Divergence is the name of the game right now!

If you look up divergence in the dictionary, you will find that the definition of divergence is "the act of drawing apart: an angle is formed by the divergence of straight lines". A further interpretation is the "difference between conflicting facts or claims of opinion". What was missing was a reference to the broader markets, but make no mistake, that is exactly what is occurring between the Dow and the Nasdaq these days, and it's happening in both senses of the word. Not only are the lines on both charts heading in opposite directions, but the general opinion concerning where you need to be to make money at this point in time is changing as well. Want some proof; look at the charts on both indices.

(10 day chart of the Dow)

(10 day chart of the Nasdaq)

Both the Dow and the Nasdaq enjoyed the month of November, with the charts on both resembling straight ascending lines. The Dow added almost 3% and the Nasdaq set record upon record in the process of bolstering that index with a 14% gain. Even the new month started on a kind note for both, with the Dow barely missing the record mark on Friday (3rd) on the strength of the employment / wage cost numbers. The divergence began when we started the first full week of the new month, Monday Dec 6th. Since that date, the Dow has experienced negative breadth and declines for three straight sessions. The index has now declined over 245 pts or 2.1% since Nov 30th. Meanwhile, the Nasdaq Composite (COMPX) has continued to accelerate upwards, maintaining a perfect ascending channel established in early November. The COMPX has now managed to tack on over 2% in December. All is not rosy regarding the Nasdaq, as the ADV/DECL has taken a turn for the negative. Fewer and fewer issues are holding up and driving the COMPX, yet the volume is increasing. Another term for this phenomenon, Narrowing Leadership - we'll get back to this.

One of the biggest stories today involved the post Yahoo! party. After a $67 pt gain yesterday (last day prior to their inclusion in the S&P 500), the inevitable sell-off took place this morning. The stock actually opened down 24 points from $348 at $324 - talk about a bottleneck at the opening. Remarkably, the sell-off was tempered, with the stock managing to stem the slide after the opening, closing slightly lower than the opening price at $319.63. Not a sparkling debut into the S&P, but considering the last week, you can bet the guys over at Standard's and Poor aren't disappointed with their newest member.

As for the market today, the Dow finished down -38.53 at 11068.12. Advancers lost out to decliners once again, 1109 to 1965. Volume overall was moderately heavy at 948 mln. Not surprisingly, the New High/New Low ratio came in negative as well (85 to 155). Among the blue chip sectors weighing on the index were the financials, retail and airline issues. Some of the standouts included; UAL -0.63, AMR -0.56, JPM -2, C -2.38, LE -14.13, JNJ -2.81, MSFT -1.25, AOL -0.38 and INTC -2.69. Among the winners were HWP +3.48, IBM +1.25, SFE +21, GE +1.69, EMC +1.25, LU +1.88 and MU +1. As for the S&P 500, it ended up down -5.29 at 1403.88. Want to guess who might have had something to do with the decline?

On to the Nasdaq, where the Composite (COMPX) managed to fight off the steep decline in YHOO (-28.38 $319.63) to end up down just -0.81 pts at 3586.11. Those leading the pack of advancers included; SUNW +6.41, EXDS +21.06, ISLD +45.31, INKT +4.31, ICGE +43.31 and SYMC +9.31. The real news ended up being the volume, and the fact that a new record was established with 1.65 bln shares changing hands. Not to be redundant about YHOO, but it did play a role in the new record as it traded almost 25 mln shares (3X the average). Back to a point we made earlier. Leadership in the Nasdaq is narrowing as evidenced by the ADV/DECL, which came in today favoring the bears at 1893 to 2188. Need more proof? The up volume outpaced the down volume 9 to 6. This is troubling. Why? When you have more issues declining than advancing, you would expect the down volume to outpace the up volume. When the opposite occurs, it points to the fact that people are pouring money into the winners and ignoring everything else. Translation - narrowing leadership. This is something we've been hearing for a long time, so it tends to fall on deaf ears, but it must change for this market to maintain the momentum - more on this later.

