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Option Blowout!

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      12-18-2003           High     Low     Volume Advance/Decline
DJIA    10248.08 +102.90 10254.08 10137.34 1.92 bln   2388/ 838
NASDAQ   1956.18 + 34.90  1957.68  1924.62 1.71 bln   2185/1075
S&P 100   540.49 +  5.29   540.66   535.20   Totals   4573/1913
S&P 500  1089.18 + 12.70  1089.50  1076.48 
W5000   10582.82 +127.40 10585.96 10455.22
RUS 2000  546.90 +  8.18   547.62   538.07 
DJ TRANS 2987.16 + 20.90  2987.48  2953.76   
VIX        16.16 +  0.58    16.19    14.66
VXO (VIX-O)16.25 +  0.90    16.30    14.54
VXN        24.53 -  0.59    25.36    24.07 
Total Volume 3,949M
Total UpVol  3,296M
Total DnVol    592M
52wk Highs  664
52wk Lows    35
TRIN       0.55
NAZTRIN    0.42
PUT/CALL   0.65

Maximum pain was inflicted to call option writers this month and the result was broken resistance and new 52-week highs. The quadruple witch week caught traders off guard with prices well above those where they wrote the options and the short covering began in earnest at the open. Once it was obvious the market was not going to dip and give them a cheaper exit the short covering began. It was still continuing at the close despite strong resistance finally slowing the advance.

Dow Chart - 120 min

Dow Chart - Weekly

Nasdaq Chart - 120 min

Nasdaq Chart - Weekly

Helping to stimulate the shorts to cover were blowout numbers in both the Chicago Fed Index and the Philly Fed Survey. The Chicago Fed National Activity Index posted a +0.55 headline number for November compared to only +0.19 for October. The three month moving average jumped to +0.33 from +0.01. Output components added +0.44 to the index with employment components only providing a negative drag of -0.05. This was the first three consecutive months of positive gains in three years.

The Philly Fed Survey also blew past estimates of 25.0 with a 32.1 headline number. Shipments jumped to 41.1 from 26.8 and new orders jumped to 41.8 from 20.8, almost doubling! Back orders rose to 17.5 from 9.0 and employees actually spiked to 21.9 from only 3.3. This was a VERY positive report and when accompanied by the Chicago report on the same day they are probably dancing in the halls at the Fed. The Philly Survey had many positive comments but they also said that overall "expectations" for the next six months remain positive but most future indicators were lower. This means there was a spike in manufacturing but the survey respondents are beginning to ratchet down their expectations for 2004. This could be just caution and an easing of the bullish sentiment into something closer to reality. As long as the current conditions continue to improve nobody is going to complain.

Jobless Claims fell more than expected to only 353,000 from 375,000 last week. For the first time in over 90 weeks the number for the prior week was revised down as well. That was a real surprise. It was only -3,000 but we will take what we can get. Evidently the Thanksgiving holiday did skew the numbers into the following week and that skew has now been corrected. This suggests we could be under 350,000 soon assuming there are no mass layoffs after the holidays. Unfortunately January is known for companies going on an employee diet and starting the new year from a trimmed down level. Still the trend is positive and we hope to see that sub 350K number in 2004.

The markets got some help from the retail sector after WMT and BBBY were upgraded to buy from neutral by UBS. BBBY raised estimates by +2 cents yesterday after reporting an increase in same store sales of +6.4%. Wal-Mart announced today they were launching a website where consumers could download songs for 88 cents a title, -11 cents less than Itunes. The category killer is looking for another category to invade. With the Wal-Mart clout they are sure to attract attention and market share in whatever they do. Wal-Mart had said on Monday that same store sales were tracking at the low end of estimates at around +3%. Retailers will have their chance to catch up this weekend. 41% of holiday sales are made between Dec-17th and Dec-24th. Saturday is the biggest shopping day of the year. Analysts have reported some pickup in sales this week with the weather better than the prior week.

Chip stocks are likely to get some help tomorrow after the Book-to-Bill number came in at 1.04 tonight. Last months number was revised up to 1.01 making November the second consecutive positive month. The November 1.04 was the highest level since the 1.02 in August 2002. The number reached a low of 0.78 in October 2002. Orders climbed +6.9% in November for the fourth monthly rise. The rate of increase in all the components is slow but at least it is continuing to increase.

