Sam Collins

Cautiously Bearish, But Still Bearish

by Sam Collins   12/18/08

Stocks opened about 2% lower Wednesday and then meandered for most of the session before losing more than 60 points in the last five minutes of trading, which resulted in a loss for the day of 1.12% on the Dow (DJI).

It was as if no one, except yours truly and a fellow named Kevin Giddis (managing director of fixed income for Morgan Keegan & Co.), had read the report.

Giddis said, "Something that still puzzles me is why the equity market went up over 300 points after the FOMC basically stated that things were so bad that they felt the need to lower the funds rate below the current Japanese overnight rate."

Many of the losses were in the technology sector, after Apple (AAPL) lost ground following reports that it must end its exclusive deal with a French network operator and Steve Jobs' unexpected decision to pull out of the high-profile Macworld trade show. Rumors immediately spread that Jobs was ill again, so Oppenheimer (OPY) cut its rating on the stock. But the company said that it had made a decision to pull out of all trade shows. AAPL was off more than 6.5%.

Bank stocks took the brunt of the selling, which was the result of a flattening yield curve, a condition in which the struggling industry would have a difficult time with such narrow spreads. All of the financial stocks on the Dow 30 closed lower.

But Morgan Stanley (MS) closed higher by 2.3%, despite a bigger-than-expected Q4 loss -- which the firm attributed to frozen credit markets -- falling asset prices and proprietary trading losses.

The dollar was weak again yesterday, hitting a two-month low versus the Euro. The Dollar Index (DXY), which measures the dollar versus six other currencies, was off 2.8%.

The Dow Jones Industrial Average (DJI) fell 100 points to 8,824. The S&P 500 (SPX) lost nine, closing at 904, and the Nasdaq (NASD) dropped 11 points to 1,579.

Volume was again light on the New York Stock Exchange, which traded just 1.3 billion shares, with advancers ahead by 3-to-2. The Nasdaq exchanged 877 million shares with breadth almost even.

The January crude oil contract fell $3.54 to end at $40.06 a barrel, and the Amex Energy SPDR (XLE) fell 32 cents, closing at $49.17. According to The Wall Street Journal, OPEC will cut crude production by a record 2.2 million barrels a day.

Gold for February delivery rose $25.80 to $868.50. The PHLX Gold/Silver Index (XAU) fell $1.16 to $119.67.

What the Markets Are Saying

Even though the major indices appear to be setting marginally higher highs and lows since November, and the near-term pattern is sideways, the overall pattern is still down. After a pop on Monday above the 50-day moving average, all three of the major indices pulled back to sit almost on top of that key line on the close.

Advisor sentiment, as reported by Investors Intelligence, showed that bullish sentiment has risen to 25.3% -- up from 23.1% the prior week -- and the bears dropped from 49.5% to 46.2%.

But the readings are more than a week old, so we'll be focusing on them again after the recent rally to see if they got caught up in the Fed frenzy, which, of course, would be a negative for the market. And tomorrow we'll have this week's American Association of Individual Investors (AAII) Bull/Bear Sentiment numbers to review.

But almost every internal indicator is now overbought, so along with the stunning rate cuts by the Fed, which indicate extreme concern over possible deflation, the big drop in the dollar, and Q4 earnings that are sure to disappoint, we remain a cautious but testy bear.

But a close above S&P (SPX) 920, and the 50-day moving average, with triple-witching option expirations tomorrow could run prices higher.

Today's Trading Landscape

Earnings to be reported include: 3Com Corp (COMS), Accenture (ACN), Actuant Corp (ATU), Bio-Reference Laboratories (BRLI), Carnival Corp & Carnival plc (CCL), China Medical Technologies (CMED), Discover Financial Services (DFS), Electroglas (EGLS), FedEx (FDX), Lennar Corp (LEN), Nobility Homes (NOBH), Oracle (ORCL), Palm (PALM), Pier 1 Imports (PIR) and Progress Software Corp (PRGS).

Quiksilver (ZQK), Research in Motion (RIMM), RF Monolithics (RFMI), Rite Aid Corp (RAD), Scholastic (SCHL), Shiloh Industries (SHLO), Smart Modular Technologies (SMOD), The Marcus Corp (MCS), Wimm-Bill-Dann Foods OJSC (WBD), Winnebago (WGO) and Worthington Industries (WOR).

The following economic reports due: initial jobless claims for the week of Dec. 13 (the consensus expects a 23,000 drop), November Conference Board Leading Indicators (the consensus expects negative 0.4%), December Philadelphia Fed Business Index (the consensus expects negative 40), the DJ-BTMU Business Barometer for Nov. 10 and Natural Gas Inventories for Dec. 13.

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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.