Sam Collins

S&P Makes a 'Break' For It

by Sam Collins   12/09/08

The combination of forthcoming help to the 'Big Three' auto companies and President-elect Barack Obama's plan to launch his own 'New Deal' set of programs directed to repair the U.S. infrastructure triggered a broader-based rally yesterday. The new programs will be targeted at creating "at least 2.5 million new jobs by 2011" with the largest investment of its kind since the building of the interstate system more than 50 years ago.

As might be expected, shares of companies that might benefit from such a massive government plan did well. Alcoa (AA) gained 17%, U.S. Steel (X) was up 24% and Deere (DE) was up 16%. Ford (F) and General Motors (GM) rallied on reports that House Democrats sent a $15-billion plan to aid the car makers to the White House for consideration and comment.

McDonald's (MCD) fell 2.9% despite reporting that November sales had increased by 7.7% worldwide. 3M Co. (MMM) fell 4.1% following a lower earnings outlook and a cut of almost 1,800 jobs.

The materials sector was up 7.7% on the president-elect's plans. Energy gained 5.7% and the financial sector gained 6.9%.

The Dow Jones Industrial Average (DJI) gained 299 points to close at 8,934, the S&P 500 (SPX) leaped 3.8%, up 34 points to close at 910 and the Nasdaq (NASD) was up 63 points to 1,572.

Volume on the New York Stock Exchange topped 1.7 billion shares and advancers were ahead of decliners by 3-to-1. The Nasdaq traded 975 million shares and breadth matched that of the NYSE at a positive 3-to-1.

The January crude oil contract gained $2.90 to $43.71, and the Amex Energy SPDR (XLE) closed at $46.12, up $1.96.

Gold for January delivery was up $17.10 ending at $769.30 per troy ounce. The PHLX Gold/Silver Index (XAU) closed at $95.28, up $7.70, opening a trading gap while scoring a buy from its stochastic and closing above its 50-day moving average. The XAU is putting in a series of higher highs and higher lows with a trading target of $106.

What the Markets Are Saying

"Don't fight the fed" means that injecting large amounts of capital into the economy usually gets things going. And, even though the Fed may not be providing all of the money, the perceived impact of an infusion of mind-boggling amounts can't be ignored.

So, in a scramble to jump on the stocks and industries that will benefit most from Mr. Obama's plans, the S&P 500 (SPX) closed above the initial resistance at 900 on a small break-away gap and set its immediate sight on the 50-day moving average at 930. The Dow (DJI) shows the same pattern, with both closing comfortably above their 20-day moving averages.

Each of the indices -- by confirming an inverse head-and-shoulders breakout following Friday's key reversal day -- now have meaningful momentum going for them. Targets for the breakout are initially Dow 9,300, then 9,625 and S&P 985, then 1,048.

But even if the targets are met, it wouldn't change the overall direction of the market, which is still down. And even though traders can benefit from moves like this, longer-term investors will want to use them as buying opportunities for the UltraShort list.

Today's Trading Landscape

Earnings to be reported include: ADC Telecom (ADCT), Analogic Corp (ALOG), ArcSight (ARST), AutoZone (AZO), Bakers Footwear Group (BKRS), Ferrellgas Partners (FGP), Finisar (FNSR) and G-III Apparel Group (GIII).

ICO Inc. (ICOC), KMG Chemicals (KMGB), Methode Electronics (MEI), Oil-Dri Corp of America (ODC), Oxford Industries (OXM), Pall Corp (PLL), Pep Boys (PBY), Photronics (PLAB), Rex Stores Corp (RSC) and SAIC Inc. (SAI).

The Cooper Companies (COO), The Kroger Co (KR), Tier Technologies (TIER), Toro (TTC), Vail Resorts (VAIL) and Williams Controls (WMCO).

The following economic reports are expected today: International Council of Shopping Centers (ICSC) Chain Store Sales Index for Dec. 6, Redbook Retail Sales Index for Dec. 6, October Pending Home Sales (the consensus expects 3.0%) and ABC/Washington Post Consumer Confidence for Dec. 6.

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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.