Monday Morning Musings: Is Dubai A Shot Across The Bow?

The markets were down on Friday, but are hanging in there so far today, after the news came out last week that Dubai World is having difficulty making its debt payments and is asking creditors for a 6-month delay.

The news sparked fears in the region that another debt crisis could unfold, with Dubai simply being the first to show cracks in the foundation. Some analysts have come out and said that Dubai's troubles are unique to itself, and should not spread to other regions.

Interestingly, while Dubai's markets were down sharply overnight, the Asian markets were nicely higher. Asian banks to not have as much exposure to Dubai as some European banks.

The dollar is lower again today, which is supporting stocks and commodities to a degree. Oil is steady at $76.70, and gold is up a bit to $1176.70.

In economic news, the Chicago PMI came in at 56.1 for November, better than the 53.0 that was expected. Other than that, the data is a little light this morning. The financial sector (XLF) is leading the action so far, while consumer discretionary (XLY) is lagging. Among sub-sectors, steel (SLX) is strongest and homebuilders (XHB) look weakest.

The 10-year yield is lower to 3.22; and the VIX is another +1.9% higher to 25.33, after a huge +21% surge on Friday that took the VIX from year low levels back above its 50-day average.

Trading comment: I have been saying that we need to watch sentiment closely here. Early last week, the sentiment indicators did in fact show a little too much complacency. The ISE call/put ratio hit a very high level at 184, the CBOE put/call ratio dipped to 0.67, the VIX hit yearly lows at 20, and the bears on the Investor's Intelligence poll fell to the low level of 17.6%.

As such, the odds were high that any piece of negative news could lead to a whack in the market, and the Dubai debt troubles fit the bill. Of course, this was no small piece of news, but I think its likely that the UAE will step in and show support. If another country pops up with similar problems, it will really raise the odds that it is time to get defensive. But right now, I remain cautiously optimistic that we can still see higher levels in the market by year-end.

long XLF

Lower Jobless Claims, Weak Dollar Boost Stocks

The market is getting a little bounce in early trading, ahead of the Thanksgiving holiday. Trading volume will likely be ultra light today as people get ready for tomorrow and travel to see family. I'll be staying here in sunny LA, and might even try to get some early morning surfing in before the tryptophan fest.

In economic news, following yesterday's strong existing home sales report, new home sales for October surged +6.2% vs. the consensus for +0.4%. New home prices were only down -0.5% yr/yr, or basically flat for the first time in ages. Also, the supply of new homes fell to 6.7 months vs. previous inventory levels of 7.4 months. CNBC reported that this is the lowest level of supply for new homes since 1971. Wouldn't it be funny to go from our current housing mess to having a dearth of houses (which would stabilize prices very quickly)?

Initial jobless claims also came in below expectations at 466,000 vs. 500,000 consensus. This marks the first time jobless claims have fallen below 500,000 in over a year. Getting better slowly. Personal income and personal spending data both came in above expectations as well.

The lower dollar is boosting stocks and commodities in tandem again. Oil is only up slightly to $76.10, but gold is hitting new highs near $1185.

Asian markets were higher overnight; the 10-year yield is higher to 3.34%; and the VIX is back at its lowest levels of the year at 20.19, a very low level.

Trading comment: The put/call ratios were a bit high yesterday, which combined with the low VIX could lead to a quick selloff in the near future. But again, the market is no longer overbought, and I will continue to look to use upcoming dips to put cash to work. I have not added to the healthcare and telecom sectors in a long time, but they are looking more attractive currently.

Consumer Confidence Up Ahead of Black Friday

The market is lower this morning, but not in any major way. Asian markets sold off overnight, and the dollar is up a bit, so some selling is not surprising.

In economic news, third quarter GDP was revised lower to +2.8% from an initial estimate of +3.5%. The revision was widely expected, so not much of a market mover. Also, the CaseShiller Home Price Index came in at 146.5 for September, which was basically in-line. The Composite for prices fell -9.4%, which is an improvement from the previous month's -11.3% decline.

