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Market Wrap

New Highs Once Again

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      01-06-2004           High     Low     Volume Advance/Decline
DJIA    10538.66 -  5.41 10549.18 10499.85 1.95 bln   1688/1561
NASDAQ   2057.37 + 10.00  2061.54  2039.63 2.27 bln   1853/1406
S&P 100   557.75 +  0.44   558.11   555.53   Totals   3541/2967
S&P 500  1123.67 +  1.45  1124.46  1118.44 
W5000   10925.16 + 18.80 10936.66 10876.18
RUS 2000  569.89 +  0.97   572.67   568.06 
DJ TRANS 3037.26 +  8.60  3042.65  3012.66   
VIX        16.73 +  0.76    17.67    16.19
VXO (VIX-O)15.34 -  1.37    16.78    15.07
VXN        22.76 -  1.13    24.21    22.69 
Total Volume 4,473M
Total UpVol  2,567M
Total DnVol  1,837M
52wk Highs 1017
52wk Lows    13
TRIN       1.04
NAZTRIN    0.74
PUT/CALL   0.57

Bad news from Gateway failed to deter tech buyers and the Nasdaq rose to a new two-year high at 2061. It was just yesterday that semiconductor billings came in at the lowest level in three months. However, historical patterns of investors buying tech stocks to open the year appears to be over powering any negative tech news.

Dow Chart - Daily

Nasdaq Chart - Daily

Tech news was not the only bad news dragging on the markets. The Weekly Chain Store Sales came in at -0.1% compared to last weeks +2.0%. Holidays are over and it appears shoppers are staying home. Colder weather in many states could have also prompted shoppers to watch football from the couch instead of blocking and tackling the malls. Good news was a projection that December could have been stronger than previously reported. Inventory levels are reported to be very low indicating that there was a last minute push and stores managed their inventory very well. However, low inventory levels will prevent strong sales in January. Considering most of those January sales are heavily discounted not having any inventory may not be a bad thing. I personally went to Target last weekend for some late holiday shopping and on a list of 20 items the individual had registered for at least 15 were sold out. Shelves were bare in places and in others they had spread out merchandise to 3-4 times the shelf space normally used in order to cover up the holes.

Worse news for investors was the ISM Services Index. The headline number came in at 58.6, well below the 60.3 estimate and the lowest level in seven months. A 58 level still reflects an expanding services sector but at the lowest level since May it does not inspire confidence. New orders rose only slightly and employment fell slightly. Basically it was only a minor negative but with the strong market gains pricing in strong growth this was another hairline crack in the foundation. It was more of a talking point than a real worry but on a slow news day it was the sound bite we heard the most. The ISM services is normally a leading indicator for manufacturing. A drop in services could suggest a drop ahead in manufacturing. Far to soon to tell and could also just be a holiday blip.

The Challenger Report showed that announced layoffs fell slightly in December by -6.5% to 93,020 workers. Typically companies make job cuts at year end to clean house before the new year begins. The 93K number would indicate that maybe the job cut cycle is fading and those normal job cuts were light. To put it in perspective the number for Dec-02 was also in the 93K level and it spiked significantly in Jan/Feb to 135K again. There were several analysts expecting a lower jobs number on Friday after the ISM and Challenger numbers. While we may have a lower than expected number I do not think you can make that link based on the figures released today. Employment components for other economic reports have been stronger and the timing of these reports and the Jobs survey is different. The bigger impact to the jobs number is the continued outsourcing of jobs overseas.

Another weak number today was the Factory Orders which dropped -1.4% but this was a November number and is already priced into the market. Back orders did rise and inventories continued to fall. Eventually we are going to get to the point where we will have to trigger an inventory rebuild cycle or there will be an impact to earnings from nothing left to sell.

Gateway led the list of earnings warnings this morning with an announcement that it could lose up to -15 cents after a very tough 4Q. They said they were hurt by aggressive price cutting by HPQ and Dell despite good sales in HDTV and digital cameras. Downgrades were the order of the day with both Dell and HPQ heading deeper into the consumer electronics business Gateway's competition is only going to increase. According to some analysts the 4Q was the best PC quarter since 2000 in terms of sales but margins could be the worst due to the price competition. PC models were heavily discounted by both manufacturers and retailers in order to move product and avoid left over inventory.

