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Market Wrap

Out of Breath, Job Done, Santa Flies Home

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On the last day of the official Santa Claus rally period, Santa appeared slightly out of breath. He wrapped up pretty packages, but left off the labels indicating whether they were for bulls or bears. He flew home leaving some questioning where indices might go next.

After a volatile session Tuesday sent some indices into their biggest one-day gains in months, this second day of trading in the new year and last day of the typical Santa Claus rally was primed to produce a choppy consolidation session. The choppy action was dutifully delivered.

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

Santa tied all his packages with the same ribbons and bows. Indices moved up to key resistance and MACD hooked up, but the indices shown here did not cleanly break through that resistance nor did MACD's produce a bullish cross. Similarly, MACD on the Russell 2000's daily chart hooked up, but did not produce a daily cross. The Russell 2000 broke above a descending trendline off the December high, but did not close above a flag that began forming in late November.

There are no labels on those similarly wrapped packages, so that market participants are going to have difficulty deciding whether Santa intended those packages for the bulls or the bears. This proves particularly troubling given the import of Friday's jobs report ahead of January's FOMC meeting. Charts usually give some idea of next most likely direction, but these give few clues.

Action across various sectors contributes to the confusion. The financials, as represented by the BIX and BKX, produced doji at the top of climbs, essentially capping gains today. Homebuilders and other stocks in their food chain couldn't help Santa wrap those presents in cheerier papers, either.


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The Mortgage Bankers Association released mortgage applications for the week ending at 7:00 EST. Once again this week, the composite measuring mortgage loan application volume fell, this time by 1.5 percent on a seasonally adjusted basis. On an unadjusted basis, volume dropped 20.8 percent from the previous week's volume and 9.9 percent from the year-ago level. The purchase, refinance, conventional and government indices all dropped. Four-week moving averages fell 4.2 percent in the seasonally adjusted market index, 3.3 percent in the purchase index and 5.9 percent in the refinance index. Refinances did increase as a percent of total applications, to 42.7 percent from the previous 40.2 percent.

The average contract interest rate for a 30-year fixed-rate mortgage fell to 6.15 percent from its previous 6.21 percent, but points increased. The volume of adjustable-rate mortgage (ARM) applications fell to 28.8 percent of all applications, down from the previous week's 32.5 percent. None of that was good news for homebuilders, and the DJUSHB, the Dow Jones U.S. Homebuilders Index, dropped 0.75 percent.

Another economic release may not have been a cheerful as it appeared on the surface. At 10:00, November's factory orders followed the mortgage information. The forecast was for a gain of 2.4-2.6 percent, depending on the source, and the actual number came right in line with expectations, higher by 2.5 percent. Inventories rose 0.2 percent, with the inventory-to-sales ratio remaining steady at 1.18. Motor vehicle orders dropped 7.8 percent. Another component, transportation orders, rose 15.8 percent, driven higher by new orders for airplanes. Boeing (BA) garnered 148 new orders in November, up significantly from October's 36 and contributing to a record 806 aircraft orders for the company through December 12.

However, Bloomberg posited that if orders for transportation equipment had been backed out of the factory orders number, that number would have been flat. Without aircraft orders, orders for capital goods fell 2.1 percent. Unfilled orders rose three percent to a record $621.4 billion, and preliminary data from early December indicated a possible leveling off of manufacturing growth.

The TRAN had risen into the 10:00 release, and was waiting just below a descending trendline off its December 27 high. With Frontier Airlines (FRNT), Jetblue Airways (JBLU), Pinnacle Airlines (PNCL) and Skywest Inc. (SKYW) among its components, a further climb was fueled by gains in airlines. Many non-airline components gained more than 1.5 percent in early trading, some more than two percent, with some of the trucking companies perhaps benefiting from an early pullback in crude prices. After the factory orders number was released, the TRAN broke above a descending trendline off its December 27 high, but had pulled back below that trendline by the close, coiling just beneath it.

The usual crude inventories release was delayed for a day due to Monday's holiday, but crude slipped lower before cash markets opened due to developments overseas relating to natural gas. European gas supplies had been disrupted by a dispute that arose Sunday between Russia and the Ukraine, with Russia stopping most of its shipments to the Ukraine. Since Europe receives about a fourth of its supplies through Ukrainian pipelines, that hit Europe's supply, too. Before the market opened, Russia's Gazprom and the Ukraine reached a five-year agreement in which it will pay more than previously for the gas it receives from Gazprom.

