Sam Collins

A 'Key' to What's Ahead

by Sam Collins   11/14/08

After a Thursday morning of bleak news -- with the Dow (DJI) down more than 350 points and new lows from some of the leading indices -- many investors reverted to a stage of total resignation. "Things will never again be the same," opined an investor.

But just after lunchtime, a huge rally developed -- not only turning the day positive but recording the third-biggest point gain in the Dow's history, and a 6% gain in the last hour of trading.

And it all came despite reduced outlooks from Intel (INTC) and Wal-Mart (WMT) and talk of more massive layoffs, higher unemployment and more new lows for the beleaguered banks.

The S&P 500 (SPX), the Nasdaq (NASD) and the NYSE Composite (NYA) all hit new bear-market lows. But after the big reversal, 22 of the Dow's 30 blue chips closed higher -- led by Caterpillar (CAT), up 12.3%, Home Depot (HD), up 12.3%, and Alcoa (AA), up 10.4%.

Gains included the energy stocks, which responded to crude oil rising more than 6%, and all 10 economic sectors posted gains, with each finishing close to their intraday highs. And, even though many banks hit new lows, the sector ended with a gain of better than 6%.

The Labor Department said that jobless benefit claims rose to 516,000 last week. But the trade gap narrowed in September to $56.5 billion -- the result of a global recession.

At the close, the Dow Jones Industrial Average (DJI) was up 553 points (6.67%) closing at 8,835. The S&P 500 (SPX) gained 59 points at 911 and the Nasdaq (NASD) rose 97 points to close at 1,597.

The NYSE traded almost 2 billion shares with advancers ahead by 3-to-1. The Nasdaq did nearly 1.4 billion shares and advancers there were ahead by 5-to-2.

The December crude oil contract gained $2.08, closing at $58.24 a barrel, and the Amex Energy SPDR (XLE) closed at $49.84, up $5.24.

The December gold contract fell to $705 per troy ounce, off $13.30, and the PHLX Gold/Silver Index (XAU) gained $9.56 to $84.71.

What the Markets Are Saying

On the day following the presidential election, a reversal from the S&P 500 (SPX) at 1,007 led to sellers controlling the markets, until yesterday.

In the afternoon of that day, following a morning of heavy selling, impressive buying led to a "key reversal day" (KRD) and, along with that, up popped a buy signal from our own Collins-Bollinger Reversal (CBR). A KRD occurs when a stock or index makes a new low and then reverses, closing higher than the previous day's high -- and does it on higher-than-average volume.

KRDs are rare and when they occur they can signal a bottom, but they are not relied upon as a sole indicator that a bear market is over.

However yesterday's KRD is encouraging for several reasons: It occurred after making a new bear market low, and it was accompanied by volume of almost 2 billion shares on the NYSE, as well as a strong signal from our own in-house indicator, the CBR. It is also encouraging that the CBOE Volatility Index (VIX) reversed along with the S&P and didn't climb much, even during the worst of the early selling.

So where do stocks go from here?

The first target is the post-election-day high of SPX 1,007 and then the 50-day moving average at just under SPX 1,050. I doubt that Thursday's action signals the end of the bear market, but it does tell us that the chance of a solid trading rally is high, and the bulls will want to jump on their favorite Exchange-Traded Fund (ETF), like our Trade of the Day to participate.

But for those not ready to trade the bullish side of the market, this rally could provide excellent entry points for their favorite inverse ETFs.

Today's Trading Landscape

Earnings to be reported include: Abercrombie & Fitch Co (ANF), Agilent Technologies (A), Care Investment Trust (CRE), Centerline Holdings Co (CHC), Enterra Energy Trust (ENT), Fuqi Int'l (FUQI), Fusion Telecomm Int'l (FSN) and Hewitt Associates (HEW).

Imperial Industries (IPII), Integral Vision (ISYS), Jinpan Int'l Ltd (JST), Lime Energy Co (LIME), Medcath Corp (MDTH), Medialink Worldwide (MDLK), Minefinders Ltd (MFN), Nexxus Lighting (NEXS) and Northern Dynasty Minerals Ltd (NAK).

Orleans Homebuilders (OHB), Osi Restaurant Partners (OSIP), J.C. Penney (JCP), Pet Drx Corp (VETSW), Suburban Propane Partners LP (SPH), Telefonica SA (TEF), Transcontinental Realty Investors (TCI) and Vanguard Natural Resources LLC (VNR).

Several economic reports are due today including: October import prices (the consensus expects a loss of 4.0%), October retail sales (the consensus expects a loss of 2.4%), October retail sales excluding autos (the consensus expects a loss of 1.6%), September Business Inventories (the consensus expects negative 0.1%), Mid-November Reuters/University of Michigan Sentiment Index (the consensus expects 55) and Nov. 7 Natural Gas Inventories.

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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.