This is starting to become a trend: The Dow Jones Industrial Average turns in another triple-digit gain as equities move to 13-month highs. The blue chip index rallied to a new 2009 high, gaining more 136 points to close at 10406.96. The S&P 500 finally broke through 1100 (again) and did so in style, rising almost 16 points to close at 1109.30. Only the Nasdaq failed to close above a key resistance level. The Nasdaq did peek above 2200, traversing that key level for the first time in over a year before closing at 2197.85.
As I said, Monday's trade sported some familiar themes. The U.S. dollar continued its perilous decline and that bolstered commodities and materials stocks, which have been among the biggest drivers of this market rally. The greenback slumped to a 15-month a low and investors took a pass on bonds, sending yields on two-year Treasuries to their lowest levels since January. Even comments from Federal Reserve Chairman Ben Bernanke regarding future economic headwinds attributable to high unemployment and constrained access to credit could not deter stocks on Monday.
Not to rain on the bulls' parade, but this weak dollar business is only avoidable when one chooses to reside in the ''ignorance is bliss'' camp. The dollar is being thrashed as investors favor commodities and commodities-related currencies. The two best performing currency ETFs in 2009 are those that track the Brazil real and the Australian dollar, two commodity currencies if there was a such a thing.
How bad are things for the buck? The chart below illustrates the performance of the 10 major currency ETFs in 2009. Nine are up on the year and I doubt it will take anyone long to guess which one is the lone loser.
There are numerous problems that a weak dollar creates, but as it pertains to this equity market rally the problem lies with familiarity possibly breeding contempt. Allow me to elaborate: Stocks are being led higher by materials names benefiting from the flimsy dollar, commodities stocks and financials that some would debate are far from out of the woods. This scenario should ring a bell. After all, this confluence of factors led the market to its last bubble and everyone that was not living in a cave in 2008 remembers the calamity that ensued.
I offer up an anecdote that may be the epitome what may be wrong with this rally, if you dare believe there is anything wrong. Last week, China said it may have purchased too much copper earlier this year and that it may export some of its excess stockpiles. If you are talking copper, like it or not, you are talking China, and a China turned copper exporter should not be music to the ears of copper producers. The chart below shows China has been purchasing less copper in recent months.
China Copper Purchases
Oddly enough, this news had no impact on a stock I mention here frequently: Freeport McMoRan Copper & Gold (FCX). Freeport touched another 52-week high today at $85 before settling at $84.48. Freeport is the largest copper producer in the U.S., but China is one of its biggest end markets. Even with news of China not needing as much copper as it did earlier this year, Freeport made another new high, something it has done quite frequently recently, as the chart below indicates. Just a little illustration to highlight that even when it looks like there might be a reason for stocks to slowdown, they do no such thing.
Speaking of metals, gold continues to shine (no pun intended.) Gold for November delivery climbed to a record high of $1144.20 an ounce before settling at $1138.60, up more than 2% on the day. Gold's rally has meant good things for miners like Barrick Gold (ABX) and Newmont Mining (NEM), both of which were up more than 2.5% today. Gold miners do not usually outperform the underlying commodity because the miners face high capital equipment and production costs that can often crimp profits.
While this fact is well-known by those that actively follow the industry, somehow, someway, the Market Vectors Gold Miners ETF (GDX) is up almost 35% in the past three months compared to a 20% gain for the SPDR Gold Shares (GLD), the most heavily traded gold ETF that actually holds physical gold. Oh yeah, GDX made a 52-week high today on volume that was roughly 30% higher than normal.
From precious metals to industrial metals, steelmakers also participated in Monday's rally. U.S. Steel (X), the largest U.S. steelmaker, gained almost 5% and rival AK Steel (AKS) surged nearly 8% after JPMorgan Chase added the stocks to its ''Focus List.'' JPMorgan said the companies may be able to raise prices as demand rebounds. Steel demand has been tepid at best throughout 2009 and increased demand for the industrial material may portend that the global economy is in fact getting better.
