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Begin Part 2 of 2

THE ECONOMY

Retail sales were up just 0.1% to 0.5% for the holiday season. Wal-Mart barely managed a gain. There were gains in specialty stores such as TLB, RSH, AEOS, and TOY, but it was obviously not across the board. This was expected, and if the Fed had not already moved, this would be another catalyst to cut.

Jobless claims just shot off the map, rising 16,000 to 375,000, the highest level in 2.5 years (back in 1998 when things were rocky). Claims were expected to come in at 350,000. The four-week average jumped to 352,250 from 347,000 (revised) the previous week. Remember last week when the claims dropped more than expected? We said it was smoke and mirrors because the states turned in estimates; true to form, the actual numbers were much higher. This was a big jump and another reason to cut.

December job cuts tripled to 133,713. This is the fourth time in the history of the report that it has surpassed 100,000.

Good new: factory orders were up 1.7% versus expectations of a 1% rise. Still, it does not offset October's 4% drop.

Summary: Things are not good. Moreover, rate cuts will take a long time to actually put money back into the economy. It is not overnight. This is one reason why we need to push all of our congressmen to vote for meaningful tax cuts as the second part of a needed economic plan. It is not just for economic recovery from the current slowdown, but it is needed to put money back into investment in technology to patch up that sector so we can further our lead in that arena for the future. We won't be the leading consumer nation in 10-15 years. Consumers will be from Asia and South America. We need our technological lead to maintain our economic status and standard of living; that will be our commodity to sell to all of those consumers. Paying down the debt does not put cash into the economy; it is an illusory benefit couched in terms of lower interest rates. History shows that lower taxes lead to lower interest rates, not lower debt levels. The tax increases are sapping the economy of needed money to advance our technological edge, our one great resource that has come out of the last twenty years of expansion. We need to put a full court press on our elected officials for the full tax cut, not just a token cut to appease the masses.

THE MARKETS

The Fed changed the landscape, but as we know, we still have to watch and see how things shape up before jumping headlong into the market. There are still earnings reports to come which will be a drag on some stocks, but the leaders will show good earnings again. That will help. We will look for a high volume confirmation and lots of buying starting Monday. That is no guarantee, but it has been a historical requirement of a strong move up. Still, we are averaging into positions on the leaders and we are playing solid-looking stocks. That way we can take advantage of quick moves up and get great prices on stocks we have wanted to add to or build new positions in.

Overall market stats:

VIX: 29.96; +1.29. Below the 30 level, but still showing some healthy skepticism after a massive 5-point drop on Wednesday's rally. We want to keep that wall of worry going.

Put/Call ratio: 0.55; +0.07. Rising slightly, but it never made that closing high of 1.0 or better. It may have been heading that way on Tuesday and Wednesday before the Fed stepped in as the markets looked ready to test 2000 this week.

NASDAQ: Sold down on high volume, but most of the stocks we looked at did not sell on higher volume. We saw telecoms and other techs moving up on higher volume. Overall volume was lower as well. That is fine for now, but we want to see things move up.

Stats: Down 49.86 points (-1.9%) to close at 2566.83.
Volume: 2.615 billion shares (-15.5%). Lighter, but still strong, above average volume. 1.152 billion shares to the upside versus 1.425 billion to the downside.
A/D and Hi/Lo: Advancing issues still topped decliners 1.22 to 1 (3.1 to 1 Wednesday). New highs rose to 92 (+32) while new lows fell to 47 (-104). We like the fact that advancers maintained their lead and the fact that new highs continued to rise and new lows continued to fall on a down day in the market.

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

Holding above the down trendline it just broke, holding above its 10 day moving average. The candlestick chart shows a loose doji, and that can signal a change of direction; with the huge gain on Wednesday, however, it is difficult to read a loose doji as some profit taking is expected. For now we have a strong move off of an intraday 52-week low, and we are waiting to see if it can move up to challenge the down trendline at 2745.

