Tis the season for parties and music, don't overindulge!

Before the market even opened on Friday, savvy investors could sense that the party was about to begin. After the economic announcements by the government had been digested, it was clear that the Federal Reserve wouldn't be inclined to take away the punch bowl and cookies before Christmas. The party was on, sparked by the fact that inflationary forces appeared to remain mild last month, while the economy created 234,000 jobs and the unemployment rate held level at a thirty year low of 4.1%. Average hourly earnings, which often accounts for two-thirds of a product's price, inched up by a mere 0.1%, less than the 0.3% rise expected by analysts. From these reports, it is clear that the tight labor market is not yet contributing to rising inflation. The unemployment report had been closely watched on Wall Street because recent economic indicators had painted a mixed picture. A strong retail start to the holiday season and a robust housing report on Thursday indicated that the economy is still growing. Friday's report seemed to stem investors worry of inflation fears, for now. Whether jubilation or just plain relief, the reaction at the market opening was pure enthusiasm, which continued throughout most of the session.

Regarding the Dow, the index rose 247.12 (2.2%) to close at 11,286.18. The market was up over 150 points within minutes of the opening. It hit its high 2 hours into the day, gaining 302 pts and surpassing the closing record for the index. Despite profit taking throughout the afternoon, the average still closed with its second biggest point gain of the year. The rally was fairly broad based, as gainers outnumbered decliners by a 3-to-2 margin. Volume rose to 984M, up from Thursday's 890M. The Dow now stands just 40 pts shy of its all time high of 11,326, reached this past Aug 25th. Blue chips lead the way with HWP adding 7.25 to $107, IBM up 6.73 at $112 while GE gained 1.56 to close at $136.25. Financials came in strong on the non-inflationary news, lead by J.P. Morgan which rose 4.13 to close at $136.63.

Both the NASDAQ (COMPX) and S&P 500 joined the party, with each setting closing records. The COMPX rose 67.85 to 3,520.63, piercing 3500 for the first time. Friday's gain leaves the index up over 60% for the year. The breadth was troubling because it came in flat, while the up volume beat out down volume 2:1, indicating a very narrow rally. On a positive note, Friday's move does seem to bring the index back into the channel that developed in November, although it is still testing the support line of that channel. Failure to turn north off this support line might send our rally and Santa south to Mexico, or some other emerging market. Not to spoil the party, but one other note of caution stems around the fact that Friday's rally was not that tradable for most Nasdaq issues. Many issues gapped up on the open and proceeded to trade down or remained flat for the remainder of the day. Then again, plenty of people showed up for the party, as volume was heavy, exceeding 1.5B. Techs led the way, with Oracle +2.75 at $78.69, eBay +11.69 at $178.75, Sun Micro +6 at $142, INTC +1.13 at $78.69, Applied Materials +2.50 at $110.25, Cisco +2.06 at $95.56, Microsoft +1.31 at $96.13 (approaching an all time high) and Yahoo +7.19 at $253 (all time split adjusted high). As for the S&P 500, it now stands at 1,433.30, up 24.26, having broken the high set two weeks ago.

As for some of the smaller indices, the Semiconductor's (SOX) added 1.3%, indicative of gains in issues like INTC, MXIM and MU. The Nasdaq 100(NDX) gained over 2% and the interest sensitive Utility Index (UIX) rose 1.74 points to close at 283.17, probably due in response to better interest rate news. The small caps have rallied over the last month, and Friday was no different, with the Russell 2000 gaining almost 1%.

Over in the Bond Market, the guys in the pit took the day off from preaching nothing but gloom and doom, allowing for a minor rally on the bond. The 30yr. Bond yield dropped to 6.257% from Thursday's level of 6.31%. Fear not, the rumors will resume to fill the air on Monday as traders look for the next piece of sky to fall. The revised third-quarter Productivity numbers are due on Tues, with Initial Claims and October's Wholesale Inventory number due Thursday. The real focus will revolve around Friday's PPI number for November, followed up on Tuesday (12/14) with November's CPI and Retail sales numbers. Many minefields to traverse, with the PPI and CPI numbers capable of sidetracking our holiday rally. Needless to say, we are going to get an earful of economic numbers over the next 7 trading sessions.

Stocks in the news Friday included Inktomi (INKT), which announced a 2:1 stock split. The stock has more than doubled since a 2:1 split earlier (Jan) this year. INKT added 17.69 to close at $145 on the news. QXL.com (QXLC) was up 48% on word of an agreement with ExciteAtHome to provide Excite users with access to the UK-based auction house with a special co-branded auction page. The stock finished up 18.25 at $56.50.

BEA Systems (BEAS) was added to Goldman Sach's Recommended List, while CS First Boston upgraded from Buy to Strong Buy. Investors responded in a big way, as the stock set a record high ($123.01) and closed up 18.81 at $115.50. Volume was extremely heavy at 5.9M vs 1.6M average.

Freeshop.com (FSHP), a provider of Internet based marketing services, was the big mover of the day, closing up over 70% to $22.06. This came on the announcement that the company had reached a milestone of over one million orders in the month of November. The stock traded as high as $31 after an opening near $14, with over 6M shares trading hands.

The only company reporting earnings on Friday was Piedmont Natural Gas (PNY) who beat expectations by $0.02. Their revenue's grew by over 8%, which is not surprising when you look at the rise in heating oil and natural gas prices. Some notables on the calendar for the coming week are Kroger Co (KR), Workflow Management (WORK), H.J. Heinz Co (HNZ), Advanced Digital (ADIC), CIENA Corp (CIEN) and National Semiconductor (NSM). NSM is the only one that looks capable of doing damage to the market if it disappoints.

As for where we stand having entered the month of December, Friday's market action reinforces the view that momentum is still strong as money continues to flow into the market. The technology sector still leads the way and shows no signs of tiring. The Dow and the Nasdaq continue to trade in channels that look sustainable, so we would not be surprised to see the Dow and NASDAQ again reach new highs next week. The thing to keep in mind about any party is the fact that there is music. At this party everyone is playing a massive game of musical chairs. Occasionally the music starts to slow or sputter and people kind of glance at the chairs but the party goers are moving so fast around the room that momentum keeps the whole mass spinning. As soon as investors stop buying the dip and start saying "that's enough, I'm satisfied for the rest of the year." then we are all in trouble. We could see a sizeable pullback at any time. Especially if someone can show some real Y2K concerns. So far, the Fed appears to be the only one watching for any Y2K issues.

There seems to be two opinions over the employment numbers on Friday, aside from the ones that debate their accuracy. One side merely sees the Friday market action as a "relief" rally and everyone breathed a sign of relief because there was no bad news in the report. While the other side feels that we've got the big green light and its an open highway from here to Dec. 31st. It doesn't matter at the moment what side you are on, because investor enthusiasm is so high. We could easily see this market run for a few days. It is the relief side that thinks we'll see a buying frenzy occur this week producing a market top before a significant pull back. The green light perspective says that money flowing into the market is too big and too fast to slow down, we can't stop now.

Which side is right? Who knows... but we need to be watching all the clues. The large gap up in the NASDAQ Friday might need to be filled first before any renewed leg up. We would rather err on the side of caution than get caught looking the wrong way when the music stops and find that there aren't any chairs left.

Louis
Chief Editor