Investors avoided black cats, broken mirrors and walking under ladders as they shook off the date with a decent rebound off Thursday's lows and the second week of strong gains.

Market Statistics

The markets shook off some bad news at the open with the Consumer Sentiment for November falling sharply to a three month low at 66.0. This is only 0.3 over a seven month low at 65.7. Both the components experienced nearly identical declines. The present conditions component fell from 73.7 to 69.6 and the expectations component dropped from 68.6 to 63.7. Analysts claim the constant press over the last week about possibility of 10% unemployment coupled with higher gasoline prices were the main drags. The employment number was not released until after the survey was completed but the press was full of expectations for a 10% number during the survey period. The markets dipped when the news was released but quickly recovered.

Consumer Sentiment Chart

In other economic news the Trade Deficit rose to $36.5 billion for September. This was up from the $30.7 billion in August. Imports increased +2.9% to $132 billion and exports increased by 5.8% to $168.4 billion. Both of those are highs for the year. Imports of petroleum products increased by 24% but that was due to rising prices inflating the numbers not increased demand. However, imports are at the highest level since fall of 2008.

This report was very good news since it showed an increase in both exports and imports. That means business activity is rebounding more sharply than previously thought. This report also suggests that oil prices are reacting to an increase in global demand as well as the decline in the dollar. For September the dollar declined -3% against the Euro and the Canadian dollar and -4% against the yen. Since this is a lagging September report and oil averaged around $70 for the month it means that the October trade deficit will be even larger once $80 oil is factored in.

Trade Deficit Chart

Last week had a very light economic calendar but next week is heavy with a couple important events. The inflation reports (PPI/CPI) will show the Fed that inflation is non-existent and they can maintain low rates for a "considerable period." The Philly Fed survey on Thursday is the first of the major regional manufacturing reports. On Monday Bernanke will speak at the Economics Club of New York at noon and the topic is "Economic Outlook." Needless to say all eyes will be on the Fed chief on hopes he will slip and give us some indication of what he is really thinking. This could end up being the most important economic event for the week.

Economic Calendar

The natural gas storage report was released on Friday due to the holiday. Gas in storage rose by 25 billion cubic feet (BCF) to 3,813 BCF. Inventories are now 9.8% above year ago levels and another record. The old annual record for gas in storage was 3,545 BCF in 2007. The stated maximum for gas storage is 4,231 BCF but that has never been tested. As more gas is pumped in under greater pressures nobody knows when those pressures will cause a leak or failure of the equipment. Storage locations are varied and include caverns, pipelines and constructed storage tanks. Higher pressures in storage create higher pressures in pipelines and many marginal producers can't generate enough pressure to inject their gas into the pipeline. This excess gas is pushing prices lower every day. The December contract hit a contract low of $4.28 on Friday.

December Natural Gas Futures Chart

Crude prices have been on their own roller coaster of late. Inventory levels have been rising since August with only a sporadic weekly decline. The EIA reported on Wednesday that inventories rose +1.8 million barrels and refinery utilization fell to 79.9%. That is near record lows on utilization for this time of year. Distillate inventories like heating oil, diesel and jet fuel are an astounding 30.7% over last years levels. Gasoline inventories rose +2.5 million barrels for the week. This suggests there is no incremental demand building and refineries are still cutting production and closing facilities to cut costs. Demand is actually weaker today than it was last December when oil was $35. Oil demand in October was at lows not seen since 1997. The CEO of Exxon said on Friday that $20-$25 of the price of oil was due to dollar speculation. When oil was nearly $82 three weeks ago I said in these pages that I expected $70 before $85 and the trend is going in the right direction.

FYI, we are making great progress on my new daily energy newsletter. I will be including links in the next couple weeks where you can sign up to get the daily emails.

Crude Oil Chart 120 min

Crude Oil Chart Daily

Tanker company Teekay Corp (TK) posted a loss of $43 million or -.60 cents for Q3 and that was much better than the -.75 cent per share estimates. The CEO said the spot market rate for oil tankers fell to a multi-year low in Q3 due to reduced oil demand and more tankers entering the market. TK closed at $22.69 and well off their $63 high during the oil bubble.

Frontline (FRO) was upgraded by FBR Capital to buy on expectations the supply of tankers would move closer to demand as older single hull tankers are phased out. FBR said 2009 was the worst year for tankers and 2010 appears to be the beginning of the recovery. FRB said the IEA was expecting oil demand growth to resume in 2010 with recent demand revisions creating further positive implications for the tanker market. Day rates for VLCC tankers are expected to rise to $33,000 per day from the current $29,000 per day. FRB also upgraded Nordic American Tanker (NAT) to a buy. Both have crummy charts and move at a snails pace so I am not showing them here.

