The Nvest Market Blog, our current thoughts on the Street

Santa Claus (Rally) is Real - Week Ended 12/25/2009

posted 12.28.2009 at 09:27 a.m. by steve

The Christmas-shortened trading week was strongly positive for investors despite more of the mixed economic data that has been seen in recent weeks. The S&P 500 advanced +2.18% while the NASDAQ and Dow finished up +3.35% and +1.85%, respectively. Perhaps more interesting is that US markets have now risen for five consecutive trading days after weeks of directionless volatility. Up until the recent Santa Claus rally, stocks have been treading water, moving neither up or down on a weekly basis since late-October. As we have discussed in recent writings, we believe the markets have been encountering resistance; common following a 50% retracement rise between the market lows (set in March) and the highs of the last bull market (ended October 2007). That resistance is between 1,100 and 1,130 on the S&P; our thinking is that if major indexes can bust through what is the current levels of resistance (a ceiling), then that resistance can transition into support (a floor) for the next leg of this advance.

In recent weeks, the package of economic data has again stalled and become more mixed. Despite fewer new unemployment claims (unemployment situation appears to be steadily improving) the past week again reminded investors that the economic recovery is slow and fragile. We received the third and final reading on 3Q GDP, which indicated that the US economy grew at a +2.2% pace despite initial indications of around +3.8%. That news was largely dismissed as stale now that the 4Q is nearing an end (markets are forward looking); we will get the first reading on 4Q GDP in late January. Meanwhile, personal consumption continues to be basically flat month over month in a sign that consumers remain cautious; holiday sales this year look to be a notable improvement over last year however. The current week (also shortened by New Years Day on Friday) will again be skinny in the way of fresh economic data. We do continue to believe that despite what looks to be a marginal improvement in the health of consumers, sustained economic recovery will depend more heavily on business activity (a surge in capital expenditures, improvements, technology upgrades, and re-hiring) than in recoveries of past. In the absence of much new data due this week and still light trading volume, the Santa Claus rally can continue into a second week, putting the cap on what has been a great year for the markets. Happy Holidays!!!

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3 Weeks Into December, Still Waiting for Santa - Week Ended 12/18/09

posted 12.21.2009 at 09:56 a.m. by steve

Despite the month of December historically being very positive for the markets, it was another week of directionless volatility as economic data continues to be mixed. For roughly two months now, the market has managed to go nowhere fast; up one day and down the next with the net weekly result being a wash. The Dow and S&P both finished the week lower at -1.36% and -0.36%, respectively while the tech-heavy NASDAQ logged a gain of +0.98% on better than expected earnings from some tech industry heavyweights. Despite the marginally negative week for the S&P, the index did manage to again close above 1,100 for the third consecutive week, giving evidence that the market has found support near the level. Meanwhile, commodities and gold in particular, came under pressure this week as the dollar gained against other currencies including the Euro on fresh worries over sovereign debt from countries like Greece. The latest currency trade serves as a reminder that while it has been easy to make a bear case for the US dollar given the ever rising budget deficits and a still weak economy, it is perhaps more challenging to make a bull case for owning another currency instead given the global economic environment.

The next two weeks will likely be somewhat slow for the stock market, as many will be focused on celebrating the holidays and taking time off before year-end. Trading volume will dip as there will be little in the way of new economic data for markets to absorb. 3Q GDP will be revised for its final time tomorrow (Tuesday) and two more data points on housing will be offered in the form of existing and new home sales; also important to the markets will be personal income and another round of jobless claims. Most recently, jobless claims have ticked up on a week over week basis; but the 4-week moving average (intended to smooth the trend) has continued to improve. Leading indicators also marked another month of improvement, now the eighth consecutive and are up 9.6% on an annual pace since June. Given the continued improvement, it appears that while the market is struggling to make new highs, the next leg up for the current rally is probably around the corner. In the absence of lots of trading and new data, a Santa Claus rally could still be in the cards this week or next to put a cap on what is already a very positive 2009! Happy Holidays to you and your family; we look forward to a new decade and a new year!

