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Market Wrap

Breakout in Progress

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       WE 11-05        WE 10-29        WE 10-22        WE 10-15 
DOW    10387.54 +360.07 10027.5 +269.66 9757.81 -175.57 -121.82 
Nasdaq  2038.94 + 63.95 1974.99 + 59.85 1915.14 +  3.64 -  8.47 
S&P-100  557.90 + 17.25  540.65 + 15.49  525.16 -  6.64 -  6.67 
S&P-500 1166.17 + 35.97 1130.20 + 34.46 1095.74 - 12.46 - 13.94 
W5000  11049.59 +340.64 11068.9 +320.91 10748.0 - 90.63 -125.85 
SOX      417.83 +  5.58  412.25 + 17.09  395.16 + 13.79 -  8.15 
RUT      604.29 + 20.50  583.79 + 16.02  567.77 -  0.65 -  6.23 
TRAN    3572.50 + 75.08 3497.42 +125.48 3371.94 + 19.26 + 16.68 
VXO       14.36           16.57           16.09           15.89 
VXN       19.47           21.90           21.36           21.80

If investors had realized how strong the post election Bush bounce was going to be the margin of victory may have been a lot wider. The markets are in breakout mode and a sudden burst of jobs activity should guarantee they stay that way.

Dow Chart

Nasdaq Chart

SPX Chart

What a week! The Dow was up +3.6% and the SPX stretched its streak of consecutive daily gains to nine days. The SPX has not posted a streak like that since 1997. New multiyear highs are popping up everywhere. Bulls have broken out of the channel and new individual 52-week highs were seen on 722 stocks on Friday. For the third consecutive day up volume has been nearly 3:1 over down volume and that volume has been strong with four consecutive days in the 4.5 billion share range.

The markets exploded out of the gate on Friday and the incentive was a blowout jobs report. The headline Jobs number showed a gain of +337,000 jobs and nearly twice the official estimates of +160k-175K and nearly three times the whisper number at 125,000. It was a monster number and there was improvement in almost every area. Even September's gains were revised up +43,000 from the prior 96,000 estimate. August gains were revised up by +70,000 to 198,000 from 128,000. This was a simply incredible report given the persistent weakness in the various economic reports over the last month.

The first conclusion analysts jumped to was a strong bounce in temporary jobs due to the hurricane rebuild effort. There was an increase in construction of +71K jobs and the BLS said many of these were hurricane related. More important was an increase of +272,000 jobs in the service sector. Temporary employment jumped +48,000 and suggests there could be a continued increase in permanent jobs ahead. Total Household employment, a completely different survey, jumped +298,000 for the month. Adding it all together we saw a +337K headline, +43K increase for Sept, +70K increase in Aug and a gain in household jobs of +272k for a grand total of +722,000 jobs. It does not get any better than this and it erased the "Bush Jobs Deficit" completely. How ironic that the Jobs release in October was well below estimates and allowed Bush to be verbally abused at even a higher intensity level for the last month of the campaign. All during that time the actual numbers were exploding. Hindsight is always 20:20.

The markets could not have been more excited. A monster increase in jobs for the October period suggests Nov and Dec could also be strong. Holiday retailers should be ecstatic as jobs produce happy consumers. That allows for profits in the entire retail food chain and a ripple effect that will be felt by manufacturers.

The downside of the jobs numbers was a sharp increase in the expectations for continued rate hikes. On Thursday the expectations were only slightly over 50% for a hike in December and that jumped to 81% on Friday. There is some talk now that a 50 point hike could be in the cards for November. Obviously this would not be received well by traders but with oil falling it might be a minimal impact.

Oil hit a low near $48 on Friday and well below the $55.65 high we saw last week. Unfortunately the rate of decline is slowing and we saw a rebound at the close to $49.65. As I pointed out on Thursday night the price of oil has always rebounded from the 50 day average since October of last year and that average is $48.72 tonight. Oil has hovered between $49-$51 for a week and a break back over $51 could start the cycle all over again. Gas is back over $2 again and a survey taken last week showed 69% of consumers were planning on spending less this holiday as a result of higher energy prices on already tight budgets.

The Dow posted another strong gain of +73 points and after a late morning break from the highs at 10400 it returned to test them again right at the close. The morning jump pushed it over the 10350 resistance and then used that same level as support on the intraday dip. The long term down trend may be over but there is still a rough road ahead. The 10450-10550 resistance range that has held since March is probably not going to fall easily. I believe it will fall and with the current momentum it could easily fall soon. However I have some concerns I will point out in a minute.

The Nasdaq managed to post another gain despite a lack of excitement in techs. Without help from the SOX the Nasdaq is clawing its way higher but well below the ramp speed of the other indexes. With very strong resistance just ahead at 2050 there could be some hesitance to join a party that is out of chips. I believe this will change also but even if it didn't a Nasdaq adding +15 points a day consistently is not really a bad thing from an investor point of view. Next week we have Dell and Cisco earnings and while they are not expected to move the market higher with blowout earnings they could confirm increased growth in the tech sector.

