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Market Wrap

Resistance Targets Hit

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      01-08-2004           High     Low     Volume Advance/Decline
DJIA    10592.44 + 63.40 10592.59 10530.07 2.52 bln   2000/1233
NASDAQ   2100.25 + 22.60  2100.25  2078.05 2.67 bln   1981/1262
S&P 100   562.88 +  3.57   562.88   559.02   Totals   3981/2495
S&P 500  1131.92 +  5.59  1131.92  1124.91 
W5000   11009.62 + 52.50 11009.62 10943.02
RUS 2000  579.62 +  5.00   580.22   574.62 
DJ TRANS 3029.70 -  4.40  3037.44  3022.89   
VIX        15.61 +  0.11    15.68    15.32
VXO (VIX-O)14.46 -  0.39    15.39    14.42
VXN        21.89 -  0.02    22.16    21.36 
Total Volume 5,497M
Total UpVol  3,836M
Total DnVol  1,615M
52wk Highs 1118
52wk Lows    11
TRIN       0.81
NAZTRIN    0.72
PUT/CALL   0.65

It was not pretty but after a day of strong volume and numerous direction changes the indexes edged up at the end of the day to close exactly at those very strong resistance levels I have been discussing for the last three weeks. The Dow was the only laggard with a close at 10592 missing my 10600 resistance target by -8 points. The Nasdaq closed exactly on the 2100 level and the Wilshire 5000 closed +8 points over my 11000 target. Friday should be a very exciting day.

Dow Chart - Weekly

Nasdaq Chart Weekly

Economically the day was a draw with the real fireworks held for Friday's open with the December Jobs Report. The Jobless Claims today came in at 353,000 and slightly over the consensus of 350,000. No brain damage there as 350K is the average for the last four weeks. This inline report was actually an upside surprise as the whisper number was for a lot more. This is the first post holiday week, although still a partial, and analysts thought it possible for a surge to appear. Next week is the real number with no holidays to skew the figures. Continuing claims continue to fall and this is pumping up expectations for the Jobs Report on Friday. A drop in Jobless Claims means layoffs are slowing but a drop in continuing claims means there are people either finding work or dropping out of the system as their claim periods expire. Analysts are hoping it is due to hiring.

The Wholesale Trade numbers rose slightly in November with Sales up +0.3% and Inventories up +0.5%. This was the lowest sales increase in three months and well below the +2.0% gain in October. Inventories remained the same at the +0.5% level. The inventory to sales ratio remained a its historic low of 1.18 for the second consecutive month. While the rate of growth has slowed it was still positive and continues to predict a rapid inventory rebuild cycle ahead.

Consumer Credit fell to $4B in November from $8.3B in Oct and $11.3B in September. Normally this would be a negative occurrence but October was revised up to $8.3B from only $900 million. Talk about a missed estimate there! The gain was almost exclusively in the non revolving component from strong auto purchases. Credit card debt fell for the first time since June. Looks like consumers were getting ready for the shopping season by making space on their cards.

Retail Sales rose +4.2% in December according to the ICSC survey. Drug stores and Wholesale Clubs sported the biggest gains at +8.0% for each component. There were some real discrepancies to this in the news today. Major chains warned that sales were weak and earnings would suffer while others raised earnings guidance. It was a very confusing sector. Kohls (KSS) warned and dropped -$3.70 to 41.80 after cutting estimates to 69 cents from prior expectations in the 92 cent range. KSS said same store sales FELL -1.2% for the last five weeks. They aggressively managed inventory and slashed prices to give away merchandise rather than carry it over into January. Competitors claimed they "bought" the business by selling so cheaply.

Other retailers warning were TAL, ANF, GPS and WMT. Retailers raising guidance were ANN, BBY, PSUN and HOTT. Wal-Mart said same store sales rose +4.3% as a surge in late holiday traffic saved them from a dismal month. However they warned that earnings would come in at the low end of their previously forecasted range. Despite the weaker than expected performance WMT still sold $33.66 billion for the five weeks ended Jan-2nd. Pretty amazing volume and their one month revenue is more than most retailers sell all year. Hard to grow in double digits when the numbers are already so large. Still despite the various warnings and misses 74% of retailers hit their Dec estimates.