Planar Systems warned last night that slowing sales of flat panel displays in its medical segment would lower its earnings. They said the consumer business was good and would offset some of the decline in the other segment but earnings would drop to 20-22 cents when analysts were for 28 cents. PLNR fell -18% in trading today.

GTW and PLNR were joined by LLY, TWTR, HLWD, DAB and JDAS who also warned on Q4. Warning to the upside were CRDN on the strength of defense orders and SBUX on stronger than expected same store sales. GTRC also raised guidance on stronger than expected sales. TMRS was down on allegations they had tried to bury negative news on experimental drug T-1249. JDAS said they failed to close a number of deals previously expected. AMAT was upgraded by SG Cowen. Visteon was cut by Goldman. ANF was downgraded by Lehman. The HMO sector was downgraded by Goldman on worries that reimbursement payments would be lowered.

The markets rallied to new highs but struggled in the process. The volume was much stronger with total shares nearly 4.5B. Internals were good but not great and advancers barely beat decliners across all markets. The Dow hit 10549, only 50 points away from really strong resistance. (Not that any resistance has mattered lately.) It took all day to recover from the opening dip and ISM depression before it hit positive territory and the new high. It was positive only briefly and closed down slightly at -5 points. 10500 was support most of the day and should be the critical level to watch the rest of the week.

The Nasdaq was the hero with a +10 point gain to a 24-month closing high despite the bad tech news. The Nasdaq has been nearly vertical since hitting 1900 on Dec-10th. It is moving into a very strong resistance range between 2065-2100 and will find any further gains much tougher without any major news event.

At the risk of sounding repetitious we are very overbought. We have followed the January pattern exactly and set new highs for the first three days of the year on the strength of the year end retirement cash flow. The market rose despite terror threats, earnings warnings and massive prior gains. Very impressive. However, and you knew there had to be a however, we are reaching very strong resistance levels and today was the last day of any material retirement cash inflows.

Dow Daily Chart with ADX

The Dow has gone from extreme to ridiculous. Using almost any indicator you like the overbought conditions are very evident. Using the ADX for example the current extremes on the Dow have not been seen since December 1996. Not even during the bubble years did the Dow reach these overbought levels. Considering the Dow has gained +950 points since the end of November without any material profit taking and the answer should be clear. The last time the Wilshire 5000 was this extreme was back in June of this year. Note the result.

Wilshire 5000 Chart with ADX

Those watching the market internals today saw a good example of distribution in progress. Volume was strong but advancers were only slightly better than decliners. The markets set new highs but only barely with minimal gains. A lot of stock was traded with little movement. To be fair this was the day after a very strong gain. Just closing flat is an accomplishment but it just did not feel that positive. With the normal January high set in the first five days of the month we are right there. This could have been the day.

We could also see one more climax high tomorrow at the open. My target for the January high was 11000 on the Wilshire and we closed at 10925 today. Very close considering the magnitude of the numbers. I hate to be Chicken Little but trees do not grow to the sky without losing a few leaves once in awhile. We need to take some profits off the table soon or the eventual correction will be much worse.

On Wednesday there are no material economic reports with only Mortgage Applications and the Consumer Comfort Index. The only speech to watch is Secretary Snow and the bond groupies will be watching for comments on the dollar. The dollar set a new low against the Euro on Tuesday and the bond guys expect the strong dollar talk to pickup soon. We also have a lot of bond paper coming to market this month and that will take some cash out of the equity market in an election year.

The biggest report for the week is the Jobs report on Friday and everything we see on Wednesday and Thursday will be posturing in advance of those numbers. The consensus estimate is for the addition of +127,000 jobs. Considering the November number dropped to only +57,000 jobs this could be optimistic. October had +137,000 and shocked the markets for a week. Considering December is not normally a hiring month it will be interesting to see if the estimates come to pass. A negative number would be very serious.

Traders are keeping one eye on the five-day barometer for guidance to the rest of the year. Historically if the first five days of the year finish with a gain we have an 85% chance of a positive year. If the first five days finish with a loss there is a 50:50 chance the year will also close down. Obviously you can twist the numbers any way you want but traders are a superstitious lot and they really want to keep it green through Thursday. For me I will be watching for weakness between now and Friday. I would be very surprised if we do not trade lower before the week is out. I consider it a buying opportunity for those who have the patience to wait.

Enter Passively, Exit Aggressively.

Jim Brown
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