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1/11/03 Technical Traders Report
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Technical Traders Report Subscribers:

MARKET ALERTS
Targets hit alerts issued Friday: ADTN; MSN
Buy alerts issued: ROK; DBD
Trailing stops issued: None issued
Stop alerts issued: None issued

You can sign up for Technical Trader alerts at the following link:
http://www.investmenthouse.com/alertttr.htm

SUMMARY:
- Market fights off 'weak' non-farm payrolls data, showing some guts it did not have earlier in the week.
- Jobs report is lagging and market discounts it accordingly.
- Economic package is a step toward tax reform.
- Close to an important break but just not there yet.
- Subscriber Questions

News turns negative again but the market shows some moxie.

You would have thought the end had come based on the somber faces on CNBC after the non-farm payrolls numbers were released. As usual the angst was somewhat misplaced and the discussion was hit and miss. One anchor even said unemployment rose based on the non-farm payrolls decline (this despite the fact that the unemployment rate held steady at 6%). In short, it was gloom and doom over a lagging indicator.

Fortunately the market does not heed the noise coming from the news desk and after a quick drop rallied back and managed to hold on for a positive close for the session and the week. It was not a banner session from the gains or the volume, but Nasdaq held onto the 200 day MVA and the SP500 held above 925 on the close. They are in position to move higher, but they have not broken the chains of that resistance. After the surge on some new money being allocated at the first of the year helped drive stocks higher, will they be able to make more tracks higher or just fizzle. Earnings this week will provide some answers as the likes of INTC, IBM, YHOO, EBAY and MSFT talk about the future. If they cannot provide some inkling that the future is now as far as business improvement the market will be subject to some short term upset.

THE ECONOMY

Retailer pessimism keeps non-farm payrolls in the red.
The overall unemployment rate held at 6% in December but there was another loss in non-farm payrolls of 101K, the biggest drop in 10 months. That was on top of a November revision to -88K from -40K. Clearly there is no job creation yet, somewhat signaled by the weekly jobless claims that are still in the trough during the bottoming process and the continuing claims that are stubbornly hanging on. But the numbers were terribly skewed by how they are tallied.

Retail supposedly took the worst hit, dropping 104K jobs during the critical December holiday period. Or did it? No, retail employment actually added 162K jobs during the holiday season as you would expect. Because that was lower than the norm, however, the 'adjustment' rules counted it as that 104K loss. Another instance of where the screwed up way the government tracks numbers took a 160K gain and turned it in into a 100K loss, a 250K swing. And people wonder why we rave about government intervention. This is just one example of how convoluted government processes get when it starts correcting for this and accounting for that as it tries to help but is simply unequipped to do so efficiently. Would a private sector company have any customers accounting for data this way?

Even with this report that CNBC styled somewhat overdramatically as 'shockingly weak' the floor traders and the market took it in stride. An early sell off was met with buyers. Why? Because the employment report always lags the rest of an economic recovery, and they had the real figures about what the real numbers were. Fund managers still see a recovering economic picture based on other more leading reports and there will also be more economic stimulus of some form. The market, as usual, is looking ahead not behind.

Will an economic package get passed?
You cannot turn on a financial station and not hear every 10 minutes some special report or update on whether the Bush economic package will be able to pass. 80% say it cannot. Even republicans such as McCain of Arizona say it will face trouble. McCain likes to be styled a maverick, but many feel that is just a euphemism for a failed presidential candidate that is trying to exact his revenge against the party that said it did not want him as president. The ink was not dry on the economic package press release when McCain was on TV saying it would have trouble passing and that 'he' was disappointed because 'he' wanted a payroll tax holiday. Instead of working with the system to get it incorporated he runs to the microphone to grab headlines. Then there is the opposition. Shooting the economy in the foot? A bit melodramatic, eh Senator Daschle? It is no wonder only 9% in a nationwide poll said they trusted what you said. Repeat this about 98 times for the other senators and you have the picture of the grandstanding that major economic packages evoke.

There are also comments about whether double taxation elimination on dividends is necessary now given the economy and the 'cost' of tax cuts. Most everyone agrees it is a good idea, but there are those wanting to hold up the process using that 'cost of tax cuts' argument we discussed last week as well as the 'help the rich only' class warfare argument. This is despite the fact that 50% of dividends are paid to individuals making $50K per year and many, many of those are seniors on fixed incomes that own dividend paying stocks solely for that income!