The bright spot this morning was the Consumer Confidence Index for November, which rose to 49.5 vs. 47.5 consensus. This is timely as it comes just a few days before Black Friday. I think those people that go to the crowded stores are crazy. I deal with enough traffic in LA without subjecting myself to bigger crowds. That said, I hope retailers do well, and have a good Holiday season. Hopefully consumers have been in saving mode for most of the year, so they are "in shape" to spend a little for the holidays.

In corporate news, HP reported a solid quarter, while med tech behemoth Medtronic (MDT) had a great quarter and its stock spiked higher this morning.

Asian markets were lower overnight, after Chinese regulators warned about higher bank capital ratios; the dollar is up a bit, while oil and gold prices lower; the 10-year yield is lower at 3.35%; and the VIX is also lower to 20.85.

Trading comment: The 1100 level for the S&P was resistance, but not looks to have turned into support. If the market can hold these levels, I think there could be more upside from here and would look for new highs. Keep doing more of what's working, and less of what isn't.

Thanksgiving Comes Early For Investors

I mentioned last week that this market has no memory from day to day. The market ended last week on a subdued note, and it was hard to see what the catalyst might be to spur a rally this week. But overnight the dollar fell, Asian markets rallied, and buyers stepped in.

Our markets opened strong, and the S&P 500 is right back near its highs for the year. So much for the "long awaited" correction. This is why I wanted to put more money to work into the dips last week, even if it didn't feel great.

Over the weekend, Chicago Fed President Evans commented that he thinks interest rates will remain near zero well into 2010. That spurred traders to sell dollars, which boosted commodity prices. Oil prices are higher near $79.60 while gold has hit new highs around $1165.

Our markets also got a boost this morning from a much stronger than expected home sales report. Existing home sales surged +10.1% in October, versus estimates of just +2.3%. That is a very strong datapoint, and revisions to September's numbers were positive pointing to a monthly increase of +8.8%.

Other recent housing reports have been on the weak side, but each time I said that the housing data is likely to continue to be lumpy at best. Today's data is one of the good lumps, so make a note of it to remind yourself if and when the next datapoint is not as good.

The sentiment indicators mostly reflected increased bullishness last week, but the chart below of Citi's Panic/Euphoria Model shows that there is still plenty of bearish sentiment out there. This model takes a wide array of data into account to compile its results, and you can see that it recently moved back into the bearish side of the ledger. This could bode well for the bull case of looking for continued strength into year-end.

Trading comment: I put some more money to work during last week's pullback, so I don't feel the pressure this morning to chase anything higher. That's been the formula that has worked this year. The spike in gold looks like its getting a little extended. I heard that the Russian central bank was the latest buyer of gold. That makes 3 central bank buyers, by my count. As such, I may look to trim a little, as gold looks ripe for a correction at some point.

long GLD

Weak Dell Earnings Weigh On Tech Stocks

The market is lower today, after weaker than expected earnings from DELL weighs on the tech sector, and some weak reports from homebuilders weigh on that sector. Of course, the dollar is bouncing today and we know that rarely do stocks and commodities rise when the dollar is up lately.

Healthcare stocks are bucking the weakness so far, as investors rotate into safety stocks. Energy stocks are the next weakest sector after homebuilders and semis.

The higher dollar is weighing on commodities also, pushing oil prices down to $76.20 and gold down to $1139.

Asian markets were lower overnight; the 10-year is roughly flat at 3.34%; and the VIX is marginally higher to 22.90, which isn't really signaling that traders expect more large selloffs.

Trading comment: The market has basically worked off its overbought condition, although many leading stocks are still correcting and forming small bases. Next week is often a strong week in the market, surrounding the Thanksgiving holiday. I am continuing to pick my spots and add to areas like tech, medical and biotech, and select energy and commodity names.

There are a lot of talking heads still calling for the "long awaited correction", but I would argue that the pullback from mid-October to early November satisfied the need for a correction, and this is just normal choppiness.

Stock Selloff Could Be Driven By Options Expiration

Stocks are sharply lower this morning on little news. There were a few economic reports, but nothing really market moving. My guess is that this selling could be related more to options expiration tomorrow. Often during expiration week, you get at least one big down day. I thought that after two down days this week already, that maybe that was all we were going to see on the downside, but that just goes to show you how difficult it is to try to forecast the market on any given day.

