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Back From The Brink

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      12-28-2004           High     Low     Volume   Adv/Dcl
DJIA    10854.54 + 78.40 10859.04 10773.92 1.25 bln 2327/ 919
NASDAQ   2177.19 + 23.00  2177.19  2156.53 1.61 bln 2285/ 921
S&P 100   577.16 +  3.30   577.77   573.81   Totals 4612/1840
S&P 500  1213.54 +  8.62  1213.54  1204.92 
SOX       426.75 +  3.70   427.48   421.51
RUS 2000  654.57 + 10.23   654.60   644.34
DJ TRANS 3811.62 + 57.40  3811.62  3753.96
VIX        12.00 -  0.14    12.40    11.97
VXO (VIX-O)12.31 +  0.15    12.47    12.12
VXN        17.79 -  0.54    18.51    17.74  
Total Volume 3,039M
Total UpVol  2,095M
Total DnVol    877M
Total Adv  5183
Total Dcl  2208
52wk Highs  545
52wk Lows    34
TRIN       0.65
NAZTRIN    1.42
PUT/CALL   0.69

The earthquake depression that weighed on the market on Monday appeared to lift today with the market returning to the recent highs. The Monday dip had pushed the indexes back to support and right on the brink of a potential trend change. Strong Consumer Confidence and strong Retail Sales helped to bring traders back to trade but volume was still light. That volume will decline even further we near the end of the week and the year.

Dow Chart

Nasdaq Chart

SPX Chart

The holiday finished strong for retailers with a closing spurt of buying for a +2.7% gain over the prior week. According to ICSC-UBS, the people that prepare the weekly numbers, year over year growth surged +4.3% and the best gain since June. This was the third consecutive week of strong gains after a weak post Thanksgiving period. It appears the majority of buyers waited for the discounts to increase before releasing their grip on their cash. Higher gas prices could have weighed on consumers with gas up an average of 30 cents a gallon over the same period last year.

The biggest boost to the market was a jump in Consumer Confidence to 102.3 and well over the estimates of 94.0 and November's number of 92.6. Today's 102.3 was a five month high with gains in all components. The Present Situation rose to 105.9 from 96.3 and Expectations rose to 99.9 from 90.2. Those planning to buy homes, autos and major appliances also saw a strong bounce. Falling energy prices and a rising stock market helped produce the lift. A positive outlook on jobs also contributed to the gains. We will get the December Jobs report on January 7th and analysts are expecting more job gains.

The Consumer Confidence helped provide a boost to the market on a slow news day but it failed to produce any decent volume. This week is not known for strong volume but more of just a constant upward bias. With positive news all around it appears that trend could continue for at least the rest of the week. Let the tape painting continue.

SIRI fell back to earth today after Banc America raised its price target to $5.25 from $3.68 per share. This caused some sharp selling since SIRI was trading at $8.10 at Monday's close. 110 million shares were traded today. XMSR was also upgraded by Banc America with a price target of $44, up from $37. XMSR was trading just under $40 when the upgrade hit the street but fell to $38.86 at the close. Valuation concerns were the culprit after negative comments were made about SIRI. Both announced strong subscriber gains for 2004 with XMSR up to 3.1 million subscribers after starting 2004 with only 1.3 million. SIRI jumped from 260,000 to one million over the same period.

Amazon completed two amazing days of gains with a +10% jump from $39 to $44.62 after multiple upgrades and positive comments about sales patterns this holiday season. Bear Stearns upgraded AMZN to outperform on the belief that they are poised to benefit from the next wave of e-commerce. BSC raised their price target to $55 and upped their earnings estimate +3 cents to 44 cents for the current quarter. Amazon is expected to have sold $2.5 billion in merchandise during the fourth quarter. Amazon also said it had its highest volume day ever during December and was selling items at the rate of 32 per second. They said their watch shop has been selling more than a watch a minute since Nov-25th and its music store sold more than one million units a week for two straight weeks.