Dow/NYSE: The Dow fell to some profit taking today as well, but the volume was another record, topping 2 billion shares. That is not good news, but again, much of the selling was rotation out of defensive sectors on high volume while other stocks sold on lower volume or rose on higher volume. Money appears to be shifting to different sectors, not leaving the market.

Stats: Down 33.34 points (-0.3%) to close at 10,912.41.
Volume: NYSE volume hit yet another record at 2.110 billion shares (+12.1%). Up volume was 990 million versus 1.089 billion to the downside.
A/D and Hi/Lo: NYSE advancers continued to lead by a reduced margin (1.17 to 1; Wednesday was 2.94 to 1). New highs fell but were solid at 272 (-45) while new lows fell to 7 (-24).

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

The Dow tapped 11,028 on its high, a level that represents resistance for the index and one that it tapped at on Wednesday. It did manage to close at 10,912.41, a level that acted as resistance in September, October and December. That is pretty good support.

S&P 500: The 500 big caps ran up to the 50 day moving average on its high (1350.24) and turned back. It was able to land at 1333, right at a possible support level in the 1335 range. The index really needs to break the down trendline at 1350 to make a serious run at further gains.

Stats: Down 14.22 points (-1.1%) to close at 1333.34.
Volume: NYSE volume set another record at 2.110 billion shares (+12.1%).

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

FRIDAY

The big pre-market news will be the employment report. Unemployment is expected to tick up to 4.1%, etc. We will all know an hour before the market what it is and what the bond traders and pre-market traders make of it. Barring any nasty surprises we cannot think that the report will be a real negative impact on the day's trading: the economy is slowing, the Fed got what it wanted last summer. This is a lagging indicator anyway; we already know what has happened. The concern is what the future holds.

The future. Despite the negative comments on the television from the experts, we think history will repeat itself. It has done so every time the Fed steps in. The 'this time it is different' line we are hearing out there doesn't phase us. Names change, sectors change, but the facts are the same: economy great, stocks performing superbly, Fed raises rates to chase inflation, stocks tank, economy tanks, Fed cuts rates, stocks start to recover, economy starts to recover. As we have said over and over, it won't be all roses because the economy is still slowing; one rate cut does not magically create money in the economy. It makes it easier to get, but companies don't just run to the teller and start withdrawing large amounts. They have to size up when the upturn could start, how they should plan for that, then actually take action. That takes time. There are market setbacks such as low earnings ahead of that.

We don't know if the Fed acted fast enough to prevent recession, indeed, we won't know until much later. What we do know is that the Fed is acting aggressively to reverse what is currently going on in the only way it can. The federal government needs, with our help, to keep focused on what is important: the economy and what makes it work. Paying the debt down does not make the economy work better. A strong economy makes the economy work better, and the fastest, surest way to get that happening is to let citizens and corporations keep more of the money they make so they can produce and consume. The Fed can lower interest rates if needed; we don't need a lower debt level to do that. Let's not lose sight of the ball: Congress wants a surplus so it can spend it on pork. History shows that the government is inherently and pathetically inept at efficiently allocating resources. Might as well take the money and burn it.

But we digress. Tomorrow we will continue to look at those sectors and stocks showing real signs of life and money flow, those stocks that we want to own long term and continue to take opportunities to average into, those pre-announcement splits that are coming up, and pre-splits, post-splits and continuing candidates that look solid. We are averaging into several stock and option positions. With options we buy a few contracts, then add a few more when the stock pulls back on a healthy pullback, and then some more when it turns. We are often profitable when we do this before the stock returns to the price where we started buying. That is cool.

