That big seasonal rally we have been waiting for remains on hold. We tested new relative lows once again this morning and it appears as though we will finish the year on yet another down note. We may have to adjust our thinking about a so-called Santa Claus rally, which showed gains from November/December lows to December/January highs, after breaking a 34-year streak, dating back to 1968. While we could certainly still see that streak end in tact if we get the rally on the other side of New Year's Eve, the series of lower lows heading into the end of December makes it looks less likely with each passing day. The Dow did add 29 points after rallying more than 100 points intraday, but the rally faded into the close and appears at this point to be just another lower high.
The Dow sank into an area where it found strong support at the end of October and beginning of November. However, it remains in a descending channel, with all but one recent high coming at a lower level. That high came the day after Christmas and the intraday 116-point gain faded quickly into the red by the close. Even if we do get a rally over the next couple of days, it will take a move back over 8650 to convince me that the rally has real legs under it. Of course, if the recent action continues, that analysis may not come for a while.
Chart of the Dow
The morning started out with what seemed to be positive news for the tech sector. The Semiconductor Industry Association released data showing that shipments rose 1.4% in the month of November and sales were up 19.6% year over year. Also on a year over year basis, the three-month rolling average was up 25%, which was slightly lower than the 26% improvement in October. The downside to the report, which was basically in line with expectations, is that the 1% decrease from third to fourth quarter is well below the 1998-2001 average sequential growth rate of +4%. J.P. Morgan, in one of the more in-depth analyst statements of the year (GRIN) said this was due to lack of end demand. Wasn't it just a few weeks ago that we heard several equipment makers talking about the upturn in PC demand heading into the holiday season? Guess they overestimated. Wireless chips once again led the pack, as demand for next generation cell phones seems to be the only sustainable area of chip demand. The data was taken negatively with a sell-off in the chip sector, as the Semiconductor Index (SOX) continued its month long slide, giving up 2.21%. The SOX has given up over 100 points from its high of 393 on December 2 and is getting close to its last pullback level, just above 280. The afternoon bounce we got in the Dow and SPX was encouraging for a January rally, but without this sector's participation, it is unlikely that any rally will be long-lived.
Chart of the SOX
It appears that all of the doom and gloom predictions for the retailers came to pass, as we got more warnings this morning. Wal-Mart re-iterated last week's comments that it would see a total of 2-3% same-store sales growth for the 5-week holiday season ending January 3. That number includes a decline in same store sales at its Sam's Club warehouse chain. This number is approximately one half of its traditional growth target of 4-6% and a reduction of the previously announced target of 3-5%. The fact that it comes during the holiday season looks very bearish for consumer spending, as the trend of lowering expectations shows no sign of slowing. If Wal-Mart is lowering growth into the holidays, then what can we expect when the bargain hunting is out of the way in the next couple of months? We got even worse news from Federated, which owns Macy's and Bloomingdale's. Federated had refused to give guidance last week, citing a high percentage of sales in the last week of shopping before Christmas and the inability to predict how those sales would add up. I questioned that reasoning last week and it appears the retailer was just delaying the bad news. Federated had been predicting sales as coming in flat to down 2.5% for the holiday season, but lowered those expectations this morning to a decline of 4.5%. Bear Stearns also had some negative news about sales at Target, saying that December same-store sales are well below plan and could be flat to down in the low single digits. Bear says there could be a 5-10% downside risk for Target's earnings estimates of 76 cents per share. December sales are on pace to increase by 1 percent, which would be the weakest year-over-year growth since September 2001, according to the National Retail Sales Estimate. If sales are down from a year ago, when consumers were still recovering from the 9/11 attacks, then it's obvious we have a long way to go before the country crawls out of the current economic hole. Investors may have been expecting even worse numbers after wandering through half-empty malls for a majority of the shopping season, as the initial dip this morning in the Retail Index (RLX.X) eventually turned into a gain, finishing up 2.3% on the day. The index had been beaten down the last week and sat on the verge of breaking down below support at 260 before today's rally took it back to 267.35. I would still hesitate to buy stocks in this sector. While the news could have possibly been worse, the trend suggests it may still fulfill expectations in the near future. Merrill Lynch analyst Daniel Barry said, "We believe most broadline retailers missed their Christmas sales plans and we expect sales and profit warnings over the coming weeks."
Chart of the Retail Index (RLX.X)
Existing home sales also took a hit with a drop of 3.5% in November, which was far below expectations of a slight gain. They were still up 5.9% from November 2001, but not what homeowners were anxious to hear. It also suggests that the torrid pace of home buying spurred by low interest rates may be cooling as we head into the winter months. Some of this may be seasonal, but the report was nevertheless worse than expected and took its toll on the home building sector, with the Dow Jones Home Construction Index (DJUSHB) falling 1.2%.
The Market Volatility Index (VIX) sunk on the afternoon rally, but remained above 30. I traded under 30 during the late November rally and a move back under that level might indicate that traders believe a rally is for real. It would probably take a Dow rally above 8600 to push it back below 30, which would also break the trend of lower highs. If we get a move back into those areas, then maybe Santa was just a little late and we'll still get that unlikely rally.
Other indicators that have been somewhat reliable in their relation to the Dow are oil, gold, the dollar and bond futures, each with an inverse relationship to the equity markets. Oil futures and gold each finished down on the day, confirming the move in equities. The dollar, on the other hand, sunk to new 52- week lows, and bonds continued their move higher through resistance. That move in the bond market would seem to cast a long shadow on today's rally, as we didn't get the flow of assets from stocks into treasuries that we normally see on sustained rallies in the equity markets.
Chart of the 10-Year Treasury
After today's bounce, traders need to be careful of jumping in long and picking a bottom. The failure by the bond market to confirm this afternoon's bounce in equities, when taken along with the sinking dollar, throws up a red flag. We also need to be aware of the fact that although the traditional "Santa Claus" rally has been remarkably consistent, all trends eventually come to an end and the series of lower lows and lower highs indicates that this may be the time for this one to end. We have fallen through several levels in the major indices where a bounce could be expected. Although the Dow has remained above its support level between 8200 and 8300, another trip below those levels may not end until we re-test the July lows around 7500. If this rally fails anywhere below 8550, traders can look to jump on short and ride the market down to another lower low.