Another warning came from Ryland Group that cratered the entire homebuilding sector. RYL said it was disappointed in its fourth quarter sales due to new orders declining for the period. While earnings are still expected to be at record levels it was not a major blow for the company but any sales weakness in new homes produces fear in the sector. RYL is still predicting earnings of $9.50 for 2004. (PE 7.7) They ended the year with an order backlog of 5,841 units worth $1.4 billion in sales. You would have thought they declared bankruptcy from the hit to the stock. RYL dropped -$10 on the news to $72.91. KBH fell -2.83, CTX -5.42, HOV -3.90.

The transportation sector took a hit after JBLU was cut by JP Morgan saying it no longer believes the carrier can gain in 2004 due to increased competition and lower traffic than previously expected. With falling seat traffic and increased competition the airline sector is facing an all out price war to attract flyers. The code orange alert and the constant cancellation of flights due to security concerns is going to slow any recovery. American Airlines is going head to head with JBLU by offering a free trip promotion in areas served by both carriers.

The telecommunication sector got another boost on Thursday from Nokia after they raised their estimates for the quarter. The sector was hot after Nortel soared earlier in the week on news of a new network build out contract. Even Lucent soared from $2.85 to nearly $4.00 on the positive sector news. LU and NT alone have accounted for more than 20% of the NYSE volume over the last two days with combined volume of more than 400 million shares on Thursday.

IBM was a focus of the day and traded up only slightly at $93 after new rumors surfaced that they would miss their revenue estimates. IBM has failed to take part in the rally over the last month on earnings fears. After the close IBM announced that the SEC had issued a Wells notice to IBM and was ready to recommend action for securities fraud in the handling of its relationship with Dollar General. IBM paid $11 million for some equipment that was replaced at DG and the accounting for that purchase and sale placed DG in a favorable position. The SEC alleges that IBM aided DG in a fraudulent transaction to pump up DG's books.

HPQ was back in the news with the Nasdaq claiming they were going to be the first NYSE company to double list on both exchanges. Carly Fiorina declined to comment in an on air interview but the floor of the NYSE was a hotbed of concern all day. Analysts feel that any material movement to "list" on the Nasdaq could divert order flow from the NYSE and limit the usefulness of the market makers thereby jeopardizing the current specialist system. Others dismissed the Nasdaq claim saying that most NYSE stocks were already traded electronically on ICNs with no material volume drain.

UBS raised their 12 month S&P target to 1200 from 1150 on expectations for better earnings in 2004. With markets at two year highs that is a gutsy call but then 1200 is not much higher than we are now. The S&P closed at 1130 and well below strong resistance at 1160-1175. If we do see some profit taking soon there are several estimates (not mine) that any dip will see 1000-1010. That would put the 1200 UBS estimate +20% off the lows. Without that dip the 1200 target would only be a +6% gain for the year. Currently more than 90% of the S&P are trading over their 200 dma. You have to go back to 1983 for the last time this happened.

The indexes closed right at very strong resistance and right in front of the December Jobs report. Talk about asking for trouble. The consensus estimate for jobs is now +127,000. The whisper number last week was for something in the +50,000 range but in less than a week that has changed significantly. I am hearing numbers as high as +250,000. This bullishness has no basis in fact. It is simple hype on top of hype but then considering the recent market action it is right in line. Needless to say the good news is already priced into the market. I went back to last year to see if there were any trends to the hiring patterns. In Dec 2002 jobs lost dropped to -156,000 from November's loss of -81,000. December was largest drop in 2002 since the -165K loss in Feb-2002. You cannot compare 2001 because that was the recession period. Also, comparing 2002 to 2003 is difficult considering the strong rebound in the economy in the last six months. Still some analysts are suggesting caution in front of Friday's report. Obviously nobody is listening to them.

The Nasdaq edged up to touch 2100 after the close as the final trades settled. This is very strong resistance as 2099 was the high for all of 2002. Moving over this level should be hard but not impossible considering the already extended conditions. The Nasdaq NDX Bullish Percent is back to 80 and the level where it has paused for the last six months of 2003.

Nasdaq Weekly Chart

Nasdaq 100 Bullish Percent

Nasdaq 100 Bullish Percent PNF

I am not suggesting the Nasdaq cannot move up from here but it will be defying gravity and some very strong resistance to do so. The Dow did not reach its key resistance level at 10600 but came very close ending at 10592. The index broke out over the down trend line from Jan-2000 currently a 10550 and pulled within 8 points of 10600. The resistance band from 10600 to 10650 represents the highs from late 2001 and all of 2002. This is very strong resistance considering the current extended conditions.

