Mixed Signals: What's Ahead

The markets remained mixed this week as the general indexes bounced off their recent lows and tried again to challenge, but failed to break out of the upside of the recent trading range.

Looking back at the past 30 days, we see leadership in diverse sectors such as China and Short Financials so it’s easy to see the cross currents flowing through this market as people try to figure out if the rally is dying out or gathering new force to break higher above the 1100 level on the S&P 500.

On the technical side, the New High/New Low index is down and 58% of all stocks are above their 50 Day Moving Averages compared to 80% a month ago when the S&P was near current levels.

The Dow and NASDAQ are +1.98% and +1.95% above their October highs while the Russell 2000, the small cap gauge, is -5.6% off its October highs. Small caps generally lead any rebound and so weakness here would support the “tired market” argument and be a red flag for higher prices ahead.

Seasonally, we’re at the beginning of the “best” six months of the year where historically the market has outperformed between October and May. Known as the “Halloween Indicator,” for buying and the “sell in May and go away” bromide for selling, this seasonality has a good track record and perhaps we’ll see that in positive action again this year. It didn’t work in 2008-2009, but certainly recent times have been like no other times we’ve seen.

Nobody has a crystal ball and there's no way to predict the future and so the best strategy, as always, is to let the market tell you where it's going next and what to do. A sustained break higher will likely draw more money into the market and we could even see some panic buying, while another failure would dampen the "animal spirits" and "risk appetite" I've been reading about all year.

The View from 35,000 Feet

The news is murky, as well, with consumer sentiment unexpectedly down for the 2nd month in a row in November while insider buying has picked up. Wal Mart issued a disappointing outlook expecting a cautious holiday season and declining sales in non essential merchandise while Disney (DIS) reported higher than expected profits. Overall operating profits have declined -14% which is the best since 3rd Quarter of 2007 and better than the -25% expected but still there is little revenue growth seen.

The Federal Housing Authority finds itself in trouble as its reserves have dropped below Congressionally mandated limits due to still rising foreclosure rates. Possible solutions include raising down payment requirements and credit score requirements which the real estate industry doesn’t want to hear anything about since those types of actions could crimp the still fragile housing market recovery.

My “Friday Bank Failure Report” indicates that 3 more banks failed on Friday bringing the total to 123 for the year and delivered another $1 Billion bill to the FDIC. One can only shake one’s head at the magnitude of these numbers.

Still, there’s more stimulus to come and it appears that a muted recovery is underway.

The Week Ahead

Lots of economic news this coming week along with earnings reports from key retailers Lowe's (LOW), Saks (SKS) and Limited, Dell (DELL) in the tech. sector and CIT (CIT), the troubled lender to small businesses. Also, we’ll see significant reports on retail sales, manufacturing industrial production and housing.

Monday: October Retail Sales, November Empire Manufacturing, September Business Inventories

Tuesday: October Producer Price Index, October Capacity Utilization, October Industrial Production

Wednesday: October Housing Starts, October Building Permits, October Consumer Price Index

Thursday: Weekly Jobless Initial and Continuing Claims

Friday: October Leading Economic Indicators, November Philadelphia Fed

Disclosure: TWM

Comments

[test213:]

A correction is likely to come when nobody expects it. That is why itg never came in October.

Meanwhile, it is best to go with the flow and participate in the upside.

test213
invetrics.com

Nov 16 08:06 AM

[drewriders:]

I got out this morning. Looks like everyone is covering before options expiration. Expect a drop before the payroll report the first week of Dec. It has been doing that for about 3 months or so lately.

Nov 16 10:01 AM

[Northern Da...:]

>Seasonally, we’re at the beginning of the “best” six months of the year where historically the market has outperformed between October and May.<

After looking at this period last year, I tend to not have a lot of confidence in that particular mantra.

Since Nov. of 2008, the Dow is up 21% and the dollar is down 15%. How can these values in the large caps be seen as any credible sort of "gain", never mind the small caps? This has been a liquidity driven rally, not a rally based on any fantastic economic recovery. Quite the opposite, there's been very little true economic recovery, and there won't be until the central banks start lending all those reserves to businesses who need them, rather than to their dirty thieving buddies who use them in the dollar carry trade.

I've got a hunch investors from beyond the borders of the USA are all too aware of the reality of the US equity markets and the outlook for the dollar. If the dollar continues to fall, the markets will appear to be rising but will in real terms only be going sideways. In fact, when priced in most foreign currencies, the S&P has shockingly been flat since June. There's no real profit in that scenario. If the dollar makes a sudden and totally unexpected spike, which is what I suspect, the markets won't like that either.

What's ahead? Either way you slice it, I don't think higher markets are on the horizon beyond this final (?) little rally. If anything, investors would be looking an any equity market other than the American markets because of the currency situation if nothing else.

Nov 16 01:01 PM

[chris coonan:]

What's ahead....when you are at the top, it is a long way to the bottom. 2010 will be a different year for the market. As CREDIT becomes a major problem in the next 2 months, and the construction industry continues to falter, and State revenues get worse, and State's layoff workers, and inflation kicks in, and as Commercial Real Estate implodes and rents get lower....not too optimistic for the short term.

Nov 17 04:35 AM

[mbkelly75:]

That is a reason to have ROW stocks in your portfolio as well as stocks that pay you dividends in a strong foreign currency. For now, although some are down so far today (it is early yet), pretty much everything is still trending up in general. I will continue to ride the uptrend as long as it lasts.

Nov 17 10:18 AM

[Smalltownba...:]

A better solution for FHA.
1. Reduce loan limits back to normal affordable housing levels and quit trying to support outrageous values in markets that are imploding but sacrificing the FHA.
2. Stop allowing use of the program to refinance people who are under water on their loans and let the investors who made the bad loans to begin with absorb that risk.
3. Give Stephens the power to enforce his initiatives and let them work. He is definitely moving the agency in the righ direction.

Nov 17 10:26 AM