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Breakfast with Brodsky


If Monday's action wasn't a classic textbook sell-the-news I don't know what is! Yesterday I had written that it did seem a bit farfetched that we would rally 2%, even 3% like the Nikkei did. Instead we opened at new 52-week highs in the S&P and Dow and quickly sold off and grinded lower all day, ultimately closing on our lows. I don't think this is as much a negative as people may be making it out to be. Why you ask?

First of all, we never sold off on BAD Iraqi war news so why would we rise on GOOD news? Secondly, yesterday's action allowed us a glimpse into what cards everyone currently holds. It is quite clear that more people were long than short yesterday and in my mind that is why we fell. Beginning last Wednesday the S&P rallied from 1053 to 1083 (yesterday's opening tick) washing out most of the short-term short money. So what's the current picture? Enough about the past!

Overall, I still believe the market is in an up trend and where the consumer may fail to carry us further on, it appears that corporations may be ready to open those purses and spend money on Information Technology. Until we get hardcore proof of this I think the tech market may be capped in the near term.

We are starting to see a minor pick-up in M&A as both EMC (EMC:NYSE) and Checkpoint (CHKP:NASD) announced acquisitions yesterday. We also saw Henkel purchase Dial (DL:NYSE) for $2.9 Billion which was one of the largest deals in recent months. Is this going to be the trend? Are European companies going to take advantage of a robust Euro and begin to scoop up US companies? Bottom line, we need to see a major pick up in IT spending or more M&A to justify these valuations. Think about it. Are you going to be purchasing companies for your portfolio that are showing no signs of continuing health? That are relying on cost cutting to improve their balance sheet? Or a company that is relying on a consumer base that has the highest personal debt values in history? I don't think so. There was a time and place for that and it was spring and early summer of 2003, and how many of us can say we bought it. Not many!

To quickly sum up my thoughts, it is clear that people are more long than short after witnessing yesterday's action. There are also two weeks left in the year and I doubt that any heggies want to risk performance at this point in the game by taking unnecessary risks. In addition, if we look at the stocks that did outperform yesterday we will find many high priced Dow components. Caterpillar (CAT: NYSE), Proctor& Gamble (PG: NYSE), and 3M (MMM: NYSE) finished the day in the green and one look at the charts and it is no surprise why. After months of steady ascent I would doubt that any big vanilla holders would let these stocks give back gains so close to year's end.

A short-term examination of the S&P shows that yesterday's close represents a 50% retrace from last Wednesday's (Dec. 10) low and yesterday's highs. Certainly something to keep an eye on. We have fallen back into the 1060-1070 range and in my opinion, those are the levels to pay attention to for now. After a month of strong gains in the Dow we may experience a pullback but due to the nature of the holders of many Dow components, I would estimate any pullback will be shallow and met with buying. The NDX closed just under 1400 and our three-month range still holds. Look for 1360 to provide support and 1450 to be resistance. Short-term look for 1380 to hold support and for 1415 to be resistance.

The BTK (Amex Biotech) did breakout above 472 but failed and closed the day at 468. Support is at 460 and short-term resistance is at 472. The SOX (Philly Semi) reversed hard yesterday failing the 500 level and closing at its low of 482. Look for support at 476 to hold and if it doesn't we could see a third wave down (Wave count = the first being down 12/02-12/09, the second was up 12/10-12/15) to the 450 area. The Banks (BKX) failed to get above 950 and appears to be ready to test their 50-day MA (937) again. The BKX has been in a rising triangle pattern. Its bottom rising trend line extends back to September and its current value interests with the 50-day MA. The top of the triangle is 952. If the banks fail to hold 937 we could see a quick hard move down into the 920 area.

Retail (IRH) continued to slide yesterday. This sector has not seen much strength since it failed to breakout at the end of November. The XAU (Philly Gold/Silver) reversed to the upside. In my opinion, for the index to carry higher it needs to trade above the 109 level. A trade above that could carry the index into the 112 range. Look for support at 106-105.

Good Luck.

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