Support Holds Again
Buyers circled the wagons at Dow 9600 and fought off all the attackers. Threats of increased terror attacks, downgrade to a Dow component, option expiration and new mutual fund allegations failed to push the indexes lower. Sellers tried to run over buyers but were turned back each time.
The was no major economic news on Friday with Internet Sales the most noteworthy report. Sales climbed to $13.29 billion for the 3Q and the second highest volume ever. The current quarter is expected to be the best ever as consumer acceptance of the web continues to grow. YHOO rose on the news but AMZN lost ground. EBAY was still reeling from the suit filed yesterday by AT&T but closed well off the lows at $51.90. AT&T sued EBAY claiming that PayPal violated their patent on ecommerce payments. Seems AT&T patented the third party pmt process where an uninterested 3rd party handles payments for a two other unrelated parties. This boggles my mind how they could patent a concept as broad as that. They are asking for all profits made using their concept as well as damages and that PayPal cease taking payments or pay license fees. AT&T was granted the "Mediation of Transactions by a Communication System" patent in 1994.
Considering PayPal is not doing anything different than Visa and MasterCard have been doing for years, handling payments between two parties, it is hard to understand how AT&T can win this suit. However, EBAY was just hit with a $29 million judgment for offering "Buy it Now" auctions. Seems somebody else patented the concept of offering to end an auction early for a fixed price. Amazon and Barnes and Noble went to court over the "1-click" option on Amazon. The suit was eventually settled out of court. Amazing. Let's go one step further. Option Investor was threatened a couple years ago for using the phrase "knowledge is power" in an article because it had been trademarked. A quick search on Google comes up with 8,670,000 pages with that phrase in print. Selling license rights for $100 per occurrence would be highly lucrative. It appears you can copyright, patent or trademark anything and once done you lay in wait for somebody to trip over your rights and allow you to sue them. Now if I could just figure out how to patent air.
The only other economic report was the ECRI Weekly Leading Index which rose to 130.9 from 129.2. The six-month growth rate rose to 11.1%. The index had stalled for about a month but over the last three weeks has begun moving up again. The +11.1% growth rate is down from the high of +13.5% back in August and the drop was mostly due to the jump in interest rates. Now that the index is rising again it is another indication that there is a recovery underway.
In stock news Dow component MRK set another 52-week low after scrapping a late stage diabetes drug. MRK was hit with downgrades, some very negative in tone, and dropped nearly -$3 to close just above $42.00. On Nov-12th MRK pulled another drug which it had been testing for six years for depression. MRK has been on the sell list since July and the bargain hunters were starting to pay attention with the spike to $47 last week but now even the bottom fishers are deserting it.
FRE made history by restating earnings to the upside by nearly $5 billion dollars. $4.4 billion came from 2000-2002 and $600 million from periods before that. FRE said that they may not be able to complete 2003 accounting until next June. The company claims it had previously understated earnings to smooth the volatility and warned that the new accounting will show that much higher volatility in future releases. Because FRE uses derivatives to hedge its interest exposure it has massive swing potential depending on the current rate environment. Needless to say regulators are not impressed and wonder what other mushrooms might be growing in the FRE accounting dept. Since they under reported instead of over reported they are not in the Enron or WorldCom category but breaking the rules is still breaking the rules. FRE spiked +$5 on the news over the last three days and then gave up nearly half as the smoke cleared.
The mutual fund scandal continued with Bear Stearns hit with a subpoena for mutual fund trading records. Innocent until proven guilty of course. Wal-Mart announced that it was pulling two Putman funds out of the 401K options for employees. Revlon and Interpublic Group also said they were pulling assets from Putman. Based on the latest estimates Putman has seen withdrawals of over $25 billion over the last three weeks and more companies are fleeing the fund daily. This is continuing to pressure the broader market as the fund family churn is removing some of the upward bias.
The mutual fund pressure on the market took a back seat to the weekend terror prospects. Homeland Security warned that there was an increased chance of an attack against the U.S. both at home and abroad over the weekend due to the Ramadan holiday. The government stressed concerns that Al-Qaeda could try to hijack cargo jets and crash them into targets. They issued that warning as well as warnings of an increased bombing alert to law enforcement agencies world wide. They specifically warned that bridges, dams, chemical and energy plants were at higher risk. They told Americans worldwide to maintain a heightened state of vigilance for possible attacks this weekend. They expressed concern that the ending of Ramadan and the beginning of the heavy Thanksgiving travel season could produce higher risk. Ramadan was kicked off with multiple attacks and officials fear it could end with a series of coordinated attacks. Ramadan ends on Tuesday.
Despite the heightened terror alert the markets held their ground. Volume was light and advancers beat decliners by a ratio of 4:3. The option expiration Friday may have helped defuse the selling by providing a mixture of position closings. The markets tracked pretty closely to the maximum pain points for the index options. Most closed within a strike of the point where the most options would expire worthless. This shows a fairly level bias and was one of the closest expirations we have seen lately.
