Option Investor
Market Wrap

The Last Hurrah?

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      12-23-2003           High     Low     Volume   Adv/Dcl
DJIA    10341.26 +  3.26 10375.93 10296.15 1.40 bln 1784/1028
NASDAQ   1974.78 + 18.98  1974.78  1952.44 1.30 bln 1996/1057
S&P 100   543.42 +  1.14   544.13   541.36   Totals 3780/2085
S&P 500  1096.02 +  3.08  1096.95  1091.73 
W5000   10657.14 + 37.56 10658.72 10607.84
RUS 2000  555.03 +  5.66   555.03   548.37 
DJ TRANS 3006.61 +  1.34  3006.87  2985.95
VXO        15.57 -  0.63    16.39    15.30
VIX        16.49 -  0.45    17.40    16.29   
VXN        23.49 -  1.26    25.11    23.31 
52wk Highs  491
52wk Lows    13
PUT/CALL   0.76
TRIN       1.02

Bulls will hate me tonight, bears will love me. For those of you who don't follow me in the Futures Monitor, a little background might help you understand the reasons for my opinions. I follow Elliott Wave Theory. I will not bore you to tears with wave counts but you should know that I am neither a bull nor a bear. I can't afford to be either because every time I form a strong bullish or bearish opinion I usually lose money. It's that forest-for-the-trees problem. Instead I let price tell me what it's doing and use EW analysis to give me some clues as to what might be next. I will admit that I have a bearish view of the market for the long term but I try to follow the wave pattern to tell me each day whether I should be going long or short. My analysis below is based on what these patterns are telling me. I use trend lines, fibonacci levels, oscillators and a slew of other technical indicators to help me identify turning points in the market. I think a major turning point is upon us. But first let's look at what happened today.

After cycling up and down during the night between 1093.75 early last night and 1090.50 early this morning, the S&P e-mini futures ran up slightly into the 8:30 reports but then worked their way lower to the open--the e-mini futures made an immediate low of 1090.25 at the 9:30 open. After the initial pop in the morning, we worked our way lower and by the late afternoon we came back to that number, literally, before bouncing again into the close. All in all, it was an uneventful day, at least from a price perspective.

The early morning economic reports did little to excite today's market. Overall, they were good numbers but just not exciting numbers. The University of Michigan Sentiment was revised to 92.6 from the previously reported 89.6 (consensus was 91.0). GDP final for Q3 was 8.2%, no change from previously reported. Monthly Mass Layoffs was 1438 compared to 1532 in November. Personal income for November was +0.6% while personal spending was +0.4%. The expectation for spending growth had been +0.7% so this number was a little disappointing. Even though this spending growth was the fastest spending growth since August, the fact that their income was up +0.6% means the consumer could have spent more! Where are those consumers when you need them most? Don't they realize they need to go into greater debt during this holiday period to support this economy? The slower retail sales reported yesterday tell us the consumer is not willing to do this. So there was no excitement with all these numbers. In fact the pre-market futures dropped slightly after all these announcements.

At the opening kick-off, there was a fair amount of volatility and the market ran higher in the first hour of trading. From there the market back-pedaled the rest of the day. It was a slow grind south as some of yesterday's gains were returned. But as seems to be happening a lot lately, the mid-afternoon rally kicked into gear and we saw a fairly steep rally as we headed into the close. The only indexes to make new highs for the day were the techies and the small caps. It looked like some good short- covering going on there. Check out the run in the Russell 2000 in the last hour of trading. Too many eager shorts I'd say. I guess everyone got excited about RIMM's 3rd- quarter earnings announcement that was double the analysts' expectations. They also doubled the outlook for the 4th quarter. Micron Technology added to the excitement by increasing their earnings expectation by 3%. So if those two companies are doing well it must mean all tech stocks are doing well, so BUY was the word!

As sectors go, the Computer Hardware, Multimedia, Telecom, Semiconductor, Biotech, etc. indexes ran up roughly 1.0% to 3.3% today. Looks like what people did not want for the past two weeks, they wanted it back today. The gold indexes also bounced strong today, but got back only a little of what they've given up since the beginning of December. At the other end of the market were the Oil Service, Energy, Oil and Natural Gas indexes which took the biggest drubbing today, down 1.9%, 1.0%, 0.7% and 0.5%, respectively. I've seen evidence that oil prices may well have peaked at last week's price of about $33.50/barrel. Projections are for oil prices to sink back down to $20 some time next year (it closed at $31.75 today). Now that would be a nice Christmas present for next winter for all of us paying high prices at the pump and for our heat.