I admit I have had my doubts about this rally and continue to have them, but that does not mean I am advocating bucking the trend. If some other sectors besides the usual suspects could really lend a hand, stocks may still have some room to run. Apparently, Goldman Sachs thinks high-end retailers may be willing to chip in. Goldman upgraded shares of luxury retailers Coach (COH), Nordstrom (JWN), Saks (SKS) and Tiffany (TIF), slapping ''buy'' ratings on Coach and Nordstrom.
Not only is this bullish news because we are in the midst of another holiday shopping season, this is also bullish because this recession has seen even the most affluent among us tighten their purse strings. Checkout the parking lot at your local Wal-Mart (WMT) and you will probably see a lot more expensive cars there than you did a couple of years ago. Still, Goldman not only upgraded those fancy retailers, it downgraded J.C. Penney (JCP) to ''sell'' from ''neutral'' and Dollar Tree (DLTR) to ''neutral'' from ''buy.'' And it is fair to say that Dollar Tree and Coach operate in two completely different ends of the retail spectrum.
Most retailers were up on Monday as the Commerce Department said retail sales rose 1.4% to $347.5 billion in October. Then again, as is so often the case, the devil is in the details. Strip out auto sales and retail sales rose just 0.2% last month. With unemployment residing at a 26-year high and the holiday shopping season underway, retailers may be hard-pressed to deliver good results, save for a Christmas miracle.
Speaking of retailers, home improvement giant Lowe's (LOW) met analyst estimates when it reported third-quarter results on Monday, but the stock closed down 11 cents. Rival and Dow member Home Depot (HD) reports before the bell on Tuesday. Analysts are calling for a profit of 36 cents a share on sales of $16.27 billion.
Home Depot and Lowe's are not prime holiday shopping destinations, so Target's (TGT) pre-market earnings report may be the more important of the two news items. Analysts expect Target to earn 50 cents a s share on sales of $15.25 billion. Saks and The TJX Cos. (TJX), the operator of T.J. Maxx and Marshalls stores, also report before the bell on Tuesday.
Looking at the charts, you may have been thinking that the 600+ points the Dow tacked on over the previous two weeks would have been enough, but that obviously was not the case. Today's close has moved the Dow well above resistance in the 10320 area. There is a lot of room to run to the next Fibonacci level around 11225, but some resistance will probably emerge around 10500 and 11000 should be another fight.
If support is a concern, 10200 should be the first backstop with 10100 helping out from there. While these levels are worth noting, it is going to take either an unforeseen negative surprise or several days of protracted selling to bring them into play.
The S&P 500 finally broke through 1100 again, topping its October peak of 1101.36. The index could see its next fight in 1020-1025 area and Monday's trade could be considered the beginning of another breakout. Bulls may dare to dream of 1200 before the end of the year, but 1150 is probably more reasonable. Support looms around 1093 and if stocks break down there, 1075 should be the next pit stop.
S&P 500 Chart
As I mentioned earlier, the Nasdaq inched above 2200 today, but did not hold there. Just as the S&P 500 seemed to beat its head into 1100 before breaking through, the Nasdaq may be doing the same with 2200. The other side of this coin is that since tech issues have played a big role in leading the market higher, even a slight faltering could lead to more down side. If the Nasdaq can break 2200, 2251 should be the next resistance area. There are some earnings reports this week that could give the index a jolt, including Dell's (DELL) third-quarter results on Thursday.
It seems that market gurus keep trying to pinpoint the life expectancy of the rally. Some say it is bound to expire at any moment because the fundamentals simply are not there to support further gains. Others insist that 80% of the S&P 500 member have beaten earnings estimates and that most companies are earning the bulk of their profits from international markets meaning the U.S. economy matters less and less. I have my doubts, as articulated here, but remain convinced it would be foolish to be anything but bullish at this point.
Perhaps the only way the bears can exert any strength in the near-term is with the sudden end of the commodities trade and a new beginning of dollar strength and that is a tough bet to make right now.