The Dow hit support at 9600 and bounced briefly before a strong sell program managed to punch through that level for a few ticks but the index was quickly bought in strength. While the buyers rushed to buy the morning dip they were content to maintain their positions around the 9620 level instead of chasing sellers higher. The index traded in barely more than a 30 point range from 11:00 until the close. The Dow closed around 20 points below its 50 DMA at 9656 and on solid support.
The Nasdaq also closed positive +12 and only traded in negative territory for about 25 minutes in early trading. The Nasdaq has tested support at 1880 for three days and each time returned to rest just below 1900. The 50 DMA is 1903 and well within striking distance.
There are so many conflicting opinions about market direction next week that it can be very confusing. There are ten analysts in the Market Monitor each day and I think there were ten different market views on Friday. Some view the next week as the potential cliff with Friday as the last step before taking the plunge. I believe the opposite.
I think the dead stop on support this week has relieved the selling pressure and the lack of a bounce was due to the terror wild card. Who in their right mind would invest serious money on a day that the U.S. is warning about a high risk of attack over the next three days? That kept many people out of the market but just enough stayed in to maintain a strong bid just under Dow 9600. Last week had been up for the last ten years and the trend has been broken. Next week has a very bullish record over the last 50 years and I think that Friday was a setup day. Traders are positioned for the worst with a sharp increase in the VXO at Friday's close as put buying increased sharply. They refused to sell and protected positions instead. Futures went out near the high of the day after the cash close.
I believe the stage is set and Monday could be a bullish day with Tuesday even stronger. Monday could still have a cloud over it with Ramadan ending on Tuesday. The flaw in this view is the weekend event risk. If we have an event close to home then the markets could break support and we could see another leg down. If we have an event overseas like the Turkey attacks then the market should hold its ground and should see any dip bought. If we have no event then the markets should breathe a sigh of relief and begin a rebound into Thanksgiving. If this does not come to pass I will be eating crow instead of turkey on Thursday.
My rationale for this is the continuing strong economic reports, the Fed going out of their way to stress low rates for a long time, the holiday mood and historical trend. We have sold off substantially from the 9900 level by nearly 300 points yet the Dow refuses to turn lose of the 50 DMA at 9650. Friday the Dow traded at or below the 50 DMA all day but closed only about 20 points below it on very negative news. If you look at the Dow since March it has not traded a single day below the 50 DMA all day. It has traded below it but never without touching it intraday. Obviously trends are only trends until they change but this trend has held the line during a very rough week. It could easily change on Monday but without a weekend event I am betting against it.
Now the bad news. I do not think that the bounce, if we get one, will take us to new highs. I still think we are going to be range bound for the rest of the year between 9600-9900. Using the Fed's comment format I will phrase it this way. The author perceives that the upside and downside risks are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in the markets exceeds that of a rise above its recent highs. While I say that jokingly it is how I view the future. Should we get a bounce next week we will end it only a week ahead of the next Fed meeting and that one will have some serious rate stress attached to it. We will also be entering the earnings warning season again as well as the year end portfolio rebalancing process. However, a rally next week will have commentators talking about a Santa Claus rally and that could offset the negatives and have retail investors jumping back on the train. Remember, cash inflows into mutual funds were near +$4 billion last week despite all the scandal news and the shuffling of money into different fund names. This is very bullish in light of the conditions.
I keep telling you to watch the internals and despite the terror threats and the -140 Dow drop for the week there were still 275 new highs and only 36 new lows on Friday. The entire week was down significantly with the new high average about 300 per day, down from around 580 the prior week, but still strong. Bottom line, until the Dow and Nasdaq lose their grip on the 50 DMA we are just profit taking. Should that grip fail the outlook could change rapidly unless it is event related. Next support on the Nasdaq is 1800 and 9500 on the Dow. Keep your fingers crossed that there are no weekend events and look for a relief bounce at the open on Monday. Should this work out like I expect the bounce should run into resistance around 9700-9725. It may not be earth shaking but any rebound after the week we had would be gladly accepted.
Most trading will take place on the first two days of the week. Wednesday is a full day for the markets but afternoon volume should be very light. Friday is a half day and the markets close at 1:PM ET. Despite the shortened week and the scarcity of traders the economic calendar is more stuffed than Thursday's turkey. Monday is a pass but Tuesday we have the GDP revision, Consumer Confidence and Existing Home Sales. On Wednesday, with most traders wanting to either leave early or not show up at all there are no less than 13 economic reports.
They have taken all the reports for the rest of the week and lumped them all into one day. If traders do show up at work the economics will be over by 10:30 with only the Beige Book in the afternoon. Despite the low volume the Wednesday before and Friday after Thanksgiving have produced some upside surprises in the past.
There are only 26 trading days left in the year and we are almost equal distance between Dow 9000 and 10,000 and analysts are almost equally divided on which one will be touched first. The economics on Wednesday along with the ISM and Jobs the following week should provide the direction for the rest of the year. Let's hope those reports have not changed direction since last month.
Enter Very Passively, Exit Very Aggressively!