While on the topic of shipping the Baltic Dry Index, the index that tracks how much it costs to ship anywhere in the world is in strong rally mode. The BDI is up +32% in the last two weeks and nearly 100% in the last two months from 2200 to the close at 4111 on Friday. It is poised to break out over the June high. Shipping rates have risen +357% in the last 12 months. The only reason this index goes up is due to more people trying to book ships for transport. This is the strongest indicator of increasing global production and demand. As proof of this China's retail sales rose +16% in October. Once the BDI moves over the June high I believe it will explode higher. Shippers are probably still trying to negotiate rates today but once it breaks out I think we could see a short squeeze of sorts as manufacturers and buyers begin to make additional commitments farther into the future to lock in prices. A corresponding play on the BDI would be Dry Ships or (DRYS) but there are others available. DSX, EXM, EGLE, GNK and NM. I like DRYS as a lotto type play and GNK as more of a sure thing.

Baltic Dry Index Chart

In the stranger than fiction category Intel and AMD agreed to shake hand and bury the hatchet. Since Intel is going to pay AMD $1.25 billion in the agreement, that hatchet is not going to be buried in AMD's back. Basically they entered into a deal where Intel would pay them $1.25 billion up front and agree to share some chip technology with AMD. In return AMD would drop all pending antitrust lawsuits and quit defaming Intel in the press. I read this as win for AMD but it is also a win for Intel. AMD gets a cash infusion and cutting edge technology from Intel in order for AMD to compete on a more even basis with Intel. They will also drop all their expensive, cash draining antitrust suits worldwide. It was the best of all deals for AMD.

Intel wins because AMD remains in business thereby avoiding monopoly concerns as the only surviving chipmaker. Intel avoids potentially billions in antitrust judgments worldwide and the billions in legal fees to fight the cases for the next decade. There was the risk of treble damages if Intel lost. Just in the current cases the companies have been compelled to produce over 200 million documents and endure over 2,200 hours of depositions. Intel's technology sharing agreement will almost guarantee that AMD lags Intel products by 12-18 months but there are indications that suggest they could both make chips to run on the same platforms. That would really help AMD since currently an AMD chip requires a completely different motherboard to function. This would help motherboard manufacturers and cut down on inventory models. It remains to be seen if Intel is going to allow this but more than one commentator suggested it was part of the deal. AMD spiked +26% when the deal was announced on Thursday and it held those gains on Friday. Intel spiked 3% but then lost its gains and traded sideways on Friday. That should give you a clue which company actually won in the agreement.

Chart of AMD

It was definitely Friday the 13th for Genzyme. The company just can't get a break. The FDA reported it found tiny particles of trash in drugs made by Genzyme. This is the second time this year that Genzyme has been cited by the FDA. The FDA said it found pieces of steel, rubber and other substances in the drugs it tested. This contamination was found in drugs used to treat rare enzyme disorders and the FDA said the drugs would remain on the market because there were no replacements and the contamination existed in only 1% of the products. This is the second time this year that Genzyme has been hit with contamination claims.

Genzyme Chart

Microsoft a buy? After a 100% rally in Microsoft since the March lows UBS added them as a buy on Friday. Analyst Brent Hill said IT spending was stabilizing and PC and server sales were expected to go up +10% in 2010. He said Windows 7, Windows Server and another Office cycle would benefit Microsoft. Here is the catch. Microsoft hit $30 intraday on Friday and Hill was so bullish he put a $34 price target on MSFT for 2010. Wow! That is really going out on a limb. He also added ADSK with a $35 target, now $27 and ADBE with a price target of $43, now $36.50. He kept neutral ratings on MFE, CRM and SYMC.

MSFT Chart

It was also Friday the 13th for three more banks as the FDIC shut them down. The Orion Bank, Naples Florida, with 23 branches was closed and assumed by IberiaBank. The Century Bank in Sarasota was also taken over by IberiaBank. Coast National Bank in San Clemente was taken over by Sunwest Bank. The total hit to the FDIC was $1.361 billion. This brings the FDIC fund to less than $10 billion remaining and well below the $45 billion balance a year ago. This brings the total to 123 banks with over 1,000 branches closed in 2009. For reference 534 banks were closed in 1989 for the most in recent years.

Abercrombie & Fitch (ANF) reported earning that fell -39% but were still better than expected. The retailer raised guidance and said it was adding new items at lower cost to combat the slumping U.S. sales and was expanding internationally where sales were stronger than the U.S. Same store sales fell -22%. ANF said Q4 sales were not expected to be better than prior seasons. ANF stock rallied +11% on the news to a new 52-week high.

I wonder how this holiday season is going to work. Almost all retailers have already downplayed expectations for holiday sales. Warren Buffett said businesses have bottomed but said Thursday that a buoyant holiday season is unlikely. We continue to get news of additional layoffs nearly every day. For instance the Adobe and Electronic Arts announcements last week. Adobe cut 680 full time workers or 9% of its workforce. ERTS said it was cutting 1,500 jobs or 17% of its workforce. Applied Materials (AMAT) said it was cutting an additional 1,500 jobs. Sprint (S) said on Monday it was cutting another 2,500 jobs. Even AOL said it was cutting more jobs on top of the previously announced 700. I could go on with layoffs from TM, LYG, SI, RBS, NWS, AMR, LCC, DGX, LMT, BMY and JAVA but you get the picture. How "buoyant" in Buffett's words is the holiday season going to be with a new round of job cuts causing consumers to fear unemployment even more?