The dollar is also higher this morning, and that is as big a culprit as anything. Stocks and commodities are both lower on the dollar's rise, with gold trading down to $1136 and oil prices lower near $78.

Jobless claims were in-line this morning at 505,000, and the Philly Fed came in better than expected at 16.7 (vs. 12.2 consensus). The OECD see U.S. GDP growth in 2010 at +2.5%.

Asian markets were mostly lower overnight; the 10-year yield is lower to 3.32%; and the VIX is surging +11.6% to 24.14, which is a huge move and nearing its overhead 50-day resistance.

Trading comment: I have said that I wanted to be buying dips here, and since today's selloff looks to have little fundamental reasoning behind it, I am going to look for spots to put some money to work. The market is still coming off its recent overbought condition, but I think after that is alleviated, we could see another move higher.

Paulson & Co. Betting That Bank of America Can Double

Stocks are slightly lower in early trading after some weaker than expected housing data weighed on sentiment. The standout so far in this down tape are the bank stocks, which are bucking the weakness and trading solidly in positive territory.

The leading stock is Bank of America (BAC), which is up +3.2% this morning and getting closer to testing its overhead 50-day average. Volume is picking up nicely as well. I haven't seen the story yet, but the news out is that hedge fund honcho John Paulson has bet that shares of BAC will nearly double by the end of 2012. I have seen analyst reports that show the normalized earnings power of BAC, once we begin to emerge from this credit crunch, and I agree that a $30 price target in the out years is not unreasonable.

The housing data out today showed that housing starts for October came in at 529,000 vs. expectations for 600,000, while building permits came in at 552,000 vs. expectations for 580,000. As I have said, this housing data will continue to be lumpy, but the overall trend I think shows stabilization in housing prices, which is the most important factor.

The dollar is lower again today, which is boosting commodity prices. Oil has bounced after some positive inventory data came out, and it nearing $79.85, while gold hit new highs earlier at $1150.

Asian markets were lower overnight; the 10-year yield is higher at 3.36%; and the VIX is 1.25% lower to 22.13.

Trading comment: After that big up day on Monday, the stock market hasn't given much back in the last 2 days (so far). This is likely frustrating to the bears, and could result in further upside as we near options expiration on Friday. If you don't think there is much bearishness left among investors, look at the TickerSense weekly blogger's poll, which showed bulls plunged to 25%, while bears spiked to 56%. The negative bull/bear spread of -31% is the most negative showing since early July, and the 2nd most bearish reading since Sept. 08 (Lehman bk).

long BAC

Dollar Remains The Primary Driver

The only question you need to ask lately is "what is the dollar doing?" This morning, the dollar is bouncing, and that is weighing on both stocks and commodities.

Stocks are only modestly lower, after breaking out to new highs yesterday. Banks stocks are the strongest so far, while retailers are the weakest.

Commodities are roughly -0.5% lower, with crude oil prices dipping to $78.50 and gold trading down to a still high $1133.

There were also some mixed economic reports this morning. Core PPI fell -0.6% in October (where's the inflation?); industrial production increased +0.1% (vs. +0.4% consensus), and capacity utilization remains very low at 70.7%.

On a positive note, there was news this morning that the first commercial mortgage-backed security (CMBS) offering was priced since early 2008. The Fed was prepared to provide up to $150 million in financing, but demand was so strong that the deal was able to get done mostly with private money. I think there has been enough money raised that the commercial real estate debacle that many are warning about will fall short of the dire predictions.

Asian markets were lower overnight. China dismissed calls for the yuan to rise, despite requests from the IMF to let the yuan rise sooner rather than later.

The 10-year yield is higher to 3.35%; the VIX is also slightly higher to 23.14.

Trading comment: Yesterday's breakout to new highs was very positive. The market has reached overbought territory again, and with this week being expiration week we could see a pullback at any time. That said, I continue to think that dips can be bought, and I am focusing on the leading stocks such as big-cap tech, medical tech, as well as emerging market and commodity-related sectors.

