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      12-07-2004           High     Low     Volume   Adv/Dcl
DJIA    10440.58 -106.50 10567.16 10440.36 1.95 bln  773/2434
NASDAQ   2114.66 - 36.60  2161.30  2114.65 2.69 bln  796/2351
S&P 100   560.94 -  5.65   567.84   560.92   Totals 1569/4785
S&P 500  1177.07 - 13.18  1192.19  1177.07 
SOX       437.51 -  9.40   451.31   437.49
RUS 2000  625.50 - 13.53   639.78   625.46
DJ TRANS 3669.66 - 37.60  3730.12  3669.66
VIX        13.67 +  0.48    13.74    12.96
VXO (VIX-O)14.18 +  0.61    14.41    13.59
VXN        20.28 +  0.75    20.38    19.02 
Total Volume 4,908M
Total UpVol  1,267M
Total DnVol  3,577M
Total Adv  1877
Total Dcl  5415
52wk Highs  289
52wk Lows    43
TRIN       1.37
NAZTRIN    0.65
PUT/CALL   0.75

It appears Santa made a list of those who have been naughty and nice and traders ended up on the naughty list. While we are still far away from the normal Santa Claus rally it was mentioned many times today and not in a complementary fashion. Everybody with a microphone or a keyboard was moaning about the failing market and the prospects of the Santa rally being past tense for 2004. Enough traders took them at heart and the markets closed at the lows for the day with no buyers in sight.

Dow Chart

SPX Chart

Nasdaq Chart

The economic reports today left a lot to be desired and they helped to weaken bullish sentiment. Chain Store Sales fell again by -1.7% and the second consecutive week of strong declines. The index fell to its lowest reading since the end of January and this at the beginning of the strong holiday shopping season. A special ICSC survey this week showed 32% of shoppers were already half done with their holiday shopping and 9% had already completed the task. Obviously some shoppers had too much extra time on their hands. I am waiting for the "real" discounts to begin on Dec-20th. Quite a few people follow my example, mostly male shoppers I presume because the same survey suggested a strong finish similar to last year's pattern.

October consumer credit rose by +$7.7 billion and last months number was revised upward to +$13.6 billion from +$9.8B. This rising credit is pushing the consumer debt burden even higher and December is expected to continue this trend. High energy prices and low wages are forcing consumers to depend more on credit to get through the month.

Jobs are still an issue with the Challenger report showing a rise in announced layoffs to 104,530. This was the third consecutive month over 100,000 and this is generally the time of year when layoffs moderate. This rising trend in a normally positive period suggests there is still trouble under the hood in the economy. The Jobs report last Friday was also lower than expected and this layoff report was a confirmation of that weakness in labor. During the boom years prior to 2000 the level of layoffs remained below 50,000 per month. However, layoffs in 2004 are 19% below the 2003 level for the 12 months ending in November.

Q3 Productivity was revised down slightly to +1.8% but costs were revised higher by that same +1.8% rate. On an annual basis productivity in Q3 dropped to +3.1% from +4.9% in the second quarter. The revision today was not a real problem but the rising costs continue to drag on profits. Corporations are doing everything they can to keep from adding to payrolls and taking on the added cost burden.

While economics were seen as only a slight depressant on the market there were some other challenges traders had to overcome. Lehman advised customers that the market ahead could be disappointing with only single digit gains in 2005. They said earnings would disappoint and not to expect big gains.

Insider trading hit a four-year high with $6.6 billion in stock sales in November. Analysts point to this trend as a lack of confidence by insiders that business conditions are going to improve in the short term. If insiders were optimistic then investors should be optimistic. This is not a hard statistic given the massive selling by the Google insiders and by Larry Ellison. Together they accounted for the majority of the sales.

Despite the triple digit Dow loss there was very little negative news on stocks. In reality there was a flood of positive news. Cisco said guidance for +13% growth was reasonable and said many positive things about their new product line. Cisco soared on the news to a three month high over $20 and then sold off to close negative. They did however make comments that suggested margins were coming under increasing pressure on tougher competition from overseas competitors.

Intel CEO Craig Barrett said that Intel had recovered from product missteps and the company was now firing on all eight cylinders again. He said Intel had regained its market share in memory after pricing themselves out of the market in 2003. They will be shipping their new dual core processors in 2005 and by 2006 they expect 70% of the product line will be the faster dual core processors. The WSJ is reporting tonight that Intel expects a ten fold increase in processor speed by 2008. That would equate to a 30 ghz chip but since they are getting away from that measurement no target was mentioned. Intel said within three years it would be delivering not just dual core processors but multicore chips with multiple processors to catapult total processor speed to new highs. Intel dropped -50 cents on the good news.

Corning announced that two of its customers had either pushed out or cancelled existing orders of LCD glass. Corning had already announced they were not going to try and increase production to corner the market. After being killed on an excess of fiber optic cable when the Internet bubble burst they are comfortable manufacturing for a profit and not trying to hog the entire sector. They expect LCD TVs to be 16% of the market in 2005.

The satellite radio wars continue to heat up with XMSR announcing Toyota will offer the radios as a factory option in 2006. Customers buying Toyota and Lexus cars can order them with factory installed radios. Not to be left out SIRI announced that Toyota will offer dealer installed radios on nine models beginning in Feb-2005. This blow for blow advertising war continues to push both stocks higher. There was a rumor today the Nasdaq would put SIRI in the QQQQ and that provided another boost for both companies. XMSR currently has more than three times as many subscribers as SIRI and this David and goliath battle is far from over.

