News from Europe and Asia combined to create a monster spike over S&P resistance at 1285 at the open. Is this a real breakout or just a climax spike?

Market Statistics

A breakout to new highs on the Dow, S&P and Russell 2000 should be a reason to celebrate but it came on overseas news and all the gains occurred in the first five minutes of trading. It was another monster short squeeze but although there were some attempts to sell it off during the day the S&P closed within two points of the opening high. Support appeared at 1290 and held on three attempts to move lower.

While I am skeptical of today's gains we have to respect the lack of a material sell off as the day progressed. The markets appear to want to move higher although the volume was still very light. It was all at the open as stops were hit and shorts were forced to cover.

We won't be able to tell if this was just a climax spike or a real breakout until tomorrow's close. We could easily see this move sold as the news fades and more earnings warnings appear. The 1285 August closing high was met with a narrow ten point range the next day and then a whopping -30 point decline the day after. These blow off tops tend to fail quickly if there is no conviction.

Sellers are clearly on the ropes and unsure of direction. They have may have less conviction than the buyers and suggests improving market sentiment even in light of a much higher than normal series of earnings warnings. Bull markets are built by climbing a wall of worry and they appear to be doing it one negative brick at a time.

U.S. economic reports today left a lot to be desired. The weekly chain store sales snapshot showed a decline in sales of -5.4% for the weekend ended Jan 7th. Obviously that is related to everyone going back to work and the end of holiday gift card shopping but it was still a big number. This was the largest one week decline in ICSC history dating back to Sept-1989. Year over year growth also declined sharply by -2.8% and the biggest drop in seven weeks. ICSC said unseasonably warm weather and rising gasoline prices were to blame for the pullback. Gasoline prices have risen by +15 cents over the last three weeks.

The Job Openings and Labor Turnover Survey (JOLTS) for November showed job openings increased only +2.3%. For the month 4.1 million people were hired, up only slightly from 4.0 million in October. The pace of hiring increased slightly to 3.2% and only +0.1 above the October level. Considering November is a hiring month for seasonal workers these numbers were disappointing.

The pace of job creation remains very slow despite the larger than expected nonfarm payroll number last Friday. That monthly number should see a significant drop in January. The JOLTS data is just one more statistic showing a very slow recovery in progress and no signs of acceleration. However, it was a November number and somewhat lagging.

The Wholesale Trade report for November saw inventories rise only +0.1% compared to +1.6% in October and estimates for a +0.4% gain. Sales rose +0.6% and the gains came primarily from in durable goods. Durable sales rose +0.9% after declining -0.3% in October. Computer equipment provided the largest boost with a +2.8% gain. Sales of furniture declined -1.1% and lumber declined -1.4%. This report provided no boost to the market and is normally ignored.

The big report for the week is the Fed Beige Book due out at 2:PM on Wednesday. The Fed is expected to say the economic activity in the 12 Fed regions is continuing to improve at a moderate pace. Assuming there has been no slippage in some of the weaker districts this report should have no impact on the market. In the prior report the housing sector was still the biggest problem for multiple Fed districts. Several districts in the south reported moderating or contracting retail activity. Hopefully holiday sales improved conditions in those areas.

Analysts are not expecting the ECB to change rates when they meet on Thursday. The JPM earnings on Friday will be the most important earnings event for the week and CEO Jamie Dimon has been saying some positive things about activity and the sector so hopefully they will post a strong earnings win.

Economic Calendar

The earnings warnings continued to flow. Tiffany (TIF) warned that holiday sales fell short of expectations. They lowered their full year earnings estimates to a range of $3.60-$3.65 from the prior range of $3.70-$3.80. The company cited sales weakness in Europe and eastern U.S. over the holidays. The fourth quarter normally represents half of their full year revenue. Their profit warning raised concerns the normally bullet proof luxury retail sector may have stumbled in Q4. In the northeast yearend bonuses were definitely slimmer. Analysts tracking the sector also pointed out that tourist flow from Europe had also slowed as well as their spending thanks to unsteady economic times and a falling euro. Coach (COH) and Saks (SKS) shares declined on the Tiffany news. Tiffany shares fell -10% for the day.

Tiffany Chart

Liz Claiborne (LIZ) shares fell -13% after the company cut its 2012 earnings outlook and announced its CFO was leaving. LIZ will be changing its name to Fifth & Pacific after selling off its namesake brand to JC Penny in November. The new stock symbol will be FNP. The company said earnings will decline to $125-$140 million from $130-$150 million in the last forecast. The company said revised guidance takes a more cautious view on how much they can trim costs and a more conservative view on the outlook for the wholesale channel for the Juicy Couture and Lucky Brand lines. The CFO, Andrew Warren, is leaving to take a position at Discovery Communications on March 26th.