The Apple Tablet

The buzz surrounding the yet to be released Apple Tablet is heating up. This article below sums up the hype--

NEW YORK (CNNMoney.com) -- Apple's lips are sealed about its widely rumored tablet computer, but technology experts are giddy about the device, already exclaiming it will be the gadget to end all gadgets.

Executives at Apple (AAPL, Fortune 500) never discuss products that are in the works, so there's no confirmation that the thing even exists. But rumors are circulating that Steve Jobs and Co. have designed a magazine-sized, touch-screen, hand-held, all-in-one device that is half-iPhone, half-Macintosh computer.

It's supposedly going to make its debut in the next few months, and you can have it for the low, low price of $600. Or $800. Maybe $1,000. No one's really sure.

If the rumors are true, the tablet will be able to do basically everything a gadget could possibly do. It's an e-reader, a gaming device, and a music player. You can watch TV and movies on it and surf the Internet (or so we've heard). And it will have thousands of third-party apps available for it ... or maybe it will run Mac OS X. That's all still unknown.

Coolest device ... ever? Maybe. Some analysts are channeling their inner-Frodo, saying the Apple tablet will be the one gadget to rule them all.

"This will be the next big thing," said Laura DiDio, principal analyst at ITIC. "Apple is going to wow everybody with the tablet."

Any time Steve Jobs gets on stage, the expectations are incredibly high, but they are especially lofty for the tablet. Analysts and investors are saying that this device could revolutionize the handheld world in the same way the the iPhone changed the smartphone market.

"The tablet will change the game, because Apple will throw down the gauntlet at the competitors, and force them to follow along," DiDio said.

To read the rest of the story, click here

long AAPL

Stocks Follow Overseas Markets And Power To New Highs

Asian markets rallied overnight, and that along with the dollar trading lower again set the tone for a positive open in the stock market. One of the things that helped boost sentiment in Asia was the leaders of the Asian Pacific Economic Cooperation pledging to maintain stimulus measures.

Last week, the Dow made a new high for the year, and today the S&P 500 and Nasdaq have joined the party. What is notable is that while small-caps led the earlier part of the rally this year, the baton seems to getting handed off to the large-caps.

There was also a couple of good economic reports. Advance retail sales for October rose +1.4% vs. expectations for an increase of +0.9%. Also, business inventories showed a -0.4% decrease for September, which isn't as bad as the -0.7% decrease expected.

In the "where is the inflation?" department, the 16-country Eurozone reported that consumer prices fell -0.1% vs. year-ago levels, the 5th consecutive annual decline. Sounds more like deflation to me, but don't tell that to the inflation hawks, they will call you a Pollyanna.

The weaker dollar is boosting commodity prices also, with gold making new record highs above $1130, and oil prices back above $78. The 10-year yield is lower to 3.39%, and the VIX is also lower to 23.10.

Trading comment: With the S&P and Nazz powering to new highs, liquid large-cap stocks are leading the way. We've seen this play out before, and it makes it likely that many of these stocks will continue to lead into year-end as portfolio managers continue to add to their favorite names. I said last week that I was looking to buy any dips, and that continues to be my mantra for now.

Stocks Rebounding From Yesterday's Selloff

Stocks are off to a strong start this morning, despite a worse than expected report on the US trade deficit. The weaker trade deficit will likely mean downward revisions to the third quarter GDP calculations.

Speaking of GDP, news this morning that the Eurozone has officially emerged from recession after five straight quarters of contraction. GDP for the 16-country zone expanded +0.4% during the third quarter, which is pretty paltry growth, but it is positive nonetheless.

Asian markets closed mixed, after representatives from China indicated that the country's currency wound not gain against the dollar in the short -term, despite comments earlier in the week to the contrary.

The dollar index is lower today, continuing the relationship between stocks and the dollar. Interestingly, commodities are mostly lower today also, with oil falling down near $75.60 and gold trading roughly flat at $1107.

The 10-year yield is up a touch to 3.45%; and the VIX is down -2.9% to 23.54.

