Sam Collins

Stalled Auto Bailout Puts Market in Reverse

by Sam Collins   12/10/08

After a gain of 20% from its low on Nov. 21 to Monday's high, the stock market succumbed to profit-taking Tuesday. Sellers lined up before the opening bell as Senators gave interviews, each expressing reluctance to go along with the Democrat proposal to bail out the auto industry, while the White House said that there were still "some sticking points" in the plan.

So, while a $15-billion auto bailout deal has been reached between the House of Representatives and the White House, passage in the Senate is not certain

And it didn't help matters that the International Council of Shopping Centers and Goldman Sachs (GS) reported that chain-store sales declined 0.8% last week from the prior week.

Then Texas Instruments (TXN), FedEx Corp. (FDX) and Danaher Corp. (DHR) all adjusted forecasts lower, and retail giant Wal-Mart (WMT) added to a late sell-off by suspending its share repurchase program. Wal-Mart said that it still had about $5 billion remaining to buy in its $15-billion program.

But there was good news from AutoZone (AZO), which reported first-quarter results at $2.23 a share versus an expected $2.20.

At the close, the Dow Jones Industrials (DJI) were down 243 to 8,691, the S&P 500 (SPX) fell 21 points to 889 and the Nasdaq (NASD) was down 24 to 1,547.

The NYSE traded more than 1.4 billion shares and the Nasdaq crossed 955 million, both with decliners ahead of advancers by 2-to-1.

The January crude oil contract fell $1.64 to $42.07 a barrel, and the Amex Energy SPDR (XLE) rose 46 cents to $46.58.

The February gold contract rose $4.90 to end at $774.20 an ounce. The PHLX Gold/Silver Index (XAU) gained 78 cents to $96.06.

What the Markets Are Saying

Friday's key reversal and the follow-up advance on Monday pushed both the Dow (DJI) and the S&P 500 (SPX) up to their respective 50-day moving averages but not through them. The immediate reason was clear as to why the market declined yesterday: the stalled bailout of the 'Big Three' automakers.

But, technically, the market was overextended with the internal indicators (the Moving Average Convergence/Divergence, or MACD, stochastic, etc.) all into their overbought zones and thus more sensitive to a disappointment regarding the auto proposal.

So, instead of a confirming move through the 50-day moving average, the Dow and the '500' have stalled at about 8,900 and 916 respectively. The rush to the election-day tops must be put on hold until the politicians sort out the details of their rescue plan.

Today's Trading Landscape

Earnings to be reported include: Amtech Systems (ASYS), Biodel (BSDI), Bway Holding Co (BWY), Cadence Design Systems (CDNS), CKE Restaurants (CKR), Emcore (EMKR), Enzo Biochem (ENZ), FuelCell Energy (FCEL) and Greif Brothers (GEF).

Lakeland Industries (LAKE), Medical Nutrition USA (MDNU), Multimedia Games (MGAM), Ocean Power Technologies (OPTT), Powell Industries (POWL) and Star Gas Partners (SGU).

The following economic reports are due today: the MBA Mortgage Application Survey for Dec. 5, October Wholesale Trade (the consensus expects negative 0.2%), U.S. Energy Dept Oil Inventories for Dec. 5, API Oil Industry Report, and the November Federal Budget (the consensus expects a $171 billion deficit).

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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.