November 30, 2010: What Will December Bring?
November 30th, 2010
With twenty-two trading days remaining for 2010 and the S&P 500 sitting on a 5.87% year-to-date gain, there is a myriad of differing opinions on exactly what kind of market we are in. Some see it as a confirmed bull market that is simply experiencing some routine “backing and filling”. Others see this as a stubbornly extended bear market rally and, that camp holds, substantially lower prices for the broad market are in our near-term future.
Regardless of where you come down in that on-going debate, the market’s strength has confounded most, if not all, market watchers. For those who monitor happenings in the technical analysis world, December 23, 2009 was an important day. That was the day when the S&P 500 traded above 1121.44 which is a 50% upside retracement of the October 2007-March 2009 decline. Holding that level and then pressing higher was an almost-mortal wound to the few remaining bears in the market.
Fast-forward eleven months and factor in some very intense volatility and by November 5, 2010, the S&P 500 was at 1227.08; just below the 61.8% upside retracement of October 2007-March 2009 decline which is 1228.74.
You may be thinking…so what?
November just ended with the index posting a 0.23% loss for the month which makes November the fifth losing month of 2010 (albeit the smallest loser by far). Decembers over the past twenty years have been quite kind to investors in the S&P 500. Only four of the past twenty Decembers have posted losses and two of those losing Decembers posted losses of less than 1%. Seems like a proverbial no-brainer…play the odds, right?
Maybe not.
The market’s response to a break-out attempt up through 1228.74 should not be quickly dismissed. While history argues that December should be a winner, the recent negative response to the 1228 area has definitely caught the attention of the technical crowd and the much-battered bears.
It seems that path of least resistance now may be to the downside. Any retail sales data that suggests a less-than-robust Christmas shopping season could quickly set the stage for at least an attempt at a sustained downside move.
We see short-term risk for the index down to the 1121-1134 area. The significance of 1121 was mentioned above and 1134 is the 200 Day Moving Average. How investors respond to a weak ending to November may tell a lot about true underlying conviction.
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November 16, 2010: The Final Few Weeks
November 16th, 2010
When the red Starbucks cups hit the shelves, people start thinking Christmas. Granted, it’s not chestnuts roasting on an open fire or jingle bells but it certainly sends a message to start gearing up for Christmas. That also means gearing up for the always-important shopping season.
The moniker of Black Friday (which traditionally belongs to the day after Thanksgiving) was recently morphed and overlaid onto the entire month. If that is the case, Black Friday may draw far less activity in stores. Another potential side effect of a “Black November” instead of Black Friday is that retailers will run deeper discounts for longer periods of time. That is great news for shoppers but not so much for the seasonal earnings picture of retailers.
We’ll see how that plays out but it’s difficult to imagine a robust shopping season given the unemployment and underemployment data.
Market action as of late has produced more volatility. In response to the mid-term elections and the Fed’s much-anticipated QE2 ($600 Billion promise), the S&P 500 rallied 3.68% from session low on November 3 to session high on November 5. The session high on November 5 was 1227.04; a new 2010 and recovery high. That peak was up 84.03% from the 2009 bear market low (March 6). Interestingly, 1228.74 is a 61.8% upside retracement of the October 2007-March 2009 decline. We suggested the importance of the 1228 area in a November 2 blog post titled, “Here We Go….”.
In April 2010, the index reached 1219.80; the peak of a ten-week, 16.78% rally and the beginning of a nine-week, 17.12% decline. So, which trend driver is stronger…profit-taking from the 1220-1228 area or more bullish bets on the Fed?
QE2 (and all things Fed) has been a primary catalyst for the recent leg up in the market. The November 3 session low was S&P 500 1183.56. Yesterday’s close was the lowest close since November 3.
IF the year-end window dressers are coming to work early this year like the Starbucks red cups, 1183.56 may attract at least an attempt at support. Given the pre-market indications this morning, there may be a test if that level during today’s session.
How investors respond to a test of the 1183 area will be an important indicator as to the likely direction for the remainder of 2010.
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November 10, 2010: Lame Duck Congress and the Home Stretch
November 10th, 2010
The mid-term elections, while bringing an historic shift of power in our federal government, came out pretty much how Wall Street expected. Funny thing about the market. The excitement about an event usually comes way before the actual event happens. Then, investors assess the actual event to see how close expectations were to reality.
