Just when it looked like Santa had gone on an extended vacation, he showed up during the last week of the year. Solid advances by the blue chips took the Dow Industrials (DJI) to a gain of 6.1% for the week — and the gains weren’t restricted to just the Dow. The broader-based S&P 500 (SPX) was up even more at 6.8%, and the Nasdaq (NASD) was up 6.7%.
Friday was the strongest day of the shortened week, with the Dow gaining 2.9% and the S&P up 3.2%. All of the Dow’s 30 stocks finished higher.
Daily volume for the four days was characteristically light at just one-half to three-quarters of the normal level but equal to other shortened year-end periods of recent years.
The most important feature of the week, and indeed the last three weeks, has been the market’s ability to withstand some very bad news.
Last week, for example, the October Standard & Poor’s Case/Shiller Home Price Index was reported to have declined 18% for the largest year-over-year drop on record, showing that the housing market has still not reached bottom. And the Institute for Supply Management (ISM) Index, which is computed from a survey of national manufacturing conditions, hit its weakest point since June 1980.
There was little corporate news last week, but in economic news, initial jobless claims fell by just 94,000 to 492,000, which was less than expected. The Semiconductor Industry Association reported that worldwide sales fell 9.8% in November and blamed a worldwide recession for the poor showing.
On Friday, the Dow (DJI) gained 258 points closing at 9,034. The S&P 500 (SPX) was up 29 points at 932 and the Nasdaq (NASD) rose 55 points at 1,632.
Volume on the New York Stock Exchange totaled 1 billion shares, with breadth a positive 5-to-4. On the Nasdaq, 543 million shares traded and advancers were ahead of decliners by 3-to-1.
Crude oil rose to a three-week high, ending Friday at $46.34 for the February contract, a gain of $1.74. The Amex Energy SPDR (XLE) closed at $50.15, up $2.38.
The February gold contract fell $4.80 to $879.50, and the PHLX Gold/Silver Index (XAU) lost 42 cents, closing at $123.43.
What the Markets Are Saying
What a difference in the chart patterns of the major indices since our last Daily Market Outlook on Christmas Eve.
Then, a number of sell signals from individual stocks, along with less-than-impressive internal and sentiment numbers and a clear sell signal from the stochastic indicator, made the last week of trading look like Santa had been the Grinch in disguise. And the massive stock losses, poor economic forecasts, and pending bankruptcies added the feeling that 2008’s last week of trading could turn into another run of last-minute tax-loss selling.
Even as late as last Monday, the major indices were trading under both their 20- and 50-day moving averages. But a three-day run of buying, albeit on light volume, drove prices through both of the key moving averages and even managed on Friday to close above the series of highs that have marked the top of a small trading range since Dec. 8.
As positive as all of this sounds, stocks are still in a bear market and, except for the past five sessions, have done little to inspire the bulls. And now the sentiment indicators are overbought and the put/call ratio is at a very low ratio, which suggests that the year-end rally may not have enough power to drive stocks higher. (Our internal indicators are overbought, too, but not to a dangerous level.)
However the short-term chart pattern of the major indices has turned up as a result of the Dow (DJI) and the S&P 500 (SPX) closing above the near-term resistance of 9,000 and 920, respectively, which formed the resistance line in a bearish channel begun early in October. This suggests that the market has enough strength to challenge the huge resistance line at Dow 9,630 and S&P 1,010 but not enough to change the intermediate from down to up.
As a precaution, we’ve moved our trading accounts to neutral, or hedged, positions and taken some bullish positions in precious metals and infrastructure stocks. This move recognizes the potential for future inflation and acknowledges the impact of the new president’s will for spending to improve the country’s faltering infrastructure.
But caution is still warranted since the long and intermediate trends are still down.
Today’s Trading Landscape
Earnings to be reported include Piedmont Natural Gas (PNY) and The Mosaic Co. (MOS).
The following economic reports are due: International Council of Shopping Centers (ICSC) Chain Store Sales Index for Jan. 3 and the November construction spending figures (the consensus expects negative 1.2%).
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
