Sam Collins

Major Indices' Resistance Weakening

by Sam Collins   11/04/08

A day before the presidential election, U.S. stock markets took a breather as investors awaited the outcome and ignored unfavorable economic news. The Institute for Supply Management (ISM) Index survey declined 4.6 to 38.9 in October -- worse than the expected reading of 41.0.

Automakers have been especially hard hit, with each major manufacturer reporting a continuation of sluggish sales in October. General Motors (GM) said that year-to-year sales for October were off 45% and Ford (F) reported a 30.2% drop. Even Toyota (TM), which has been an industry leader, said that October U.S. sales were down 25.9%.

Retail sales, too, have been slow and Circuit City (CC) has decided to close about 20% of its stores because of a "deteriorating" liquidity position. But the market interpreted that as good news and CC gained 38.5%.

Goodyear Tire & Rubber Co. (GT) gained 5.4% after the company's drop in Q3 earnings still beat analysts' estimates. Wal-Mart (WMT) gained after being upgraded to "overweight" by JPMorgan (JPM).

At the close, the Dow Jones Industrial Average (DJI) was off five points to 9,320, the S&P 500 (SPX) fell two points to 966 and the Nasdaq (NASD) gained five points, closing at 1,726.

Volume on all exchanges was light. The New York Stock Exchange traded just over 1 billion shares, with advancers ahead of decliners by 9-to-7. And on the Nasdaq, 736 million shares were exchanged with decliners there ahead by 5-to-4.

The December crude oil contract fell $3.90 to $63.91 a barrel as traders continued to worry about a global economic slowdown. The Amex Energy SPDR (XLE) fell $1.59 and closed at $49.81.

Gold for December delivery rose for the first time in three sessions, gaining $8.60 to close at $726.80 per troy ounce. The losses of the past month are chiefly due to strength in the U.S. dollar and worry that deflation could take prices even lower.

What the Markets Are Saying

Although investors seemed reluctant to take equity positions the day before national elections on Monday, the market held steady despite some nasty economic news. And this is not a new trend.

On Thursday of last week, when I entered a trading alert of a possible pending market breakout, I noted that instead of falling sharply on bad news, the markets ignored the bad news for over a week: "Consumer Confidence is the worst ever, GDP is off .03%, crude oil prices are higher, the U.S. dollar has strengthened as foreign markets have collapsed, and many are convinced of a deep recession -- or worse. We have reached beyond fear to resignation! Doom and gloom are upon us -- a great contra-indicator."

And also in that alert, I said that the buy signal for a solid advance was that "the Dow (DJI) must close above 9,300 and the S&P 500 (SPX) must close above 985."

For two days in a row, the Dow has closed above 9,300 but the S&P 500 is lagging despite getting tantalizingly close yesterday with an intraday high of 984.38 before closing at 968.75.

This "chipping away" at a stubborn resistance zone usually succeeds as sellers eventually run out of stock and the barrier gives way. Our internal indicators are still positive, so when both indices close over the resistance, the run to Dow 10,000-10,500 and S&P 1,100-1,200 should start immediately.

But volatility is still high and volume is low. Unless volume picks up on an upside break, the chances of a major advance are slim. The market's overall trend is still down with a strong possibility of a sharp near-term rally and then another test of the Oct. 10 low.

Today's Trading Landscape

Earnings to be reported include: Ameren Corp (AEE), American Medical Systems (AMMD), American Shared Hospital Services (AMS), AMREIT (AMY), Andersons (ANDE), Archer Daniels Midland Co (ADM), Assisted Living Concept Nev (ALC), Atlas Pipeline Partners (APL), Atricure (ATRC), Avista Corp (AVA) and Axcelis Technologies (ACLS).

BioScrip (BIOS), Blue Nile (NILE), Boise (BZ), Boston Beer Co (SAM), BRE Properties (BRE), Cambrex (CBM), Capital Senior Living (CSU), Carriage Services (CSV), CBL & Associates Properties (CBL), Church & Dwight Co (CHD), Cimarex Energy Co (XEC), Cowen and Company LLC (COWN) and Cuisine Solutions (FZN).

DCT Industrial Trust (DCT), Dean Foods (DF), Denbury Resources (DNR), Douglas Emmett (DEI), Eagle Rock Energy Partners LP (EROC), Emerson Electric (EMR), Endeavour Int'l Corp (END), EPIX Pharmaceuticals (EPIX), Equity One (EQY), FirstEnergy (FE) and Franklin Street Properties (FSP).

Glatfelter (GLT), Golden Star Resources Ltd (GSS), Greatbatch (GB), Harvest Natural Resources (HNR), Hawaiian Electric Industries (HE), HCP (HCP), Headwaters (HW), Health Net (HNT), Heartland Payment Systems (HPY), Hecla Mining (HL), Holly (HOC) and ION Geophysical Corp (IO).

Jacobs Engineering Group (JEC), JMP Group (JMP), Kenneth Cole (KCP), Louisiana-Pacific Corp (LPX), Macerich (MAC), Magna Int'l (MGA), Mariner Energy (ME), Marvel Entertainment (MVL), Metropolitan Health (MDF), Mueller Water Products (MWA) and Myriad Genetics (MYGN).

National Retail Properties (NNN), Nationwide Health Properties (NHP), Nautilus (NLS), NeuStar (NSR), NiSource (NI), Northgate Minerals Corp (NXG), Otelco (OTT), Park-Ohio Holdings Corp (PKOH), Penwest Pharmaceuticals (PPCO), Perot Systems (PER), PetroQuest Energy (PQ), Pinnacle West Capital Corp (PNW), Pioneer Natural Resources Co (PXD), Pioneer Southwest Energy Partners LP (PSE) and PPL Corp (PPL).

RCN Corp (RCNI), Rowan Companies (RDC), RTI Int'l Metals (RTI), Saga Communications (SGA), Stone Energy (SGY), Tenet Healthcare (THC), Tenneco (TEN) and Teradata (TER).

The St. Joe Co (JOE), Thomas Group (TGIS), Tredegar Corp (TG), UBS (UBS), Unit Corp (UNT), USEC Inc. (USU), Ventas (VTR), Virgin Mobile USA (VM), Weight Watchers Int'l (WTW), West Pharmaceutical Services (WST), Yamana Gold (AUY) and ZymoGenetics (ZGEN).

Several economic reports are due today including: the International Council of Shopping Centers (ICSC) Chain Store Sales Index for Nov. 1, the Redbook Retail Sales Index for Nov. 1, September factory orders (the consensus expects negative 0.5%), and the ABC/Washington Post Consumer Confidence for Nov. 1.

Archer Daniels Midland (ADM) reported Q1 earnings of $1.63 versus an estimated 69 cents.

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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.