It is said that there is nothing worse than a reformed anything. Well there is. That is a reformed person that is also ignorant or is reformed only in name. As to the latter, this talk of deficits and fiscal responsibility rings very hollow given that Congress has yet to offer one penny of cuts from its bloated budget. With spending debacles such as the INS and its 98% fraudulent assistance rate and the undoubtedly hundreds if not thousands of other such examples (e.g., NASA's $9 million bill for personal cell phone use), it is the height of arrogance and hypocrisy to refuse to streamline agency budgets and program budgets as an alternative to requiring the U.S. taxpayer to pay the same or more in taxes. It is like a child coming to its parents for more allowance after the child squandered his savings on comic books and soda pop while not even doing do his chores as required in order to receive the allowance. Clean up your own act Congress before you come to us crying for more money or saying we are not entitled to keep more of our hard earned money. There is a tax revolt already underway, and if this keeps up, it is going to get worse.

As for the reformed ignorant, I once had an instructor who taught me a simple truth: if you educate an idiot you have an educated idiot. There are a lot of born again (born anew?) deficit hawks who don sackcloth and ashes over the threat of rising deficits. They say if you cut taxes that will have a dollar for dollar negative impact on tax receipts and ultimately raise interest rates. This static, bean counting view of the economy is so massively misguided it would be laughable but for the fact it costs us billions in wasted government expenditures and lost economic output. Pick up a remedial economics textbook and at least become an educated idiot. Ever heard the phrase you have to spend money to make money? Or on an even more remedial level as some in Congress seem to require it, how about the children's jingle about the magic penny that if you hold it, it does nothing, but if you lend it and spend it they become so aplenty they roll all over the floor?

The point: tax cuts generate more economic activity and that leads to even greater tax revenues. That means you have businesses making more product and selling more product. That means businesses taxable income rises. That means more money in the Treasury. As 70% of the businesses in the U.S. are small businesses, don't try to argue about corporations paying no taxes. That is ridiculous as most businesses are sole proprietorships, S corporations, and closely held C corps. The former two pay at the individual tax rate. Second, if the economy improves, jobs are created and more people go back to work. What happens then? Their wages are taxed. More people working means more dollars to tax. That means more money into the Treasury.

Given the current tax rates, the reductions proposed would result in an increase in economic activity and thus tax receipts easily in excess of the amount (or as some would erroneously put it, the 'cost') of the tax cuts. This is known as the Laffer Curve principle, and it was proved during the Reagan years when taxes were slashed and revenues soared. There were still deficits because for every extra dollar brought in, $1.35 was spent. After the fall of the USSR and no more cold war, the extra money generated in the long economic boom became the surplus.

Don't underestimate the American public.
All of this media hoopla about the ability to pass the economic package in our view is once again underestimating the President's ability to get things done and the American citizen's desire to take more control of his/her future without government intervention and hold the federal government accountable for its spending. Poll after poll thus far has shown overwhelming support for the economic proposal. Some of those against portions of it have valid alternatives that should be considered. Others are just promoting the same redistributionist dogma that would make the drafters of the Constitution dry heave. Most U.S. citizens would and do gladly help those who cannot help themselves, but chafe at being required to support those who choose not to help themselves. Does anyone you know give to a charity that supports those who choose to sit on their butts versus trying to help themselves? Of course not. Yet that is what many programs our federal government devised and funds unintentionally do.

This economic package is more than a growth package. It is a package that is the start to untangling the mess that has been created through years of good intentions gone awry. It is designed to help further empower the individual by giving him more control of his money and to thus make better decisions according to his own ideals. It also makes the federal government make do with what it has without coming to the overtaxed citizen to pay for bloated, inefficient, and even unconstitutional agencies and programs. It is a start back on the path of individual freedom, a path to investing in the U.S. and the ingenuity and drive of our citizens. There was not an income tax until the 16th amendment was passed in 1913. Our forefathers did not want an income tax because as one Supreme Court Justice put it, the power to tax is the power to destroy. Our freedom was founded on ideals that as a beneficial result allowed us to prosper both spiritually and economically. Giving money back to our greatest resource, the inventive, industrious, and ingenious U.S. citizen, is an investment in the greatness of the U.S. It cannot be wrong to require government to streamline while allowing the U.S. citizen to keep more of what he makes to invest back in this great nation.

It is time to bombard our senators with support for this package. We should throw in that we need some tax credits and also would support a payroll tax holiday IN ADDITION to what is in the Bush plan. We were able to help get the last package passed and if we call and fax (emails are okay, but faxes seem to work better) our senators in ALL states it makes a huge difference. They see polls and the support for the plan, but what speaks loudest are constituents blaring in their ears. Those are real votes that they can either have in the future or toss away. Remind them of that.

