Still Some Gas in the Tank
Talk about a head fake! The Tuesday sell-off flew in the face of history, as Thanksgiving week has traditionally seen the market in the green. Of course, after a 1500-point gain in the Dow since the middle of October, some pullback could be expected. That pullback found support on Tuesday at the bottom of the recent ascending channel and took off like a bat out of a very warm place today. We have now seen the third higher low in the current trend, and although the economic news is not exactly astounding, we are starting to see some improvements that could push us higher.
It was certainly a feel good day heading into the holiday, giving investors something to be thankful for. We got several reports this morning that looked bullish than we've seen in a while. They didn't come without cautious linings, but still led to a big rally. The initial jobless claims data for the latest week fell 17,000 to the lowest level in more than a year. The four-week average, which is widely used to smooth out the data, dropped to 385,750, the lowest level in 15 weeks. The only fly in the ointment here is that continuing claims grew by 91,000 to 3.65 million, dwarfing the drop in new claims. This indicates that the time to find new jobs is getting longer. Part of that is due to seasonal volatility, as firms put off hiring until after the New Year, but it is something that could get in the way of spending for the holidays.
That brings us to the spending number. Personal spending increased 0.4%, which was slightly higher than expected. This contrasted personal income, which rose only 0.1%, and was slightly less than expected. This is probably good news for retailers, as it indicates a little more willingness to dip into savings and stretch the plastic as we head to the official holiday season. November retail numbers are bound to be low, since we had fewer "official" shopping days due to a late Thanksgiving. However, I expect sales to simply shift to December, since whatever gifts will be purchased will simply be done so a little later. The real effect that the later holiday can have, however, is fewer "full-price" days for retailers to reap profits. Since they can't move Christmas back, prices will be heading down the closer we get and leave fewer days to shop ahead of those price reductions.
The other number retail investors need to be looking at is Consumer Sentiment. The index rose from 80.6 in October, to 84.2 in November. The increase was bullish overall, but came in below the preliminary reading of 85.0, which was release a couple of weeks ago. This was below estimates, which were looking for 85.4. The expectations index also came in above October's reading, but below estimates.
One of the most bullish signs we saw this morning was the durable goods number. Durable goods orders rose 2.8% in October, which was well above expectations of 1.6%. Within that report was a 65% jump in communications equipment orders. That was the biggest one-month gain in over 5 years. The industry has seen a big drop-off in capital expenditures and this reading may be signaling a turnaround.
Next we got the Chicago Purchasing Manager's Index (PMI), which gave a November reading of 54.3, after sinking to 45.9 in October. Expectations were for 48.5, so on a percentage basis, it beat estimates by a mile. More importantly, any reading under 50 shows contraction, while readings over 50 show expansion. The flip to the upside of 50 also foreshadows a more positive reading for the NAPM national purchasing manager's survey.
All of this data translated into big gains market wide, sending the Nasdaq soaring along with the Dow. Not only did both indices make up yesterday's drop, but ended the day at new relative highs, as well. The Dow has now been in an ascending channel since it's bounce on October 12, with each pullback followed by extreme bullishness. We have seen three higher lows and now three higher highs during the rally. We are approaching the August high of 9077 and if the industrials continue the pattern of following the techs, then we could be looking at a few hundred upside points to go. The NDX broke the August high at the beginning of the month, pulled back and then took off again. The Nasdaq Composite followed a similar pattern, but didn't actually break the August high until after the pullback. Still, it made it through on the recent rally.
The next challenge for the Dow will be the August high, and then the 200-dma above that, sitting at 9188. The Dow has not seen its 200-dma since before Memorial Day, after which it began the slide that we are still attempting to recover from. If we can get back over both of these levels, then a continued rally certainly looks possible. The economic situation in the country will have to improve to support rising equity prices, however, this morning's news was a start. At some point, we'll see an increase in spending, and a gain in durable goods orders, along with a turnaround in manufacturing, could be signaling a change in the tide. Last week's guidance increase from Taiwan Semiconductor, citing an increase in PC demand, could also be an important sign.
Chart of the Dow
The Nasdaq also made up yesterday's losses and with the August high in the rear view mirror, looks intent on testing the 200- dma. It is getting close now, and after the third higher high in the current run, another 10 points will do the job. That 200- dma is descending and is now just below the 1500 level. A break over both levels would look even more bullish and could put us into new territory there, as well.
Chart of the Nasdaq
One of the leading tech sectors has been the chip stocks. The Semiconductor Index (SOX) has now put on 78% from its October low of 214 on October 9. The index finished the day at 381.69 and looks intent on testing its 200-dma above 400, as well. After rallying throughout earnings season, in spite of almost daily warnings about the lack of chip demand, it appeared that funds simply felt the news wasn't as bad as expected. However, it is hard to explain an almost doubling of value in a month and a half. Traders should also remember that the index traded as high as 641 in March and had plenty of room to bounce. That still leaves the sector down 40% in 8 months, even after the 167-point rally.
Chart of the SOX
We are seeing a pattern here, with most of the broader indices approaching these 200-dmas. Certainly the current rally will run out of steam at some point and that level would be a good time to start buying protective puts. The bullish percentages are all very extended, which is bound to happen in such a furious rally, and are telling us that the risk is shifting to the downside. The Nasdaq Composite and SPX are both up against their bearish resistance lines, while the Dow and NDX are floating around in overbought territory over 70%. While the bullish percentages can remain in overbought or oversold territory for quite a while before a turnaround, once the three-box reversals down begin to occur, it is time to be extra cautious and possibly take some profits. The Nasdaq Composite has been turned away from the bearish resistance line on its last three rallies, so the fact that it is right there now should be a red flag to keep an eye on.
Chart of the COMPX Bullish Percent
I am still leaning bullish, as today's new relative highs indicate more upside in the immediate future. However, once we get to those 200-dmas, I'm going to start picking up puts across the board. Friday is traditionally an up day for the market, but expect extremely low volume on the half-day. Most traders stay home, and the options floor is practically silent. I expect some continuation of the rally, however I find it curious that the Market Volatility Index finished up on such a big rally. Someone is apparently worried about the downside, as that is usually the driver behind a VIX increase. Until we get that rollover, trade the trend, which is still up, but begin to exercise more caution as we put on a few more points.