Dow Jones 10799.63 -11.28 7:55 am PST, December 8, 2005  NASDAQ 2252.89 +0.88 For info, visit access.smallcapnetwork.com S & P 500 1257.58 +0.21 Change your subscription status here Russell 2000 683.86 +0.85 VOLUME 05: ISSUE 92  Feature: Rally Rockin' or Rolling Over? Guilty Market Pleasures. Prior to what has become my annual pilgrimage to Las Vegas--I like to lose early so I can enjoy the rest of the trip--I thought it would be prudent to look at the markets; especially since we have been calling this recent rally correctly for a while now.  Following that, we'll engage in some pithy discussion regarding the JNJ/Guidant/Boston Scientific brouhaha as well as the soapy drama that is Icahn/Time Warner/AOL.  I have to admit, one of my guilty pleasures is that I do enjoy seeing the market get the last laugh and surprise the majority of 'smart' investors, like Carl Icahn as well as the intelligentsia at CNBC. First to the markets.  We would tend to disagree with those that feel the market is topping out at this level. This conclusion is based on several technical developments, not the least of which is that the action on December 2nd where investors took out a short term high on the COMP, which if the market was wanting to go south, shouldn't have happened. As a result, shorts got caught nicely, covered, re-shorted and then got nailed again as the market failed to sell-off.  Stay with me now. The blue circle on our chart denotes a failed double 3x3 re-penetration (No worries, I've included a definition of a double 3x3 re-penetration below), which, had it breached the blue 3x3 line on the downside the second time would have heralded a directional change and likely sell-off. As the market was up against a Logical Profit Objective (LPO) around 2033, a decline would have been, well, logical, as the conventional strategy would have been for traders and hyperactive investors to take profits and move the index lower. A failed double re-penetration to the downside in our opinion confirms a whole new upleg. We feel that the next LPO for the NASDAQ is in the 2310-2355 range, which could take tech and biotech nicely higher.  Traders should buy the dips and use 2315 as the profit point--the LPO-- to lighten up or sell. Frankly, we currently see little to no evidence of weakness or a pending sell-off in the NASDAQ. Interestingly, the DOW appears weakest against the NASDAQ and S&P.  Good news and bad news for smallcaps. Good news is that we feel that the Russell 2000 is going higher; nice for smallcaps. Bad news is that in our opinion we'll not see that move for a while yet. The index is banging up against an LPO currently, so a pullback to the one or more lower levels noted in the chart is likely. Once the index is cleaned out, the next incline has the LPO at 733--a nice move off of the lows. We think that around 633 appears a good entry point with one caveat: if the Russell 2000 takes out a new high in the next days or weeks, all bets are off, 'cause we'll likely go higher with what could be a fierce rally. I suspect the former scenario is more likely, but this is the smallcap market, so we can't discount the latter completely.  Ostensibly, the big caps look more likely to tantalize the year-end buyers. Markets who laugh last.... As I mentioned earlier in the week, last Friday, the talking heads that are CNBC were espousing their brilliance on some randy options' trading action in Boston Scientific (NYSE: BSX). The reason, oft repeated by these folk was 'talk' of BSX as a takeover target. I'm sure lots of folks punted the options on the tout. Fast forward to Monday and the only takeover talk regarding BSX was it's $24- odd billion hostile bid for medical devicer Guidant (NYSE: GDT) blowing out previous suitor Johnson and Johnson (NYSE: JNJ) and most of the option players. Ooops. That'll leave a nasty mark. Come Monday, all the CNBC talk was about the new deal and the rah-rah regarding BSX being taken out slipped quietly into the ether. Friday the volume on BSX was 9.2 million shares. Monday and Tuesday combined trade was over 55 million. The point? No matter how 'wired' or 'tuned-in' we think we are, the market still has the capacity to surprise. Collectively, the markets are way smarter than we are and as with a natural disaster or any other exogenous event--good or bad--the truly profound news still comes out of nowhere. That's a good thing. Keeps it interesting and fair for all.  And teaches those who think they're da bomb, that they're actually not--at least most of the time. As I said, a guilty pleasure, but one I'm glad has endured through 24/7/365 cable channels, podcasts and 'substantive' business news stories that are little more than a couple of pictures and a sound bite. When will the media learn that beauty really is only skin deep? Ugly goes right to the bone.. The other fun happening was in the Time Warner (NYSE: TWX)--which we still like a lot--"what to do with AOL saga' coupled with the constant hammering of management by Carl Icahn. This prattle will continue until the spring when Carl tries to nuke the TWX board at the shareholders' meeting for more agreeable--to Carl--execs. He apparently would like to break up the giant, and it looked like his intentions were gaining some traction. Carl, you're going to be surprised... Instead of doing an ostrich, CEO Parsons et al came out and stated:  "We are not interested in selling AOL," (CEO) Richard Parsons [CQ] was quoted as saying at a press briefing in Los Angeles. Instead, an alliance/deal/whatever with Microsoft (NASDAQ: MSFT) or Google (NASDAQ: GOOG) looks more practicable. Sure, selling AOL would reduce TWX's debt significantly, but throwing in with Google or challenging the GOOG by allying with Mister Softee makes long-term sense for both the company and long-suffering shareholders. Media reports lean toward MSFT as TWX/AOL's eventual partner. While Icahn gets all the ink trying to make TWX management look like incompetent boobs, the methodical and unassuming Parsons may quietly prevail--which no one would have given you odds on last week. Everyone thought Parsons would sell the AOL bus. The surprise is that he obviously plans to drive it. Good on him. Icahn was getting pretty tiresome. The really good news is that whatever happens or whoever prevails it will be good for shareholders.  The moral to this tome is that facts that appear obvious in the markets likely aren't; a good lesson to remember, since we should close out the year with over a trillion dollars in merger and acquisition activity. That trend will undoubtedly continue into 2006 since there are record, merde-loads of cash on corporate balance sheets. Mergers and acquisitions are good for markets. The fewer number of shares and companies means the volatility increases; another good thing for everyone. There's nothing duller than a grinding market. No matter the news, the potential surprises or both, you should likely own TWX and BSX. By the way, while I'm away, have a peak at the SCBLOG. Last entry delineated some simple rules for investing in SmallCaps. They deserve repeating and a reading in these quiet times. Your comments graciously accepted... As promised: impress your friends... Double re-penetration: using a 3x3 displaced moving average (DMA), when a stock or index has been thrusting upward or downward for more than 12 trading periods or so (the more the better). After the upthrust, we need closes below, above and again below (or opposite for downward thrusting) of the 3x3 before the change of direction is confirmed, as long as the moves stay below the high and the closes above and below are within 5-7 trading periods or so, it is confirmed. A double repo is a big signal for change of direction.  A failed double repo is an equally significant indicator that a new leg in the same direction is coming.  In this case, as we noted, the new leg should be up.     We Value Your Feedback Got comments, questions or suggestions? 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