Option Investor
Market Wrap

Check your inverted yield curve.

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      12-20-2004           High     Low     Volume   Adv/Dcl
DJIA    10661.60 + 11.68 10735.27 10652.07 1.78 bln 1383/1434
NASDAQ   2127.85 -  7.35  2154.48  2124.22 1.98 bln 1128/1952
S&P 100   567.80 +  0.43   572.14   567.31   Totals 2511/3386
S&P 500  1194.65 +  0.45  1203.64  1193.36
SOX       419.40 -  4.35   428.19   418.53
RUS 2000  638.05 -  4.03   645.17   636.95
DJ TRANS 3730.88 - 20.19  3762.15  3728.45
VIX        11.83 -  0.12    12.34    11.77
VXO (VIX-O)13.61 +  0.90    13.63    12.28
VXN        18.21 +  0.00    19.22    18.21
Total Volume 3,773M
Total UpVol  1,421M
Total DnVol  2,206M
Total Adv  2511
Total Dcl  3386
52wk Highs  304 
52wk Lows    29
TRIN       1.06
PUT/CALL   0.84

Buoyed by oil prices failing more than a $1.00 a barrel, the DOW charged out of the gate this morning, gained about 85 points, hit its daily high of 10732 and reversed and unfortunately from there it was downhill for the rest of the day. The DOW closed at 10661 for a measly +11.68 gain for the day. The SPX also hit its daily high early in the morning at 1203.64, fell for the balance of the day making a daily low at 1193.36 and also closed poorly at 1194.66 for a daily gain of +0.46. Same story for the NASDAQ, it hit its daily high at 2154.48, made a daily low at 2124.22 and also closed poorly at 2127.85 for a daily loss of -7.35 points

NASDAQ most actives were SIRI, MSFT, PARS, SYMC AND CSCO. NYSE most actives were PFE, LU, NWS, NT AND MRK.

On the Big Board, 1.4 billion shares traded and 1,641 stocks rose and 1,677 fell. On the Nasdaq 2 billion shares changed hands with 1,169 advancing and 2,001 declining. New highs/new lows on the NYSE were 242/11 and on the NASDAQ it was 144/17.

According to the Stock Trader's Almanac the Santa Claus Rally is scheduled to begin on December 23rd and should continue through the last five trading days of the year and into the first two days of the New Year. Since 1969 the S&P has averaged 1.7% gains during this time but it is important to note that if this rally fails to materialize it has often been a harbinger of bear markets ahead. The saying is "If Santa Claus should fail to call - bears may come to Broad and Wall."

Retailers are gearing up for one of their best weeks of the year although recent data of retail sales doesn't look too good. Data from ShopperTrak of Chicago estimated that retail sales on Saturday were down 7% compared with the same Saturday last year. The research group took into account two additional shopping days between Thanksgiving and Christmas this year so the slowdown is "a little alarming" said Bill Martin, co-founder of the research group. Many midprice retailers tried to spur sales with sharp price cuts and discounting was so steep at some major stores that experts aren't sure whether retailers can bring home the 4.5% sales gains the industry has projected for the 2004 season. Retailers are blaming the lack of a trendy holiday gimmick and high energy costs for the slowdown. Doesn't this sound like Krispy Kreme blaming its woes on the low carb craze?

However, there are some retailers that haven't been affected by high energy costs, retailers like Apple (AAPL). Apple's can't ship its portable music player, iPod, fast enough giving rise to Lehman Brothers raising its profit outlook and target price on AAPL. Lehmen expects AAPL will post first quarter revenue up $0.1 billion. Interestingly AAPL closed at 62.72 down -2.27 for the day.

In other news Exelon (EXC) has agreed to merge with Public Service Enterprise Group Inc. (PEG) for $12.81 billion in stock thus creating the largest power generator in the country. Under the merger agreement, which both boards unanimously agreed to, each PEG common share will be converted into 1.225 shares of EXC so PEG stockholder will ultimately own 32% of EXC's pro forma shares. EXC closed at 43.05 up +1.19 and PEG closed at 50.59 up +3.29. Obviously Wall Street likes this merger.

The Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE) and Edward D. Jones & Co. have tentatively agreed to a $75 million settlement due to the brokerage firm's practice of steering its investors to mutual funds from which they received compensation without disclosing the fact to the investor. Last year the SEC fined Morgan Stanley $50 million for conflicts of interest which included the same practice.

The only economic report out today was the Leading Indicators index (LEI), a report of 10 different economic indicators compiled by a private research group, the Conference Board. Of the 10 indicators, six increased in November: stock prices, real money supply, average weekly initial claims for unemployment insurance, index of consumer expectations, manufacturers' new orders for non-defense capital goods, and manufacturers' new orders for consumer goods and materials. The four negative indicators were: vendor performance, average weekly manufacturing hours, building permits, and interest rate spread. The overall LEI had fallen for the last five straight months showing that the economy's momentum was running out of steam and giving rise to worries of inflation but today the conference board announced that overall LEI increased to 0.2% after a revised 0.4% decline the month before. Economists had expected to see a gain of 0.1% for the month.

Although this report looks good lifting up the hood we find some problems. The report's performance this year hasn't corresponded particularly well with actual economic performance and a survey of top economists finds that they are not placing tremendous emphasis on the report this year.

On to the charts.

DOW Daily

Although the DOW looked weak intraday when you look at it on the daily chart you see a pretty healthy looking chart with the exception of the MACD divergence. This market could drop all the way back to the triple bottom at about 10400 before you see a hint of a trend change. I think the bulls are still doing OK.

DOW Weekly

Looking at the DOW on a weekly chart you start to see that it may be hitting a resistance that could be quite difficult to get through.

SPX daily

Once again although the intraday chart of the SPX was anything but bullish the daily chart tells the real story and this is a bullish chart if you ever saw one. However, things need to cool off a bit and the MACD may be telling us that that is exactly what the SPX may be doing.

NASDAQ daily

The NAZ has a similar chart to the SPX but with some differences that are worth noting. First of all the MACD is more bearish in that the slow line is starting to curve up in the SPX but not in the NAZ; the NAZ is at the bottom of it channel and much more of a move downwards could mean the trend changes and the bearish double top is confirmed; then we have the double top on the NAZ whereas it is a higher high on the SPX.

Tomorrow, Morgan Stanley (MWD) and Bear Stearns (BSC) are the only two S&P 500 components with earnings before the bell while General Mills (GIS) is expected to report quarterly results during market hours. There will be no economic data out until final Q3 GDP readings hit the wires on Wednesday at 8:30 ET.

One last note - in a New York Federal Reserve 1996 study on what indicators were the most reliable predictors of a recession, only one of six indicators measured that was significantly reliable was an inverted yield curve. They later did a private study with over 20 factors and still the only dependable indicator was the inverted yield curve. So what is an inverted yield curve? Well normally, short term rates are lower than long term rates because investors want to be compensated for the risk of the longer holding period. But sometimes short terms rates rise above long term rates, giving rise to what is known as an inverted yield curve. What this 1996 (and subsequent studies) have found is that when the yield curve is inverted or negative for 90 days, you typically get a recession in about 12 months. The last time we had a inverted yield curve was August 2000 and according to John Maudlin of Frontlinethoughts.com a recession after a 90 day inverted yield curve is more than typical. He states, in the US, every time we have had a period of negative yield curves, we have had a recession within a year. Should we start to worry? Not yet.

The US yield curve is slowly flattening but is not inverted and is not signaling a recession but Mr. Maudlin has spotted a worrisome inverted yield curve in England. I won't go into the dept that Mr. Maudlin did but suffice it to say he has found enough similarities between the two economies for us to take note and watch to see if this may be our canary in the mine for a recession heading our way. In any advent I would start watching the yield curve and if it inverts start to take action for a possible recession. You can watch the yield curve on stockcharts.com, which has a tres cool dynamic yield curve.

Remember plan your trade and trade your plan.

Jane Fox


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