The string of consecutive Dow gains was snapped at seven with the Dow closing down less than 2 points. The S&P and Nasdaq also lost a couple and it was a testament to window dressing that all the averages remained near their highs on very low volume.
Market Stats Table
This is a light week for economics and there was nothing in this morning's reports that could support market sentiment. The S&P Case/Shiller home price index improved for the fifth straight month but this was a lagging report for the October period. The report received a lot of play in the press but the markets ignored it. Prices are still down in the 20-city survey by -7.3% compared to the same period in 2008.
Case Shiller Chart
Consumer confidence rose to 52.9 for December. That was up from 49.5 in November. The November number was revised up to 50.6 in today's report. The gains came completely from a +5.3 jump in the expectations component from 70.3 to 75.6. The current conditions component continued to fall to 18.8 from 21.2. The current conditions component is now below the March low of 21.9.
Buying plans fell as well. Those planning on buying a car fell to 3.8% from 4.5% and another low for the year. Those planning on buying a home fell to 1.9% from 2.1% and this is a new low for this recessionary cycle. Only 10.3% of consumers expect their income to increase while 71.7% expect it to stay the same and 18% expect a drop in wages. Only 2.9% of workers felt that jobs were plentiful. That is another low for this cycle.
If you only look at the headline number then consumer confidence is rising. If you look at the internals the current conditions are dismal. This is not an atmosphere conducive to a consumer recovery in spending. It may not be conducive to further gains in the stock market until Q4 earnings are reported in January. If they are as good as analysts expect it may lift confidence and spending patterns.
Consumer Confidence Chart
For Wednesday the reports on tap are the ISM-Chicago, Kansas Fed Manufacturing Survey and the Oil & Gas Inventories. The Chicago ISM is expected to rise slightly to 57.0 from 56.1. Crude supplies are expected to fall again as refiners put off adding to inventory before the December 31st tax year ends. They have to pay property taxes on anything in inventory at year-end. Given the already bloated inventory levels the pace of imports has fallen to a decade low over the last four weeks. I would bet there are dozens of tankers circling outside the U.S. boundaries as they wait for refiners to give them the all clear next week.
Crude prices rallied over the last week on drops in supplies and increased geopolitical concerns in Nigeria, where fighting has erupted again and on Iran's nuclear deadline. News broke today that Iran was trying to smuggle 1,350 tons of purified uranium from Kazakhstan. This would be a clear violation of existing UN Security Council sanctions. Iran is reportedly paying $450 million for the shipment. The higher than market price was due to the secret nature of the shipment and according to other reports because Iran is running out of uranium to enrich and making them desperate to acquire more on the black market. 1,350 tons is enough to make 150 nuclear weapons according to David Albright, head of the Institute for Science and International Security.
Annual transfers of more than 500 kilos are subject to close scrutiny by the Nuclear Suppliers Group of countries. Purified ore, or uranium oxide, also known as yellowcake, is processed into uranium gas, which is then spun in centrifuges to produce either nuclear fuel or nuclear weapons. Iran has a January 1st deadline to halt enrichment or face further economic sanctions. Many analysts are afraid continued revelations like this uranium smuggling deal will push Israel over the edge and they will bomb Iran. Iran has said they will retaliate by closing the Straits of Hormuz where 25% of global oil is shipped every day. This is putting a security premium into the price of oil and should such an attack occur it could hit $125-$150 almost immediately. If the UN is ineffective in adding any real sanctions in January the premium will evaporate.
Crude Oil Chart
For stock news this was another low activity day. Basically everyone not on vacation is holding their breath hoping the markets hold the high ground until next week. However we are seeing some selling begin to appear on the recent high flyers. SanDisk (SNDK) has tripled over the last year and it is up +50% in December alone. In the last two days it has declined from $31.18 to $28.52 on no news and much higher than normal volume. Normal volume is about 6.5 million shares and nearly 17 million traded on Monday and another 13.4 million on Tuesday. This is clearly profit taking by funds unwilling to risk holding over Dec-31st. Heck, up +300% for the year and +50% in December, I would say it would be a perfect candidate for profit taking in January and some long puts before Dec-31st.
Black & Decker (BDK) and Stanley Works (SWK) said today that the antitrust review period had expired and the $8.4 billion merger was a step closer to completion. They are still working on getting approval from foreign regulators. Oddly enough both companies declined on what should have been good news. However, both had risen sharply in December so it was another sell the news event.
