Option Investor
Market Wrap

Going Out at the Top!

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      12-30-2003           High     Low     Volume Advance/Decline
DJIA    10425.04 - 25.00 10456.07 10405.85 1.23 bln   1796/1331
NASDAQ   2009.88 +  3.40  2010.13  1997.82 1.52 bln   1759/1471
S&P 100   549.07 -  0.16   549.56   547.75   Totals   3555/2802
S&P 500  1109.64 +  0.16  1109.75  1106.41 
W5000   10799.44 +  6.80 10799.44 10764.22
RUS 2000  565.47 +  1.59   565.47   562.13 
DJ TRANS 3021.95 - 16.20  3037.66  3012.62   
VIX        17.69 +  0.60    17.97    17.20
VXO (VIX-O)16.97 +  0.93    17.04    16.46
VXN        23.36 -  0.37    24.18    23.36 
Total Volume 2,996M
Total UpVol  1,676M
Total DnVol  1,211M
52wk Highs 1052
52wk Lows  1118
TRIN       1.06
NAZTRIN    0.66
PUT/CALL   0.59

A combination of factors produced a strong Monday rally to new 52-week highs and the markets held the high ground on Tuesday. Profit taking was limited to some consolidation but no real selling despite a triple dose of weaker than expected economic reports. The Nasdaq managed to add +3 points while the Dow gave up -24. The SPX/OEX both ended within .16 of unchanged. An end of day buy program in the Russell overcame a sell program 30 min earlier to push that index back into positive territory as well.

Dow Chart

Nasdaq Chart

Those weaker than expected economic reports were led by the Chicago PMI at 59.2 and below consensus at 61.3. The headline number for November was 64.1 making December's drop to 59.2 significant. This is still well above the 51.2 for September and low for the last eight months. Manufacturing is still expanding but this could be showing a cooling off period from the faster pre holiday pace. New Orders fell to 65.5 from 73.3 and Back Orders fell to 50.8 from 59.6. Inventory levels continue to fall at 40.6 indicating no willingness to stock up on products. This shows no conviction that the recovery has legs. Overall this was a positive report but one that will be watched closely in January for further signs of weakness. Taken alone this drop is not material but when seen in combination with the -3.1% drop in Durable Goods Orders last Wednesday it could be spelling trouble for the future.

Consumer Confidence fell to 91.3 and was weaker than the consensus estimates of 93.5. This echoes the fall in the Michigan Sentiment last week. The present conditions component was the critical element dragging the index down. It dropped from 81.0 to 73.9 while the expectations component rose to 102.9 from 100.1. Continuing unemployment was blamed as the reason for the drop in sentiment. The survey was taken before the heightened terror alerts so that should not have been a factor. Also, the capture of Saddam should have given the index a lift. I wonder where it would have been without the Saddam capture. The most likely reason for the dip was a money shortage during the shopping season. Consumers with jobs are conserving and the nearly nine million still without jobs are rationing funds. Tough to spread holiday cheer without discretionary funds in your pocket.

Existing Home Sales also fell significantly at -4.6% to 6.06 million units. This was a drop from the 6.35 level in Oct and the 6.68 record pace in September. The continued low mortgage rates are helping to maintain the six million plus levels but the recent rate blip has definitely slowed the sales pace. Cold weather also helped slow the trend as blizzards tend to retard the shopping process. This dip is likely a seasonal fade that will pick up again in the spring. We already know that building permits are at record levels and inventory of finished houses will be huge in the spring. As long as interest rates remain low the stage is set for a banner year for new home builders and existing home sales. All we need is for the economic recovery to hold its gains for one more quarter and supply the confidence needed for consumers to make the purchases.

Talking heads on TV failed to mention the gains in the NAPM NY Report to 242.6 from 227.3 in November. This was the 4th straight monthly gain and the six month outlook jumped from 57.4 to a whopping 90.0. Current conditions jumped to 80.7 from 51.9. Purchasing managers are becoming increasingly optimistic about 2004 which should be a leading indicator for the manufacturing sector. The NY area is recovering from its recession but is still a fragile economy. Should the New Years celebration pass successfully we could see a collective sigh of relief and a surge in conditions for the area.

The Weekly Chain Store Sales showed a +2.0% bounce for last week but the numbers were not enough to overcome a slow start for December. Target said the week was strong but said sales for the month would come in at the low end of guidance. This was nearly identical to the Wal-Mart press release last week. Post holiday crowds are reportedly strong as shoppers hunt for bargains.

Micron may be about ready to admit it conspired to fix prices on chips as part of an agreement with the Justice Dept to avoid prosecution. If MU does make the admission it is likely to implicate other companies in the conspiracy. Infineon, Hynix and Samsung are suspected. Rambus rose +13% today on speculation that Micron may be on the verge of settling with them on their long running court case. If MU settles it would set the stage for other companies to also settle. Seems like Micron is in the settling mood and hoping to go into 2004 with a clean slate.

FedEx bought some copies on Tuesday, a lot of them. They acquired Kinkos for $2.4 billion in cash in an effort to offset the competitive edge UPS got from acquiring Mail Boxes Etc last year. UPS picked up 3300 outlets in the US with the purchase. FDX picked up 1100 Kinkos around the world with plans on making them into shipping centers as well as business centers. We had been talking about a potential FDX move in the office when we were putting together the Top-50 Stocks for 2004 list. I expected FDX to make an acquisition play but Kinkos never crossed my mind. I think it was a good move on their part. UPS sells for almost twice the value as FDX and I think this will help FDX bridge that gap. I ended up not picking FDX as one of the Top-50 Stocks because of the rising oil prices and concerns about terrorists and cargo aircraft.

Santa brought a bag of presents to traders with the indexes breaking out to new highs on Monday. According to historic trends we could have a couple more bullish days ahead as retail traders filled with bullish holiday sentiment and holiday bonuses take advantage of the holidays to add to their 2004 portfolios. Historically this influx of cash will continue to provide bullish lift for the first 2-3 days of January. Opinions are seriously mixed once we hit January 6th.

The Nasdaq held its ground above 2000 for the second day and the Dow held above 10400. Both are poised above recent resistance and could move higher. Odds are good they will not be taking a giant leap. The Dow 10450 resistance is closely followed by 10650 resistance and that one is very strong. The volume on Tuesday was light and Wednesday is expected to be even worse. Bulls need volume to make serious gains and odds are good it will be missing. The market internals are off the scale positive with new 52-week highs at 1118 on Monday and 1074 on Tuesday. New lows for both days totaled only 48. Despite the imbalances the advancers only beat decliners 4:3. This is typical of pauses at new highs. Everybody wants to buy the dip but few want to buy the top. Lately we have not had any dips and only in place consolidations. Sprint, pause, sprint, pause. Today was the pause and it remains to be see if tomorrow will make it out of the starting blocks.

On Saturday Greenspan will give a speech on risks in the current monetary policy. This has the bond groupies in a head spin with the potential for good news/bad news. The equity market should only expect Greenspan to say good things and this could be priced into the market on Friday. Greenspan is not likely to say anything to derail the rally and force a change in the current rate environment.

Monday was the last day of year-end window dressing for funds and Monday could be the first day of window stripping. The wild card here is the threat of terrorist activity over the New Years eve celebrations and the New Years day events. If nothing happens then buyers waiting for the all clear could pour cash into the market on Friday/Monday. Add in the normal year end retirement cash and the next few days could be bullish.

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