The narrower indices were mixed, with the SOX closing down -7.3 at 660.24. The OEX finished down -1.99 at 754.11, while the Russell 2000 managed to add 3.12, finishing at 468.82.

What happened to the bond? It's all we've heard about for months. Since last Friday's employment/wage cost numbers' release, the bond traders have been keeping to themselves. Fear not, the nervous types are still out there and will be making themselves heard over the coming days as we await the PPI numbers on Friday, followed up by next Tuesday's CPI report. We don't make predications, but in this one instance, we will go out on a limb. We predict that we are about to get an earful of economic numbers and the accompanying spin over the next 4 trading sessions. For today, the bond yield finished up +0.21 at 6.22%. The number floated last week was 6.25%. A yield below that will keep the bears in check (that may be an oxy moron for the bond market in 1999). We will see whether the coming numbers will keep the yield above or below that mark in the next several sessions. One thing to keep in mind regarding the naysayers and their fear of further Fed action. The Beige Book numbers were released today, indicating that the economy is basically the same as 6 months ago. In other words, labor is tight and the economy is still strong and growing. Might sound good to us, but the naysayers hate to hear about growth, especially considering the fact that we've seen three rate increases already.

As for news influencing the markets, the most notable was YHOO - oops, we covered that one already. Seriously, the most notable deal was the one announced between Digital Island (ISLD), Inktomi (INKT) and Sun Microsystems (SUNW). ISLD agreed to purchase 5000 Sun servers ($150M) equipped with INKT traffic technology. This will enhance ISLD's presence in the e-Business arena.

Ericsson AB (ERICY) and Microsoft (MSFT) are teaming to make mobile products available that can access the Internet. Ericsson, the number 3 mobile phone producer, will use Microsoft's mobile browser to allow users to access the Internet and e-mail. ERICY gained +5.44 on the news.

Exodus Communications was the recipient of a coverage initiation from Merrill Lynch, who recommended a NT-Buy/LT-BUY. Shares of the Company gained +21.06 to finish at $165.56.

The biggest piece of negative news might have involved Lands' End (LE). They found out what happens to a retailer when their sales decline over 18% in the all-important fourth quarter. Janney Montgomery Scott wasn't laughing, and they downgraded the stock from a Buy to a Hold. Ouch. The good news is the quarter isn't over yet. The bad news - see the good news. Shares of LE declined -14.13 to finish at $43.63.

On the earnings front, it was slow day. IDT Corp (IDTC) missed expectations by $0.01, Advanced Digital (ADIC) came in +$0.04, while Wallace Computer missed the mark by -$0.02. Both Costco (COST) and National Semiconductor are set to report tomorrow, and misses by either could effect their sectors.

Back to the markets and where we go from here. The advance/decline issue is one that must be dealt with by the broader markets. Failure to do so is a set-up for problems. In November, when the Nasdaq was on a record tear, people seemed to miss the fact that the small-caps came back into focus on investor's radars and started to participate in the rally. While this scared some people (the old when you see the tiny guys being bought by moms and pops, smart money heads for the hills), the reality is that the breadth improved and money was being spread around. We are now back to seeing the rich getting richer and everybody else standing still or declining. This will have to change for the Nasdaq (same for the Dow) to continue the 1999 "record tour" into 2000. Enough said.

In terms of the Dow and the blue chips, the index has been declining, but it is approaching a level (11050, also the 10 dma) it has tested and bounced off of on a number of occasions. The decline does seem to be decelerating, another positive sign. The question remains, why the decline now? With near record in-flows of money and no serious trouble readily apparent to sidetrack the index, it is still sliding. We will know soon enough, as the market will have one last chance to be spooked by economic numbers (CPI and PPI) in the coming days. Bottom line, the support at 11,050 (better yet 11,000) is strong, and probably offers a great chance at entry. If the market tests and bounces off that level, a Santa rally is very likely. Failure to hold 11,000 is a serious problem!

Louis
- Editor