After the bell Texas Instruments gave their mid quarter update and they narrowed guidance to the middle of their previous range. They said the inventory correction that began in Q3 was continuing and order trends remained soft. TXN said its own inventory problem will be down by year end but they declined to predict how long the sector problem would last. The after hours impact to futures from TXN was negligible.

On a positive note Seagate Technology (STX) raised its estimates on stronger than expected demand for its products. They said profits could be as high as 22 cents and that was well above the prior 11 to 14 cent estimate. Revenue was expected to jump to $1.76B from the $1.61B prior estimate. Shares of STX jumped +$2 in after hours to $18.50. The company said retailer inventories had declined to 3-4 weeks. With the prices at nearly free it is not surprising. I bought five 200GB Western Digital enhanced IDE drives this week for $104 each. (no rebate needed at www.dttechnology.com)

The market drop today came only a few hours after Ralph Acampora issued his new targets for all the indexes. Ralph now believes that we are in a new cyclical bull market that started in October 2002 and will last for the next six months. His targets are Dow 13,264, SPX 1473, Nasdaq 2796, Russell 797. I am sure he was very gratified by the market implosion the day after he went on CNBC with his bullish comments. In reality he is about the only high profile analyst expecting good things from 2005. The list is long and growing longer for those who feel January will be the high for the year.

That feeling may have helped put the market on the skids today and once the drop began it took on a life of its own. Volume was very high on the Nasdaq with 2.7 billion shares trading. The broad market advance decline line was more than 3:1 in favor of declines. The market reporters were constantly feeding the public a dose of the Santa rally blues and predicting it will not appear this year. In reality we are just in the period I mentioned several times last month where tax loss selling normally occurs. I have discussed in this column the potential for that selling to have moved to the week ahead of Thanksgiving in order to get in front of the Microsoft dividend and that could have been a factor in the pre Thanksgiving weakness. However, the sharp drop today without any real news trigger was not simply a concentrated effort by some funds to adjust their portfolio. Why they chose today to accelerate the selling we will never know exactly. This was the third consecutive down day and the selling began at 1:PM and never stopped. Various support levels provided short pauses but sellers were still unloading in the after hours futures. Several reporters mentioned that extreme selling volume in the S&P futures after 1:PM drove the majority of the drop.

One theory I pondered today had to do with the Microsoft dividend play. If you remember we saw a huge spike in the market the day before the dividend payment. The Dow soared +162 points and the SPX rallied to a high just below 1195 on "strong buying in the S&P futures." Once the dividend was paid NOTHING happened. After that Wednesday rally the market has been flat to down. We speculated that the funds who bought the futures were hedging themselves in advance of the expected liquidity bounce. The high volume for the next three days with no gains or losses were thought to be funds unwinding those futures positions (negative market pressure) and moving into stocks with the Microsoft money. (positive pressure) This unwinding was thought to be producing the high volume and no relative movement. After watching the market action today and reviewing the action after the close I am speculating today was the real unwinding of that Wednesday bounce.

I am speculating that the strong futures led bounce was in anticipation of that Microsoft liquidity causing a monster market move. Hedge funds positioned themselves for that move with futures just like the mutual funds. When it did not appear they grew nervous and today they bailed. The market retraced to almost EXACTLY where the rally began last Wednesday. Last Wednesday the Dow opened at 10425, SPX 1174, Nasdaq 2104. Of those three the Dow and SPX retraced to almost exactly those levels today. The Nasdaq held its gains slightly better with a close at 2116 but I am betting the positive Cisco and Intel news helped prevent further weakness.

The Russell was the index that really broke the trend. The Russell began last Wednesday at 634 and closed today at 626. However, the Russell had been the index of choice for the prior five weeks. Funds normally buy the Russell stocks going into year end and I suspect there was a lot more posturing in small caps before last week's bounce. The Russell also led this week's drop with a very weak performance beginning on Monday. When the bottom fell out today it began on the Russell and never let up. After the close the Russell futures fell to 624 in after hours. The Russell futures have been weaker than the cash index and this agrees with my speculation about the pre dividend futures speculation. They just unloaded them today and with the Russell futures a "thinner" market the damage was more apparent.

All this speculation about the reason for the drop does not tell us where the drop will stop. Personally my target for the drop this week was SPX 1177. (1176 in the futures) I talked about it all day in the futures monitor and that has been exactly the low so far. No magic here but just very obvious support. That equates to 10425-10440 on the Dow. The Nasdaq equivalent would have been 2100 but the techs are holding their gains better despite the -36 point drop. The Nasdaq closed at 2116.

For Wednesday I am looking for a potential rebound but it may only come in the form of an oversold relief bounce. Some damage has been done to the bullish sentiment and it may take a couple days for that to be erased. We are still in the period in December where weakness is common so there is no reason to get too excited. I have to admit the sharpness of today's drop was out of character for the current market and if it is not due to the futures play by hedge funds then there are forces at work that could continue to undermine support.

I am still a dip buyer above SPX 1165 and would target that level for a conservative entry in front of a Santa Claus rally. Below 1165 I would be flat or short. If we do get a relief bounce at the open on Wednesday then I would want to see that bounce hold over 1177 for bullish confirmation before going long. December is normally a bullish month but no trend is infallible. Choose your positions wisely and raise your stops to protect profits. Don't get caught letting profits slip away just because December is "normally" bullish.

Time is slipping away for the end of year renewal special. This would be a good time to check it out! Bonuses are shipped in the order they are received.

Buy the dips until the trend changes.

Jim Brown
Editor

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