January 5th, 2003

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The new year is finally upon us, and from the looks of things none too soon! While I was at the New Year's Eve party Tuesday night, it seemed that everyone there was expressing the same opinion: very glad to have 2002 over with, and very optimistic about 2003. But it didn't seem as if anyone had any specific reason why the new year be so much better.

I am glad 2002 is over and very much looking forward to 2003. Now comes the difficult question, where is the excitement in the market coming to come from or in other words what is going to make 2002 better than 2003? That is the "BIG QUESTION" for the start of the new year.

The Market:

The Dow Jones Industrial Average closed Friday at 8,601.69 down 5.83 points. With Thursday's strong move to the upside, the Dow defiantly broke it's downward trend line. To be honest the 265.89 points the Dow moved to the upside on Thursday came as quite a surprise. With Friday's lackluster activity, and combined with the fact that most of investment professionals I deal with still were not back from the New Years' Holiday, I am not sure to what to make of Thursday's move. Was it short covering done in 2003 to avoid having to pay taxes until April of 2004 vs. April of this year? Was it a sudden change in the view of the US economy? Politics? Or something else? To be perfectly honest, I'm not sure, but the real question is will the market continue to move higher or reverse the new trend & move back lower? I feel that the answer to this question will be found within the 1st few days of trading this week. As a result I am enter the week with a cautious stance.

The NASDAQ 100 (NDX) closed Friday at 1,031.63 up 3.77 points. The NDX generated a Buy Signal with Thursday's strong move upwards. As a result I am expecting the NDX to continue to move higher and test 1,049.03 and then 1,065.86

However the mid to long term outlook for this index remains unclear, and any attempt to pry that information from the current chart could easily cause brain damage. So without causing any more damage to my brain than I need to, I took a look at the NDX chart and tried to determine a mid range outlook. It appears at this point in time the NDX is in the process of building a base in the 900-1,000 point range. I would normally expect the NDX to track the movement of the Dow, but I feel the structural problems of the NDX could cause it to be left behind when the other major indices do finally start to move higher.


Influencing the Market?

I very strongly believe that the 2 biggest influences on the market are new technologies and regulatory changes. The overall stock market is contains many different sectors that represent different industries. Moves in the broad market indices are generally the result of a major move in one sector or another. When I was working as a stock broker in Denver our bond manager said there was always a bull market occurring in one sector or another. Almost every sector rally has been the result of a new technology being introduced to change an industry or changes in the regulation of a specific industry.

During the last 14 years I can easily remember Bull Markets in the Biotech, Gaming, Interactive Media, Telecommunications, Energy, Internet, and Financial Services industries. Each and everyone of these sector bull markets was either the result of technological or regulatory changes, sometimes both technology and regulation changed at the same time. Let's also not forget that tax and interest rate changes are also ultimately political in nature. I have always maintained that politics is the single biggest influence on the overall market. The reason I bring this is up is because other than "nanotechnology" I do not see any new technology on the horizon that will spark a new bull market. As a result I see the markets recovery being dependent on political forces this year, and the nature of regulatory, tax and other reform issues. After all these items all affect the net income of companies, and isn't that what we base the value of companies on?????????.

The last time the Republican's gained control of Congress it sparked one of the greatest bull markets in the history of the country. Will it happen again? Only time will tell. I believe that the distractions of a few high profile scandals and the war on terrorism have delayed needed reforms that will allow the market to move to higher levels.

In the next several editions of my newsletter I will begin to cover my "Wish List" of needed reforms and changes, and what I believe there impact will be on the market.

PS. The 1st few days of this week should be interesting and provide a good indication of the near to mid term trend of the market.

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Disclaimer: The Sterling Investments series of newsletters is produced by Sterling Investment Services, Inc. All information used in the production has been obtained from sources believed to be reliable and accurate. Sterling Investment Services does not warrant or assume any liability for inaccuracy of the information used to produce our publications. To receive further information on these services please visit our web page at: www.sterlinginvestments.com If you would like to contact us our fax # is (404)-816-8830 Email address is: enelson@sterlinginvestments.com Sterling Investment Services may hold positions in the securities recommended or may be providing consulting services to the companies mentioned within this report.