Chart of Stanley Works
Broadcom (BRCM) announced it had settled a class action lawsuit for $160 million in cash. This was related to a stock option backdating charge. Broadcom agreed to the payment but did not admit to any wrongdoing. $160 million is a lot of penance for doing nothing wrong. This was the second largest cash settlement for options backdating. United Health (UNH) paid $895 million to settle investor claims related to backdating. Broadcom shares lost -1% on the news.
The banking sector continued to be a drag on the markets despite the three-day rally last week. The banking index is forming yet another lower high and I expect it to breakdown in January. The individual bank stocks like Goldman Sachs and Wells Fargo have been declining for two months but there is still plenty of profit left to capture from the March rebound. An analyst pointed out today that put volume on the XLF was very strong with nearly 8,000 January $14 puts trading today. The open interest in the January puts is in the hundreds of thousands all the way down to the $7 put, which would be a 50% drop. That $14 put is trading at 17-cents. I can see why traders are throwing a few dollars into that strike as a lottery play.
Chart of the XLF
The airline index (XAL) gave up a little ground today but the selling was relatively muted. The knee jerk reaction to the Detroit event was short lived and it appears investors are comfortable with the increased security. This is another index I would expect to see give up some ground in January because of the strong gains in Nov/Dec. With oil prices over $75 and passenger traffic about to drop sharply in January it might be a good time to take profits in the airline sector. Since al-Qaeda admitted to planning the attack it suggests they might try again soon to regain some of their lost stature from having failed in the Detroit attack.
Airline Index Chart
The five-year Treasury Note auction of $42 billion went off without a hitch with a 2.59 bid to cover. This was weaker than recent auctions but still decent due to the holiday timing. For reference the movie industry is bragging about the potential to hit $10 billion in 2009 ticket sales and the first time ever over $10B. The Treasury has already sold $84 billion in debt this week with another auction on Wednesday.
Volume across all exchanges came in at 4.52 billion shares and the second lowest day in months. Last Thursday was the lowest at 2.26 billion. Volume is likely to continue to decline this week and without a news driven event could easily be under 4 billion shares on Wednesday and back into the 2B range on Thursday. To say this was a low volume week would be an understatement.
Most trading desks are closed with only a caretaker maintaining watch in case something goes wrong. Those traders forced to work are tasked with keeping the windows dressed through year-end. They did a pretty good job yesterday and today in keeping the indexes pinned at their highs for the year. If volume remains ridiculously low through year-end it could make their jobs a lot easier.
The Dow rallied to 10,580 intraday before falling back at the close to end at 10,544 and the loss of one-point. The sharp selling at the close probably struck a little fear into those chosen to keep the windows dressed. The sell program at the close suggested a major player exiting. If a major fund or two decide to follow suit tomorrow the window dressing will be shredded in short order.
The Dow has support at 10450 but it is not relative for the rest of the week. The rest of the week is simply a balancing act as traders try to keep all the balls in the air until Thursday's close. Support and resistance are not relative for the next two days. In a very thin low volume market we could see big moves in either direction.
Dow Chart - 5 min
Dow Chart - Daily
The S&P-500 broke over old resistance at 1115 last week but is struggling to hold its gains. Notice how it is moving closer to the uptrend support rather than extending its gains to the top of the channel. It is stuck in another bearish wedge and stopped exactly at resistance. This is not a bullish chart despite the new highs.
S&P-500 Chart - Daily
The Nasdaq exploded past resistance in a clear breakout move last week with short covering on nearly every big cap Nasdaq stock. This week that rally has stalled and without some serious extra effort by the window dressers we have probably seen the highs for the year. Same story on the Russell with last week's breakout rally stalling at 635.
Nasdaq Chart - Daily
Here is the bottom line for the rest of the week. The Dow is up +61% from the March lows. The S&P is up +67% and the Nasdaq +80%. Considering the S&P is trading 268 points below where it started the year 2000 at 1394 a +67% gain is outstanding but it would take another 20% gain to end the ten-year period with a gain. In fact analysts are only predicting another 20% gain for all of 2010. I can't say it was a lost decade even though it covered a ten-year period. The S&P started the decade at 1298. (1/1/2001)
That means the +67% rebound without a meaningful correction along the way is long overdue for a pause. The same goes for the Nasdaq at +80%. I am not claiming we are about to drop into another bear market but that a decent correction should appear in January. The first window of opportunity is between Jan-7th-14th. That allows for 401K money to provide some support the first few days then a 7-10 day window before Q4 earnings begin to appear. Since Q4 earnings are expected to be strong it is entirely possible we just get a short dip before earnings and then a big dip in February after the major companies have reported.
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