Sam Collins

Market Direction Mixed

by Sam Collins   11/17/08

Until about 3:15 p.m. Eastern, Friday's daily chart looked a bit like a classic saucer.

After plunging 4% in the first hour on a Commerce Department retail sales report that showed a 2.8% decrease in October sales, the market clawed its way back until about 3p.m. -- it was all very encouraging. And nasty sales reports early in the day from retailers Nordstrom (JWN) and Kohl's (KSS) seemingly had little impact on the overall stock market.

Tough talk from Congressional Republicans regarding a bailout of General Motors (GM) did little damage and GM even rose 2%. Citigroup (C) gained on reports that the bank is anticipating a major jobs cut of at least 10,000 jobs worldwide. And in the early afternoon, the market seemed to pick up steam on Treasury Secretary Hank Paulson's voiced confidence on CNBC in the U.S. financial system.

But in the last 45 minutes of trading, the saucer cracked. All of the day's gains were lost and more than half of Thursday's big reversal went down with it, as well. Selling was heavy in technology stocks, with Dow member Intel (INTC) leading the charge, down 7.69%.

By the close, the Dow Jones Industrial Average (DJI) lost 338 points at 8,497. The S&P 500 (SPX) fell 38 points to 873 and the Nasdaq (NASD) was off 80 points, closing at 1,517.

On the New York Stock Exchange, volume approached 1.5 billion shares and the Nasdaq traded 978 million shares. Breadth on both exchanges was negative by about 4-to-1.

For the week, the NYSE fell 5.0%, the S&P 500 was off 6.2% and the Nasdaq fell 7.9%.

On Friday, crude oil (December delivery) fell $1.20 to $57.04 a barrel, and the Amex Energy SPDR (XLE) closed at $47.77, down $2.07.

The December gold contract closed at $742.50, up $37.50 per troy ounce, and the PHLX Gold/Silver Index (XAU) fell $4.51 to $80.20.

What the Markets Are Saying

Thursday's key reversal day with its huge upside volume on the Nasdaq (NASD) was very encouraging. Even with the sell-off in the last 45 minutes of Friday's trading, Thursday's reversals put the ball into the hands of the bulls for the extreme near term.

But we are still in a bear market and testing the October lows. Now the major indices must hold on and not breach the lows of Thursday and the Oct. 10th low. Breaking down to a new low close would almost certainly lead to another sell-off and force us to conclude that Thursday's series of reversals on the major indices was merely a massive short-covering rally.

There is much evidence to indicate that the stock market -- at 12 times S&P 500 (SPX) earnings -- is very cheap compared to bonds and other investments. And some of the technical indicators are showing that the market is oversold and due for a major rally.

But we'll let the market tell us its next direction. If it holds above last week's lows, the chances are high for a solid rally. If not -- well, there are still the Ultra Short Exchange-Traded Funds (ETFs).

Today's Trading Landscape

Earnings to be reported include: China Distance Education Holdings Ltd (DL), Covidien Ltd (COV), Ctrip.com Int'l Ltd (CTRP), Franklin Covey Co (FC), Hanover Capital Mortgage Holdings (HCM), Hastings Entertainment (HAST) and Implant Sciences Corp (IMX).

Longtop Financial Technologies Ltd (LFT), Lowe's Companies (LOW), Mad Catz Interactive (MCZ), Orbotech (ORBK), Schawk (SGK), Target Corp (TGT), The9 Ltd (BCTY) and Transmeta (TMTA).

The following economic reports are due today: November New York Fed Manufacturing Index (the consensus expects negative 27), September Industrial Production (the consensus expects 0.4%) and September Capacity Utilization (the consensus expects 76.7).

The big news is the bailout of General Motors (GM), and there will continue to be a lot of talk about that. Also, in this morning's Wall Street Journal there is a report that Democratic leaders in Congress plan to push for legislation next week to use the $700-billion rescue fund for auto makers' use.

Expect the market to respond directly to all rumors.

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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.