Sam Collins

Markets Grim on Economic Reality

by Sam Collins   11/07/08

Stocks crumbled Thursday as fear of a deep recession, some estimates of the "true" costs of implementing various of the president-elect's plans, and lower-than-expected retail sales hit investors hard. Add to that the fear that today's release of the October unemployment report may be worse than anticipated, and the result was a broad sell-off for the second day following the presidential and congressional elections.

Broader-based selling hit virtually all markets with every one of the S&P 500's (SPX) 10 industry groups in decline. And every stock of the Dow-30 (DJI) hit the dust, as well, with General Motors (GM) leading the selling, down 13.67%.

Energy stocks were hard-hit as a result of a new round of selling in crude oil. Consolidated Energy (CNX) fell more than 20%, ExxonMobil (XOM) lost more than 5%, and Chevron (CVX) was down more than 6%.

And with job losses on the increase, many potential buyers are holding off on new purchases. Therefore, retailers like Nordstrom (JWN), Gap (GPS), American Eagle (AEO) and Abercrombie & Fitch (ANF) all reported double-digit declines in October same-store sales. However wholesalers, like Wal-Mart (WMT) and BJ's Wholesale (BJ), were able to increase sales as shoppers became more price conscious.

At the close, the Dow Jones Industrial Average (DJI) was off 443 points at 8,696. The S&P 500 (SPX) closed at 905, down 48, and the Nasdaq (NASD) fell 73 points, closing at 1,609.

The New York Stock Exchange traded 1.5 billion shares, with decliners ahead of advancers by 5-to-1. On the Nasdaq, more than 1 billion shares changed hands with decliners there ahead by 11-to-3.

The December crude oil contract fell 7%, down $4.53 to $60.77 a barrel on new concerns about a global recession. The Amex Energy SPDR (XLE) fell $3.05 to $47.60.

The December gold contract fell $10.20, ending at $732.20 per troy ounce, and the PHLX Gold/Silver Index (XAU) fell $7.93 to close at $81.87.

What the Markets Are Saying

Last week, I issued a "breakout pending" alert advising that a trading opportunity was about to occur on the S&P 500 (SPX) and the Dow (DJI) if the indices closed above S&P 985 and Dow 9,300.

We got that signal on election day, when the Dow got as high as 9,651 and the S&P climbed to 1,008 before both turned and headed down to the support area at 8,680 and 905, respectively, and well short of the targets of Dow 10,500-11,000 and S&P 500 1,100-1,200.

The support levels at Dow 8,680 and S&P 905 are important because they represent a 61.8% retracement of the rally from the Oct. 10 low to the election-day high, and 61.8% is a Fibonacci number.

Curiously, on Thursday, the lows of the major indices hit just below those numbers and then closed above them. For now, the alert is still in effect since the markets closed above those numbers on Thursday and Friday. But if those important numbers are violated on a close next week, then we will want to very quickly jump on the short side of the market again since a penetration of such an important line of support has very bearish implications.

For those following the Nasdaq (NASD), the tops at 1,782 were never exceeded and so an alert was not issued. But Fibonacci support for the Nasdaq is at 1,609. On Thursday, the Nasdaq closed at 1,608.70, with the same bearish implications as the Dow and the S&P 500, if the support is violated.

Today's Trading Landscape

Earnings to be reported include: AES Corp (AES), Aircastle Ltd (AYR), Alamo Group (ALG), Applied Energetics (AERG), Arbor Realty Trust (ABR), Brookfield Asset Management (BAM), Calpine Corp (CPN), CGGVeritas (CGV), Consolidated Edison (ED), Constellation Energy Partners LLC (CEG) and Cooper Tire & Rubber (CTB).

DRS Technologies (DRS), Edison Int'l (EIX), Employers Holdings (EIG), Enerplus Resources Fund (ERF), Ever-Glory Int'l Group (EVK), General Motors Corp (GM), Genpact Ltd (G), Harken Energy Corp (HKN), Harrah's Entertainment (HET), Hooper Holmes (HH), Inhibitex (INHX), Intelli-Check (IDN), Kowabunga! (KOW), Kubota Ltd (KUB) and Lafarge North America (LAF).

Metalico (MEA), MI Developments (MIM), Mirant (MIR), Newcastle Investment Corp (NCT), Nippon Telegraph and Telephone Corp (NTT), Nordic American Tanker (NAT), North American Energy Partners (NOA), Orix Corp (IX) and Reliant Energy (RRI).

Salem Communications Corp (SALM), Santander BanCorp (SBP), Saul Centers (BFS), Sotheby's (BID), Spectrum Pharmaceuticals (SPPI), Sprint Nextel Corp (S), Stoneridge (SRI), Sun Communities (SUI), Sunrise Senior Living (SRZ) and Superior Industries (SUP).

Telus (TU), Tetra Technologies (TTI), E.W. Scripps Co (SSP), Tim Hortons (THI), Toreador Resources (TRGL), Trump Entertainment Resorts (TRMP), UTEK Corp (UTK), Verso Paper (VRS), Westar Energy (WR), Windstream Communications (WIN) and Zi Corp (ZICA).

Several economic reports are due including: October non-farm payrolls (the consensus expects a loss of 200,000), October unemployment rate (the consensus expects 6.3%), September wholesale trade (the consensus expects 0.3%), September pending home sales (the consensus expects negative 3.0%), and September consumer credit (the consensus expects $100 million).

Ford (F) reported a Q3 loss of $1.31 versus an expected loss of 94 cents and it has cash on hand of $29.6 billion. Ford will cut 10% of its salaried force and seeks to sell some of its non-core assets. Sprint Nextel (S) had a Q3 loss of 11 cents versus an estimated profit of 3 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.