Economic improvement is pushing the market higher on hopes the U.S. recovery is finally beginning to accelerate.
Thursday saw a flurry of mixed economic reports but investors and traders seemed to focus on those with a positive spin. The weekly jobless claims declined to 264,000 and the lowest level since June 2008. While I would be thrilled if these numbers were accurate and represented a new trend I continue to believe this is a seasonal disruption. Anyone who was just laid off and has a final paycheck in their pocket is not likely to file for unemployment until after the holidays. I suspect we will see a strong pickup in claims in the first two weeks in January.
If by some quirk of fate the claims did not spike up in January this would be very bullish for market sentiment. If employers are cutting the number of layoffs then the next step would be to add new workers. Some analysts have already started raising their estimates for the nonfarm payrolls to a gain of 250,000 jobs. I suspect they will see a negative surprise. December is not normally a big hiring month.
Jobless Claims Chart
University of Michigan Consumer Sentiment rose to 69.9 for the final reading for December. That was up from 67.7 in the initial release. This is a significant gain from the 64.1 in November.
The expectations component carried all the weight with a jump from 55.4 to 63.6. The current conditions component was only slightly higher at 79.6, up from 77.6. Sentiment rose more strongly in the second half of the month and again suggesting the recovery is accelerating. However, I view this as a seasonal disruption. Sentiment normally improves ahead of the holidays and then declines in January when the bills come due.
If the sentiment continues to improve and begins to move over the 75 level I think it would be contagious for the market. A move over 77.5 would be a new post recession high.
Consumer Sentiment Chart
Mass layoffs declined slightly to 1,331 from 1,353 but the number of workers impacted rose to 129,887 from 118,689. This was for the November period. December is a big month for layoffs as more than 100,000 seasonal workers are terminated. I expect this number to increase over the next two months.
The final GDP revision for Q3 declined to +1.81% growth from +2.0%. The decline came from a lower estimate of consumer spending and a higher revision to inventory accumulation. The economy grew by +1.3% in Q2 and +0.36% in Q1. The market ignored this report because recent GDP estimates for Q4 have been rising sharply.
A month ago the consensus was for something in the 2.5% to 3.0% range. That rose to 3.25% a couple weeks ago and now we are starting to hear estimates as high as 4.0%.
I think we are being setup for failure again with the rapid escalation of estimates. They are using the sudden increase in consumer spending, strong pace of auto sales, which could be at the high of the year for December and the declining jobless claims as justification. I am not holding my breath and I will be thrilled with any number starting with a +3.n
On the flip side the Chicago Fed National Activity Index (CFNAI) for November fell to a three month low at -0.37 from -0.13 in October. Estimates had been for a minor gain. The CFNAI was hurt by a big drop in industrial production in November. This was due in part to a slowdown in components from Thailand that weighed on electronics and auto production. This report was ignored because the Thailand flood was a onetime event and not a reason for concern in future quarters.
The Conference Board Leading Indicators rose by +0.5% for November. Even though this was lower than the +0.9% in October they continue to show expansion and a declining chance of another recession. Estimates were for a gain of +0.3%. Seven of the ten components posted gains. This report was also ignored although it got a positive mention in several headlines.
The calendar for tomorrow has four reports but there will be nobody around to care. New home sales will probably be the only headline worth noting and the headline number is expected to rise to 316,000 from 307,000.
Thursday was almost as bad for traders as Friday will be. Volume was only 5.8 billion shares and Friday will likely be under five billion shares. The stock news was almost nonexistent but there were a few winners and sinners.
Micron (MU) rallied +16% despite missing earnings and revenue estimates. Micron posted a loss of 19-cents compared to estimates of 9-cents. Revenue was $2.09 billion compared to estimates of $2.12 billion. Gross margins held at 15% thanks to improvements in NAND Flash margins, which were offset by declines in DRAM margins. The company said the flooding in Thailand had cut demand for basic chips as much as 15%.
Micron shares rallied after analysts raised their ratings on the company saying the worst was behind them and chip prices would likely firm from here. Wedbush Morgan upgraded Micron from neutral to outperform and Raymond James reiterated a strong buy. Both analysts said the product mix was shifting to the higher margin chips and demand should increase in 2012 as the flood impact dissipated.