THE MARKET

No barn burner but the market exhibited some new found strength in overcoming bad news from the employment report and North Korea's 'you made me be bad' excuse for withdrawing from its nuclear treaty. Seems the U.S., by insisting that North Korea abide by its agreements, has forced North Korea to not abide. It is totally screwed up logic (a.k.a., illogic), but that is how the outlaws play the game and why they are treated the way they are. We would love for them to be responsible world citizens, but they are so out of touch with the rest of the world that they cannot be dealt with on a level of trust.

But I digress. The point is the market showed something it did not earlier in the week, i.e., overcoming some bad news and managing to rally back and hold important levels. It was a fight to simply do that though the market did show decent though not great price/volume action. It was up on rising volume and down on lower volume for the most part, and though up volume moved back above average levels it was not the surge that would indicate the majority of institutions were in there buying.

That leaves the market in decent shape to start the week. The Nasdaq is again over the August high, now making its second week to close over that level. If it continues that would spell the end of the long downtrend as it logs some higher lows and higher highs. The DJ30 and SP500, however, have yet to make over their August highs even once yet. They have to do that, and the overriding issue in that regard is the start of earnings. Alcoa delivered a downside surprise last week and investors need to see something better out there this week in guidance from Intel, IBM, MSFT, YHOO, etc. We think they will be hard-pressed to say things are improving.

Still, many semiconductors look quite solid, showing the same 'building patterns' they did in November. That holds quite a bit of promise along with the fact that there were some more breakouts last week as well as leading stocks resuming their moves higher. Much will rest on the earnings that are going to come out in force starting this week, but the market is set up to take advantage of any good news.

Market Sentiment

VIX: 27.13; +0.25
VXN: 42.28; -0.71

Put/Call Ratio (CBOE): 0.75; +0.01

Nasdaq

Moved further over the 200 day MVA and the August high on continued above average volume. Constructive, but needs support from its friends.

Stats: +9.26 points (+0.64%) to close at 1447.72
Volume: 1.656B (-1.93%). Remained above average but was lower. No major buying Friday.

Up Volume: 1.217B (-249M)
Down Volume: 406M (+196M)

A/D and Hi/Lo: Advancers led 1.2 to 1
Previous Session: Advancers led 2.36 to 1

New Highs: 82 (-22)
New Lows: 22 (-5)

The Chart: http://www.investmenthouse.com/cd/$compq.html

Tech stocks closed a 4.4% weekly gain by putting more distance between it and the August high (1427) and the 200 day MVA (1434). Nasdaq has broken the string of lower lows and lower highs, closing above the August high for the second time. While that is a positive, there has been no surge in buying to accompany the move, just steady increases on decent volume with mostly good price/volume action. It is still not far enough away to resist the gravitational pull of those levels nor to use the 200 day MVA as a support point. You want to put some distance between you and that level so you have some maneuvering room on any pullback. With earnings coming up and the initial surge of buying on some new money allocation into the market, Nasdaq may not get that cushion it needs. Still, several chip stocks look just as the did in November before their nice runs, i.e., breaking through a key resistance level, testing it, then starting back up. KLAC, NVLS, ALTR, XLNX, AMAT are examples of this, and these provide the same kind of 'building patterns' that Nasdaq can use as a foundation for a move higher.

S&P 500/NYSE

Closed perfectly flat on continued above average volume. Not a bad comeback, managing to hold over 925.66, the early November high.

Stats: 0 points (0%) to close at 927.55
NYSE Volume: 1.476B (-2.54%)

Up Volume: 848M (-443M)
Down Volume: 614M (+380M)

A/D and Hi/Lo: Advancers led 1.07 to 1
Previous Session: Advancers led 2.43 to 1

New Highs: 91 (-43)
New Lows: 18 (+7)

The Chart: http://www.investmenthouse.com/cd/$spx.html

The large caps were in a fight, hitting 917.66 on the low, but still holding well above the 909-911 point marking the July, August and September interim highs. It rallied back to close flat, but still holding above the early November high at 925.66. that is a positive, but it does not put any distance between it and that level. A run to the 200 day MVA at 950 would have been preferable to give it some 'pullback room.' It is working on breaking upside, but it is a struggle.

DJ30:

The blue chips ran up over the early November intraday high (8800; 8818 on Friday's high) but could not hold that level. Still, they again held over that closing high (8771.01) as the blue chips fight to break up the head and shoulders pattern. It is receiving help from its technology components to make the move it has; that is huge as MSFT, INTC and IBM announce earnings next week. If the news is good enough it can run to the 200 day MVA (8935) to 9050.

Stats: +8.71 points (+0.1%) to close at 8784.89
Volume: 1.476B (-2.54%)

The Chart: http://www.investmenthouse.com/cd/$indu.html

End Part 1 of 3

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