Good economic news in the U.S. overcame a steady stream of negative news from Europe to lift the markets slightly higher.

Market Statistics

Europe did not crash the markets but conditions did not improve. Bond yields continued to rise and a new crisis has developed. The Italian government will face a new confidence vote on Friday in reaction to the austerity measures imposed by Mario Monti. That confidence vote is suspected to pass but only because the reforms have been severely watered down. The labor reforms have been almost completely eliminated and the opening of previously closed professions were dropped. Monti is finding it is a lot easier to tell people what needs to be done than to actually get them to make the changes.

Spain sold euro six billion in 10-year bonds at a yield of 5.45%. Demand was about twice the 3.5 billion they expected. The yield was neutral but the demand was positive and helped to calm fears that Italy would contaminate Spain.

In the USA the weekly jobless claims surprised to the downside at 366,000 and a drop of -19,000 from the prior week. Last week was revised only slightly higher from 381,000 to 385,000. The drop over the last two weeks is a major acceleration in the recent trend. The number this week is the lowest level in three years.

HOWEVER, in capital letters, very few terminated people will rush out to apply for a new job only two weeks before Christmas. They don't want to go through the hassle of looking for a job over the holidays. Corporations are not hiring although they may be going through the motions. Most workers would look at being laid off two weeks before the holidays as an opportunity for a vacation. Look for claims to accelerate higher the first week in January.

Jobless Claims Chart

The Philly Fed Manufacturing Survey for December was much stronger than expected at 10.3 compared to the prior month at 3.6 and estimates of 5.0. The Philly Fed is a proxy for the national ISM report due out in early January.

This was the third month in positive territory after dipping to -30.7 in August and the current reading is the highest since April. New orders rose to 9.7 from 1.3 and back orders rose from -1.5 to +7.2.

This was a bullish report and suggests the manufacturing sector is accelerating as we head into 2012.

Philly Fed Chart

The New York Empire Manufacturing Survey for December rose to 9.5 from 0.6 and three times the consensus estimates of 3.0. This was also a very strong report suggesting economic activity is accelerating. New orders rose to +5.1 from -2.1 after being in negative territory for six months. Backorders declined to -15.1 from -7.3 and a surprise given the gains in the other components. The employment component picked up sharply from -3.7 to +2.3. Job growth in the region has improved consumer confidence and that shows in the increased activity.

NY Empire Chart

The November Producer Price Index (PPI) rose by +0.3% compared to estimates of +0.2%. Several analysts had expected it to be flat or down for the month. The spike was related to a big jump in food prices including vegetables, meat and poultry. Excluding food and energy the core rate rose only +0.1%. Prices of core intermediate goods declined and crude goods declined -2.5. The headline gain of +0.3% offset a -0.3% decline in October. Since the headline gain was limited to only a couple components it would appear inflation is going to continue lower.

Industrial production was the black sheep of the economic group today. Production declined -0.2% for November after a +0.7% gain in October. Manufacturing output fell -0.4% and the first decline since April, led by a -3.4% drop in auto production. Floods in Thailand caused parts shortages just as the automakers were recovering from the Japanese quake. Because this was basically a weather event most analysts ignored the production decline.

The SEMI Book-to-Bill for November rose to 0.83 from 0.74. This was the second consecutive monthly gain. For every $100 in product shipped they received $83 in new orders. New orders rose +5.0% and shipments declined -6.7%. Demand for consumer electronics continues to grow with well over 100 million units of phones, tablets, iPods, etc expected to be sold in Q4. Despite the warnings from Texas Instruments it would appear things are looking up in the chip sector. Broadcom (BRCM) raised guidance with earnings this week.

There was an acquisition in the chip sector today with Lam Research (LRCX) acquiring Novellus for $3.2 billion. Novellus shareholders will 1.125 shares of Lam stock for each Novellus share. That represents a 28% premium over Wednesday's closing prices. The acquisition will close in Q2.

Novellus Chart

FedEx (FDX) reported earnings of $1.57 per share compared to 89-cents in the year ago quarter. The earnings beat street estimates of $1.53. Revenue rose +10% to $10.59 billion. The company guided higher for the current quarter. The FedEx guidance roughly corresponded with the National Retail Federation's expectations for holiday sales in Nov and Dec to rise +3.8% to $469.1 billion. That is above the +2.8% forecast made in October. FedEx said it shipped over 17 million packages on Dec 12th. They also announced they were buying 27 new Boeing 767-300 aircraft with the first to arrive in 2014. They will replace some planes as old as 40 years. They also announced they were delaying the purchase of 11 Boeing 777 freighters because of slowing demand in Asia. That is a key factoid that we should remember in future economic discussions. I have reported before that shipments to Europe from Asia had declined -20%. Here is further proof from FedEx.

FedEx Chart

Deckers (DECK) was downgraded to underperform from buy at Sterne Agee. The analyst said channel checks indicate disappointing UGG results. The firm believes there could be order cancellations in Q1 due to high inventory levels. They put a price target of $72 on the $95 stock. DECK declined -$9 on the downgrade to close at $86. Lazard Capital defended Deckers saying their order book was strong.

