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Market Wrap

Markets Shrug Off Terror Alert

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     12-22-2003            High     Low     Volume Advance/Decline
DJIA    10338.00 + 59.78 10338.00 10255.26 1.50 bln   1783/1040
NASDAQ   1955.80 +  4.78  1958.74  1941.62 1.25 bln   1585/1480
S&P 100   542.28 +  2.02   542.28   538.66   Totals   3368/2520
S&P 500  1092.94 +  4.28  1092.94  1086.14
RUS 2000  549.37 +  2.49   549.37   544.86
DJ TRANS 3005.27 + 17.84  3005.63  2982.40
VIX        16.94 +  0.52    17.31    16.61
VXO        16.20 +  0.15    16.91    16.10
VXN        24.75 -  0.14    26.36    24.70
Total Volume 3,140M
Total UpVol  1,963M
Total DnVol  1,130M
52wk Highs     662
52wk Lows       19
TRIN          0.82
PUT/CALL      0.98

Markets Shrug Off Terror Alert
By James Brown

The markets shrugged off the government's announcement to elevate the terror alert level to "orange", its second highest rating. The Dow Jones Industrials saw some initial strength and then pulled back to spend a good portion of the day in a narrow 25- point range above the 10,250 level. A strong afternoon buying spree lifted the DJIA to a 59-point gain and its highest close since May 17, 2002. The S&P 500 also enjoyed another new 19- month high but the NASDAQ continued to lag behind. Year to date the INDU and the S&P 500 are up about 24 percent while the NASDAQ is up 46 percent. Investors are locking in gains from the NASDAQ's tremendous year and rotating into big cap, highly liquid cyclical stocks, which are more heavily concentrated in the DJIA and SPX.

Contributing to the Dow's gains were big moves in General Motors (GM), McDonald's (MCD) and Honeywell Intl (HON). Overall 22 of the 30 Dow components closed in the green. The strongest buying was seen in homebuilders, broker-dealers, defense stocks and software. Lagging the markets were declines in natural gas, retail stocks and the airlines; the latter closed relatively flat despite the terror warnings. Foreign markets did not seem too concerned over the raised alert level and the Asian markets closed higher with the NIKKEI up almost 90 points to 10,372 and the Hang Seng up 116 points to 12,487. The FTSE followed with a small gain of its own but the German markets were down despite comments that the rise in the dollar had not yet hurt German exporters. Gold futures rose $1.40 to $411.30 an ounce and crude oil for February delivery dropped over a dollar to $31.90 a barrel.

Market internals for U.S. exchanges were mixed but generally positive. Stocks were strong on the NYSE (think Dow and plenty of S&P components) where advancers out paced declining stocks almost 18 to 10. The advance-decline line on the NASDAQ spent most of the session in negative territory but pulled it out by the close with nearly 16 winners for every 15 losers. Again we see buyers in the NYSE with 419 new highs but only 116 new highs on the NASDAQ. Up volume was nearly 2-to-1 down volume on the NYSE while just 7-to-5 on the NASDAQ.

Chart of the DJIA:

Chart of the NASDAQ:

It truly is a testament to the strength in the markets to pull out yet another gain on top of last week's rally after the Department of Homeland Security raised the terror alert rating to "high" or "orange" status. It hasn't been this high since May. Homeland Security Secretary Tom Ridge said that the most recent information suggest that Al Queda and those in their network were planning attacks that could be more devastating than those of September 11th. The DFI and DFX defense indices climbed on the news. Considering that this is the Christian and Jewish holiday season in the U.S. I'm surprised that the alert level wasn't raised sooner. It's probably a good thing for the economy that it was not. While I doubt the "orange" alert status will deter desperate shoppers it may slow down some of the more casual spending from consumers with nothing better to do during Christmas break but cruise the malls. It will be interesting to hear next month if retailers report a drop in traffic during the last week and a half of December.

Speaking of retail the titan of retailing, Wal-Mart (WMT), did not have good things to share this morning. WMT reported that same-store sales are tracking toward the low end of their 3 to 5% range. It has not been a good month for WMT. On December 1st the company warned that the holiday season was not off to as strong a start as they had hoped. Yes, sales were up and Black Friday produced another new record for one-day sales volume but management had been expecting more. The company warned again in mid-December that weekly sales were tracking toward the low end of their range. In response investors took the stock from $56 near Thanksgiving to $50.50 about a week ago. Propping up the stock today, despite WMT's guidance, were comments from Goldman Sachs. The Goldman analyst believes the worst may be behind the company and its "underperformance may nearly be over."

Adding to today's bullish sentiment was another Wall Street firm, UBS, who released their monthly investor optimism index. UBS said optimism rose for the second month in a row, hitting 104 in December, up from 93 in November. Bears will shake their heads in collective disbelief but from those surveyed by UBS at least 75 percent believe that stocks will do better in 2004 than they did in 2003. That's pretty optimistic. I wonder what they'll be thinking in January or February after the expected first quarter correction occurs?

One of the biggest stories of the day was Ford Motor Co (F). The company said it will take a $1.6 billion charge in Q4 in strong part due to their Viseon (VC) spin-off's healthcare costs but told Wall Street that its full year 2003 earnings outlook should improve fueled by "continued cost savings" and strong sales from their redesigned F-150 pickups. The optimistic earnings guidance from Ford lifted Dow component and larger rival General Motors (GM) to a 4% gain and a new 52-week high.

It wouldn't be a Monday without some merger news. This week's merger falls in the drug sector. Drug behemoth Pfizer (PFE) has agreed to buy Esperion Therapeutics (ESPR) for $35 a share in cash. The $1.3 billion deal sent shares of ESPR to a 52% gain, closing at $34.53. ESPR has been developing some new treatments involving "good" cholesterol or HDL. It's a strong defensive move by Pfizer, who makes Lipitor, the best-selling drug on the planet. Lipitor works by lowering LDL or bad cholesterol.

The PFE-ESPR deal wasn't alone today. Provident Financial (PFS), the New Jersey-based holding company for Provident Bank, announced plans to buy First Sentinel Bancorp (FSLA) for $642 million in cash and stock.

Tomorrow does bring a few economic reports into the picture for any traders not yet on holiday vacation. Economists will be looking for the November personal income numbers to rise 0.4 percent while November spending is expected to rise 0.7 percent. We'll also get the revised reading on the University of Michigan's consumer sentiment numbers for December. Economists are looking for an upward revision from 89.6 to 91.0. Lastly, we'll hear the final revised growth rate for the third quarter, expected to remain unchanged at 8.2%.

Historically the last two weeks of December are up as the Santa Claus rally comes to pass. Most traders are on holiday and these low volume days tend to float higher both on last minute window dressing and retail trading. However, the DJIA is up more than 700 points from its Thanksgiving low near 9600 without much of a rest. Thus, the index is very extended and overdue for a pull back. It would not surprise me at all to see some minor selling, at least in the INDU and the S&P 500. We should still have another three weeks of bullish optimism so short-term traders might want to focus in on their favorite stocks to trade and look for the dip.

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