As strong as Amazon may be it is a distant second to EBAY. Previous Internet darlings AMZN, YHOO, VRSN as well as many other high flyers in 2000 are just a shadow of their former stock prices. EBAY however has more than tripled in the last five years and still climbing. EBAY is the only Internet stock that has created its own self sustaining support base. Hundreds of thousands of sellers now make a living on EBAY working out of their homes. Companies use EBAY to sell excess inventory and offer their core wares to a broader audience. EBAY recently said China, a strong growth market for them, would eventually surpass America as its biggest revenue producer. Europe has also turned into a strong performer. EBAY gained +3.30 today on the Amazon news and it is only $2 below its all time high.

The weekend earthquake shook our markets on Monday as some traders locked in profits while they waited to see if there would be any economic impact on the U.S. Once the news was fully digested the Nikkei rose to a five month high and that led a market rebound that followed the sun westward. Traders holding their breath after Monday's market swoon finally exhaled as the long awaited Santa Claus rally finally appeared.

The Dow rose to close at 10856 and completely erased Monday's loss. This is the third consecutive day the Dow has tested resistance at 10850 and today's move suggests there is a breakout ahead. Today's close was another new multi-year closing high and only 11 points away from its intraday highs for the year at 10867. Intel was the only Dow component that finished in the red. Caterpillar was the leader with a +2.37 gain and a breakout to another new high. There was speculation that CAT could benefit from the tsunami rebuilding effort.

The Nasdaq surpassed the Dow by posting a strong gain and surging to a new 3.5 year high and a close at the high of the day at 2175. This is a very strong move considering Intel was negative on the day and the SOX is still clinging to 425 with no hint of breaking that grip. The Nasdaq gained support from biotechs and from the Russell. The Russell fell off the planet on Monday dropping from a new all time high of 651.72 at the open to 642.84 on the morning dip. Today the Russell rebounded even stronger than before to close at another new all time high at 654.35, well over Monday's pre drop high. This gain was sparked by three strong buy programs and suggested funds were already putting end of year money to work or maybe just repainting the tape after Monday's drop.

The SPX also rose to a new closing high at 1213 but it is facing some serious overhead resistance at this level. If the SOX suddenly found buyers, which it may any day now, I believe the techs in the SPX would push it well over this resistance very quickly. Another factor holding the SPX back is the energy component which accounts for 8% of the S&P. Energy stocks have softened as we wait for the Wednesday crude oil inventories.

Crude has found support at $42 and has held at this level for nearly all of December. Wednesday's inventory numbers are expected to show a drop in inventory levels due to higher consumption from colder weather. I have not heard of any material oil disruptions from the earthquake region but those would not impact inventory in the U.S. for weeks to come. If there was any drop in production related to the disaster the speculators should have already picked up on it and prices have not budged.

For the rest of the week we can expect low volume and a potential upward bias. The year-end positions have already been established and funds will be holding their breath hoping the current levels hold for the next three days. There will likely be some tape painting as we near Friday's close but once those performance bonuses are locked in and the calendar expires it could produce a rocky week ahead. Funds with huge profits in some high flyers could elect to take those profits once the calendar year changes.

The worry for traders is the potential for some institutions to exit in front of this event. Offsetting the potential for profit taking should be the very strong cash flows into retirement funds over the next two weeks. It could develop into a question of who blinks first the bears or the bulls. The next big flurry of economic reports begins on Friday with the NAPM-NY, PMI and the Help Wanted Index. Monday has the ISM and kicks off a week of heavy reporting. All of these things should be overshadowed by the cash influx but we need to keep our eye on the potential potholes ahead. Until the trend changes we should remain long but with increasing caution. Watch the volume and the advance/decline line for clues to the real market strength.

There are only three days left in 2004. Don't wait until the last minute to take advantage of the Year End Renewal Special. Do it now! https://secure.sungrp.com/05renewal/

Buy the dips until the trend changes.

Jim Brown
Editor

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