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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 calendar gods have conspired to give us what should be the second consecutive week of very low volume. Most schools in the U.S. will remain closed until Thursday, January 2nd, 2003, meaning turnover is not likely to pick up before then. At least there will be some important economic data out to keep things interesting. However, the monthly unemployment report is not due until January 10th (the normal release date is the first Friday of the month). More below.

THE WEEK IN REVIEW
Last week was a typical Christmas week. Neither the Nasdaq nor the New York Stock Exchange (NYSE) broke 900 million shares traded on Friday, as nobody was willing to take any bets. In addition, many big players have been -- and will remain on -- vacation until January.

As you can see from the weekly ETF performance table below, the only equity-linked ETF to put in a positive week was the Japan MSCI WEBs (EWJ, $6.87), which rose 0.7%, aided by a continued weak dollar and a moderately higher Japanese equity market. The various fixed-income-based funds also managed gains, with the 20-year Treasury iShares (TLT, $89.03) racking up a 1.9% gain during the holiday-shortened week. Some very short-term Treasury notes fell to record low yields, while the five-year notes sank to their lowest yield since October 31st. Mortgage rates have approached their lowest levels in 40 years!

Holiday revelers have celebrated by staying away from stores in droves. Although online buying is up substantially, bricks and mortar retailers have suffered through a terrible season. Sales gains compared to last year, when America was still reeling from the terrorist attacks, have been minimal at best. Not surprisingly then, retail stocks have been hit very hard and the Retail Holders (RTH, $68.14) are down almost 15% from their December 1st high. RTH was the second-worst performer in our list last week, tumbling 3.6%. Only the Oil Service Holders (OIH, $57.54) fell further, losing 4.7%.

As always, the business media remains clueless as to what moves the markets, as the papers continue to blather on about geopolitical risks sending stock prices lower. I have to admit that I am utterly amazed at how well the stock market has acted recently. Even with one of the worst shopping seasons on record, and with an increasingly recalcitrant North Korea, equities hardly moved last week. None of the broad indices even fell as much as 3.0%! And fear -- as measured by the various volatility indices -- was mixed, with the Nasdaq Volatility Index (VXN, 46.71%) falling and the S&P 500 Volatility Index (VIX, 34.15%) rising. With the Middle East on tenterhooks, the economy readying to slide into oblivion and retail stocks quickly approaching their October lows, it is amazing how well the broad market has held up. If the media had any clue, they'd be touting how well the market is doing given all the negatives out there.

ECONOMIC ANALYSIS
The U.S. economy continues to teeter on the brink of big trouble. The housing sector continues to amaze, aided by the lowest mortgage rates in recent memory. If you like to take risks, and pay points, you can now get a three-year adjustable mortgage for under 3.25%! Refinancing is just about the only thing fueling the economy right now, as consumers are still spending more than their incomes are increasing. The debt load that consumers have piled up is huge, and as such, I am not sure where the next spending boost will come from.

The two main data releases last week were a mixed bag. As I warned in prior reports, the weekly claims numbers improved dramatically, as seasonal adjustments never capture holiday hiring properly. In fact, I would not be surprised to see very strong results in early January as well. Businesses hired a lot fewer temporary employees, so therefore a lot fewer will be laid off. That will make initial unemployment claims look better than they really are in the weeks ahead.

Durable goods orders tumbled last month by 1.4%. Consensus was for another gain. This is a very worrying development, as the usual culprit -- weak airplane sales -- was not the problem. Non-defense and non-aircraft durable goods sales sank 2.2% in November. Business investment remains nil. The release should lead analysts to lower their fourth-quarter GDP forecasts.

WHERE DO WE GO FROM HERE?
Next week sees some important economic data due for release. We start off slowly on Monday with existing home sales, which is expected to be another whopper after Friday's strong new homes sales numbers. Tuesday, New Year's Eve, gives us another revised consumer sentiment number, which might not be very pleasant considering how little the consumer was willing to spend on holiday gifts. The Chicago Purchasing Managers data is due out on Tuesday as well and is forecast to slip. The monthly ISM national purchasing managers report is due out on Thursday and consensus expectations are for a minor gain there. Personally, I think the consensus is wearing rose-colored glasses here.

Sentiment remains amazingly bullish even though stocks have fallen in recent weeks. Remember: Although the market has held up fairly well, December is usually a pretty good month for stocks. The Dow is off more than 5% this December, but I suspect that most professionals are amazed, like I am, at how well equities have held up despite all the bad news. Having said that though, prices are still falling -- just more slowly than I had expected them to.

One poll, a weekly survey of analysts and traders, showed more than 70% bulls last Thursday (yours truly partakes in that survey and was one of the 30% bears). Although the market has acted admirably, we are now near important supports in several of the ETFs I track. As such, a failure to rally early in the week will likely lead to an acceleration lower when the big boys get back on Thursday.

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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 recommendations this week. However, I will be keeping my eye on a couple of developing situations and might send a recommended trade via a News Flash early in the week. I will be watching the Pharmaceutical HOLDRs (PPH, $72.70) for a possible buy signal on completion of a five-wave drop. In addition, several other ETFs are gearing up to fall through support, which should allow for some low-risk shorts. Keep a watchful eye on your email inbox!

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4. CONTINUED GUIDANCE ON PREVIOUS TRADES

I have two outstanding trades at the moment...

TRADE #1: SELL THE S&P 500 SPDRS (SPY) SHORT AT $90.57
This trade is now ahead 3.0% from when I sold SPY on December 16th. I trailed my stops lower last week, and had to sweat it out as the fund came within $0.09 of hitting those stops. The market might accelerate lower here, but if prices fail to continue down by Tuesday or Thursday, then I may need to close this position. For the time being, however, I've trailed my stop lower again, now to the 62% retracement back to the high on Thursday morning after Christmas.

RECOMMENDATION:
Sold SPY at $90.57
TARGET:  $81.64
STOP:  Revised to $89.39, or $0.01 above the 62% retracement back to last week's high
CURRENT PRICE:  $87.38

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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
TARGET: $4.00
STOP: $0.60
Sell half of your position at $2.40 to lock in gains (this is a correction from prior weeks, when I showed the sell level as $2.50)
CURRENT PRICE: $1.20

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Good trading in the week ahead!

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

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