Buyers Gave Thanks
The buyers rallied out of the gate on Monday after being depressed by new mutual fund disclosures and terror warnings the prior week. They managed to push the indexes right back to prior resistance and hold them there right into Friday's close. In short, buyers gave thanks for the dip and bought their Thanksgiving desert on sale.
Dow Daily Chart
Nasdaq Daily Chart
S&P Daily Chart
There were no economic reports on Friday but Wednesday was a banner day that needs a little review. The mostly bullish report calendar was highlighted by a massive jump in the PMI to 64.1 from 55.0. This is an eight year high and represents the seventh consecutive month of gains. The component gains were led by a jump in new orders to 73.3 from 59.2 and that would indicate the recovery in the Chicago area is picking up speed. Order backlog rose to 59.6 from 47.3. This report was very bullish but it was met with a yawn. The bad news was the jump in the prices paid component from 61.5 to 67.3. This shows that inflation is beginning to gain traction and the Fed is probably beginning to get nervous.
The Jobless Claims fell again and faster than expected to only 351,000 and -9,000 below estimates. Claims were revised up for the prior week by +7,000 to 362,000. Still this is continued good news for consumers and for the markets. If jobless numbers continue to decline next week they could break the psychological 350,000 level and the level where it is commonly assumed a real turnaround in employment has occurred. This continued drop is bullish for the long term market. The drop in claims over the last four weeks should impact the non farm payroll report next Friday and estimates are for a gain of +150,000 jobs.
However, the October Monthly Mass Layoffs soared to 158,240 and nearly double the 82,647 reported in September. This is in stark contrast to the Jobless Claims and the expectations for the employment report next week. It is however a late report for the October period where the other reports are more current. Manufacturing and the West Coast reported the most layoffs.
The final Michigan Sentiment for November was inline with estimates at 93.7 and unlike the Consumer Confidence failed to soar to higher than expected levels. The expectations component showed the biggest gains from 83.0 to 88.1. The headline number finally exceeded the highs reached last May with the post war rebound to 92.1. The Michigan Sentiment is less dependent on business conditions than the Consumer Confidence and the smaller bounce could be due to consumers maintaining a wait and see attitude.
The strongest report was the Durable Goods jump of +3.3% compared to estimates of only +0.8%. This was the strongest gain since Sept-2002 and coupled with the +2.1% jump in September shows a rapidly accelerating recovery. On a year over year basis the gain was +8.2% and the sharpest growth in over three years. Unfilled orders continues to jump indicating that orders are coming in faster than they can be filled. This is good for the employment factor as manufacturers will begin to add workers to keep up with the orders.
The Beige Book described a broadening expansion over the last six weeks and suggested a positive outlook for retail sales for the holiday. Areas improving included retail sales, tourism and domestic travel. They did say that business travel remained weak. Outlooks for commercial real estate actually improved in several regions. This was one the most positive Beige Book reports since 2001.
After all the positive reports last week we have a lighter calendar next week but it still contains some blockbuster names. Monday we will get the ISM data for November and it is only expected to be flat with the 57.0 reported in Oct. Based on the positive gains over the last month this could produce an upside surprise. On Wednesday we have the ISM Services Index and Productivity. The ISM Services is also expected to be flat or down at 64.0 but the Productivity is expected to jump to +8.3% with whisper numbers in the +9.0% range. Friday rounds out the reporting week with the Non Farm Payrolls and Factory Orders. Factory Orders are expected to rise by +0.8% and the economy is expected to have added +150,000 jobs.
Obviously there is plenty of room for disappointment in those numbers with the ISM the only potential for a real upside surprise. This sets up next week to be confusing for most traders.
The month end for November went out with a whimper with both the Dow and Nasdaq gaining less than 10 points each on Friday. Wednesday was not much better with the Dow only gaining +15 an the Nasdaq +10. Shucks Tuesday was flat also with the Dow +16 and the Nasdaq -4. The only really bullish day in a normally bullish week was Monday which stormed out of the gate as I expected. That left the indexes trending positive but unable to make any real gains for the rest of the week.
Where was the month end portfolio window dressing? Where were those monster bullish days we have seen in Thanksgiving week in the past? Economics were good, terrorists were on holiday and there was not any really negative stock news. The indexes failed several times at resistance but managed to close very close on Friday. Dow 9800, Nasdaq 1960, S&P 1060 have proved to be difficult. Actually the S&P at 1060 has been the failure point for the entire month. The Dow at 9800, Nasdaq 1960 while current resistance and are actually lower highs for those indexes. Dow 9900 and Nasdaq 1980 were the prior resistance highs. Could this be a leading indicator for next week with the bearish divergence by the Dow?