If it is Friday it must be a Palm takeover rumor day. The rumored suitor this time around was Nokia. Cell phone giant Nokia has been missing the love from consumers due to its lackluster phones using the Symbian operating system. Meanwhile Palm has generated some market hype around its new smart phones with the highly regarded Web OS system. Some feel that Nokia could drop about $4 billion to acquire Palm and it would be a bargain and revitalize the Nokia offerings. Nokia could easily sell far more Palm phones than Palm can so it would pay off quickly. Palm was also up on Friday in anticipation of the Sunday launch of the new Pixi phone. That is a smaller version of the Palm Pre and priced at $99. The main drawback to a Palm acquisition is the new Nokia N9000, which could be seen as a viable competitor in the smart phone market. That may be the snag that keeps Nokia on its private path. The smart phone market is still growing due to constant new products by the majors. Phone maker HTC is the hottest maker because of the Android operating system in HTC phones. This chart shows smartphone sales gains by maker over the last 12 months. Obviously Nokia needs help, a lot of help!

Smart Phone Sales Chart

The Dow rallied +2.46% last week and tested resistance at 10,300 three times. Each time it failed but Friday's close at 10,271 shows the bulls have not given up. Dow 10,300-10,350 is strong resistance and I did not expect it to breakout on the first test. Actually I did not expect it to break out at all until the S&P conquers resistance at 1100. The Dow should have run its course with a +600 point gain over the last two weeks. It is time to rest and wait on the rest of the market to catch up. However, Thursday's decline was bought faster than wrapping paper on Black Friday. It is tough to make a market call when the bad news bulls are back in action. Support for next week appears to be 10,200 after two tests last week. A break there should only be profit taking and 10100 should be the backstop.

The red downtrend resistance line from Oct 2007 has not changed on my chart in over a month. The dead stop at that line at 10,300 also corresponds with the 50% retracement resistance at 10,318 and the upper boundary of the uptrend channel. This is serious resistance that "should" result in some profit taking but the bulls appear determined to avoid that event.

Dow Chart - Weekly

Dow Chart - Daily

I have not redrawn any lines on the S&P chart since last week. As you can see the overhead resistance at 1100 was a brick wall but the prior uptrend support was solid. Also the prior downtrend resistance (red) has also turned into support. What we have for next week is a tightening range that will eventually produce a dramatic breakout or breakdown. It will not likely be a slow mover. The trick is knowing which way it will break. If you had asked me on Thursday night I would have bet on the downside. After Friday's bad news rally I would like to bet on the bulls but that resistance has proven strong in the past.

SPX Chart - Daily

The Nasdaq is a picture of contradictions. The composite is still showing a possible head and shoulders but the Nasdaq 100 is showing a bullish breakout. This contradiction is due to the money flowing into big cap techs as I described last week. Small caps are out of favor again and big cap techs are leading.

The Nasdaq 100 has broken over prior resistance at 1775 and is now using that resistance as support. If the NDX can move over that level next week the target becomes something around 1900. That could be a strongly bullish move. The red downtrend from Oct 2007 was broken long ago and is no longer relative.

Nasdaq 100 Chart - Daily

The Nasdaq Composite is a completely different picture from the Nasdaq 100 or NDX. Resistance from March 2008 continues to be a challenge and the composite is at risk of falling back out of the channel and forming a potential head and shoulders top. Obviously the composite can't fail while the NDX is in rally mode so something has to change on one or the other. Either the NDX has to fail or the composite find enough traction to get over the October highs. Moving over the highs would turn the chart bullish again.

Nasdaq Composite Chart - Daily

The Russell remains my biggest cause for concern for the overall market. The velocity has failed completely and the Russell gained only 1% for the week when the NDX gained +3.3% and the Dow +2.46%. Volume died on the Russell and fell from days with over a billion shares traded back around Nov 1st to less than 650 million on Friday. Friday was the lowest volume on the Russell since Sept-28th.

Volume is a weapon of the bulls and fund managers appear to be out of ammo. It appears as though managers are scared of an impending sell off and are putting money in the big caps where it can be extracted quickly. This is a serious negative for the overall market unless the Russell finds some buyers soon.

Russell 2000 Chart

My bias for next week would be cautiously bullish. I stated my fears about the Russell and the Dow and S&P have come to a dead stop at resistance. The NDX is the only index that appears to be attempting a breakout and it is feeble at best. The Bernanke speech on Monday is going to be a hurdle but I expect it will turn into a positive event. Think about it. He can do more good for the market and the economy by saying positive things than dwelling on the potential negatives. He is faced with the Fed holding over a trillion dollars in debt it does not want to own. If he talks down the market/economy then he is burning his own assets. If he provides a positive and upbeat view on the economy then the market will rally and he will be that much closer to unloading those assets. With Senator Dodd and Barney Frank on the warpath against the Fed and his nomination coming up for consideration soon I doubt he will turn into Chicken Little on Monday. The sky is not falling and it is his job to paint a rainbow on it.

Jim Brown