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Market Wrap

Glad Tidings

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      12-21-2004           High     Low     Volume   Adv/Dcl
DJIA    10759.43 + 97.80 10765.27 10661.89 1.86 bln 2324/ 920
NASDAQ   2150.91 + 23.10  2151.71  2133.34 2.02 bln 2037/1120
S&P 100   573.36 +  5.56   573.46   567.80   Totals 4361/3040
S&P 500  1205.45 + 10.80  1205.93  1194.65 
SOX       424.40 +  5.00   424.91   418.42
RUS 2000  646.20 +  8.15   646.20   638.05
DJ TRANS 3792.09 + 61.20  3798.54  3730.04
VIX        11.55 -  0.28    12.00    11.37
VXO (VIX-O)11.52 -  2.09    12.23    11.35
VXN        16.94 -  1.27    18.35    16.58  
Total Volume 4,080M
Total UpVol  3,087M
Total DnVol    923M
Total Adv  4958
Total Dcl  2360
52wk Highs  460
52wk Lows    41
TRIN       0.68
NAZTRIN    0.63
PUT/CALL   0.79

While there is a new high celebration in progress on most of the indexes there were a couple not yet feeling the holiday cheer. The SOX continues to hold below resistance at 425 and well off the December highs at 453. The Nasdaq is still struggling with the 2153 level and is also under last weeks high of 2171.

Dow Chart

Nasdaq Chart

SPX Chart

Wilshire 5000 Chart

The markets had a lot to celebrate with Chain Store Sales rising for the second consecutive week with a +1.6% gain. The holiday shopping season is alive and well and with only two shopping days remaining until Christmas those gift cards are flying off the counter. Ironically stores cannot count them as sales until redeemed. It is unknown if you will buy an item with a 50% margin or a 5% margin so the money goes into limbo status until spent. I have not heard any complaints from retailers being forced to hold off accounting for the cash. The ICSC reiterated its estimate for holiday spending at only +2.5% to +3.0%. This is down from the +4.0% level last year but up from this November's level at +1.8%.

An economic negative the market brushed off today was the Chicago Fed National Activity Index at only +0.12. The index rallied in October to +0.49 from -0.23 in September but that rally appeared short lived. The three-month average is holding at +0.13. This index hit its highs back in early 2004 in the high 70s, low 80s and has been declining ever since. With the average holding at +0.13 we may be trying to put in a bottom and 2005 could see a rebound in activity. The pressure from high energy prices is creating a drag on the economy and this national index is proof. The real decline in the CFNAI did not begin until after July and the real escalation in oil prices began.

RIMM announced earnings after the close and beat the street by +3 cents at $0.58 per share. Despite this +450% jump in earnings and raised earnings guidance the stock was crushed in after hours trading. They raised earnings guidance to a range of 60 to 67 cents per share and analysts were expecting 62 cents. There were two problems impacting the stock price. Their revenue guidance for Q4 at $390-$410 million was below the analysts estimates of $412.5 million. New BlackBerry subscribers rose +387,000 for the quarter to over two million but analysts were hoping to see stronger growth. The stock was very active in after hours and was holding at $83 and dip support from last week.

The shell game in Russia over the new owner of the Yukos oil assets is continuing. There are so many players you can't tell who will be in the drivers seat from day to day. The Yukos asset, Yuganskneftegaz, was sold to a mystery bidder on Sunday for $9 billion with a true value of closer to $20 billion. This phony sale was done to legalize the eventual transfer back into Russian control. According to Russian investigators the mystery company, Baikal Finance, whose reported registration address turned out to be a café in a small town 125 miles from Moscow, may have been a front for Kremlin-backed oil company, Surgutneftegaz.

Surgutneftegaz chief Vladimir Bogdanov is perceived as Kremlin-loyal and could have obeyed government instructions to use his company's reported $8 billion in cash reserves to acquire Yuganskneftegaz - and ultimately transfer it back to Gazprom. Putin said today that the buyers of the Yukos asset would likely partner with another Russian energy company with interest in the oil. Analysts said this confirmed to them that it would eventually end up as part of the state controlled gas giant Gazprom. This is exactly where Putin wanted it, right back under Russian control with oil headed back over $50 again soon. I believe strongly that this is the first shot in the coming oil wars and has guaranteed a stable oil supply for Russia regardless of what happens on a global scale. They can now be independent of outside supply concerns and insulated from future high prices. I believe we will see further positioning in the oil sector very soon. With the permanent decline of global oil production looming in our near future we can expect further subtle changes in the playing field as 2005 unfolds. Make no mistake, this was a key move in setting up the global chess board for the crucial game ahead.

