Sam Collins

A Turn for the Worse

by Sam Collins   12/12/08

Weekly jobless claims at a 26-year high, a soft dollar, and an unexpectedly high October trade deficit would have been enough to crush any market. But add to that the Senate's inability to come up with a rescue plan for the 'Big Three' automakers, and you have the recipe for a sell-off.

Even though the economic numbers were horrible, the market this week has been moved on one major story -- Congress' bailout plan for the car makers.

The House came up with a $14-billion proposal that was satisfactory to the president, however the Senate is not yet ready to endorse it. Cash burn has been a problem for the automakers and, the longer the delay in receiving a loan from the government, the greater the chances of General Motors (GM) will cease operations.

In fact, GM has hired experts to examine bankruptcy. Europe and Asia sold off on the U.S. auto news. The next move for GM is to appeal to President Bush for a loan from the $700-billion Wall Street fund.

But, although the financial stocks received massive aid, they were the worst performers yesterday because of continuing operating losses.

Both Bank of America (BAC) and JPMorgan Chase (JPM) fell more than 10%, and Citigroup (C) was off more than 8%. JPM's Chief Operating Officer, Jamie Dimon, told CNBC that the integration of Bear Stearns has been harder than expected and the story has been the same with the integration of other brokerages into the banks.

Blue-chip consumer-products giant Proctor & Gamble (PG) lowed its sales growth forecast for the current quarter, but the stock held firm. Costco (COST) missed its earnings for FQ1 by 2 cents and the stock fell more than 3%.

The dollar was hit hard, falling 1.3% against a basket of currencies. This was due to comments from a European Central Bank member that said a "rate cut is not a done deal."

Axel Weber, head of Germany's Bundesbank, went on to say, "The ECB has never taken interest rates below 2% and that the central bank doesn't have enough information to decide on a January cut." Last week, the ECB cut rates by 75 basis points to 2.5%, the largest cut in its history.

At the close, the Dow Jones Industrial Average (DJI) was down 196 points to 8,565, the S&P 500 (SPX) fell 26 points to 874, and the Nasdaq (NASD) lost 58 points closing at 1,508.

Volume on the New York Stock Exchange totaled 1.4 billion shares with another 812 million traded on Nasdaq. Decliners exceeded advancers on both exchanges by 3-to-1.

Crude oil jumped more than 10%, with the January contract up $4.46 to $47.98 a barrel due to weakness in the dollar and proposed cuts in production by OPEC. The Amex Energy SPDR (XLE) closed at $48.76, off 23 cents.

The February gold contract rose $17.80 to end at $826.60 per troy ounce, and the PHLX Gold/Silver Index (XAU) fell 96 cents, closing at $105.47.

What the Markets Are Saying

The market's fall of 198 points Thursday was seemingly due to the Senate's reluctance to pass the House version of the automaker's bailout bill, but it also coincided with the S&P 500's (SPX) turn down and away from both the 50-day moving average and a bearish resistance line drawn from the October high.

Both, at just above 900, have become the first line of resistance for the bulls. And on Thursday those lines became even more significanct when the stochastic indicator flashed a sell signal.

Now the bears have everything going for them, since it appears that the market is in a downward channel and in the process of turning away from the broad resistance from SPX 900-1,010. A test of the support at 800 is about to occur and, with it, the closing low of 752 is about to be challenged.

As noted last week, you have to be nimble to survive these turns in the market, so we covered our trading longs yesterday and took to buying the contra-Exchange-Traded Funds (ETFs) again, with the expectation that the next couple of days might be weak. But don't get locked into any position since the turns are usually unexpected, and high volatility sometimes creates violent reverses as well as opportunity.

Today's Trading Landscape

Earnings to be reported include Duckwall-ALCO Stores (DUCK) and Frequency Electronics (FEIM).

Several economic reports are due today including: November Producer Price Index (the consensus expects negative 2%), the November PPI excluding food and energy (the consensus expects 0.1%), November retail sales (the consensus expects negative 2%), November retail sales excluding autos (the consensus expects negative 2%), October Business Inventories (the consensus expects negative 0.3%) and the Mid-December Reuters/University of Michigan Sentiment Index.

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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.