It would not be a normal market without a gap open and our daily change of character. Did Wednesday serve notice of a breakout ahead?
After a week of negative news events we saw a flurry of positive news on Wednesday morning that helped propel the markets higher on the backs of the shorts. Starting the pre-market off on the right foot was the weekly jobless claims, which fell to 407,000 from 441,000 the prior week. This is the lowest level since the summer of 2008 and the 34,000-claim drop was the largest since July 17th. Continuing claims fell by -142,000 to 4.182 million.
This is a strongly watched number and the sharp decline was market positive. However, last week is when all the hiring peaks ahead of Black Friday. This might have been just a seasonal blip. Claims have been trending down but very slowly.
The Consumer Sentiment number took a sharp turn higher we I had been expecting. I have written about this before. Now that the elections are over I believe consumers are relieved and positive about the future of taxes and regulations. The headline number for November jumped to 71.6 and a +3.9 point spike. That is the highest level since June but still well below historical norms. The present conditions component jumped nearly 6 points from 76.6 to 82.1 while the expectations component rose to 64.8 from 61.9. Since the majority of the survey is down in the first half of the month this second half jump suggests sentiment improved significantly as the month progressed. I expect something in the 75.0 range for the first report in December.
Consumer Sentiment Chart
Personal income for October shot up unexpectedly by +0.5% compared to a -0.1% decline in the prior month. Spending also rose by +0.4%, up from +0.3% in September. Wage income posted the strongest growth since May. The saving rate rose to 5.7%. This bodes well for the holiday spending season.
The Kansas City Fed's Manufacturing Survey rallied for the third consecutive month. The headline number jumped from 10 to 21 and the highest level since April. New orders spiked to 25 from 16 and the highest level since March 2005 and employment surged to +10 from -1 and the highest level since January 2008.
This was a very good report and continued the recent trend of the regional reports suddenly showing some decent growth.
Kansas Fed Manufacturing Chart
On the negative side Durable Goods Orders declined -3.3% for October and partially offset a +5% in September. I believe this is more of a data issue than an actual material decline in orders. The biggest declines were in computer and electronics orders which fell -7.7%. There was also a -5.2% decline in transportation orders. (Aircraft)
New Home Sales declined by -8.1% to an annualized rate of 283,000. This was a decline from 307,000 in September and well below estimates of 337,000. Sales prices fell -9% over 2009 levels. The southern region was the only region to post a gain. Sales in the West and Midwest both declined over 20%. Months of supply jumped from 7.9 to 8.6. The average price of a new home declined to $198,100 from $225,900 in September. That was a -12.3% decline. Slow job growth and tight credit were still the reasons given.
New Home Sales
In stock news Amazon was reiterated with a buy rating by Citigroup and the analyst could not say enough good things about the company. He said Amazon was the only store with all 20 of the Toy Insiders Top 20 Hot Toys List. He also said Amazon offered the industry leading toy retail selection compared to Wal-Mart and Target. He said that not only did Amazon have all 20 toys but had them all at cheaper prices. Target had 75% of the list and Wal-Mart 65%. The analyst said the Kindle remained the hottest of the e-readers and e-book sales would probably be stronger than others expected. When my wife was in the hospital last week I read three books on my Kindle DX and every nurse, doctor or orderly that came in the room wanted to play with it. Amazon gained +9 on the recommendation to a new high at $177.89.
I tried to buy some of Amazon's door buster items online on Wednesday and they were selling out faster than the page would refresh. Of course they still had them at retail prices. Amazon just announced their shopping app online where you can take a picture of an item or scan its barcode and the app will show you the prices at Amazon plus the prices at all the local competitors. You can't beat that. I still expect Amazon to take a run at acquiring Netflix sometime next year.
Netflix announced a new "streaming only" plan in the U.S. in an effort to increase its 16.9 million subscriber base. Now subscribers can pay $7.99 per month and stream their movies rather than wait for the red envelope to show up in the mail. Of course that is the entry level plan. Netflix is also raising prices by a buck on the various by mail DVD plans. Coinstar's Redbox DVD service is also planning a streaming content program but they are going to partner with either Amazon or Wal-Mart on the digital platform. All of these retailers are gearing up to do battle with Comcast and the 20,000 titles that company already has online for streaming.