Trading comment: As soon as the market sold off yesterday, I heard more people calling for a market top. I don't think yesterday's action was anything more than churning under resistance at S&P 1100, after a streak of several up days in the market. I still expect us to consolidate around here for a bit, and then break above the 1100 level on stronger volume. The Nasdaq is in a similarly bullish setup.

A Rare Up Day For The Dollar

We have talked lately about the strong inverse relationship between stocks and the dollar. Today is no exception, with the dollar getting a strong (and rare) bounce, and that is weighing on stocks. This led one market watcher we read to exclaim, "Stocks are the new commodities".

There were more strong earnings reports last night, as earnings season has just about wound down to a halt now. Wal-Mart (WMT) beat estimates and raised guidance for 2010, ditto for both AMAT and HPQ in the tech space. And HPQ also announced that it was buying 3Com (COMS) for a nice premium. With so many analysts worried about 2010 earnings, its nice to see all of these companies reiterate and even raise guidance for next year.

On the economic front, weekly jobless claims came in a bit below expectations, so they are at least moving in the right direction, albeit slowly. This jobless recovery has not been lost on anyone, even the Obama Administration, who is said to be scheduling a special meeting to address the lackluster pickup in jobs.

If you noticed the last productivity report, which showed productivity in this country spiked to over 9%, the takeaway is that companies are finding ways to be more productive and get more done with less staff. I've always said that employment is a lagging indicator, so I wouldn't expect to see meaningful improvement on the jobs front until we are well into this economic recovery.

In Europe, the Bank of England said its extraordinary efforts to stimulate growth may be extended, as it forecast a long, slow economic recovery hindered by weak bank lending and the government's need to slash spending. Sound familiar?

Asian markers were lower overnight; the 10-year yield is up a bit to 3.48%; and the VIX is +5.2% higher to 24.22.

Commodities are lower, with oil prices falling back to $77.30 and gold prices declining to $1110.

Trading comment: The market is nearing overbought territory again, after a nice bounce this week. The S&P 500 is also running into resistance at the 1100 level. As such, I'm not chasing things here, but I remain in dip buying mode in the near-future.

Will The US Bond Market Continue To See The Kindness of Strangers?

Not a lot of major news this morning, other than a few earnings announcements. Priceline.com (PCLN) was the standout that I saw. The company trounced estimates by 53 cents, and its stock is spiking +17% this morning to new highs. AIG is also getting a boost from comments by Moody's that the financial giant will be able to repay its Federal Reserve credit line and much or all of the Treasury's investment if financial markets continue to stabilize.

I find it amazing that the general public is more up in arms about Goldman Sachs (GS), who regained its financial footing first, and repayed the TARP investment netting the govt. a 23% return on its investment. Would you rather the other banks follow the lead of GS or AIG?

The big event for today will be the $25 billion auction of 10-year Notes. The bears have been saying all year that foreigners are unlikely to continue to buy US debt, which will cause bond yields to soar. To date, this has not been the case. All of the bond auctions lately have been extremely well received, and the indirect bidding (foreign buyers) has been higher than expected for most of the auctions. It will be interesting to see if this trend continues for today's important auction.

The dollar is roughly flat today, as are most commodities. Oil prices are near $79.45, while gold is up slightly again to $1103.

European and Asian markets were higher overnight. Fitch said Britain is the most at risk among big economies to lose its AAA rating, of course British officials came out to downplay the risk.

The 10-year yield is lower to 3.44%; and the VIX is slightly lower to 23.05

Sentiment Indicators Point To Another Market Bottom

(Note: this post originally appeared on Sunday, 11/8)

The S&P 500 closed above its 50-day average for the 2nd day in a row on Friday, a good sign that the market is continuing to bounce from its recent oversold condition, and quite possibly has seen its lows for the near-term.

A lot of technicians have been up in arms lately, saying that the market is poised to put in a "head & shoulders" top, and that the highs for the year are likely behind us. My response the whole time has been that we can't just look at the technicals in isolation, but rather the key to timing the duration of this correction would be how investor sentiment reacted to any market decline.

