Today was the third day in a new losing streak that most investors are ignoring. The losing streak I am referring to is not the jobless claims or retail sales but the new 52 week highs and lows. A new trend is emerging and traders should be aware of it.
Dow Chart - Daily
Nasdaq Chart - Daily
Just when economists would have you believe that new jobs are being created and the record unemployment number from last week was an error the jobless claims deflated their argument. The new claims for the week soared to 441,000 and a level not seen since April. Analysts who ignored the holiday impact last week when bragging about the artificially low numbers were quick to claim holiday impact for this week to diminish the reaction to this very bad report. The headline number for the week was +63,000 over the consensus estimate of 378,000 claims. Claims for the prior week were also revised upward slightly. Considering the pace of layoffs rose sharply in Oct/Nov this is not a welcome sign. A new wave of layoffs in the airline sector due to the UAL bankruptcy could add to the current tide. New hiring is not increasing and the risk of a jobless recovery, if any, is increasing.
Another misleading number came from the November Retail Sales report. The headline number came in at +0.4% and surprised nearly everyone who has been following the weak same store sales reports. The November number was held up almost entirely by sales at Furniture and Home Furnishing Stores, Appliances and Building Materials. Furniture stores showed a spike in sales of +2.3% in one month after averaging only +0.17% over the last seven months. Why? With the boom in housing now a year old why would one month suddenly spike +1000% from the prior months +0.2% number? Is this another instance of a number that will be revised downward next month? Nobody knows today but the fact remains that mall stores are in trouble. The numbers for department stores dropped -1.4% and clothing stores -1.3%. General Merchandise stores only gained +0.3%, which was a -75% drop from October. With retail stores already complaining about holiday sales the outlook for the December numbers is not good.
Also weighing on the markets today was the FOMC minutes from the November meeting. The Fed saw dissipating stimulus as a problem which means the impact of the first series of rate cuts was slowing and the vaccinations did not work. The Fed decided that another larger injection was required to slap the economy out of its doldrums. They decided that risk of inflation from such a move was minimal considering the lack of movement in the economy to date. The biggest argument was the change in the bias back to neutral. Several members opposed the move back to neutral based on the severity of the current problem. They were swayed to go along with the decision by discussions of market reaction to a 50 point rate cut and leaving the bias to further reductions. There was a fear the markets would self destruct due to the Fed's negative outlook. No kidding! Now that the truth is out there for all to see the markets did not self destruct but they are far from happy about the Fed's concerned outlook. The concern is that the soft spot in the economy does not become a black hole.
Also putting the brakes on the holiday sentiment were several geopolitical concerns. One news report claimed that Al-Queda had acquired VX nerve gas from Iraq over the last couple months and the weapons had disappeared into the terrorist network. Iraq of course denied it since a non-denial would mean they actually had the weapon(s) to begin with. North Korea said they were restarting their plutonium based nuclear power program, which the U.S. had claimed was a thinly disguised effort to build a nuclear weapon. This was a nose thumbing at the U.S. for being unable to keep the Scud missiles that were stopped on the way to Yemen. It was also open defiance to the Bush policy statement yesterday that the U.S. could and would respond with nuclear weapons if any nation used a weapon of mass destruction against us. It appears North Korea is calling our bluff while knowing we cannot attack them. While this war of words continues on the global school yard the markets are beginning to show signs of concern. Reports also surfaced that IRAN could be close to developing nuclear weapons after news reports that two different nuclear plants for weapons production were under construction.
The assets in all money market mutual funds rose by +$10.36 billion in the week ended Dec-11th. However, retail MM funds fell -$3.64 billion. The overall gains were due to institutions stashing cash to the tune of +$14.55 billion last week. While retail investors were taking money out for the holidays or to put into the markets, corporations were adding to cash reserves instead of stocks. Since the market dropped during that week it appears corporations were selling stocks just when a typically bullish period was about to begin. Makes you wonder if Santa Clause is really coming to town.
CIEN provided hope for tech investors today and was probably the main reason the Nasdaq finished in positive territory. CIEN raised its guidance for the first quarter and predicted a lower than expected loss. After taking huge write offs for restructuring over the last two years any positive outlook is an improvement. CIEN gapped up to $6.20 on the news for a gain of +20%.
Unfortunately it did not help the Semiconductor sector. Despite the positive TSM news about better than expected sales from the largest foundry in the world and affirmed guidance from several major chip companies the sector remains flat. The comments from Intel CEO Andy Grove continue to weigh on the sector. He said on Tuesday that it might be too early to forecast a rebound in the sector despite recent industry reports indicating an upturn may be on the horizon. He said Intel had not seen any material increase in overall chip sales and for the sector to pull out of the doldrums companies would need to cut back on capacity on a global scale. Don't hold your breath.
The new streak I mentioned earlier was the new lows beating the highs for the third straight day 124 to 109. While this is not a break away rout it is a troubling indicator. The Dow remains trapped in the 8500-8600 range and it appears the ceiling is dropping faster than support is getting higher. In this typically bullish period the most bullish indicator from Thursday was the gain in the Russell-2000 to 395 but it was a weak gain and stopped just below strong resistance at 400. There is simply no conviction for a further rally and the lack of volume, only 3.1 billion total, makes it tough for bulls to force any gains.
Several of the big caps in the Dow are looking particularly weak including MMM, IBM, JNJ, IP and WMT. This should be the best quarter of the year for Wal-Mart as the biggest discount retailer yet investors are fleeing the stock. IBM said they were busy and were not asking employees to take extra time off like other tech companies but the stock has dropped nearly $10 in two weeks. MMM closed within cents of breaking its 100 and 200 DMA.
While I am not trying to paint a bearish picture there is cause for concern. I had originally expected this week to be up slightly with a dip before Christmas week to prime the typical holiday rally. If this was the bullish week I hate to see what next week could bring. Actually, I think we are safe from any major market drop with very strong support just below us from 8350-8500. It appears we are going to drift just above that support until something happens to energize the buyers. War talk on multiple fronts, live fire exercises only ten miles from Iraq and the word nuclear being used more in one day than in the past six months is enough to make even the most aggressive investor a conservative. The +$14 billion of institutional money moving into money market funds instead of stocks is confirmation of that idea. With the big caps resting on critical support there is potential for strong holiday gains but there is also the potential for those gains to evaporate just as quickly. As investors maybe we should be investing in the malls instead of the markets next week.
Enter Very Passively, Exit Very Aggressively!