Deckers Chart

Honeywell (HON) reported earnings and reiterated guidance for all of 2011 at $36.5 billion, an increase of +13% and earnings of $4.03, a +43% increase. Prior guidance was $3.85 to $4.00. Guidance for 2012 rose +6% to 12% to between $4.25 and $4.50. HON shares rose slightly on the positive report.

Research in Motion (RIMM) reported earnings that beat the lowered street estimates but their guidance was negative. RIMM posted earnings of $1.27 compared to estimates of $1.19. Revenue was $5.2 billion compared to estimates of $5.27 billion. They guided for revenue of $4.6 to $4.9 billion compared to analyst estimates of $5.1 billion. They expect to sell 11-12 million devices in the quarter. Analysts said the number of devices should have been 20-25% higher for the holiday quarter. They took a $54 million charge for the outage early in Q4. They also took a huge charge for writing down the value of their Playbook inventory. They also warned they were delaying the shipment of the new QNX-based Blackberry 10 phones until the "latter part" of 2012. They had been expected in Q1. Shares of RIMM declined to $14 after the earnings.

RIMM Chart

Adobe (ADBE) posted earnings after the bell of 67-cents compared to estimates of 60-cents. Revenue was $1.15 billion and a +14% increase. The company said 2012 would be a transition year as it moves away from Flash and shifts toward other types of software including a strong emphasis on the cloud. Adobe guided to 54-59 cents for the current quarter. Shares rose +3% after the report.

Adobe Chart

Zynga priced its IPO after the bell at $10 and the high end of its range. They are selling 100 million shares to raise $1 billion. This values the company around $7 billion, about equal with ERTS but less than ATVI at $14 billion. Zynga has 54 million active customers and more than the next 14 game companies combined. It has not monetized those customers yet and receives only 5% of its revenue from advertising. The ticker symbol will be ZNGA.

The market spiked at the open on the better than expected economic news but that was the high of the day. There was very little interest in trading for the day before option expiration. Volume was light at 6.7 billion shares with only a slight edge for advancers over decliners.

I believe traders are still wary of the support break on the major indexes and the continued problems in Europe. With Friday OpEx and the majority of traders planning to head for the malls next week instead of trading stocks there is little to stimulate trading.

Commodity funds have been sellers. Hedge funds have been sellers. Individuals have been selling. Nobody really believes Europe is fixed and they are just waiting for the next shoe or country to drop. Spain's debt auction today was a positive step but Italy's confidence vote on Friday could be a setback.

I think traders are probably done until after Christmas. They may start bargain hunting again on the 27th but most will likely wait until the new year in hopes of picking up some January bargains.

The S&P spiked to resistance at 1225 and it was rock solid. That killed the day right from the start. It was all downhill from there. Support intraday was 1215 but the conventional wisdom is suggesting a retest of 1200 and quite a few analysts believe it will fail with a retest of 1160 the real target.

Since sentiment has switched from bullish to bearish over the last week the risk is for a counter trend rebound. We did not see any support of that theory today so I would not hold my breath. The Adobe earnings after the close were positive but probably not enough to offset the negative sentiment from RIMM.

I would not be loading up on longs here although I am itching to buy some oil and gold. We may get a chance to buy those lower since critical support levels have been broken. Overall I would suggest shopping at the mall on Friday instead of the stock market.

S&P Chart - 5 min

S&P Chart - 90 Min

The Dow failed to hit 12,000 on the opening spike and while it traded better than the other indexes it was still lackluster. Initial support is now 11,800 and I believe we could easily retest 11,600 on any further negative news from Europe. The key level to watch on the upside is 12,000. It would take a move over that level to produce any real buying interest. The opening gain was +144 and it barely closed positive at +45.

Dow Chart

The Nasdaq failed to make a lower low but the opening spike of +27 points ended the day with a gain of less than two points. Intraday support at 2540 was exactly where the Nasdaq closed and I am surprised it did not close negative.

The chip stocks were weak despite the LRCX/NVLS deal and although tech stocks typically do well in December the worry over the disk drive shortage continues to weigh on the tech sector.

Support at 2530 is the key level to watch. A break there would target 3500 or even 2450.

Nasdaq Chart

Overall I am slightly bearish on the market. I believe we could see a short term rebound but today was definitely not a promise of things to come. However, it was not a down day. It was a consolidation day ahead of option expiration. I believe the volatility of the last week knocked most option traders out of the market. That would definitely be true for any longs. The shorts and put holders will have to bail on Friday and that could produce a positive bounce at the open.

You have to wonder if the weekend event risk will keep what few traders that are left from placing any material bets on Friday. I would think the odds are good it will be a lackluster day unless something happens to cause a new short squeeze. Since that squeeze did not appear on Thursday's opening spike the odds of a strong squeeze on Friday are slim.

If you have to be in the market take small positions and exit early.

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