For the fifth consecutive day the Dow has been a drag on the markets. With daily point change of 20 points or less the Dow has only moved +8 points in five days.
The Dow does not have any big losers or big winners and has gone dormant while the tax compromise is debated by lawmakers. Starting last Friday the Dow gained 20 points, lost -20 on Monday, -3 on Tuesday, +13 on Wednesday and -2 today for a total of +8 for the week. It is not that there are not any decent stocks in the Dow but more a case of the big caps losing money as fund managers move to tech stocks and small caps. Over the same period the Russell 2000 has gained +17 points and that is on a 750-point index. That is a +2.2% gain in the Russell. The out performance is clearly visible as is the reason the Dow is lethargic.
The indexes all moved higher at the open after the new Jobless Claims came in at 421,000 and brought the four week moving average down to 427,500 and the lowest level since August 2008. The headline number was a drop of -17,000 over the prior week. We could be very close to a headline number under 400,000. The most recent low was 410,000 two weeks ago.
The only other economic report was the Wholesale Trade for October. Wholesale inventories jumped a strong +1.9% and September was revised higher to +2.1%. The consensus estimate was for a much lower gain of +0.8%. Wholesale sales surged by +2.2% and nondurable goods spiked +3.2%. Don't let anybody tell you there is no food inflation. Farm prices rose +20.5% after an even larger +25.6% in September. The worry over the impact of droughts and floods in overseas markets was pushing grains higher. These gains should mean there will be an upward revision in the Q3 GDP in the next release.
The weekly natural gas report showed a drop of -89 Bcf into storage as colder weather increased demand significantly. Gas in storage at 3,725 bcf is still 9.8% above 2009 levels. The news spiked gas prices to a three-month high at $4.63 but a sell program hit shortly after the report to push prices back to $4.42. Gas should not be able to move much higher because of the abundance of supply unless we see a winter that resembles a new ice age. The bottom should be $4 but there is limited upside.
Natural Gas Chart - Weekly
The economic reports due out for Friday contain no earth shaking events. The Consumer Sentiment for December is probably the most important. We should continue to see sentiment rise along with the stock market and the coming holidays.
The most important event on the horizon is the FOMC meeting next Tuesday.
Besides the shift in fund manager interest away from large caps and back into the riskier techs and small caps another reason for the lagging Dow is the debate over the tax cuts. The House Democrats are putting up a strong defense to the President's compromise and have refused to pass it. The Senate is due for a vote as early as Friday. The House has enough Democratic votes to prevent it from passing if they really want to stand united. We saw a rally as soon as the compromise was reported but when Democrats instantly began vowing a defeat the markets have gone sideways. The markets want the tax cuts extended and they will probably continue sideways until the fate of the compromise is decided. If it fails I would expect a major decline. If it eventually passes I would expect an acceleration of the rally. Until then it is a stock pickers market.
One stock I would not pick is GMCR. Green Mountain Coffee (GMCR) angered investors today after they finally reported earnings for the last quarter. There was a previously reported delay and disclosure of some accounting errors. Today they raised revenue guidance but lowered the outlook on profits. GMCR is currently under SEC investigation for accounting irregularities and another announcement was credited with pounding the stock. GMCR said investors could no longer rely on prior guidance on shipments of K-cup packs, previously estimated to grow 64% to 68% in 2011. That guidance is no longer going to be updated and the company will no longer provide sales estimates. Instead, from time to time, the company "may" comment on general sales trends.
For a company under SEC investigation to say prior guidance is no longer reliable, there is no current guidance and future guidance has been canceled is the kiss of death to a stock price. Shares fell -20% in after hours trading.
If you were lucky enough to be an owner of Lululemon (LULU) today you were greeted with a +14% gain today to an all time high. LULU reported earnings of 36-cents that easily beat estimates of 25-cents. The clothing maker raised guidance for Q4 to between 46-48 cents.
AIG investors were rewarded with a +13% gain of $5.56 after the company announced it had struck a deal with the Federal Reserve to repay its bailout loans, close a Fed credit line and dispose of the remaining stock held by the Treasury. No details were given but AIG is expected to hold a secondary offering so the government can unload the rest of its shares to the public. AIG is in significantly better shape than it was two years ago and stands a good chance of getting out from under government control. AIG will use the proceeds from the sale of two non-U.S. life insurers to repay the Fed.
National Semi (NSM) reported earnings of 34-cents vs estimates of 32-cents. Revenue of $390 million missed estimates of $399 million. NSM guided lower for the current quarter to a range of $344-$359 million and analysts were expecting $382 million. NSM said a temporary supply chain adjustment to absorb excess inventory would lower revenue in Q4. Shares traded down about 60-cents in after hours. Considering the big gains over the last two weeks that was a negligible drop.
The Treasury Dept auctioned off $13 billion in 30-year securities today and the auction was very strongly bid. Recent long-term auctions have had weak demand. The bid-to-cover ratio at 2.74 today was the highest level since August with foreign central banks buying the largest amount (49.5% of the offering) in more than a year. (Unbelievable) The Fed is buying in the 3-7 year range so it was not a result of the Fed hiking the bidding. After two days of declines in bonds this rejuvenated the bond market. I believe it will be temporary. I think we are in for a bond bubble burst once that tax compromise becomes law.
