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Market Wrap

Happy New Year, I Think

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       WE 01-02        WE 12-26        WE 12-19        WE 12-12 
DOW    10409.85 + 85.18 10324.6 + 46.45 10278.2 +236.06 +179.48 
Nasdaq  2006.68 + 33.54 1973.14 + 22.12 1951.02 +  2.02 + 11.18  
S&P-100  549.99 +  7.21  542.78 +  2.52  540.26 +  8.48 +  8.27  
S&P-500 1108.48 + 12.21 1096.27 +  7.61 1088.66 + 14.52 + 12.64  
W5000  10777.86 +115.48 10662.4 + 82.96 10579.4 +114.94 +111.88  
RUT      560.85 +  5.75  555.10 +  8.22  546.88 -  0.71 +  8.58  
TRAN    3008.16 +  8.49 2999.67 + 12.24 2987.43 +  4.02 + 72.83  
VIX       18.22 +  0.83   17.39 +  0.97   16.42 +  0.01 -  0.68  
VXO       17.94 +  1.36   16.58 +  0.53   16.05 +  0.10 -  1.39  
VXN       24.51 +  0.56   23.95 -  0.94   24.89 -  0.97 -  1.19  
TRIN       1.01            0.79            1.02            1.02     
Put/Call   0.76            0.86            0.80            0.75     

The Dow surged at the open on Friday on relief that there were no terrorist events over the holiday. The first economic present of the new year came in the form of the ISM report and investors cheered once again while any shorts from before the holiday were squeezed out of the market. A new year and already a new high. Happy New Year!

Dow Chart

Nasdaq Chart

The ISM report lost no time in putting investor fears to rest that the economy had softened in the fourth quarter. The index rose to 66.2 from 62.8 and well over consensus estimates of 61.0 on the strength of surging new orders. This is the highest ISM since July 1950. New Orders surged to 77.6 from 73.7 and Employment rose to 55.5 from 51.0. This is the 2nd month over 50 for employment after 38 months in decline. Orders were higher than production for the fourth straight month. Only 10% of those surveyed saw a decline in production. There was no bad news in this report and investors should have breathed a huge sigh of relief. The questionable economics over the last two weeks were suddenly history and the hope for a fourth quarter earnings surprise began to firm.

The good news pushed the Dow to a new high at 10527 and a level not seen since March 2002. The Nasdaq soared to 2022 and a level not seen since January 2002. The excitement was short lived and sellers started to appear around noon. The reasons were many and the end result was a Dow close -118 points below the highs for the day but still above the current psychological 10400 level.

One of the reasons for the Dow decline was IBM. A Bear Stearns analyst predicted IBM would miss its December quarter bookings by as much as $2 billion. IBM had blessed a $14 billion estimate in mid-October but the Bear analyst is now expecting only $12 to $13 billion. IBM has not helped the situation with a refusal to comment on the $14B estimate earlier this month with a "timing remains uncertain on various deals" dodge. IBM lost -$1.13 on Friday.

Russell Chart

Other big cap Dow stocks with large drops were MMM, PG and WMT. The Dow finished with a -44 point loss while the Russell closed with a +4 point gain. If you remember we saw a rotation out of small caps and into blue chips over the first three weeks of December as some fund managers shifted assets into highly liquid issues. The funds benefited from the gains in the Santa rally and were positioned in the liquid issues if they decided to exit.

Apparently some did decide to exit early on Friday as shown by the index imbalances. Helping them decide to take the plunge was an almost constant news of flight cancellations somewhere on terrorist fears. 11 flights have been cancelled in the last four days. The urge to hold 2003 profits over the weekend with these kinds of fears proved too much for some even on the positive ISM news.