The day after the md-terms, Ben Bernanke and friends finished a two-day FOMC (Federal Open Market Committee or Fed) meeting and rolled out a $600 Billion plan for more quantitative easing (QE2). Investors liked that because it assured markets around the world of our government’s resolve to “print” as much money as it takes to support, backstop, guarantee, stimulate, attract (pick a verb) buying or at the very least…discourage broad market selling.
Afterall, those who have fought the Fed since late 2008 (sold stocks), despite a few short-term wins, have been utterly squashed as every period of weakness from any point in the past two years has proven to be a buying opportunity.
So is it the right thing….now…to simply close your eyes and pull the “buy” lever? With approximately seven weeks left in a surprisingly strong 2010, the path of least resistance certainly seems to be to the upside for the broad market.
But…
Momentum is a tricky thing to evaluate. Look at names like GOOG, AAPL, CMG, PCLN, and NFLX. There are many other examples but these stocks illustrate optimism gone wild. Analyst estimates are now chasing the stock price to justify ever-higher levels. Consider that from the October-November 2008 lows to the October-November 2010 highs the stocks above have rallied as follows: GOOG +155%, AAPL +306%, CMG +530%, PCLN +848%, and NFLX +932%. During that same period of time, NAZ 100 rallied 116% and the S&P 500 rallied 84% (S&P 500’s low came in March 2009). Isn’t it strange how a two-year, 84% rally does not sound like all that much?
Accounts who have sold and/or shorted any of the above names have been obliterated. So now sellers are terrified and all news is good news…..for now.
As we have quoted many times, Alan Shaw, a technical analyst with Smith Barney “back in the day”, defined bull cycles as having three distinct phases: disbelief, belief, and greed. Per Shaw, bear cycles also come in three phases: disbelief, belief, and fear.
For the five names above and for an increasingly large portion of the market, we believe the bull cycle is firmly in the greed phase and the baton may be getting passed to a bear’s disbelief phase.
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November 2, 2010: Here We Go….
November 2nd, 2010
Bets are made. Campaign messages through television, telephone, the Internet, and every other imaginable media outlet are rapidly reaching their crescendo. Almost three trading weeks ago (thirteen days), the major averages went into neutral. Upside extensions were quickly sold but downside reversals were quickly bought during that time. All of that price action (or inaction) was in anticipation of November 2 and 3. The market is waiting….
Today we get the mid-term elections and there are voices on both extremes (non-politically speaking) who are calling for vastly different outcomes in terms of market response. The most pervasive and popular expectation supports an old stock market saying; “the trend is your friend”. Meaning that most expect the recovery rally to continue. That approach, regardless of one’s view of the rally’s catalyst, has been the right approach since March 2009.
It is quite doubtful if you polled most money managers back then when we were becoming familiar with a wave of acronyms to describe various government programs to “backstop” certain securities, companies or whole industries that those managers would have envisioned the magnitude of rally that we have seen over the past twenty months. Performance, low to high, for the major averages during that time has been as follows: Dow 30 +74%, S&P 500 +82.4%, Naz 100 +110.83%, Russell 2000 +117.74%. With numbers like that, a passing observation can quickly conclude that whatever the spark was for those rallies, it certainly worked.
However, the Dow 30 and S&P 500 are beginning to stall at key resistance levels. Dow 11,246 and S&P 1229 are 61.8% upside retracements of the 2007-2009 declines. Recall that all-time highs for those (and several other) indexes came on October 11, 2007. From that day, the indexes began what would become respective seventeen-month, 54.4% and 57.7% declines.
As we have suggested on several occasions, traders are full of short but very descriptive quips about the market. In the 1923 classic, “Reminiscences of a Stock Operator”, a book presumably about the famed stock speculator Jesse Livermore, another one of those great quips is offered.
The four worst enemies of the speculator are ignorance, fear, greed, and hope.
Over the past several weeks, a tremendous amount of HOPE has gripped the market with bets on the Fed’s ability to deliver on very lofty expectations for another massive dose of quantitative easing (QE2). With today’s elections likely to shift power in Washington and tomorrow’s FOMC meeting set to roll out their plan to continue supporting or stimulating the broad market, a fifth “enemy of the speculator” has to be considered….uncertainty.
We believe the market is increasingly setting itself up for a “buy the rumor and sell the news” phase in response to news flow this week.
Regardless of where you land politically, get out and vote!!!!
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