Dow sitting on 200 points of upside potential

It often is amazing to see how only one day’s worth of trading can affect stock market sentiment.

Last Thursday, the market labored through a negatively biased session – thanks to the Senate’s failure to reach a compromise on fiscal stimulus legislation. The situation in Argentina did not help one bit either. The dark, dank atmosphere that day made it seem like the market was willing to forget everything that had moved it nicely higher in prior weeks.

But when all was said and done, the Dow Jones Industrial Average posted a reasonable gain for the week and clearly indicated the market’s conviction about what appears to be better times ahead in 2002.

The market’s performance in the face of poor news has to be taken as a distinct positive. The Senate’s failure to agree on a fiscal compromise, however, should not be overlooked.

The unfortunate part of last week’s failure to agree on a fiscal stimulus package is that the different opinions were not far apart. There was agreement on a $300 tax rebate for low-income workers and the tax breaks for corporations. There also was increasing acceptance of the Republican proposal that would accelerate tax cuts.

Republicans were not against the Democratic proposal of additional spending on unemployment benefit extensions. The whole deal appears to have collapsed on how to provide health insurance benefits for the unemployed. The Democrats favored an employer-based system that pays 75 percent of the costs, while the Republicans wanted credits given to individuals for health care insurance.

There are valid arguments to support both approaches to the health insurance problem, but this is not the big issue. The failure to reach a compromise is. Despite all the talk about bipartisan cooperation following Sept. 11, in the end this proposal died purely on the basis of electoral politics.

The fact is, it’s likely there will be no stimulus package. But that will not change the ultimate economic outcome. The economy will recover. It, however, likely will take longer to do so. How long could become the source of some disconcerting potential impact.

Expectations are everything. Even if your expectations are met, disappointment can result if those expectations take too long to become reality.

The market has assumed that 2002 will start slowly and ramp higher through the year. The lack of fiscal stimulus will slow the recovery pace. Will the market have the patience to wait several more quarters than is expected to see what the economy will achieve• The answer is a huge unknown, but it may not take long in 2002 before the answer becomes abundantly clear.

The market’s pre-Christmas-week performance was credible, particularly considering the news background. Trading suggested the normal Santa Claus rally will dominate activity between Christmas and New Years and likely through the first week or two of next year. Around the middle of January, however, is the time when being very watchful of day-to-day market activity could go a long way toward determining how well your investments will do next year. At that time, the market could begin to have second thoughts about how rapid the pace of the economic recovery will be.

If there is any notable key to watch for this week, it will be whether the Dow can continue to edge toward the resistance point it has touched frequently around 10,000 but failed to surpass. Even without a breakout above that resistance point, there is probably 200 points of upside potential. A breakout, however, would notably increase this potential.

Last week, interest paid on short sales, which rose for the 10th straight week on the New York Exchange, could become a crucial factor if that resistance is surpassed. Anyone in a significant short position likely would be forced to throw in the towel and buy back their positions in fear that the market could run higher on a breakout. This factor alone could be enough to fuel significant upside late this week or right after New Year’s Day.

The other side of this issue, obviously, is that the failure to break out of the current trading range would increase the odds of a post-New Year’s pullback. The longer the market goes without breaking through this resistance the better those odds become.

Regardless of the market outcome, this holiday period probably carries with it more significance than many in recent memory. There are times that try men’s souls, as they say. Certainly this year has been one of them. This week is a great time to reflect upon those things that are most important to everyone – things that often get set aside due to the press of everyday existence.

Truly, this holiday season is vastly different than many in terms of how we view the world and our own places in it. Those of us who are by the mere chance of birth fortunate enough to live in the United States should recognize just how lucky we are.

Instead of worrying about how robust the economic recovery will be, at least for this week we instead should consider those around the world whose thoughts are not on economic recovery but rather on merely surviving.

Merry Christmas to all.