SOX Chart

Russell Chart

Wilshire Chart

The Russell was the index I felt might be indicating that the rally may slow next week. The opening spike shot up to over 607 but it declined most of the day with only a small bounce into the close. The Russell has very strong resistance at 606 and it is knocking on the door but the energy seems to be slowing. The Russell is up +7% over the last two weeks and while there was some consolidation just before the election it still needs to rest.

The concerns I mentioned earlier are the strongly overbought conditions and the very strong overhead resistance. Couple those with the Fed meeting next Wednesday and a strong economic calendar and there is ample reason for a pause. I do not believe the rally will fail and return to the prior trend but I do believe we could see some consolidation at or below the current levels. I would look at any dip as a buying opportunity.

The market positives are far too many for the bears to ignore. The missing piece of the economic puzzle was the weak labor market and Friday's report completes that bullish puzzle. Oil has lost its luster and while it may turn higher again most investors have now become immune to the constant sound bites about the price of oil. Economic prosperity can withstand high oil prices better than a stagnant economy and we could be on the verge of a turnaround. The terrorist threat appears to be dwindling and dozens of analysts have said the Bin Laden tape could be a sign they are losing their credibility around the globe. We had dozens of high profile public events in the U.S. and the Olympics in Greece and despite high profile threats that they would decimate us nothing happened. The Bush election is being proclaimed the best thing for the markets short of abolishing the IRS and the odds are good he might pull that off as well. Add in the potential for privatizing social security and market analysts are positively giddy.

Analysts don't create a bull market by calling their brokers to place orders. They create a bull market by energizing millions of investors with excitement that prompts them to call their brokers or click a mouse. The hysterical frenzy on stock TV this week is bordering on unbelievable. Headliners are actually yelling at each other and physically pounding the table screaming buy. Yes, I am talking about Cramer. The man was just getting over a weeklong bout of hoarseness and yelled himself into a stuttering fit on Friday telling a guest real estate analyst who was recommending real estate as an investment that he was crazy and he was going to short him and use the money to buy more stocks. Granted Cramer is not your ordinary talking head but he is a high profile symbol of the bullishness in the market.

With the markets at new highs and no sellers in sight it should make technical analysts more cautious about the impending resistance levels. Instead most analyst panels look more like the hear no evil, see no evil, speak no evil monkeys. Everybody is afraid to say anything negative. The negatives I see are the current escalation of aggression in Iraq, the impending death of Arafat and growing tensions over Iran and North Korea. Second term presidents are dangerous. They are not known for restraint because they have run their last election campaign. I just found out today that there is a growing wave of boycotts in Europe against US products to protest the election. Games are being played in the currency markets that could eventually topple not only the rally but the economy as well. The dollar has been crushed since the middle of October and it was especially bad over the last three days. Analysts suspect government intervention from overseas in an effort to warn Bush he better think twice before making any major policy changes that impact them. The current account deficit must be addressed or the dollar will become the next "oil" and one that could actually tank the current economic boom. On Friday bonds sold off, gold hit a 16 year high and the dollar hit an all time low against the Euro. Definitely some economic problems ahead as evidenced by those events.

Dollar Chart - Five Year lows

For next week we have a strong economic calendar but after the jobs numbers there should be nothing that can trip up the rally. The markets may pause ahead of the Fed meeting on Wednesday on fears of a 50 point hike instead of just a 25 but the outlook statement can only be positive. I would look to buy any dip above Dow 10250 and the 200 day average. The SPX closed at a new 32 month high at 1166 and should be in breakout mode. The official analyst target is 1250 for the year end.

The impending death of Arafat on November 15th could cause some market ripples but they should be minimal. The latest rumor suggests that Arafat will not be allowed to officially die until after Ramadan ends which is Nov-13th in Palestine. This also gives them time to find a burial location. Opposing forces are currently locked into a fierce battle over the prospective location. Sharon has vowed he will not be buried in Jerusalem as long as he is Prime Minster. It is traditional for Muslims to be buried within 24 hours of death and the arrangements need to be in place before he dies such a long way from home. His death would trigger 40 days of mourning and many say some serious Fatah infighting, the potential for a new series of suicide bombings and Israeli reprisals. This could be a very serious event.

The historical trend for a post election rally is still intact. However several other trends have gone down in flames. The Redskin loss the weekend before the election has predicted the defeat of the incumbent correctly since 1933. It obviously failed this year. The Stock Traders Almanac claims that since 1904 any time the Dow has lost more than -0.5% in October the incumbent has lost. This year broke that 100-year trend with the Dow loss and the Bush win. There were several others but you get the picture. Hey, the SOX came back from a 0-3 deficit to win the playoffs and the series. This is a year for historical trend breaks. Let's hope the trend for November and December to be the top two market months of the year is not the next trend to break.

Sell Too Soon!

Jim Brown



 
 



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