Also helping the decline was a worry that the spotlight is now back on the Fed. With the prior Fed comments being based on expectations for slow and steady growth the ISM spoiled the outlook with the fastest growth in manufacturing in over 20 years. Bonds were hammered on the positive implications and analysts were tripping all over themselves to raise GDP estimates for the 4Q. The first look at the 4Q GDP will be Jan-30. If the economy has suddenly gone from a sputtering four cylinder to a purring V12 then the Fed's "considerable period" qualification may be in jeopardy. The head Fed is speaking on Saturday in San Diego on the U.S. economy and current monetary policy risk. The bond groupies will be all ears. Fed funds futures were expecting a 25 point rate increase by July but that assessment could change very quickly based on his speech. The next Fed meeting is a two-day affair on Jan-27/28th. Conveniently two days before the GDP report.

Demonstrating the rate fears were the home builders which took a serious hit. CTX -3.25, RYL -3.56, PHM -2.67, HOV -4.16 and NVR -33.25 to name a few. Financial stocks also took a hit on the worry about a rate change ahead.

It is hard to draw any real conclusions for 2004 based on one low volume day with lots of terror news. Friday was just a blip on the radar screen not a trend change. There were some disturbing chart patterns but it was just one day. The Dow may have broken 10525 but the important event was the closing hold above 10400. This level has been support for the last three days and it remained support. This is key because institutions could have chosen to sell in volume but didn't. Total volume across all exchanges was only 3.3 billion and it was 5:3 in favor of advancers despite the negative finish on the Dow, S&P, OEX and Wilshire. The headlines do not always tell the story.

The real story was the pullback to support with continued terror fears. It could have been much worse but support held. The wild card here is of course the light volume. This was a retail day, not an institution day. Retail traders were putting their year end bonuses to work and buying stocks in the beaten down sectors. Drug stocks soared after being ignored during the tech rally in the fourth quarter. This could be a double-edged sword. Drugs are defensive and the surge today could be seen as a move into safety in advance of a potential January dip.

Before I get into my outlook for next week I need to clear up something. I got a couple emails over the last couple weeks saying I was too bearish and I should not be telling people the market will crash in January. Excuse me? I am not trying to be bearish and I am not telling anybody the market will crash in January. I apologize if it came across that way but I guess one persons profit taking dip is a crash for others. Secondly, I don't know if the market is going to dip in January any more than anybody else does. I do expect it to dip based on historical trends. I do not expect it to crash. Assign your own meanings to the terms dip and crash based on my outlook below. I analyze the market, compare it to current and historical trends and draw conclusions. I report these conclusions, good and bad, and explain my rationalism behind them. As an investor you should take these conclusions and compare them to your market view and make your own decisions. Finally, if I were bearish then my picks in the Top-50 & Top-20 should reflect that. They are all long plays.

My outlook for January is based on historical trends. Over the last six years those trends have been for a January high to be established in the first 3-5 days. This has been followed by a drop of between -550 and -1050 points over the next several weeks. Obviously a drop of -550 points would barely break 10,000 and would be insignificant to the current market. Hardly a crash. Should the market reach the other extreme from the 10527 high on Friday it would push us right back to decent support at 9500 and would still be less than a 10% correction. Still no crash. So where does reality actually lie? That correct answer today would be worth millions. What would you do on Monday if you knew in advance that the Dow would hit 9500 in two weeks? Unless you are Osama and know of an impending attack that answer will remain hypothetical.

I will try to be as specific as possible with my current outlook. The reasons for a profit taking dip remain the best Dow year since 1996, best S&P since 1998 and third best Nasdaq year in history. This does not even take into consideration that the first three months of the year were down. We recovered the earlier losses and rebounded to those gains after the March lows. There is considerable profit on the table and funds coming out of a bear market need to show some gains and produce some new marketing materials showing those gains. Up until Friday the good economic news was priced into these gains. The December ISM may have given them one more up leg or maybe not. The worry about the Fed accelerating their rate schedule could offset the ISM bounce. Funds also know that these profits could go up in smoke in an instant if a major attack did appear. Also, many "analysts" think the current market is very overbought citing a current PE of 38 for the Nasdaq. In short there are plenty of reasons for some profit taking ahead.