Research firm ComScore said e-commerce spending is likely to increase by 11% this season to $32.4 billion. I can remember when I reported the first time consumers spent more than $10 billion in online holiday shopping. Consumers have already spent $9 billion online in the first three weeks of November.
Boeing finally said they were going to announce a new delivery schedule for the 787 within a few weeks. Boeing said "foreign debris" likely caused the fire on a 787 Dreamliner and caused a halt to all flight-testing. Boeing says they don't yet know how to fix the problem but should have a fix and a new schedule in a "few weeks."
The markets recovered their losses from Tuesday but stalled once again at strong resistance. The S&P closed just under 1200 and the Dow was nipping at 11,200. However, the Nasdaq, Russell, Semiconductor Index and the Dow Transports all exceeded their resistance highs from last week and that suggests we could move higher from here.
Just because those indexes had the best day in the last two weeks does not mean the bulls are back. All were heavily shorted after the week of declines and the sudden outpouring of good news simply produced another monster short squeeze. The fact they exceeded recent resistance is a plus. I would have preferred the S&P was along for the ride but we don't always get what we wish for.
The S&P made its second round trip to support at 1175 in the last two weeks. The first drop to that level was on the 16th and the second one on Tuesday. However, Tuesday's dip had higher lows and support was solid. This makes me believe the next test will be to the upside and not back to 1175. That really depends on the news events ahead. Anything is possible.
The Dow came very close to 11,200 but there were still bears perched there to short the attempt even on the very low volume. A couple analysts are seeing a potential head and shoulders forming but I don't see it yet. Inside the U.S. the conditions are suddenly improving and corporate profits for Q3 were a record. Employment is starting to improve even if only marginally but it is improving. Outside the U.S. the Eurozone problems are making headlines but they really don't impact us other than demand for exports into those regions will slow. The news is pushing up our dollar and that has weighed on stocks and commodities. Korea is a non-event. This is the quarterly "in your face" provocation and it will go away. China issued some new rules and the market has accepted it.
This means the industrials in the Dow should begin to make some gains. "Should" being the operative word. I think the markets are about done looking for an excuse to sell off and should begin looking for an excuse to rally. Improving economics, rising employment and record profits are three good reasons.
If the Dow can more over 11,200 I think we would see an acceleration to the upside as the bears suddenly become converts and fund managers begin chasing performance again.
The Nasdaq rallied back over the resistance at 2520-2530 and the internals were strong thanks to the corresponding rally in the semiconductors. If the traffic reports from places like Best Buy are positive for Black Friday sales then we could move higher. This is going to be an electronics Christmas and the ads for tablets, TVs, phones and computers are already blanketing the airwaves. This is positive for the Nasdaq. Let's hope it produces some follow on gains.
The SOX moved up very strong past the November resistance highs. It appears almost certain to break through the April highs at 400 on even a marginally positive market. Once over 400 it should trigger additional short covering and performance chasing.
Semiconductor Index Chart
The Russell turned in a terrific performance on Wednesday and appears ready to finally break through that strong resistance at 740 from April. If the Russell is successful we could begin a very nice rally through year-end.
Dow Transports are on the verge of a breakout as well. The transports should energize the industrials and provide confirmation of a positive change in economic trends.
Dow Transport Chart
I was encouraged by Wednesday's rally even though it was powered by the shorts. A rebound all the way back to resistance and even higher on some indexes suggested there was also some retail buying helping to push the markets higher.
For the day before Thanksgiving the six billion shares of volume was higher than expected. Internals were 10:1 positive and there was no real evidence of any attempted selling. The bears may be on the edge of capitulation.
Asian markets are up strong on Wednesday night and our markets wonâ€™t be open on Thursday to contradict their rally. I remain bullish over 1175 and reenergized after questioning my thought process in Tuesday's decline.
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