likely to lag the Dow simply due to the amount of profit accumulated over the last nine months. There will be excess overhead supply until the funds rebalance their portfolios in January. This suggests the Dow will be trying to move higher while dragging the Nasdaq along behind. The Dow continues to surprise everyone and make new highs despite growing bearish sentiment. It has broken very convincingly the down trend from Jan-2000 at 9900 and the psychological 10,000 level. While the bulls are having their "been there, done that" bumper stickers printed for each of those events the buyers just keep pushing the index higher. This victory lap could come to a halt soon when the next real resistance is reached in the 10200-10250 range. Most analysts think the index is running on borrowed time but then they are not the ones buying the stock.

I am one of those in disbelief as I thought the index would slow at 10K and trade in a 9700-10000 range for the next two weeks. We are still not far out of that range but with two consecutive closes over 10K the Dow is winning converts daily. With retail investors focusing on the much discussed Santa Claus rally the odds are good we will see another new high before the year is out. The rally is based on the almost always positive holiday week. This "certainty" in some minds suggests that next week could finish positive in hopes of capitalizing on the trend. Nowhere in the trend is there a rule that the week before the holidays must go up as well but given the bullish sentiment I would be very surprised if it didn't. There is a past saying for this trend that bears repeating. It is derived from historical trends for bear markets to follow weak holiday performance.

If Santa Claus should fail to call,
bears may come to Broad and Wall.

The market managers (makers, excuse me) got their wish of a weekly close over 10K and the breakfast table conversation on Saturday will not only what toys to buy for the kids but also the market recovery. "Shucks, Martha the market has recovered from that bear market bubble thing. Maybe we should cash out those CDs and buy some stock before the market gets too high again." While that thought process is not they way you and I think it will be repeated thousands of times this weekend. I am not going into any detail about the long term market potential today but the odds are very good any money transferred into the market over the next two weeks could be a victim of bad timing. I feel the next two weeks will be a traders market and once we get to January the real fun will begin. We have spent a lot of effort picking stocks for the Top Stocks CD and I can't wait for those entry points to start getting hit.

For the next two weeks I would look for the Nasdaq to remain locked in the 1900-2025 range. I have upgraded my range for the Dow to 9850-10250. The resistance at 10250-10300 is very strong and is very technical unlike the psychological 10,000 level. Plan your entries and exits at the extremes of these ranges and try to stay out of the chop in the middle.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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