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       WE 01-07        WE 12-31        WE 12-24        WE 12-17 
DOW    10603.96 -179.34 10783.3 - 43.82 10827.1 +177.20 +106.70 
Nasdaq  2088.61 - 86.16 2174.77 + 14.15 2160.62 + 25.42 +  7.13 
S&P-100  566.38 -  8.64  575.02 -  1.04  576.06 +  8.67 +  1.89 
S&P-500 1186.19 - 25.46 1211.65 +  1.52 1210.13 + 15.93 +  6.20 
W5000  11648.89 -323.90 11972.8 + 38.98 11933.8 +150.45 + 91.38 
SOX      407.56 - 25.72  433.28 +  6.85  426.43 +  2.68 +  1.00 
RUT      613.21 - 37.87  651.08 -  1.71  649.37 +  7.29 +  9.84 
TRAN    3636.78 -160.56 3797.34 +  9.56 3787.78 + 36.71 + 65.04  
VXO       13.85           13.58           11.23           12.71 
VXN       19.15           18.37           16.80           18.21 

It has been a long time since funds have seen cash outflows in January. For the week ended on Wednesday $3.7 billion flowed out of U.S. funds. $3.1 billion flowed into funds that invest internationally. $1.3B also flowed into bond funds. If we see this same ratio of fund flows next week it could be a real change in direction for investors. If the majority of fund inflows continues to head for international funds the U.S. markets could experience further withdrawal symptoms. This resulted in a very rocky start to 2005 but the biggest damage was not done by withdrawals. The damage was simply profit taking. That profit taking should be over and beginning next week it will be fund inflows that give us direction.

Dow Chart

Nasdaq Chart

SOX Chart

The Jobs Data came in just right and exactly where traders wanted it at +157,000 jobs. This was less than the consensus but still a decent gain. This was market neutral and traders hope Fed neutral as well. The November number was revised upward to 137K from 112K and the October number was revised up to 312K from 303K. This was a net gain for the day of +191,000 jobs and gave us a total jobs gain for 2004 at +2.2 million jobs. This was the biggest gain in five years. The gains for the month were still less than the consensus and the bond groupies were able to relax slightly with the Fed more than three weeks away. There is a positive trend towards the creation of better paying jobs as professional and technical categories continue to post better gains than the retail and hotel businesses. With job gains for 2004 at 2.2M it puts us back at 1999 pre recession levels after 46 months. Normal recession recovery averages 22 months but normal recessions don't come after Y2K Internet bubbles with the largest terrorist attack in history in the middle.

This market neutral report should have given the bulls a reason to celebrate but they may have been knocked off balance by a serious case of sticker shock. When the news initially hit the wires someone reported that the November jobs had been revised to 312K. In reality it was October being revised to that level for a gain of +9K. On the surface it appeared initially that it was a November number which would have been a gain of +200,000 in November plus the +157K in December. The bond market went crazy and there was a huge spike/dip in the equity futures that blew out stops in both directions in a 10 point range on the S&P. The range in bonds was a full two points and something that is nearly unheard of in only several seconds of trading. Those bond traders that blew out positions when it appeared jobs had exploded found themselves on the wrong side of the market when the news was clarified. There were huge amounts of money made and lost in just seconds as the electronic markets reacted to the conflicting news and stops were triggered in both directions.

This sticker shock may have cooled any real interest to rush into the equity market. However, it does appear they are willing to enter at the right price. After some strong volatility at the open a strong sell program hit the markets at 10:00 and knocked the Dow back to 10571 and the Nasdaq to 2076. Buyers immediately appeared and pushed the indexes right back to their opening levels or higher. Even the SOX rebounded +11 points from its 401 support low. The rebound had all the appearances of a V bottom liftoff but resistance held across the board.

The Dow rebounded to 10650, the Nasdaq to just over 2100 but they lost traction once again. The highs of the day were seen at 12:30 as a result of the rebound but there was a steady bleed the rest of the day. All the indexes except the SOX closed in negative territory once again with a strong flush cycle in the last 15 min. The Russell was the hardest hit once again dropping back to 613 and an 8-week closing low. Both the Dow and the Nasdaq have held at their 25% retracement points for the last two days. This is a logical place to pause and could be a launch point if the funds quit selling.

Where is this craziness going to stop? I have two possible scenarios. If next week was going to be positive I would have expected a little bullishness at the close in anticipation of a rebound. There was obviously no bullish bias after 12:30 and there was almost no attempt to buy the dip in the last 30 min. This suggests the selling may not be over. Even the shorts failed to cover and that leads me to believe they see more downside ahead.

