Sam Collins

Do Oversold Signals Point to Rally?

by Sam Collins   11/18/08

The weekend meeting of the G-20 finance ministers produced an agreement to continue meeting and coordinating future actions, and to not implement any new trade barriers.

But the meeting lacked any new initiatives other than continuing to use fiscal measures to help stimulate domestic demand and to help developing countries gain access to credit. Many considered the meeting to be short of specific new action and, therefore, a disappointment.

With that -- and news that Citigroup (C) is planning to cut 52,000 jobs in a worldwide cost-cutting initiative, and more earnings downgrades -- the stock market had some tough headwinds to buck. Lowe's (LOW) topped Q3 expectations and Target (TGT) made its estimate. But both adjusted future expectations lower and Target cut its capital expenditure forecast by $1 billion, temporarily suspending its share-repurchase plan.

Democrats continued to push for a General Motors (GM) bailout and President Bush agreed that there was a need for some action. But no details were announced and GM's stock rose to $3.18, up 5.7%.

Industrial Production increased by a surprising 1.3% in October from a decrease of 3.7% in September. But the increase was attributed to recovery in mining (oil) and regional output following recent hurricanes.

At the close, the Dow Jones Industrial Average (DJI) was down 224 points to 8,274. The S&P 500 (SPX) fell 23 points to 851, and the Nasdaq (NASD) was off 35 points and closed at 1,482.

It was a very light day of trading, with the New York Stock Exchange crossing under 1 billion shares and the Nasdaq trading just under 675 million shares. On the NYSE decliners were ahead by 2-to-1 and on the Nasdaq the figure was negative by 3-to-2.

The December crude oil contract fell $2.09 and closed at $54.95 a barrel, and the Amex Energy SPDR (XLE) lost 99 cents at $46.78.

The December gold contract fell 50 cents to $742 per troy ounce, and the PHLX Gold/Silver Index (XAU) fell $3.90 closing at $76.30.

What the Markets Are Saying

Monday's light-volume selling placed the Dow (DJI) just above its key support zone of 8,175-8,250.

The S&P 500 (SPX) closed at 850.75 and that connects with two other closes at 848.92 made on Oct. 27 (so far the lowest S&P closing price) and 852.30 on Nov. 12. This makes 850 a very important number since a close under it would likely launch a new round of selling.

But volume is contracting dramatically on declines and our internal indicators are now modestly oversold. That would lead us to believe that stocks can still rally from current levels since there seem to be few sellers remaining to punch the averages to new lows and sentiment indicators, too, are oversold.

But one indicator that is in focus is in a somewhat dangerous zone and that is the CBOE Volatility Index (VIX), which closed yesterday at 69.15, just under last Thursday's big reversal high at 69.99. A pop above 70 might tell us that stocks are headed for a new leg down.

This bottom-making is tedious stuff with little in the way of reward for all but the trader and patient long-term investor. For those with the will and the capital to take the risk with short-term trading in Exchange Traded Funds (ETFs), the rewards can be huge.

But traders should have a plan that includes modest daily goals, a willingness to cut losses quickly, and the wisdom of knowing that they might miss the big gain in exchange for many small ones.

Today's Trading Landscape

Earnings to be reported include: ArvinMentor (ARM), DHT Maritime (DHT), GigaMedia Ltd (GIGM), Gran Tierra Energy (GTE), Home Depot (HD), Jack in the Box (JBX), La-Z-Boy (LZB), Medtronic (MDT), Mitsubishi UFJ Financial Group (MTU), Mothers Work (MWRK), Pacific Sunwear of California (PSUN), Phillips-Van Heusen (PVH), ReneSola Ltd (SOL), Saks (SKS) and Sinovac Biotech (SVA).

Several significant economic reports are due today including: the International Council of Shopping Centers (ICSC) Chain Store Sales Index for Nov. 15, the October Producer Price Index (the consensus expects negative 1.7%), October PPI excluding food and energy (the consensus expects 0.1%), Redbook Retail Sales Index for Nov. 15, September Treasury International Capital Flows, November NAHB Housing Market Index, and the ABC/Washington Post Consumer Confidence for Nov. 15.

Home Depot (HD) said that its Q3 net income fell 31%, but it reported 45 cents a share compared to an expected 38 cents. Sales are estimated to be down as much as 8% for the full year.

Founder Jerry Yang is stepping down as CEO of Yahoo (YHOO) as rumors persist of a sale to Microsoft (MSFT). Execs of the "Big Three" auto makers and the head of the UAW will testify before the Senate Banking Committee today seeking $25 billion in government aid.

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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.