So for now we remain excited about the future, but with earnings coming up we have to be cognizant of our sell points on those stocks we are not averaging into long term and our shorter term option plays. We were selling some covered calls on long term holdings yesterday in anticipation of some profit taking, and we will look at closing those positions if things look stronger. Tonight Nasdaq futures are up about 7 points, meaning anything can and will happen by morning, namely the employment report. If that is a non-event, we could get a nice rally going after what was a rather nice, quiet day today. Or we get some more profit taking. After a massive move that came on a change of policy, the trend is positive, but the interim period has to iron out the bumps. We approach it both ways: picking up breakouts and other good moves on a rally, and averaging into some more positions on selling. As always, keep an eye on volumes. We don't want to see selling on heavy volume; if we do, we hold off averaging in until things start slowing down as higher volume selling usually means more selling immediately ahead.

Support and Resistance Levels

Nasdaq:
Resistance: Some at 2600. The big point ahead is the down trendline at 2745.
Support: 2200 down to 2000.

S&P 500:
Resistance: The down trendline at 1350 and previous resistance at 1360.
Support: 1335 is some support. 1270 is possible support. 1254.07 is the 2000 low.

Dow:
Resistance: Still holding above 10,900, and still needs to beat 11,020. After that, 11,400.
Support: 10,900 should act as some support. Then 10,600 and 10,300. After that, 10,000.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

1-4-00
Initial jobless claims (8:30): 350,000 versus 333,000 prior.
Factory orders for November (10:00): 1.0% versus -3.3% prior.

1-5-00
Non-farm payrolls for December (8:30): 133,000 versus 99,000 prior.
Hourly earnings for December (8:30): 0.3% versus 0.4% prior.
Unemployment rate for December (8:30): 4.1% versus 4.0% prior.
Average workweek for December (8:30): 34.3 versus 34.3 prior.
New home sales for November (10:00): 925,000 versus 928,000 prior.

TEAM TRADES

ORCL: Made a strong move Wednesday, closing at the top level of its ascending wedge. We figured the support would hold until the market rallied again, since the stock had been in a decent-looking wedge. We are looking for a decisive move up in its base.

Opened at 31.56 and ran to 33.25 by 8:45 (CT) on good volume, but then pulled back with the rest of the market (the Nasdaq was moving up and down between positive and negative territory), but the stock was holding support as we figured it would. By 9:42 it had formed a pretty decent-looking intraday pennant, and had bounced off the 15 minute MVA twice already, and looked like it might to do the same here. The Nasdaq was down to -26, though, so it looked it could easily be a holding pattern until that turned up. ORCL held steady at 32.25 by 9:44. Volume was still looking good at 22.7 million (closing volume previous session was 7.6 million), though it had been tapering down since just before 9:30.

The stock showed a doji in the next minute with the Nasdaq down only 3 points, and ORCL moved up from there. The stock tapped 32.44 a few times, pulling back on the low volume, though. It looked like it really wanted to move but the low volume was holding it back. If the Nasdaq crossed over its 5 minute MVA we might be in business. Options were trading at 8 by 7.50 (March 27.50, which had a delta of .742). ORCL broke above 32.44 at 9:50, and we decided to enter with partial positions. We put in a bid at 8 and got hit in the next minute as the stock hung at 32.38-32.50. Looked like it was going to be a lower-volume pullback day. If we got in now, that would be good on a turn back up when the market rallied, and we could always average in a bit more on some selling.

We had to leave the computer for a while, and put in a stop loss on the options at 25% below our buy point (at 6). Upon our return, ORCL was holding at 32.25 (at 2:39pm). We are holding the options for now, because of the market's pullback on lower volume (still above average, but can hold support around 2500). ORCL is in good position for a move up on stronger volume, closing at 32.56 on lower volume at support.

EMLX: We averaged in on some more April 75 options at 22 when the stock bounced at 77 after hitting a morning low of 75 in the first half hour. When the stock touched 77 and turned up, we felt that might be a good rally point for the day. It did rally, but it sold off in the last two hours, so it held above our entry point. Averaging down as this stock waits to break to the upside big time.

Good Investing!
Jon Johnson and the Tech Traders Report Staff.

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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