The market started off on a very bullish note after the futures climbed right from yesterday's close and gave us a strong gap up at the open. Equities continued their climb, albeit more slowly, right through lunch and then pretty much flattened out for the afternoon. The strong rally today that was followed by a choppy pullback is indicative of further rally ahead. However, it's looking to me like the rally off the October low is close to being finished, but not before the DOW likely gets over 11K. That bell needs to get rung before the Boyz will let the Bears sit at the table.
The week-long pullback looks like it might have been some house cleaning in preparation for a December rally. Looking at the NYSE, while it pulled back from its high on Nov. 23, the new 52-week highs continued to outnumber the new lows. It looked like there was some accumulation going on in preparation for a rally. Looking at the performance of the small caps relative to the large caps the past few days, you can see where the buying was going during the pullback. Today was the beginning of the best month for blue chips as December has historically seen an average of a +1.7% gain in the S&P over the last 55 years. Adding this to the index's +3.1% year-to-date gain bodes well for a year-end forecast of a +5.0% gain for the S&P that many have been looking for. Anticipation of new fund inflows was also a likely factor in the jump out of the gates today. Today's rally was strong by most measures. Up volume blew away down volume better than 4:1 and advancing issues were almost 3:1 better than declining issues. Overall volume was strong. Until proven otherwise, today's rally should be viewed as the start of a new advance and not as a correction to the recent pullback.
But there was an interesting observation made by Linda on today's Market Monitor and I think her observation is exactly right. Here's what she said, "I've noticed something during the rally off the October lows that I don't remember noticing at other times. In this run up, one index always seems to be the leader. It was the TRAN for a while. As soon as the TRAN moved above 4000, pulled back, and then rose through it however, I started noticing other indices picking up, as if the baton were being passed to another sector. If I remember correctly, the financials were next. Now they're appearing to be flagging, and here comes the SOX. It seems to be as if one sector after another is being pumped up, and as soon as it gets to some level that might sustain it in bulls' eyes, so that they'll buy on pullbacks, attention is turned to another."
This is what I call "tub sloshing" as it reminds me of water sloshing from one end of the tub to the other. I've reported before how mutual funds currently have record low cash on hand as a percent of total assets. The last time cash was this low was when we were heading into 2000 and we know what happened shortly after that. Basically when everyone casts their vote and puts money to it, in this case an expectation for a year-end rally, we soon find out that there's no one left to put more money to it. Hence the reason for using this as a contrarian indicator. Without a lot of new money that can enter the market (other than foreign capital which I believe is plenty right now) money tends to flow from sector to sector. Somebody is in the tub and just pushing the water back and forth--money leaves one sector and heads for another, out of that one, into another. The challenge for stock pickers is to figure out where the money will rotate to next. As for the major indices, they've been basically stuck in neutral while all this is going on (the market has essentially been flat for almost 2 years). Conspiracy theorists could be forgiven for thinking it's all a carefully choreographed show just to hold the major indices up. Sooner or later market forces will prevail and some of the excesses in the system will need to be purged, which is healthy, but for now the maestro plays on.
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Today was an active one as far as economic reports although the market didn't seem to pay much attention to any of it. It seemed to have an agenda and that was to rally. After the pullback into the end of the month of November, which appeared to be an overlapping sideways/down correction, we had a nice setup for a rally to start off the month of December. Not much got in the way of that today. Kicking off reports was actually an overnight report from London as the European Central Bank (ECB) announced its first interest-rate hike in more than five years, lifting its key rate by a quarter-point to 2.25%. This was supposedly done in an effort to fight the threat of inflation caused by high oil prices. The rate hike was unanimously approved and widely expected after recent comments from President Jean-Claude Trichet, who had indicated over the past few weeks that the ECB was ready to move against the threat of inflation. The previous rate of 2% had been in force since June 2003.
October personal income from wages and salaries was reported before the bell and it rose +0.6%, near expectations and the biggest gain in 3 months. Disposable incomes (after taxes) increased +0.3% in October. After adjusting for inflation, disposable incomes rose +0.2%. In the past year, real disposable incomes are up +0.9%. Proprietors' income fell -0.2%, after rising +4.8% in September, and income from assets rose +0.6%, including a +1.0% rise in income from dividends. The increase in personal incomes follows a +1.7% gain in September which was skewed by the impact of Hurricane Katrina.
Personal spending rose +0.2%, also matching forecasts. Real consumer spending was up +0.1%, the first increase in 3 months, and it follows a decline of -0.4% in September. But real spending on durable goods was down -2.5%, the 3rd straight monthly decline. Spending on nondurable goods increased 1.1%, while spending on services increased 0.1%.
With incomes rising faster than spending, the personal savings rate improved to -0.7% from -0.8%. The record low was in August at negative 2.2%. The savings rate has been negative for six of the past seven months. The October savings rate was -0.7% versus -0.8% in September, an improvement but obviously still not healthy. And now we head into the Christmas season where credit cards will likely be maxed out.