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Directionless Volatility Continues - Week Ended 12/11/2009

posted 12.14.2009 at 09:33 a.m. by steve

It was another week of directionless volatility for the US markets, leaving the major indexes little changed from the prior week. The S&P and Dow both managed to finish barely higher (+0.04% and +0.80%, respectively) while the NASDAQ dipped ever so slightly (-0.18%). Still, for a second consecutive week, the S&P closed above 1,100; a level that has been crossed mid-week with on several occasions over the last two months only to fall back below going into the weekend. Meanwhile, many commodities (including gold) dropped as the US dollar strengthened somewhat unexpectedly; international equities have continued to outperform US counterparts against a backdrop of a stronger recovery story. It has been somewhat disappointing to see the US market churning in recent weeks as the month of December has historically been a great month of the year for stocks. This has been especially true in years where the market is up handsomely going into the holiday season. Now, just 17 days remaining in 2009, it is looking as if December will not be all that exciting for stock investors compared to other months we have seen this year.

Despite rather flat US equity performance in recent weeks, economic data points have been generally better than expected. In the latest weekly installment, both consumer spending data and inventory data rose. Housing has appeared more stable and the unemployment figures have continued to improve. But, early reports have suggested that consumers have fallen behind in their holiday shopping this year; but that could be setting retailers up for a pleasant surprise in these last few weeks before Christmas if shoppers pick up their pace even a little bit. This week is somewhat quiet for fresh economic data; most watched will be the Empire State Manufacturing Survey (Tuesday); the CPI and Housing Starts (Wednesday); and Jobless Claims on Thursday. Still, the markets could experience a good start to the week, following reports this morning that Abu Dhabi will provide $10 billion in aid to help neighbor Dubai work through its recent debt crisis. Additionally, Citigroup has announced plans to repay $20 billion of its TARP loans from the US government; viewed as one of less financially stable banks, the news suggests that the banking sector as a whole is becoming more financially stable.

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S&P Finishes Week Above 1100 for First Time Since Oct 2008 - Week Ended 12/4/09

posted 12.07.2009 at 5:01 p.m. by steve

For the first time since October 2008, the S&P 500 managed to finish above 1,100 for the week. The S&P rose +1.3% while global markets jumped more. The broad S&P index has been flirting with the level for nearly two months, and has eclipsed it on several occasions during the middle of the trading week; but it has failed to finish a week above the level, which is coincidentally roughly half way from the market peak in October 2007 to the low set in March 2009. There was much in the way of good economic news for investors in the most recent week but the favorable jobs report issued Friday was the brightest light. Non-farm payrolls dropped just -11,000 during the month of November. That figure seemed almost too good to be true when benchmarked against the October reading of -190,000! Even consensus expectations by economists looked for a decline of -100,000 in November. The figure was good enough to move the unemployment rate from 10.2% back to 10.0%.

The markedly better than expected jobs data is an extremely positive surprise for investors and economists alike. And, while one data point does not make a trend, it does suggest that the economic recovery is indeed underway. Widely feared in recent months has been the notion that the current economic recovery will be one in which unemployment will remain stubbornly high. Further, if the unemployment rate moves too high, there is fear that the economy may take a u-turn and head south again. Also worth noting has been the recently better housing and consumer credit data. For the last several weeks mortgage applications have again been on the rise and consumer credit has been better than expected. That is important because small business owners have relied on equity in their homes to serve as collateral for business loans, and the economy has relied on small businesses for job creation. In short, more positive readings from housing, manufacturing, productivity, retail and automobile sales indicate that the current equity market rally is probably justified; and if positive surprises continue it helps alleviate the concern that stocks have moved too far, too fast. As we indicated in our most recent monthly commentary, Directionless Volatility, the market is currently bumping its head against technical resistance around the 1,120 level. If data can help push the index above that ceiling (resistance), we believe the level can transition to become new support (floor) for the next leg of the bullish advance.

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