Bed Bath and Beyond (BBBY) reported better than expected earnings but revenues disappointed. Earnings were 95-cents and beat estimates of 88-cents. Revenue rose +6.8% to $2.34 billion but that was less than the $2.359 billion estimate. One negative was a decline in same store sales growth to +4.1% from +7.0% in the year ago quarter. Management guided to sales growth of only 2% to 4% in the current quarter. The cautious guidance and lower sale growth caused traders to toss BBBY into the dirty linen hamper. Shares declined -6%.
Akamai Technology (AKAM) rallied +19% on news it was acquiring privately held Contendo, a company that specializes in software and services that improve content delivery on the web and on mobile devices. The company is a small 100-person firm with most employees working in Israel. Analysts were very positive on the acquisition saying Contendo's applications were a perfect fit for Akamai. They must have really liked it because you almost never see a major spike in the acquiring company.
The NYSE Euronext (NYX) rose slightly after the Justice Dept approved the company's merger with the Deutsche Boerse contingent on a sale of some assets. NYX must sell ISE's minority stake in Direct Edge Holdings. They have two years to complete the sale.
The Dow has now closed positive for three consecutive days. The positive economics, lack of any negative news from Europe and the normal holiday sentiment has pushed the indexes back to their early December highs.
It would be very hard to make anything out of today's move given the lack of volume. This is the normal pre holiday melt up because the major funds and institutions are not in the market. They can't trigger buy/sell programs in a market this thin without inducing severe volatility.
This minor rally ahead of the holidays is normal. A week ago I was very skeptical it would happen and I am definitely not complaining. The indexes have closed with resistance and a major news headline could push us over and cause further short covering and price chasing into year end.
The market for Friday is an afterthought. The only way we could produce less volume is if they closed it. You can't draw any meaningful conclusions about market direction from today's action or Friday's. I am not going to spend a lot of effort diagramming the charts because other than the overhead resistance they don't matter for Friday.
The S&P rallied +10 points to close at 1,254 and just under strong resistance at 1,255, the 200-day at 1,259 and prior resistance at 1,265. Without a major news event I can't imagine breaking through those levels on Friday. However, news the House was going to approve the two month extension of the payroll tax cut did spike the S&P futures by +7 points late Thursday evening.
The Dow came to a stop just under strong resistance at 12,200. Should a big news headline power the Dow over that level we could see new short covering and a possible breakout to a new five month high. That would be a great way to finish the year but a breakout could produce enough market buzz going into yearend we could conceivably push over the high close for the year at 12,810. That would be an amazing feat to close at the high for the year after months of extreme volatility.
I am not predicting it but we are close enough that the possibility exists.
The Nasdaq is the fly in our year end soup. The Nasdaq is stuck at resistance at 2,600 with the 200-day at 2,661 and well under the highs for the year. The Nasdaq can move fast when techs are on fire but I would be very surprised to see a major move over 2,700.
The Nasdaq would have to pull an Akamai like move of better than +10% over the next six days to equal the high for the year at 2,872. It is technically possible but like the possibility of a permanent solution in Europe the odds are slim.
Russell 2000 Chart
The wild card for Friday and for next week is the Dow Transports. They are very close to a breakout and a new five month high. A breakout here would energize the Dow and S&P and could be the spark we are looking for to create a yearend rally.
Dow Transports Chart
If you have to buy something on Friday make sure it is in the mall and not the market. My only qualification to that would be to buy calls on the Dow Transport ETF, the IYT.
Dow Transports ETF Chart (IYT)
Friday will be extremely low volume and almost assuredly extremely headline driven. However, with the majority of the world in the mall and not the market it may take a dramatic headline to create any movement. The qualification to that is of course the low volume. Any material headline would be capable of generating a sizeable market move. Rarely do these happen on the last trading day before Christmas but it is always possible.
The futures are up +7 on the agreement between the Democrats and Republicans to accept the two month extension on the tax cuts with some added language to force a conference committee on extending it for the rest of 2012 in January. In a truly show of political avoidance the vote on extending the cut for two months will not be recorded. That way nobody will know who voted for it. Only in Washington!
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