The core personal consumption expenditure (PCE) price index came in at +0.1% versus +0.2% expected, which left a +1.8% year-over-year rate, down from +2.0% in September. It's the smallest year-over-year gain since February 2004. Fed officials have said they want core inflation to remain between 1% and 2%. Consumer prices rose +0.1% in October, after rising +0.9% in September, giving us an annual rise of +3.3% in the past year compared with a +3.7% rate in September.
While the above numbers are all Fed-friendly, as it suggests inflation remains under control, it is still widely believed that the Fed is likely to raise rates at least a couple more times in the next few months as insurance against a breakout of inflation. The Fed's policy committee will meet on Dec. 13 to consider a 13th consecutive quarter-percentage point increase in the federal funds target rate to 4.25%.
Jobless claims were also released at 8:30 and showed initial claims fell 17K to 320K (consensus 325K). The continuing jobless claims were down 24K to 2.77M.
Spending on U.S. construction projects increased +0.7% in October as public-sector outlays jumped. Total outlays rose +0.7%, versus +0.5% expected, to a record seasonally adjusted annual rate of $1.13 trillion. September's increase was revised down to +0.2% from +0.5% previously. Spending is up +7.9% in the past year. Public-sector spending climbed +1.9%, the biggest increase since February, while private-sector spending rose +0.3%. Within the private sector, spending on residential projects increased +0.6% and spending on nonresidential projects fell -0.3%. Again, some of these improvements in residential projects may be hurricane related. And speaking of residential construction, home prices are up +12% in the past year but that's down from +13.4% in Q2.
Next out were the ISM numbers. The Institute for Supply Management reported that the index fell to 58.1% in November from 59.1% in October, not as large of a decline as expected. The consensus forecast of estimates was for the index to drop to 57.8%. Any reading above 50 indicates expansion. New orders fell to 59.8% in November from 61.7% in October. The employment index rose to 56.6% from 55%. The price index fell to 74% from 84%. All in all, these were pretty neutral numbers.
Very quickly, retail numbers are pouring in and notable names beating expectations include LTD, GPS, JCP, ANN, TLB, CHS, FDO and GYMB while disappointments include TGT, COST, FD, KSS, JWN, SKS, DG, and TJX. Walmart is getting a lot of attention because of their poor performance out of the gates last year (they didn't discount enough or early enough). They're reporting same-store sales rose +4.3% with estimates for December same-store sales at +2% to 4%. WMT was down on the news today.
Onto the charts to see where all this leaves us.
DOW chart, Weekly
This weekly perspective shows the significance of the rally above the downtrend line from January 2000. Weekly stochastics has now reached up into overbought and while it can stay there it is a heads up to be careful now after the strong rally off the October low. The shorter term chart shows more rally potential but it must continue its rally from here.
DOW chart, 120-min
This 120-min chart shows a parallel up-channel to keep your eye on. If price were to drop below 10800 it would be a signal that a high is probably in. Currently the DOW is fighting a previous uptrend line at its most recent high. A break back above this line, with a rally above 10960, should easily send it over 11K which should be attained before this rally is finished. The top of the current up-channel is near 11,100.
SPX chart, Daily
The trend line along the highs since January 2004 shows upside potential for the current rally to get up near 1280. Some internal Fib projections point to 1272 and there's a Gann number at 1275. But the under-throw below the uptrend line from August 2004 could mean an over-throw of the upper trend line is coming (a common occurrence). That would suggest we might even see as high as 1300. If the SPX is to have an average +1.7% gain in December (as discussed above), that takes us to 1271. That doesn't mean we'll top out there because we could rally above it and pull back to it by the end of the month. But the confluence of numbers in the 1270-1275 means it could end up being tough resistance there.
Nasdaq chart, Daily
The COMP looks bullish by holding above resistance by the trend line across the highs since January 2004. But the internal wave count suggests this one could be topping soon and Fib projections of 1277 (only 10 points higher) and then 2306 are not far away. On a weekly chart a failure to rally above those levels and then a drop back below the line would look like an over-throw and would be longer term bearish. For now, stick with the bulls.
SOX index, Weekly chart
Lots of excitement about the SOX today--a new 1-1/2-yr high! They of course fail to mention that it is still below the high of January 2004 and is still around 75% below its 2000 peak. But SOX is one that gives me a more immediate bearish feeling as compared to the major indices. As shown on this weekly chart, price action over the past 1-1/2 years looks suspiciously like a bear flag to me. The internal choppy price action supports that view. By this chart, resistance is right here and any failure to continue its rally could start to look a lot more bearish. Be careful about being long the semi's.
Time constraints prevent me from continuing last week's discussion on the pension benefit fiasco that's building. I'll provide some more information in next week's report.
