Sam Collins

Despite Rally, Downward Trend Remains

by Sam Collins   11/24/08

On Friday, stocks were doing the usual see-saw and were close to the low of the day when it was announced that New York Fed President Timothy Geithner would be nominated as Treasury Secretary. Almost instantly, the market turned and in the final hour it surged more than 500 points in reaction to further announcements that named New Mexico Gov. Bill Richardson for Secretary of Commerce and Hillary Clinton as Secretary of State.

It was a classic case of the market's delight with certainty, which ran counter to earlier in the week when Congress decided to forestall a decision on the bailout of auto companies and instead went home for the Thanksgiving holiday, after which the market fell to new lows.

But even after Friday's big gain of 6.5% and reversal, the Dow (DJI) was down 5.3% for the week and down 43% from last year's record close. Bond markets have been hit hard and a host of junk-bond issues that were planned for after Labor Day have been canceled, according to The Wall Street Journal. In almost all markets, both equity and debt, the word 'paralysis' is being used to describe the scenario.

On Friday, Citigroup (C) fell 20%, which makes the week's total decline 60%, as pressure built to sell some of its business units. And worst of all, a government bailout was becoming more likely which would could leave the stockholders' holdings almost worthless.

But there was good news too: Of the 30 stocks in the Dow, 28 ended higher. Alcoa (AA) headed the gainers, up 23.2%. Wal-Mart (WMT) gained 4.5% after naming a new CEO, and Gap Inc. (GPS) gained 27% after it reported a profit increase of 3% and said that its prior annual earnings forecast would be met.

At Friday's close, the Dow Jones Industrial Average (DJI) gained 494 points at 8,046, the S&P 500 (SPX) was up 48 points at 800 and the Nasdaq (NASD) gained 68 points, closing at 1,384.

The Big Board traded a big 2.4 billion shares, with advancers ahead by 5-to-3. On the Nasdaq, more than 1.4 billion shares traded and there the advances were ahead by 8-to-5.

For the week, the Dow was off 5.3%, the S&P 500 was down 8.4% and the Nasdaq fell by 8.7%.

Crude oil for January delivery rose 51 cents to $49.93 a barrel, and the Amex Energy SPDR (XLE) rose $4.46 to $44.42.

The December gold contract had a big day, up $43.10 to $791.80 an ounce, and the PHLX Gold/Silver Index (XAU) rose $18.72 to $88.80.

What the Markets Are Saying

Friday's late-afternoon rally indicates just how starved the market is for even a shred of good news. And it may also underscore how susceptible it is to the current "undervaluation of stocks versus bonds" as reported by Thomson Reuters to be 10.7% versus 3.20% for the 10-year note.

With the reversal up of the major indices on Friday, and another Collins-Bollinger Reversal (CBR) buy signal from our own internal indicator, it is clear that Dow 8,000 and S&P 800 are very significant numbers. Stocks held just above these levels for almost seven weeks before finally being crushed on Thursday by an inept Congress that had no incentive to make a decision on the future of General Motors (GM) and the other U.S. carmakers.

But one warm day does not turn winter into spring, and neither does one reversal day turn a bear market into a bull market.

The trend is still down for long, medium, and short term. So, for now let's continue to enjoy the short side of the market by adding to the contra-ETFs on rallies but remaining vigilant for the damage that a major dead-cat bounce could inflict.

Today's Trading Landscape

Earnings to be reported include: Analog Devices, Atwood Oceanics, Campbell Soup, CBRL Group, Citi Trends, Donaldson, Dycom Industries, General Employment Enterprises, Gilat Satellite Networks Ltd, Hewlett-Packard, SkillSoft Corp, Star Bulk Carriers Corp, Universal Technical Institute and Valspar.

The October Chicago Fed NAI and October Existing Home Sales (the consensus expects negative 2.9%) are both due today.

Cititgroup (C) will receive a $20-billion injection of capital from U.S. federal regulators to back up $306-billion worth of assets. President-elect Barack Obama said yesterday that he is preparing a $500-billion stimulus plan.

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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.