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IN THIS WEEK'S ISSUE:

1. MARKET SUMMARY  
2. WEEKLY ETF PERFORMANCE  
3. THIS WEEK'S TRADES  
4. CONTINUED GUIDANCE ON PREVIOUS TRADES  

1. MARKET SUMMARY

THE WEEK IN REVIEW
Both bulls and bears were frustrated last week, as the U.S. equity market ended little changed. Foreign stock markets were mixed, with most major European exchanges finishing lower. The FTSE-100 (United Kingdom) did manage to post a fractional gain. Meanwhile, Asian equity markets were mostly weaker, with Japan and Hong Kong down and Korea up.

Constant chatter regarding the Iraqi situation weighed on the market. However, this was more evident in gold's sharp rise and the bond market's gains than in stock market losses. Yet Colin Powell's statements that war is not imminent took some of the luster off the yellow metal, as February gold futures (GCG3, 341.0) formed an island reversal on Friday, suggesting further losses in the short term.

Volume was low throughout most of the week, which led some analysts to express optimism as equity prices slipped Tuesday through Thursday. This is a common theme in the media when equities lose ground. Unfortunately, low volume as prices fall is not actually a bullish sign. Prices can fall in a vacuum. The increase in turnover on Friday may have bullish implications, but the first quadruple-witching day may have been part of the story there. Not only did index futures, options on index futures and stock options expire, but the first series of single stock futures also rolled off.

Overall, U.S. and foreign equity, foreign exchange and debt markets acted much as you would expect during the last two weeks of the year. Many money managers have essentially closed their books and are not taking risk. Activity is not likely to expand until the turn of the year, and the fact that Christmas and New Years fall mid-week will probably increase this effect. Be forewarned that low liquidity can often lead to outsized moves... so be prepared.

The prior week's big news -- the incredible shrinking dollar -- ran out of steam. This occurred despite the jump in gold and oil prices. The dollar's sharp losses left the currency moderately oversold and due for a consolidation. Unfortunately, the rebound was muted at best and adds little confidence that the Greenback has found a lasting bottom as of yet.

ECONOMIC ANALYSIS
Economic data came in largely as expected last week. Consumer prices gained 0.1% in November, with the core rate rising 0.2%. This was largely in line with expectations and should be enough to keep deflation fears at bay. However, it also gives no evidence to those who seem to think, incorrectly in my opinion, that the larger risk is now shifting to inflation.

Just about all other data that were released last week proved to be better than expected. This is what makes the stock market's performance so disappointing. Housing starts, capacity utilization, the Philadelphia Fed and trade balance all managed to top expectations. The final revision to GDP was unchanged, and jobless claims, fraught with seasonal problems, were a bit worse than expected.

One factor that helped push prices higher on Friday was Alan Greenspan's speech before the Economic Club of New York on Thursday evening. During the speech, which mostly focused on how a central bank could or should react to an asset bubble and the possible subsequent risk of deflation, he gave a guardedly optimistic view of the economy. That said, however, this outlook was little different from what he has been saying for months. In addition, recent economic data remains muddled at best.

WHERE DO WE GO FROM HERE?
The week ahead is unlikely to provide us with any fresh ideas. Equity prices may be able to edge higher in a corrective fashion, but as long as prices do not accelerate higher and volume does not increase on such price increases during the holiday-shortened weak, I will remain bearish for the short term.

Next week's economic data will not be of the market-moving variety. Personal income and consumer spending, though of interest to economists, rarely send the market up or down. Expectations are for fairly decent gains in both, however, so the risk is to disappointment. Durable goods orders are forecast to be strong again, even after last month's 1.5% gain. Consumer sentiment, which is due out on Friday, may be the most important release of the week.

Remember -- this week will probably be the slowest of the year. All western markets are closed on Wednesday. The U.S. closes early on Tuesday as well (1:00PM EST), and some markets will be shuttered on Thursday. There is potential for the stock market to continue higher this week, and I would not be amazed to see losses temporarily evaporate in the short S&P 500 SPDR (SPY, $89.79) position I recommended last week. But, the overall outlook remains bearish by all my indications.

Although it should not have a lasting effect, one catalyst that almost certainly helped Friday's market action was Senator Lott's decision to step down as majority leader in the Senate. This will help Republicans to focus on their agenda and Congress to avoid a further messy squabble. Much like the very passing nature of the gains engendered by the economic team shake-up, I doubt this news will have any lasting meaning.

As a technical analyst, I am a market psychiatrist. While I do see some nascent signs that the stock market may be preparing for a substantial rally, the timing is early. There are a lot of bulls out there, as evidenced by several recent stock market sentiment surveys. The bond market is extended too, but it refuses to give ground even when equities push higher. With that in mind, I see little reason to shift my stance, for the time being, from the bear side.

Be forewarned, however: I fully expect 2003 to be a great year to be long stocks. Not right way though. Prices should remain soft at least for January and I continue to forecast new lows in the major indices. But, I would not be amazed to see the Nasdaq Composite double and the S&P 500 rally 50% or more from whatever low we achieve early next year.

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2.  WEEKLY ETF PERFORMANCE

Below you'll find a table of weekly performance data for all ETFs that I track for this newsletter...

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3.  THIS WEEK'S TRADES

As I noted in our News Flash on December 18th, 2002, there are no new trading recommendations for the coming week. Click here to view that announcement:

http://www.StreetAuthority.com/etf/flashes/12-18-02.htm

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4. CONTINUED GUIDANCE ON PREVIOUS TRADES

I have three outstanding trades at the moment...

TRADE #1: SELL THE S&P 500 SPDRS (SPY) SHORT AT $90.57
As I implied in my outlook section above, although I do see risk that prices will rise further this week, I remain firmly convinced that the trend is still a downward one. However, I do not want to risk major losses and have tightened my stops as noted below.

RECOMMENDATION:
Sold SPY at $90.57
TARGET:  Revised to $81.64 due to $0.44 dividend paid 12/19
STOP:  Revised to $90.75, just above intraday gap from the close on December 16th to the open on December 17th.
CURRENT PRICE:  $89.80

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TRADE #2: BUY MARCH 2003 23 PUTS ON THE NASDAQ 100 TRUST (QQQ) AT $1.20

RECOMMENDATION:
Bought QAVOW at $1.20
STOP:  $0.60
TARGET:  $4.00
Sell half of your position at $2.50 to lock in gains
CURRENT PRICE:  $1.20

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TRADE #3: BUY THE RETAIL HOLDRS (RTH) AT $70.85
This trade was not executed as per our news flash on December 18th, 2002.


Good trading in the week ahead!

Steven W. Poser
Steven Poser
Editor
The ETF Authority
New York, NY

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