There were a lot of sales numbers coming out of the auto industry today and I'll just reprint what Jonathan posted during the day on the Market Monitor. In a nutshell, Nissan, Volvo and GM sales were down while Toyota, Mazda, Honda, Suzuki and Hyundai sales were up. GM's sales were almost universally reported lower but I guess that made investors feel better about the stock--it was up +3.4% today and one of the leading DOW components. This follows a -4.8% drubbing it took yesterday to finish the month of November down -19%. A little house cleaning on that one and I guess it was a steal today, especially after it reported a less than expected -11% decline in November sales (-13% expected). Ford said they expect things to improve from its -14.8% decline in November sales. That could be like saying the savings rate, as reported above, improved this month (from -0.8% to -0.7%). I could report that little improvement, which of course is still negative and a bad number, as a +12.5% improvement in the savings rate. That's how numbers can be so easily distorted to obfuscate the truth. At any rate, here are the raw numbers reported:
NISSAN NOV. U.S. CAR SALES DOWN 5.2% AT 37,994
BKX banking index, Daily chart
The short term charts support a further bounce in the banks but the daily chart says a top is in. This was a rally that went too far too fast and as compared to the broader indices, this one looks bearish to me. If the DOW and SPX are able to rally to a new high but the banks do not, I would consider that a major intermarket bearish divergence. So watch for that.
U.S. Home Construction Index chart, DJUSHB, Daily
The bounce from the October low in the housing index looks bearish. The 200-dma is currently providing support and then the 50-dma is just below at 897. The weekly chart looks like it's rolling over which supports my bearish view on this index. In addition to the 50% retracement offering resistance, the upward correction came close to achieving two equal legs up in its bounce (976.30 and the high was 970.28). If it does press a little higher, watch that 976 level for potential resistance.
Oil chart, December contract, Daily
Oil continues to stay trapped in a relatively tight parallel down-channel and until it can break out (needs to get above $60 here) the trend is down. It's currently stalling at its 200-dma. The 50-dma is coming down hard now so any rally to that level will likely offer up resistance. In the energy arena, natural gas stocks were reported today as down 49 bcf and price closed up $0.45 at $13.00. It's currently stalled under its 50-dma so it will be interesting to see how price reacts from here. Down please!
Oil Index chart, Daily
The oil index is essentially chopping sideways between its 50 and 100-dma's. If it continues to chop sideways into a coil, it will look bearish. With a sharp drop followed by this consolidation we can expect another drop with the 2nd leg down equal to or greater than the first leg. That would be a clear break of its longer term uptrend line. That's the way I'm currently leaning on this index.
Transportation Index chart, TRAN, Weekly
The Trannies had a heck of a rally from the October low--to an all-time high. It's one of the reasons why it's important that the DOW at least rally to a new annual high (forget about an all-time high). The Dow theorists are having a field day with the bearish divergence created between the TRAN and the DOW. The TRAN looks like it should rally a little higher though and the DOW might follow it this time.
U.S. Dollar chart, Daily
After hitting a previously broken uptrend line the dollar has been consolidating on top of previous resistance just under $91. The consolidation continues to look bullish and we should see a rally up to $93 soon. We could then get a deeper pullback that sets up another strong rally. I see no change to the forecast for the U.S. dollar to reach up into the upper 90's by spring 2006. Then things could start to get ugly for the dollar again.
Gold chart, August contract, Daily
Just another symbol and just another buying spike. Too much too fast again. Longer term gold bulls don't want to see this kind of rally. This is more indicative of a blow-off parabolic move and they tend to correct hard the other way once everyone has piled in (and shorts bailed out). Once the music stops the new bulls get trapped in the southbound cattle cars wailing all the way. Will gold crash and burn? Who knows but at this point I consider it risky to be long gold. At a minimum I wouldn't be surprised to see a correction kick off that takes gold down to $460.
Results of today's economic reports and tomorrow's reports include the following:
In today's sector action, no surprise, all were green today. Leaders to the upside were the SOX, gold and silver, energy, airlines and most technology sectors. Laggards today included the utilities, retail, financials, pharmaceuticals and biotechs.
It's rare that we have complete agreement between sectors and indices and today is no different. The broader indices look like a rally dead ahead but the SOX looks like it could be topping here. The banks look like they've topped. The COMP looks like it's very close to a possible high. SPX could be within 10 points of major resistance which puts the DOW just over 11K. Will the fund managers hit the sell button at 11K and lock in their +5% year (and lock in their huge bonuses)? What would you do if you were a fund manager with those kinds of gains and potentially little upside potential? I think I'd lock in gains, especially in the big caps. The small caps might continue to benefit but the risk there is that they're harder to get out of if the selling begins.
I'd stick with the bulls for now but only if the rally can continue right away. I see the potential for a little more pullback tomorrow morning but it will then need to get turned around and rally to a new high above today's. For futures traders I would not want to see today's gaps filled--that would be too great a retracement and would indicate to me that a larger pullback is still in progress and a December rally will have to wait (or more bearishly, that a high is in for the year). If a rally does not materialize, all the new money that has made it into the market recently could be looking for the exit in a hurry. That's how no-bid situations develop and it likely would not be pretty. Those expecting Santa to show up this month may be positioning themselves for it, placing some yummy cookies on the table for him. If he starts threatening a no-show people might be quick to grab their cookies and run for the door. Be careful with your positions and don't let them go against you. Good luck and I'll call 'em as I see 'em on the Futures Monitor. See you there.