LIZ Chart

Royal Phillips Electronics (PHG) maker of lighting and various electronic equipment said earnings would decline from 1.2 billion euros to 1.0 billion due to the weakening economy in Europe. Shares of PHG declined -5% on the news.

PHG Chart

Signet Jewlers (SIG) declined -$3 after releasing same store sales estimates and profit forecasts for 2012. Sales for the Nov/Dec period rose +7.8% compared to a +9.4% rate for the full year. The slowdown in sales for the holiday period was another warning the high end shopper may have cut back on spending in Q4.

Signet Chart

Lululemon Athletic (LULU) did not share the same slow sales fate as the rest of the retailers. Strong holiday sales led the retailer to upgrade earnings estimates for Q4. LULU now expects to earn between 47-49 cents compared to prior estimates of 40-42 cents. Shares of LULU spiked +12% on the news.

LULU Chart

WebMD (WBMD) fell -27% after the CEO resigned unexpectedly and took itself out of the market. The company had been looking to sell itself after Carl Icahn acquired a 10% stake and began pressuring the board to take action. Discussions with several private equity firms failed to produce a deal. The website is support by advertising from drug makers. So much for their unbiased reporting. Cowen and Co analyst Kevin Kopelman said there was not a problem at the company and they were still generating a lot of revenue. However, a more difficult regulatory environment was making it tougher for drug companies to launch new ad programs. WebMD expects revenue to decline in 2012 by 2% to 8% and expenses to rise by 5% to 8%. Welcome to my world.

WebMD Chart

Microsoft declined after the bell when it said PC sales had fallen sharper than previously expected due to the floods in Thailand. Previously analysts had predicted PC sales would only decline -1% in December due to the flood impact. Microsoft said after the close the "actual number will probably be lower." Two different Microsoft officials made those comments in two separate events at the CES show. Shares of MSFT declined -2% in afterhours trading. MSFT shares had risen dramatically over the last week with a gain of $2 to $28.

Microsoft Chart

Alcoa (AA) ended the day flat after posting an earnings loss after the bell on Monday but also giving a bullish outlook on aluminum demand for 2012. Alcoa expects demand to rise by 7% in 2012 thanks to strong demand from Asia. Alcoa said many Chinese foundries are operating at a loss. Alcoa shares finished the day flat but the company's guidance lifted miners and steel stocks.

Alcoa Chart

China's economy is still weak but it appears they may have engineered a soft landing of sorts. China released its import data and copper imports in December surged to a new record of 508,942 metric tons. That was the seventh consecutive month of increases. It was a +48% increase over December 2010 and a +12.5% increase from November. Crude oil imports rose +6% from November.

China's Shanghai Composite rose +2.7% on Tuesday as a result of the favorable economic news. Year to date the index is up +3.9%.

Orange juice futures spiked the daily limit of 20-cents and stretching the two day gains to +17%. The price surge came on the freezing weather in Florida and news an illegal fungicide had been discovered in oranges from Brazil. We import about 10% of our oranges from Brazil. After the bell the ICE exchange announced a margin increase that nearly doubled the prior margins. That should produce another spike on Wednesday as overleveraged traders rush to cover. This is a traders worst nightmare when an exchange has a limit on a product. Bids can go limit up for multiple days and trade is halted before you can exit your losing position.

Crude prices rallied again to close at $102.15 on news of the rise in imports to China, further saber rattling by Iran and riots in Nigeria. The $102-$103 resistance level on crude oil has been firm but remember, February is normally the seasonal low ahead of the spring/summer rally. If conditions persist with Iran and there is no reason why we should expect them to ease, we could see the summer rally take off from an already elevated position. That would be great news for energy stocks. The EU is scheduled to hold a meeting on Jan-23rd on the proposed Iranian oil embargo.

One of the reasons for the market spike at the open today was news Fitch was not going to downgrade France or Germany in 2012. That was a positive for market sentiment and traders ignored the rest of the Fitch comments. The CAC-40 index rallied +2.53% on the news. The Managing Director, David Riley, warned that Italy could see its rating cut this month and he also warned that an exit by Greece from the euro zone in 2012 was a potential option. Riley said eurozone countries would have to raise two trillion euros in 2012 with more than half of that from members of the bloc at the highest risk of a downgrade. Italy currently has a A+ rating but Riley said it could be cut by Jan-31st when a review in progress was scheduled to end.