Crude costs weren't to stay down, however, and crude's daily chart shows the battle going on between crude bulls and bears.

Annotated Daily Chart for Crude for February Delivery:

While Santa was working his last day before winging off on vacation, analysts busied themselves unveiling upgrades and downgrades. Bear Stearns upgraded Google Inc. (GOOG) to an outperform rating, up from its previous peer perform. The analyst raising the rating coined a new term, the "Google ecosystem," when praising the company's increasingly interactive business community, but he also referenced the company's long-term fundamentals when upgrading the company and raising its price target to $550 from its previous $360 target. This analyst could be termed conservative, it seems, when compared to the Piper Jaffray analyst who upped the target to $600 yesterday. In addition, two newspapers this week, the Los Angeles Times on Sunday and the New York Post today, reported that Google might sell an inexpensive computer through Wal-Mart with this computer reportedly not using the Microsoft operating system. GOOG was to gain 2.27 percent, closing up 9.90 points at $445.13.

Banc of America Securities upgraded Exxon Mobil (XOM) to a buy rating from its former neutral rating, but the firm downgraded Citigroup (C) and General Motors (GM). Citigroup's 1.84 percent drop was to contribute to the weakness in financials. Office Depot (ODP) also collected a downgrade, this one from Goldman Sachs. The firm cited valuation concerns when downgrading ODP to an inline rating from its former outperform one. ODP peer Lowe's (LOW) collected its own downgrade from J.P. Morgan, with that firm citing a slowdown in home sales. ODP dropped 1.90 percent and LOW, 1.23 percent.

Pharmaceuticals and biotechs grabbed the spotlight. Pfizer (PFE), Schering-Plough (SGP) and Merck & Co. (MRK) presented at a Morgan Stanley conference today. All three headed higher in early trading, with PFE closing higher by 3.23 percent; SGP, 0.23 percent; and MRK, 1.16 percent. Biotech Boston Scientific (BSX) gained 3.47 percent after speculation that Guidant's (GDT) board may favor BSX's bid over JNJ's when the board meets next week.

December auto sales were released, with stocks of auto makers displaying some volatility before and after their release. Sales figures were expected to be down and they were. DaimlerChrysler was one of the first to release figures. Its total sales dropped 5 percent, and U.S. sales of Chrysler and Mercedes-Benz vehicles dropped 2 percent in December, with a promotion of free gas not helping sales. Total sales had been expected to drop 5.3 percent. Sales for 2005 rose 5 percent. DCX was to close lower by 0.44 percent.

Ford and General Motors released their results later during the day. Ford's sales dropped 9 percent, with some sources having expected a deeper drop of 10.5 percent, and with U.S. sales of cars falling 5.8 percent and trucks, 10.2 percent. For 2005, Ford's U.S. sales dropped 4.9 percent. Ford's stock closed higher by 2.29 percent.

GM's December U.S. sales dropped 10.3 percent when compared to the year-ago level, with 2005's U.S. sales dropping 4 percent. GM's results were deemed slightly worse than expected, while at least one source deemed DCX's and F's slightly better than expected. GM closed higher by 2.69 percent. All three major U.S. car manufacturers' stocks rose into the sales figures, dropped afterwards and then rose again. F dropped heavily in the last minutes of trading, however.

Tomorrow will include several economic releases, with initial claims at 8:30, December's ISM services at 10:00 and crude inventories at 10:30. Earnings remain light, but attention tomorrow will probably be on the crude inventories and resultant action in crude and on Friday's jobs numbers.

It's as easy to imagine rollovers on all these indices as it is to imagine breakouts, and that's a problem. Many indices attempted breakouts today, with more and less success on various indices. None of the breakouts proved particularly convincing, and playing such breakouts can be an iffy matter over the last year. It's far better to have already been long from those tests of the 50-sma's and 72-ema's and to be making decisions about protecting profits than to be looking for new bullish entries, but do make those decisions about protecting bullish profits.

For guidance, keep a watch on the SPX. If it should break convincingly above today's high, watch for next resistance at about 1284. If long, continue to tighten stops and plan your tactic for dealing with the current retest of December's high and then of the 1284 level, if that should be approached. If planning new bearish trades, make sure that you're seeing a rollover at the resistance levels depicted above, and watch for potential support at the midlines of the regression channels shown above, many of those midlines now roughly congruent with converging 10- and 30-sma's. If prices should plummet through those levels, watch 50-sma's for next support.

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