Sam Collins

In a Holding Pattern

by Sam Collins   12/16/08

As if things weren't bad enough! Now comes reports of a scheme run by a former chairman of the Nasdaq (NASD) that has allegedly defrauded investors for an estimated $50 billion.

Financial stocks were hit hard by the news, with some of the blue chips down sharply. JPMorgan Chase (JPM) was off 8.5%, American Express (AXP) off 5.9%, and Bank of America (BAC) fell 6.4%. Banks around the globe announced exposure to the massive Ponzi scheme.

The "Big Three" automakers' fates are still uncertain, even though this weekend the Treasury Department said that it would make funds available. Then yesterday, the White House seemed to be entertaining the idea that bankruptcy might still be the best solution to the problem.

The economic news provided little optimism.

The National Association of Home Builders said that its housing market index stayed at a record low in December, with fewer than one in 10 builders who said they believe the market is good. The Empire State Index, which gauges manufacturing in New York, contracted at a record pace in November. Further, the Federal Reserve said that the output of U.S. factories, mines, and utilities declined 0.6% in November with weakness in all manufacturing industries.

But despite that, the Dow Jones Industrial Average (DJI) closed lower by just 65 points to 8,565. The S&P 500 (SPX) was off 11 points to 869 and the Nasdaq fell 32 points closing at 1,508.

Volume contracted to only 1.2 billion shares on the New York Stock Exchange, with decliners ahead of advancers by 3-to-1. On the Nasdaq, 668 million shares traded with decliners ahead by 2-to-1.

The January crude oil contract was off $1.77 to close at $44.51 a barrel, and the Amex Energy SPDR (XLE) fell 28 cents to $48.00.

Gold for February delivery rose $16 to end at $836.50 per troy ounce -- the highest price in two months. The PHLX Gold/Silver Index (XAU) rose $4.38, closing at $112.62.

What the Markets Are Saying

Despite the worst news in my four decades of investing, the stock market continues to tenaciously hold above the support lines of 810 on the S&P 500 (SPX) and 8,000 on the Dow (DJI). Since November, day after day of unprecedented bad news, like Monday, has failed to more than just nudge the major indices lower.

But now some of the major internal indicators, like the Moving Average Convergence/Divergence (MACD) and stochastic, are beginning to fade. Nevertheless, the sentiment indicators remain neutral with the CBOE Volatility Index (VIX) at 56.76 -- which, though historically high, is still in its lower range since September when the stock market broke down.

With the internal indicators now fading, we'll be focusing on a squeeze between the 20-day and the 50-day moving averages, since a close above the 50- or below the 20-day moving averages could result in a major break.

Here are the numbers for the bands that represent those two simple moving averages in each major index:

• Dow 8,455-8,749

• S&P 500 857-910

• Nasdaq 1,480-1,593

Today's Trading Landscape

Earnings to be reported today include: AAR Corp (AIR), Adobe Systems (ADBE), Angeion Corp (ANGN), Applied Signal Technology (APSG), Best Buy Co (BBY), FactSet Research Systems (FDS), Goldman Sachs (GS), Hovnanian Enterprises (HOV), Schiff Nutrition Int'l (WNI) and VeriFone Holdings (PAY).

Several economic reports are due today, including: International Council of Shopping Centers (ICSC) Chain Store Sales Index for Dec. 13, November Consumer Price Index (or CPI. The consensus expects a 1.3% drop), November CPI excluding food and energy (the consensus expects a 0.1% increase), November Housing Starts, the Redbook Retail Sales Index for Dec. 13 and the Dec. 13 ABC/Washington Post Consumer Confidence Index.

The Federal Open Market Committee (FOMC) will announce its decision on an interest rate cut at 2:15 p.m. Eastern today.

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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.