Dow Weekly Chart
While the overall market sentiment is still strongly bullish there are numerous cracks trying to appear around the edges. In the chart above you can see the long term down trend resistance from the market highs in Jan 2000. Except for the May-16th 2001 temporary spike above the line the trend is very clear. The Dow ran full speed into the 9900 down trend several times in November and failed each time. The current down trend resistance has declined to 9850. There are many analysts who feel this resistance will hold and we are going to begin another down leg soon.
The thought process is that the market is fully valued at this level until the Q4 earnings are known. Everyone is hoping for top line revenue growth based on the economics but not wanting to bet on it. Lately each time we near the 9800 level the buyers simply evaporate. Like I said last week they are willing to buy the dip but not the top. Until they are willing to push the bears out of their comfort zone we will remain trapped at this level.
Nasdaq Weekly Chart
The Nasdaq is not without its own level of resistance but more horizontal than down trending. The Nasdaq has strong resistance from 1960 to 2050 and that is not going to be broken quickly. Even a break over 2050 only leads to more strong resistance at 2250.
With Monday typically bullish from fund inflow purchases I am a long way from predicting any sell off. I am simply suggesting that moving up from here may be difficult. The markets have huge overhead supply from 10,000 and above from traders hoping to get out of positions they have held since we traded in the 10,000 range for about seven months in early 2002. This level represents very strong congestion.
In order to get through this congestion we need a catalyst. There are no events in the near future that should fill this bill. With the Dow up +33% from the March lows and the Nasdaq +56% the indexes are starting to look tired. Not weak, just tired. Like a marathon runner turning the corner at 22 miles and finding the last four miles are all up hill the markets are suffering from chest pains and leg cramps but determined to finish the race. Finish, but not sprint out into the lead.
As we move into the last four weeks of the year, 22 trading days, the goal is still Dow 10,000. This is the yardstick where the market recovery will become official. It is the psychological finish line and it is tantalizing us just a few points ahead. Actually the nearness of the goal could be preventing a material sell off. The optimism is so strong that everyone expects it to be reached. Why sell now when we are so close? Good point but like the investors who have been holding since we last broke under Dow 10,000 their patience may be wearing thin.
I said we need a catalyst and short of Osama and Saddam being found sharing a hideout in Tikrit the good news is already priced into the market. +8% recovery in the GDP? Priced in. Jobless Claims under 350,000? Priced in. Non Farm Payrolls +150,000? Priced in. PMI 64.1? Priced in. Consumer Confidence soaring to 91.7? Priced in. Over the last eight months the market has discounted those events and now that they have come to pass there is little to look forward to. At least nothing visible in our immediate future. The 4Q earnings will be critical. If there is top line growth then we could ratchet up expectations for 2004 to the next level. If not then investors will probably subtract some expectation premium from markets.
The only real expectation in our future is for the beginning of the next rate hike cycle. The next Fed meeting is only a week away on Dec-9th and there will be quite a bit of rate hike apprehension going into that announcement. Fed funds futures are suggesting a March rate hike and the Fed needs to give the markets further assurance that there will be no hikes for a "considerable period" or the reaction could be negative. We are entering the period where talk is cheap and the Fed will likely try to talk its way out of trouble to delay the rate hikes until the last minute. I expect the Fed heads to hit the campaign trail next week with carefully crafted statements meant to calm the bond and equity markets.
To put all the prior comments in perspective I am not looking for a dramatic week ahead. The first trigger will be the ISM on Monday then the INTC mid quarter update on Thursday. If INTC raises guidance then we might make that 10,000 goal. If they talk down estimates then I expect to remain range bound. The Jobs number on Friday had better be positive or the vacuum left by the imploding markets is liable to suck your keyboard into your monitor. Forget the reports from last week the ISM and JOBS are the only reports than matter now.
What I am looking for is a potential retest of 9800-9850 on Monday from mutual fund cash hitting the markets. That is of course assuming the cash outflows from funds under pressure does not offset the inflows. With the dollar still falling we cannot expect help from overseas investors. We are on our own. If the ISM is less than exciting I would expect a return to 9700 and the middle of our current range to wait for the Jobs number on Friday. If the Jobs report is uninspiring then I would expect one more dip before a potential Santa Claus rally. Institutions would like to clear the decks for one more push to Dow 10K in late December so they can dress up their statements with D10K comments. With the VXO at 16.50 there should not be a lot of upside left so I am still expecting a sales event with a touch of Dow 10,000. Everybody put Dow 10K on your holiday gift list and lets get 2004 kicked off with a bang.
Enter Very Passively, Exit Very Aggressively!