Dow Weekly Chart

DJIA Bullish Percent

DJIA Bullish Percent PNF

While the Dow and Nasdaq are the most followed indexes the broadest market indicator is the Wilshire 5000, $TMW.X or $WLSH depending on your chart service. This index succeeded in touching the key 11000 level intraday and then edged over that level after the close when market on close orders were settled. First, this is very bullish if it can continue its upward progress. It is at the top of its uptrend resistance as well as its horizontal resistance and a breakout here could attract even more buyers. The 11000 level was the high for all of 2002. Are you seeing a common theme here? Dow, Compx and Wilshire are all at 2002 resistance highs.

Wilshire 5000 Weekly

Here comes the hard part. Back in mid December I predicted the Wilshire would hit 11000 the first week in January. That happened on Thursday and that brought us to a critical point in the markets.

You know I have been suggesting the highs for January would be made this week. So far so good. Now we are at that critical point and those resistance highs will either hold or they will be broken. If they hold then normal historical trends would still be in play. If they are broken with the indexes at this already extended level it would be very bullish. I am not the only one expecting a buying opportunity in January. If we move up from here it could mean that buying opportunity is not going to appear and those waiting on the sidelines could begin rushing in to chase prices even higher. Those who have been shorting this rising resistance all week will be squeezed even harder and this already extended market could take off like a rocket.

While I personally do not expect a strong gain from here there are those who feel the market is just getting its second wind. Volatility has collapsed with the VXO setting a new multi year low of 14.42 and showing a complete lack of fear in the market. The bullish percent on the NDX is 80% and 86% on the Dow. Traders point to the rapidly increasing volume on the NYSE as proof that the rally is real. Let me quickly point out that 500 million shares on Wednesday and 400 million shares today have been in Lucent and Nortel alone. Take 500 million off the totals for both days and you still have strong volume but far from convincing.

Still while almost every indicator is grossly oversold the buyers just keep coming. The internals are extremely positive with 1131 new 52-week highs on Thursday. Only one day this week has been under 1000 new highs and even at 814 it was still bullish.

So how do we rationalize this situation? We are at very strong resistance but the market does not seem to care. Resistance levels have been failing for weeks. Even key resistance has buckled. Does that mean this resistance will as well? Nobody knows but the answer is clear. The bulls are stampeding and nothing is stopping them. Even the cautious TV commentators that were suggesting restraint just last week are now tripping over their tongues to praise the market internals. It seems the world has converted to a buy only mentality and until something happens to shock everyone back to reality the sky is the limit.

What is it going to take to break the spell? With estimates for market gains for 2004 at +10% to +12% we are already up +5% in the first five days. What is left? Are we going to spend the next 355 days covering that 5-7% left or raise the targets? We all know, whether we want to admit it or not, that this cannot go on forever. Eventually something will happen to break the spell and return us to normal market conditions with alternating up and down cycles. On Friday the Jobs Report is officially expected to show +127,000 new jobs. The whisper numbers are up to +250,000. What if we only grew +50,000 jobs? That is probably not drastic enough to matter. What if we lost jobs? Does the market care.

I think that is the key. The market did not care that Gateway warned or Wal-Mart sales are slowing. It did not care that RYL sold fewer homes or the ISM Services index fell. Remember the bubble? Nobody cared about the fundamentals. Buy stocks they are going up. Once the Dow closed over 10,000 in mid December Pandora's box was opened and the investing fever was loosed again. If the Dow is over 10,000 the market must be ok. Buy stocks. Those that did not buy in December are chasing prices in January. I do not know where it is going to end but every feeding frenzy always ends. I can't in good conscience tell you to go long. That decision is up to you. I can only suggest that if you do go long you take out enough insurance to protect yourself. Fortunately with volatility at multiyear lows that put insurance is very cheap.

I had a vision today, more of a flashback of a video clip they run on CNBC periodically. You know the one where they show the running of the bulls in Spain. Those in front of the herd are running for their lives and having a great time. Those unable to stay ahead or slipping on the cobblestones get trampled or gored. There are always a greater majority safely on the sidelines watching as the scene plays out. Tonight I am short at Wilshire 11000. If the herd runs by me I will become a watcher from the safety of the sidelines. I refuse to chase after the herd because I do not want to meet it head on when it changes direction.

Enter Passively, Exit Aggressively.

Jim Brown
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