For the DOW, it had a middle-of-the-road day today. It showed greater weakness relative to the NAZ which was a different behavior from what we've seen most of this month. Of the 30 components, 17 gained ground today, so only about half the companies were pulling their share of the load today. But nearly half of those 17 hit new 52- week highs today, as did the S&P 500, which hit 1096.95 today, a high not seen since May 2002. As I'll discuss below, this 1096 level is very important and may be a rally high, or very near to it. The DOW components hitting their 52-week highs were Alcoa, Boeing, Caterpillar, DuPont, Exxon Mobil (interesting as their sector was hit hardest), Honeywell and Procter & Gamble.

Market internals were actually stronger than the closing numbers would indicate. Advancing/declining issues and advancing/declining volume were positive all day. Seems like we had slow bleeds interspersed with buying spurts, so the buying was stronger but "they" were letting the market settle back each time so "they" could buy cheaper products. Just a guess. Overall market volume was below average, but no surprise there.

Looking at the major indexes, we see an overbought and extended market. Deja vu all over again, harking back to the days in late 1999, early 2000. My guess is that the result of this over-exuberance will be the same as it was then. Longs need to suck up your stops tight to get as much out of this as you can. Bears are salivating for their turn at the food table. Bears have been getting their paws slapped for trying to sneak a bite before it's their turn. The bulls are pretty full and looking sleepy so it's almost time to rotate positions.

Let's look at the major indexes:

The DOW daily:

The DOW weekly:

S&P 500(SPX) daily

Zeroing in a little closer, here's the Nasdaq-100 chart. So far the high put in on December 3rd has not been exceeded, nor do I think that it will. We're very close though, so just a little more rally would do it.

NDX 120-min chart:

Now I know a lot of people are going to look at my bearish comments as proof I've lost my marbles. Everyone knows that the Santa Claus rally goes through the end of the year and into the first week or two of January. I will admit that my opinion about the market topping right here is causing me some consternation due to this "belief" that we will rally. Too many people expect it and will make it happen. Ah, therein lies the rub. How many times have we seen high expectations for the market, only to then be surprised? Didn't everyone expect a sell-off to occur in the normally bearish period of September-October, especially after the strong rally we had seen since the spring? What happened? We rallied. Then everyone was expecting November to see a strong sell- off since we hadn't taken a breather in 8 months. What happened? We dropped a little but ended the month nearly back to even. Now everyone is expecting Santa to not disappoint us. What will happen? Mr. Elliott is telling me to pull my stops up tight and that we may have an opportunity to short this market like we haven't seen since early 2000.

But what about all that new money that will be coming into the market in the beginning of January? Surely it will drive the market higher since it's unlikely to make it into money market funds. If the market starts down, as I suspect it will, my expectation is that we will indeed see a rally in January. It might even bring the market all the back up to the highs we're currently seeing. But for the EW count I'm showing to stay intact, once we tip over we will not make new highs in January. In fact you may be witnessing highs that won't be seen again for, well, let's just say a very long time. But that's for another discussion.

Tomorrow morning we have a couple of economic reports. At 8:30 am we have Durable Goods Orders for November. Forecast is +1.5% while the market consensus is +0.6% (October was +3.3%). Initial Unemployment claims will also be reported at 8:30 am. Forecast and market consensus is 355K (353K was the prior number). New Home Sales for November is reported at 10:00 am. Forecast is 1.14M while market consensus is 1.11M (prior number was 1.105M).

I don't see anything earth shattering in these economic numbers so it's tough to tell how it might affect the market. My expectation, based on EW analysis and fibonacci levels (along with the myriad bearish divergences) is that we could see an initial move up at the open but it will be short-lived as I believe it will mark the tippy top of this market. For the bears, consider shorting any opening move higher. For the bulls, decide how much you're willing to give back. I could be wrong on this (wouldn't be the first time, not by a long shot), so only you can decide where you want your stop. Bears, don't get overly enthusiastic such that you lose your discipline. This market has defied most technical indicators for a long time now. Keep your stops tight and don't let your "belief" get in the way of sound money management.

Good luck to everyone in their trading tomorrow. Have a great night and I'll see some of you in the Futures Monitor tomorrow for a shortened day of trading (market closes at 1:00 pm). Let's see what Ms. Market serves up in the morning.

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