The good news did not stop European banks from depositing a record 455.3 billion euros with the ECB overnight on Monday. That was the most since the introduction of the euro in 1999. Banks place unused cash on deposit with the ECB and earn 0.25% interest. The ECB loaned 523 banks a record 489 billion euros for three years in December at an interest rate of 1%. Undoubtedly some of these funds on deposit at the ECB are related to those loans. The banks don't currently have any place to put that money to work and they are not lending it to other banks for fear of defaults. Bankers expect further record overnight deposits as the ECB reserve maintenance period closes on Jan 17th.

The S&P spiked to 1293 at the open and then made a second effort at 10:00 with a touch of 1296 before declining to close at 1292. The fact the S&P found new support at 1290 and failed to give back a lot of its opening gains is relatively bullish. In theory we have a breakout in progress but we need a higher close on Wednesday to confirm. Should the S&P fall back below 1285 it would qualify as a reversal and be a bearish signal.

The Microsoft warning after the close is going to weigh on Wednesday's market. The Fed Beige Book could also be a roadblock to continued gains unless the report shows economic conditions improved in December. I would look to short a dip under 1290 for a trade. Volume was light with only 3:1 advancing over declining volume. That is very little conviction. It was only a short squeeze. Only 45% of the S&P 500 companies are trading over their 200-day average so the January rally is not broad based and is primarily in the very large cap, highly liquid companies.

S&P Chart - 5 min

S&P Chart - Daily

The Dow broke out to a new five month high today but in doing so ran headfirst into major uptrend resistance at 12,500. The major gainers were CAT, UTX and JPM but there were seven laggards. It was not a unanimous effort.

The Dow is stronger than the S&P because the stocks are bigger. These are the companies seeing positive money flows from funds. The financial sector has been a positive influence to the Dow in 2012 and that should continue, especially if JPM reports decent earnings on Friday.

If the Dow moves though 12,500 I think we will see a test of 12,750. However, I think we are stretching our luck on keeping this rally alive. Support is well below at 12,350.

Dow Chart

The Nasdaq gapped though downtrend resistance to come to rest at round number resistance at 2700 and a level it had trouble holding in October and November. This doji candle is a perfect setup for a down day on Wednesday. Opening and closing at almost the same level means buyers and sellers were evenly matched and lacked conviction.

Apple has traded flat for two days (+1.51 today) and Google only managed a fractional gain. Google has declined -$50 from its 2012 highs over the last week but appears to be holding at support of $620.

The battle on the Nasdaq is not on the composite index. The battle ground is on the Nasdaq-100 ($NDX) at 2400. The weekly chart shows the massive resistance at 2400 with the high close at 2435 in mid 2011. The Nasdaq big caps have to break out of this monster resistance for this rally to continue. With Google and Apple weak something will have to change to make this happen.

Nasdaq Chart - Daily

Nasdaq 100 Chart - Weekly

The Russell 2000 finally broke through that solid resistance at 750 but it all happened in the first five minutes of trading. It was a pure short squeeze and not fund manager buying. They could begin to chase prices here but that assumes we have another positive close on Wednesday. The most likely scenario would be a return to 750 as support and another run higher at some point in the future. If these gains do hold it would be very bullish.

Russell 2000 Chart

The Dow Transports have the most bullish chart. This is a clear breakout that began on Monday and then extended its gains today. This is a bullish confirmation point for anyone ready to go long Dow stocks. This suggests trader sentiment is improving for the economic outlook. This chart negates "to some extent" the negative concerns of the other charts above. When the transports and small caps lead the market is healthy. We just need another confirmation day on the Russell.

Dow Transports Chart - Daily

I am concerned about the Microsoft comments about lower PC sales. Analysts had pretty much factored in a decline in sales in Q1 as a result of the floods but a significant drop in Q4 would be a surprise. The flood damage is quickly being repaired and hard drives are starting to reappear in the distribution channels. I bought a dozen 2000 Gigabyte Seagate drives over the last two weeks. The price has declined $30 each in the last week alone. That is positive news for PC sales in Q1.

The Fed Beige Book could be a problem but almost anything they could say is not something the market does not expect in some form. We know the recovery is struggling but at least it is still growing. "Less bad" news in the report could be another buy signal.

The bigger problem is the debt auctions by Spain and Italy on Thursday and Friday. The market may rest ahead of those auctions just in case disaster strikes.

Today's short squeeze was low in volume and lacking follow through. It could be a blow off spike but the trend is definitely to the upside. A day or two of rest would be just what the doctor ordered. We still have that historical trend of 12 of the last 15 January's having a significant mid month decline. I am not seeing it as yet but it does happen quite often. Also, only eight times since 1929 has the market moved higher in the first week of January and NOT traded lower in the months to come. That is a very strong trend.

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