The second scenario revolves around the closing flush. As a fund manager tasked with getting rid of a certain amount of stock this week to capture profits and get ready to rebalance the portfolio for 2005 the time was expiring. With the sharp drops early in the week there may have been some funds waiting on the bounces trying to maximize their gains and hoping for a bounce on volume to help them unload. With progressively lower highs all week those sellers had to keep lowering their ask as the price ran away from them. When it appeared the day was going to expire without a closing bounce they rushed to clear the remaining orders so they could switch to the buy side for new positions next week. This may sound over simplified but until you actually sell the winners and convert them into cash you really don't know how much cash you have to spend. That projected number has been shrinking all week with the drop in the market.

I favor the second scenario but I am concerned about the lack of cash inflows. As I reported above Trimtabs said U.S. funds had outflows for the week BUT they did report inflows on Thursday. We will not know about Friday until next week. If the tide has turned then next week should begin the normal liquidity bounce.

The talking heads on stock TV have been making a big deal about the drop for the week. I believe that we have only done what is normally expected. The Nasdaq normally corrects -5% in January. The -115 point drop from the Monday high at 2191 to today's low at 2176 was -5.2%. If we are going to have a "normal" bout of profit taking then we should stop here. I agree we did not have a normal Q4 and gained much more than expected. That could easily mean we should correct more as well. A -10% correction would take us to 1975 on the Nasdaq and a reversion to seriously oversold. I do not expect that but it is possible. That would undoubtedly take the Dow back to 10425 and very strong support as well.

To assume we are going to take that dip you have to believe the market bias is changing. We are still in a cyclical bull market and this is January. TrimTabs has not changed their estimate for $31B to flow into the market. That will float a lot of stocks from what could be considered bargain levels at today's closing prices. The arguments for that change in bias are rising rates and slowing earnings. After Friday's jobs numbers most doubt the Fed will depart from its measured pace of increases. No real harm there. Earnings are likely to slow but until we get past the next couple weeks we will not know to what degree. I believe it is too soon to be exiting the equity market and from the drop in treasuries on Friday they are not rushing into bonds.

I believe the SOX may be giving us a leading indicator of market direction. After four days of strong selling in the chips there was a strong buy program at 10:45 that pushed the SOX from 401 to 412. It would take a lot of money to push the SOX that hard and the big money is seldom wrong. There were several attempts to sell it off but support held until the last 10 min. Chips normally lead the Nasdaq and this could be a sign of coming times. Intel will announce earnings on Tuesday and I doubt anybody wants to be short chips going into their announcement. There are numerous reports that PC sales gained speed going into late December and most analysts are expecting Intel to report good results.

That brings us to another point. The entire earnings parade begins next week and will ramp up to full speed the following week just as the fund flows are expected to peak. Where we go after earnings is anybody's guess but I am going to be real surprised if we don't move higher over the next week. Of course an Intel miss could erase this entire train of thought.

The first week of January is history and when measured by the various historical statistics the outlook is not good. Since 1950 there have been 34 years where the first week of January was positive. 85% of those years the markets finished with a gain for the year averaging +14%. In the 20 years where the first week was negative only 50% of the time did the market finish higher for the year. On the surface this would appear the odds were stacked against the bulls. However, since 1890 there has NEVER been a year that ended in five that finished in the red. There is something about mid decade cycles that favors the economy and the bulls.

Just to show I try to present a fair and balanced view the Nasdaq just finished its worst week since 1991. There have been fund outflows from tech funds for the last seven consecutive weeks. Before that there was a string of eight weeks of outflows despite the Q4 rally. The bears would look at that as a glass half empty but the bulls are thinking half full and it must be about time to put money back into techs. Next week will prove which view was correct.

Oil briefly topped $46 again on Friday after it was reported that three Chinese oil firms are trying to buy a stake in the Alberta oil sands in Canada. Let's see if my geography is correct I don't think Canada is anywhere near China. If you continue to connect the dots of Yukos, China's CNOOC rumored $13 billion bid for Unocal, joint Russian/China military exercises and the attempt to lockup reserves in Canada I think you will eventually get a picture of a coming oil shortage. Just a hunch but the more you study the subject the more these moves seem to suggest long term consequences.

For next week any further drops should be confined to Monday/Tuesday and any weakness after Tuesday negates the entire bullish scenario. If we do dip again on Monday I would still be a dip buyer as long as we stay above Dow 10425 and Nasdaq 2000.

Jim Brown

"In the old days people quit spending when they ran out of money"

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