Intel is rumored to be announcing a chip for those large screen HDTV sets that will significantly lower the cost of the units. They are expected to announce this chip at the January 8th Consumer Electronics show in Las Vegas. This is a good step for Intel as it puts them into the consumer market with a high dollar product that is likely to have high margins. Current manufacturers are TXN, HIT, PHG and SNE. Because of Intel's capacity and technology they are expected to be a major player very quickly. Analysts said TVs made with the Intel chip could drop to the $2,000 range by next Christmas. The same product now runs from $3,000 to $10,000. Seven million HDTV sets will be sold in 2003 and they expect more than twice that amount in 2004.

Naked call writers took it on the chin today or maybe I should say took a hit in their wallet. The levels where the most options would expire worthless and produce the maximum profit for option writers were significantly below the current market levels. Traders short calls had been hoping for one more dip before the Santa rally to buy back those calls or pickup stock to offset the damage. When we did not get a failure on Wednesday after Tuesday's gains they began to get nervous. Especially when there was a sprint into the close. The futures traded up overnight and traders held their breath at the open. After a short period of volatility where prices failed to fall the gold rush began. Traders began to bite the bullet and buy stock. The Dow surged to 10200 by 10:00 and that resistance held until 2:00. Once the Dow cleared the 10200 level there was a strong rush of short covering aided by a fast buy program at 2:30. The Dow finally topped at 10254 and gravity took hold once again. There was no drop but the ceiling was in for the day.

Even the Nasdaq was feeling the love again with a +35 point gain. The Nasdaq charged out of the gate and ran smack into resistance just below 1950 and could not break free until the 2:30 buy program. Once that line broke the volume really spiked. The close at 1954 was the highest close since Dec-4th. That was the day after the Nasdaq touched 2000.

Needless to say there was a lot of surprised traders and a lot of delighted funds. If the funds were holding their breath last week with the dip below Nasdaq 1900 while watching their profits slip away then today was a relief. With three real trading days left before Christmas there is little risk that we are going down hard. Skip three more days of zero volume and the Christmas holiday and that leaves funds with only three more days on pins an needles. Considering that those light volume holiday days are typically bullish the funds just got a "get out of 2003" free pass.

With the jump to strong resistance at 10250 today and only stronger resistance above to 10300 the odds are very good we are not going much higher. The good news is the odds are very good we are not going much lower either. There is simply too much riding on the year-end close and the odds of going back under 10,000 are almost nonexistent. The great press potential of a year-end close over 10K and the massive profits the funds will pocket at this level will keep everyone on the sidelines feeding the bears just enough to keep them at bay until January.

For Friday there are no material economic reports and Monday is blank as well. This leaves us to trade on continued bullish sentiment and holiday euphoria. With a huge chunk of options expiration already out of the way with the SPX and DJX options now history we will not have as much upward pressure tomorrow. Odds are very good that anybody who needed to cover has already done so on the individual stocks and other indexes. Any remaining scramble will occur at the open and then traders will begin leaving for the holidays. With the indexes other than the Nasdaq at new highs this is a perfect opportunity for traders to clear the table and take a long holiday. I have already received dozens of emails from traders doing just that and signing off until January.

With strong resistance at 10250-10300 and SPX 1100 the odds of another blowout are very slim. The Nasdaq and Russell are already well below their highs on profit taking despite the strong gains today. Friday's close is when the Nasdaq rebalance occurs and selling in those issues being removed could be a drag. The S&P Indexes are also being rebalanced at the close of business on Friday. These rebalancings could produce some heavy volume in late trading but it is not expected to have a material directional impact on the market.

I am looking for a range bound market for the next week between 10000-10300 and for volume next week to be very slow. Volume on Thursday was good but not exceptional. There were less than four billion shares traded across all markets although the up volume was 6:1 over down. If we can't break four billion shares on a day like today you can imagine what next week will look like. Investors are going to end this year with a smile on their face and that includes me.

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Editor

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