30-Year Treasury Yield Chart
Another factor weighing on the market is the chance of a rate hike by China this weekend. They have said they were going to raise rates and analysts expect it this weekend. The only question is by how much? China suspended a 3-year bond auction scheduled for Thursday and according to analysts that is almost a guarantee of a rate hike. Because analysts were so strongly expecting a rate hike the auction might not have gone well. You don't want to buy bonds at one rate only to have that rate jump a couple days later.
China is going to report several data points including CPI on Saturday and that is another reason the bond sale probably would have drawn few bids. If the rate hike is only a token increase then our markets on Monday should be fine. If China takes a hard line on inflation and really spikes the rate then Monday will be a bad day for equities. Most analysts believe China will go easy because they can't afford to have their growth fall below 8% or unemployment will spike. They are between a rock and a hard place. There is no easy solution. China's CPI in June was 2.9%. It rose to 3.6% in September and 4.4% in October. Analysts are expecting 4.7% in Nov but there are quite a few claiming it could be over 5%.
OPEC meets this weekend to discuss production quotas but nothing should change. There are no signs they will change production. Crude inventories are at record levels and other than Asia the economic recovery is progressing very slowly. Most sound bites from OPEC oil ministers call $80 to $85 oil reasonable. There are some hawks saying anything up to $100 is reasonable given the depreciation in the value of the dollar. Most analysts do not believe OPEC will make any production changes as long as prices remain under $100. Crude closed today at $88.41. I am projecting $120 oil in 2011 and $150 in 2012.
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The large cap stocks may be waiting for the tax deal to pass but the small caps and techs are in a stealth rally of their own. This is what some analysts are calling the "reflation trade." With the economy recovering and the long-term outlook for the dollar weaker they are expecting dollar denominated stocks to move higher. Earnings are expected to be strong and grow stronger in 2011.
The Nasdaq closed today at the highest level since December 2007. Since Google, Amazon, Apple and other big caps failed to participate it was purely on the back of the small cap techs. This is the cash rotating out of the big caps and into stocks expected to outperform in 2011. This is a bullish event!
The S&P closed at a new two year high at 1232 and is slowly extending its move away from prior resistance. Wednesday's dip is now history and were it not for the tax deal and China's rate hike we would be moving up much quicker.
The markets are on hold until Monday. The S&P has support at 1220 and next resistance on the S&P is around 1250. That is the most quoted target for the S&P for year-end.
The Dow is in a holding pattern as I described earlier with a total movement of +8 points for the last five days. Support at 11,335 is holding despite cash moving from large caps to small caps. The big caps are the most affected by sentiment surrounding the tax deal. Until something happens in that deal I would be surprised to see any major Dow gains. There is risk from the China rate hike since most of the Dow stocks do considerable business overseas. I believe it is a "news event" risk rather than fundamental or earnings risk. If China makes a major move we could see a major dip given the profits from the big gains in the prior week. Resistance is 11,444 and support 11,335.
The Nasdaq is in a stealth rally tacking on additional points every day but no significant moves. The Nasdaq has posted gains for the last seven days. As I reported earlier it is not being supported by the big cap techs. Stocks like Google, Apple and Amazon are either lagging or negative as cash moves out of large caps and into small caps.
Note on the chart that after the gap up rally at the beginning of December it has been a slow upward progression with small gains. The bears are still shorting the new highs but the buyers keep picking up the pieces and pushing prices higher. Resistance is now 2625 and support 2600.
The Russell has moved sideways for three days as it consolidates its gains from the December rally. However, the intraday chart show a much tighter range on Thursday afternoon that could be signaling an upside breakout ahead.
That breakout may not come until next week because of the news event risk on Friday. Support is now 764 and resistance is nearly 800. The Russell should be our sentiment indicator of overall market health.
Russell Chart - 90 Min
Russell Chart - 10 Min
The Dow Transports continue to move higher as well and that is also a confirming signal the broader market should continue making gains.
In summary we have some event risk while we wait for the next compromise on the tax deal and the China rate hike. Friday is a tossup and Monday is dependent on China then unfounded worries over a possible change at Tuesday's FOMC meeting. By Wednesday we should be directional again and baring any unforeseen events I believe the markets will be moving higher.
Remember, we are in "don't fight the Fed" mode in a recovering economy. Stocks almost always go up in this situation. I know it is painful for the bears to watch and theorize about hidden market movers and governments manipulating the markets as a reason to justify their losses. I lost a good subscriber this week. He has been with us since 1999 but he had turned so bearish about the future it was killing him. While I agreed with him about the U.S. financial problems long term he could not rationalize why the markets were moving higher today. Whenever I expressed my bullish bias in recent months he would always email me a list of reasons why the economy and the market were about to crash. I am going to miss RP but I think this is a good example of how we can't let our bias become so emotional that we can no longer trade correctly. Remember, "the trend is your friend" and "the markets can remain irrational far longer than we can remain liquid."
I know everyone reading this has a bias. You may not agree with me but you need to agree with the market. Otherwise you will suffer financially and become frustrated. I know readers who have been shorting gold for the last six months because they "believed" it was overbought. It may be but others have made millions following the trend.
I "believe" the markets are going higher long-term. Whether they go up tomorrow or next week is always up for debate. Because of my long-term bias I am still in buy the dip mode. I will remain there until proven wrong. The bears can put their conspiracy theories aside and come along for the ride or continue pounding their head against the wall in frustration. If you agree or disagree I will be happy to discuss it with you. Send me an email! Send me an email
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