While Santa may be trying to tiptoe into town this week the bulls are stampeding. The Dow broke out to a new 52-week high and a new three year high at 10758. While the Dow had been lagging the other indexes for months the big caps have finally attracted the attention of the bulls. Only one Dow component finished the day in negative territory and that was JNJ at -0.12. Hardly a serious loss but just enough to keep it from being a shutout for the bears. For two weeks the Dow has been resting on support at 10650 and the final breakout today comes in advance of the normal Santa Claus rally period. That period is typically the last four days of the year and the first two days of the new year. I speculated last week we would see traders try to move into the market by midweek in anticipation of that year end liquidity rally. I was surprised by the strength of the big caps today given the weakness in chips and a lagging Nasdaq.

The Nasdaq has tried for a week to get back over its prior resistance high at 2153 with no success. We have traded over that level for extended periods twice in December but we just can't seem to maintain traction at the new highs. Part of this problem is directly related to the continued weakness in chips with the SOX stuck at 425. Even the bullish outlook by SG Cowen today on Dell could only provide a minor SOX bounce. SGC said there was unusually strong demand for PCs from the corporate sector with an sharp upgrade cycle in progress. I have mentioned before that the accelerated depreciation tax benefit that expires on 12/31 was going to have an impact on year end PC sales and it appears to be working. Still the Nasdaq closed at 2150, under the psychological 2153 level but poised for a takeoff if conditions warrant.

According to a report out from TrimTabs.com today the conditions are ripe for a major move. According to them money flows are stronger now than any time in the last ten years. The firm turned "leveraged bullish" or 200% long from "cautiously bearish" and 50% short. They were long since the end of October and turned short just last week. They said the market digested the three-year high in IPOs over the last two weeks with barely a pause and conditions going into the year end were very strong. They said new offerings would slack off until late January and stock buybacks were adding about $1.8 billion in cash daily. There were $20 billion in buybacks announced last week. TrimTabs also said insider selling typically slows in late December as blackout periods apply before the January earnings cycle. They expect fund flows in January to possibly surpass the $31 billion they took in last January. SPX 1300 was mentioned as a potential January target.

After that paragraph above it would seem as if Wall Street was about to be overrun with stampeding bulls reminiscent of the cattle stampedes in western movies. Helping provide confirmation is the VXO (old VIX) which closed today at 11.52 and a level not seen since 1995. Yes, 1995. For nearly ten years the 18-20 level has been a reliable sell signal with the last prolonged stint around 15 back in 1996. For nearly all of 2004 that 14-15 level has been the base but a complete lack of volatility over the last quarter has caused a collapse to today's low. While it would be a historical sell signal on the surface you have to take other factors into consideration. The TrimTabs numbers above expecting an extreme liquidity boost over the next four weeks is removing the fear from the market. We still have that Microsoft cash sloshing around the market plus cash from a strong flurry of takeovers. The Dow is at three-year highs and life is good on the surface for the bullish case. It is also the time when bulls should be the most concerned. Disaster always strikes the hardest when you least expect it. When everyone lines up on the same side of the boat it usually capsizes. I do believe we are going higher over the next two weeks. Fund managers are painting the tape as hard as they can to dress up those statements and earn those bonuses. This suggests the VXO/VIX can move even lower and every tick down is another warning signal that there will eventually be a reversal. Today's close at 16.94 on the VXN (Nasdaq VIX) is an all time historical low.

VXO Chart

VXN Chart

One factor that gives technicians cause for concern is volume indicator. For the three days prior to today the volume was very high, even extreme on Thr/Fri with Thr at 5.9B and Friday 5.985B and it was strongly weighted to the downside. While I believe this was due to the various index reweighting games it is still a caution. We really need a strong volume day to the upside to bring conviction to the market. I heard several analysts claiming today was lackluster but based on the internals it looked pretty strong. The A/D line was better than 2:1 in favor of advancers and volume was better than 3:1 in favor of up volume. Were it not for the drag from the SOX I suspect it would have been much stronger.

For the rest of the week the volume is expected to slow but all indications are the markets will move higher from here. With the SPX bouncing at our 1195 level we were using as a long/short indicator on Sunday everyone should be long tonight and hoping for a that TrimTab 1300 target to come true. The market is closed on Friday and we will be putting out the Sunday newsletter on Thursday night. While I doubt anybody will be reading it until Sunday it will be there and waiting for your viewing pleasure. I would like to take this opportunity to wish everyone happy holidays and a joyous time with your friends and family.

When boredom sets in over the weekend and your family has charged off to the mall to return all those thoughtful gifts you personally selected you can always spend the time registering for the End of Year Renewal Special.

Buy the dips until the trend changes.

Jim Brown
Editor

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