Broadmarket analysis is presented here courtesy of Cashflow Heaven.
Friday’s spike higher drained some value from the
rest of our open put positions so the question now is will the rally
continue, or is this market destined to roll over? To get a better idea
let’s take a good look at…
WHICH WAY THIS MARKET IS HEADED
As you can see both
major indices are still in downtrends although we could see some follow
through from Friday’s spike higher on Monday. This coming week we’ll get
several key economic reports and if they come in as grim as predicted
we’re liable to see another rollover to the downside. Any breakdown of
the horizontal support lines above should provide confirmation of a
continuation of the current bear market.
One interesting
aspect of the rebound on Friday that could point toward further weakness
is the lackluster rebound on the NDX of +1.1%. This is the index that
should be bouncing the most since it has been the strongest over the
last eight days. Big cap techs should be the first stocks to see gains
if buyers were really returning to the market. RIMM, AAPL, YHOO, GOOG,
MSFT, INTC, CSCO, etc, are highly liquid and institutions can get out as
quickly as they get in and that gives them relative safety—however we
saw very little buying in big caps on Friday.
One possibility is
because big caps don't offer the same risk reward for those traders
shorting stocks. It is much harder to profit from shorting a $200
billion company than a $2 billion company. There are a 100 times more
shares in the float and shorts can't readily move them. Therefore in a
short squeeze they are the least responsive. The biggest responders on
Friday were financials and retailers which makes sense because those
were also the stocks the most heavily shorted.
One of the big keys
to predicting direction is volume. Friday's volume was less than half
the volume of any preceding day in the last seven so we’re going to have
to discount this one-day spike higher.
Over the past seven
days down volume of 29.9 billion shares was nearly twice the volume of
16.1 billion shares of advancing volume. Volume tells you whether a move
has conviction—and Friday’s jump higher didn’t. The most likely cause
was short covering as traders closed Wednesday’s session at recent
record high short positions and those positions needed to be closed
during Friday’s abbreviated session.
One factor that could
fuel a further rally on Monday however is the all important US consumer.
The holiday shopping season got off to a strong start, with sales on
“Black Friday” rising 8.3% on the year, according to research group
ShopperTrak RCT Corp.
Preliminary estimates
indicate that sales on Black Friday totaled $10.3 billion, said the
group, which tracks sales at retail outlets across the U.S. “Consumers
remained resilient and proved they were willing to spend despite rising
oil prices and other economic pressures”, ShopperTrak said in a
statement on its Web site.
The Black Friday sales
figure typically accounts for between 4.5% and 5.0% of all holiday
sales, the group said. In 2006, Black Friday was the highest sales day
and traffic day for the season, and has been either the second or third
busiest day in past years.
We’ll get more
clarification on Holiday sales come Monday but for now it looks like
folks are still willing to spend—and that should provide the markets
with some holiday cheer.
On the flip side
housing has been a big drag on the economy and this coming week's data
forecasts don't offer much hope that the housing outlook will improve.
Analysts are predicting existing home sales will drop to a seasonally
adjusted annual rate of 4.99 million in October—down from an eight-year
low of 5.04 million in September. The existing home sales report is due
out at 10 a.m. on Tuesday.
Analysts are
forecasting that new home sales for October in a report due on Thursday
at 10 a.m--will fall to a seasonally adjusted annual rate of 730,000
from 770,000 a month earlier. "We don't expect any good news on housing
anytime soon, specifically on the demand front," says Ryan Sweet of
Moody's Economy.com. Demand will remain weak for the remainder of the
year and well into 2008, he says.
In other
housing-related data, October construction spending is expected to fall
by 0.2% following a modest rise of 0.3% in September. That release is
scheduled for 10 a.m. Friday.
As the home market
continues to decline and credit standards tighten there will be less
money available from home equity to continue spending through the
holiday season and beyond—that overwhelming shadow could depress
corporate earnings in the current quarter and into ’08—a scenario that
is likely to have serious negative consequences for the stock market.
Already economists warn
the labor market may be weakening after a government report on Wednesday
showed more Americans continuing to receive jobless benefits. The number
of Americans receiving state unemployment benefits increased 7,000 to
2.57 million in the week ending Nov. 10.
Recent data on initial
jobless claims suggest layoff activity is gradually accelerating as the
full effects of the fallout from tighter credit conditions and the
housing recession are realized. The Labor Department will report weekly
jobless claims on Thursday at 8:30 a.m. Eastern.
The bright spot in
the economic reports for the week is likely to be Gross Domestic
Product. The GDP number is a revision to the third-quarter figure and is
expected to show a rise to 4.4% from a previously reported 3.9%. However
we could see downward revisions of current-quarter growth after the
report. The GDP report is due out at 8:30 a.m. on Thursday.
The bottom line is
in spite of a nice spike higher Friday that could possibly continue
Monday, the economy looks to be weakening and if that is the case the
markets will follow…the question is…
HOW DO WE MAKE
MONEY ON IT?
We’ve got two
super-looking plays lined up this week—one bullish and the other
bearish.
The chart on our
first play looks extremely strong because the stock is breaking higher
out of a bull flag pattern after spectacular earnings at the beginning
of the month. The chart tells us to expect a leap higher this coming
week and it won’t take much to make some excellent profits on the right
calls—calls we’ll be jumping on first thing Monday morning.
Our next play is on
a stock that has been falling hard on a combination of poor earnings and
a bearish chart. The stock rebounded recently but was slammed to the mat
again this past week—and now it looks to be breaking below critical
support for another free fall to the downside. With the stock above
seventy though there is still plenty of room to fall—a profitable plunge
we’ll be riding with some well placed put triggers placed first thing
Monday morning.
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