Offsetting the potential for profit taking is the hope that the Jobs Report next Friday will be a blowout based on the ISM gains. One more positive economic point for the recovery and one more negative for the Fed if it came to pass. Add in the lack of any serious earnings warnings and very few warnings in general and the 4Q earnings appear to be on track to surprise to the upside. Factor in the coming $165 billion in first quarter tax stimulus and the stars are aligned for a continued gains according to the bulls.

You can decide which scenario you like best and invest accordingly. However, if recent January trends repeat the Dow could easily test 9500 before January is over. Does that mean I am bearish? No, it just means that historically we could test 9500 before the end of January. I personally think it will produce a significant buying opportunity for 2004. I think investors should consider it an opportunity and not a dip or crash.

Dow Chart - Weekly

To balance the scales today we need to look at the upside potential as well. The Dow has taken out resistance on almost a daily basis for the last three weeks. Since 10,000 was broken the Dow has been on a constant upward march. The last two days of December saw a plateau reached and held at 10400 and despite the intraday selling on Friday that level still held. Moving up from here could be a problem. The 10525 level reached on Friday is exactly the downtrend resistance line from Jan-2000. There is even more significant horizontal resistance at 10650 which was the high for all of 2002. Were it not for the current very extended conditions my outlook might be more positive but I believe we are going to have a tough time moving above the 10650 level without some profit taking first to create that next buying opportunity.

S&P Chart - Weekly

Wilshire 5000 - Weekly

Next week is full of economic reports but the only one that really matters is the Jobs Report on Friday. We may get some volatility on the others but it is only a prelude to the Friday report. What we are likely to see is simply a very volatile market in general as both the bulls and the bears are scared to commit to a position. Friday was a throw away day with most fund managers on vacation after a long year. Next week is going to be a pivotal week as those managers come back to work to implement their plans for 2004. They will first have to wade through the inflow of year end retirement cash and decide how/when to put it to work. Index funds do not have that luxury. They receive cash and spend it. Their goals are a lot different as they only have to mimic the market and not time it. This year-end cash inflow to index funds normally provides the liquidity needed to produce those early January highs. The hold at support on Friday could be the launch point for a Monday bounce. I am sure many retail traders could not bring themselves to go long on Friday with continuous newscasts about flight cancellations. If we make it to Monday with no event those traders will breathe a sigh of relief and step up to the line if conditions are positive. I am sure you can see there are a lot of "ifs" for next week and odds are good we could move quickly in both directions.

We will be sending our first Top-50 Stocks for 2004 newsletter update on Monday night to everyone who signed up for the special. We will update entry points, exit points and our outlook at regular intervals as each play progresses.

Sunday is the last day for the year-end renewal special. Because of the time critical nature of the Top-50 Stocks for 2004 and the Top-20 Lottery Picks we have loaded the CD to the web and we will send the link to anyone who signs up on Sunday. We will follow up with the actual CD by Priority Mail. We want you to be ready to take advantage of any potential buying opportunity in our immediate future. SUNDAY IS THE LAST DAY but anyone who signs up on Sunday will get the link by close of business on Monday. Don't miss out on this opportunity to begin 2004 with a profitable entry. https://secure.sungrp.com/04renewal/

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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2003 Year End Renewal Special - LAST CHANCE
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TOP 50 STOCKS for 2004 SPECIAL INVESTOR GUIDE

What better bonus could we give you than the potential to double or triple your money in 2004?

https://secure.sungrp.com/04renewal/

Sunday is the last day for the year-end renewal special. Because of the time critical nature of the Top-50 Stocks for 2004 and the Top-20 Lottery Picks we have loaded the CD to the web and we will send the link to anyone who signs up on Sunday. We will follow up with the actual CD by Priority Mail. We want you to be ready to take advantage of any potential buying opportunity in our immediate future. SUNDAY IS THE LAST DAY but anyone who signs up on Sunday will get the link by close of business on Monday. Don't miss out on this opportunity to begin 2004 with a profitable entry. https://secure.sungrp.com/04renewal/



 
 



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