Eight Weeks and Counting
For the first time since March 1998 the Dow has stretched it's winning streak to eight weeks. It did so with a +91 point gain for the week which was 1/3 of the Wednesday total. That gain was the largest Thanksgiving Wednesday gain ever. The challenge we will continue to face now is the nearly +1600 point Dow rise since the October lows that culminated on last Wednesday.
Dow Chart - Daily
Nasdaq Chart - Daily
The markets tried to rally on Friday after the Semiconductor Industry Association said chip sales rose in October by +1.8%. Flash memory was up +6.9%, PC chips +6.5% and DSP chips +4.4%. This unexpected growth is pointing to a better than expected 2003 and some stealth growth possibilities for December. The Nasdaq Compx ran up to within three points of 1500 on the news but sold off to 1479 on profit taking in the shortened session.
There were no economic reports on Friday and the negative sentiment came from UAL. Talks with labor unions regarding required cuts in labor costs had failed and it now appears more likely UAL will have to file bankruptcy because it cannot get a government guaranteed loan. The impact of a UAL bankruptcy would be the bankruptcy of several other airlines to avoid giving UAL an unfair advantage of a reduced cost structure. A bankruptcy would give an airline the opportunity to drop unprofitable routes, cancel rental contracts on unused gates, restructure debt and break unfavorable union contracts. Other airlines cannot afford to allow a major carrier like UAL to gain these advantages. This sets up a series of domino events if UAL files.
After the bell Massachusetts announced it was going to appeal the federal judge's decision to accept the MSFT settlement. They were one of several states that had until Monday to file an appeal. Iowa issued a statement late Friday saying it had declined to appeal and West Virginia was the only state left which had not made an announcement. That announcement would be made on Monday. MSFT has traded flat for the last three weeks as the clock wound down on the appeal process. If Massachusetts is the only state to decline the settlement then MSFT should rally as fighting one state would have far less impact than a consortium of nine.
In addition to the weight of an eight week winning streak the markets will have to fight a solid economic calendar and the beginning of earnings warning season next week. Economically the week begins with the ISM Index and Construction Spending on Monday, Productivity, Factory Orders and ISM Non-manufacturing on Wednesday. The big report comes on Friday with Non-farm payrolls. The triple threat of two ISM reports and the Non-farm payrolls could keep a lid on future gains.
The trading on Friday was lackluster at best with the NYSE posting the lowest volume day for the year at 638 million shares. Nasdaq volume was less than 850 million shares. Ironically the VIX gained +4.35 for the week and closed well over the 26.73 level from the prior Friday. With the market up for the week and pressing upper resistance it is very clear that investors are scared this rally is about to fail. It is very rare that the VIX moves up this strongly on positive market gains. This increase in bearishness is actually good for the markets despite the possibility of profit taking next week. It simply means that the current irrational bullishness may have run its course and we are moving back into a more fundamental basis.
The Nasdaq NDX fell back below its 200 DMA at 1121 despite the positive semiconductor news. This could be a clear indication that the tech stocks are running out of steam at this level and the +40% gains from the October low are about to shrink. Warnings from tech companies next week could accelerate this demise. The Compx has the same 200 DMA resistance at 1495. The Dow has plenty of room before hitting it's 200 DMA at 9183 but has plenty of resistance in the 9000-9050 range to keep it busy.
Trading will be complicated by several high profile analysts meetings. Cisco will host a meeting on Tue/Wed to update analysts. HPQ will do the same thing on Tue/Wed with AOL also presenting on Tuesday and INTC on Thursday. Any of these meetings can cause serious market volatility with any unexpected positive or negative guidance.
The outlook for next week is bullish on a sentiment basis and bearish on a technical basis. Without additional positive news from the economic reports or positive guidance from stocks, any attempt to move higher through current resistance will be difficult. Sentiment can only provide so much lift without some confirming fundamentals. With warnings likely to start next week this sets up some rocky days ahead. I fully believe there will be some dips but I also believe those dips will be bought by bargain hunters looking to stuff their mattress for the years ahead as well as stockings for the holiday season.
Enter Very Passively, Exit Very Aggressively!
"There is only one side to the market and it is not the bull side or the bear side, but the right side". - Jesse livermore