The technicians said the exact same thing back in July, when it really did look like a head and shoulders top was in, but a strange thing happened on the way to Armageddon. Investor sentiment quickly grew so bearish, that the market bottomed and began to move higher. As those bearish bets became losing ones, the bears slowly began to unwind them, and that added fuel to the fire and sparked a very solid summer rally.

With year-end not far off in the distant future, I would not be surprised to see a similar scenario play out in the markets now. While not every sentiment indicator that I follow is showing high levels of bearishness, enough of them are to suggest we have seen the lows in this most recent correction. To wit,

• The AAII investor survey showed its most bearish spread between bulls and bears (22% bulls, 56% bears) since the week prior to the March lows. That's pretty surprising, and indicates just how skittish investors remain, as they jump to the bearish camp on any slight decline in the market.
  
• The Rydex Nova/Ursa ratio, which measure market timers in the Rydex funds switching from bullish to bearish leaning mutual funds, has quickly moved to its lowest level in 2 years. That means there are more market timers leaning bearish than there was in October 2008 and March of this year. You can see in the chart below that when we reached these levels in July, the market had also bottomed and rallied from there.

• In the options market, the 10-day CBOE put/call ratio has reached its highest level (0.97) since the July lows. Again, this indicates that over a multi-week period, investors have been loading up on put options either to hedge their portfolios or to speculate on further downside in the market. Either way, as these bets get unwound, it often adds upside pressure in the market.
  
• Last, the chart below shows Citigroup's Panic/Euphoria Model. This is a proprietary index that measures many different things in the market to get a sense of investor sentiment. While it is not at incredibly bearish levels, I did find it interesting that despite the record rally from the March lows, that not once has this indicator moved closed to the "euphoria" levels indicated by the upper horizontal line in the graph. If and when we eventually reach those levels, I will agree that it is time to pull in my bullish horns.

From my perch, this has been a textbook correction within a bull market. The S&P 500 looks to have left another higher low in the charts, so I wonder if that will get the technicians to change their outlooks going forward. As a portfolio manager, I know too well the feelings of performance anxiety that come when the market is rallying and you don't feel like you are fully participating. I suspect more and more managers will experience this phenomenon as year-end draws closer, and the chase for performance will drive the market to new highs for the year.

long SSO

Monday Morning Musings: Stocks Rally On G-20 Meeting, and Dollar Weakness

The market is up nicely this morning on the heels of the G-20 meeting over the weekend, where representatives reiterated their opinion that global stimulus needs to be maintained. If you looked at the futures last night, as I do, you would have seen that the markets were already reflecting this strength well before our markets opened this morning.

The dollar is also making fresh lows this morning, and as we have noted, stocks and commodities have been rallying in tandem lately on days when the dollar is moving lower. That is certainly true today, with gold spiking to new highs, oil rising back to $79, and other commodities strong as well.

The 10-year yield is lower to 3.49%; and the VIX is -2.8% lower, back below its 50-day average to 23.51. This weeks looks relatively light in terms of major earnings announcements or economic releases.

Trading comment: I had a piece up over the weekend that looked at sentiment indicators and noted how much bearishness had risen recently. I'm not sure what happened to it, so I'll have to go and repost it in a bit.

The Dow is making new highs for the year this morning, while the S&P and Nasdaq are back above their 50-day moving averages. This puts the market in good position to work its way higher, and with sentiment having grown so bearish recently, I believe that will support the market here as well. I think we are back in dip buying mode.

long SSO

Stocks Trade Lower After Jobs Data Disappoints Investors

This morning's jobs report was weaker than expected. I have been saying that the incoming economic data will continue to be lumpy, and that we should not expect a smooth upward trajectory of improvement. The payrolls report showed the economy lost 190,000 jobs (vs. -175,000 consensus). The unemployment rate also ticked up to 10.2%, the highest rate since 1983.

Those figures will not make for very good headlines, but what will not be reported is that the jobs data for the previous two months was revised higher to show less jobs lost than previously estimated. That said, the unemployment rate shows that this is still another jobless recovery, and that slack in the economy should convince the naysayers that the Fed is on hold from raising rates for a longer time than most perceive.

In earnings news, Starbucks (SBUX) reported a solid report and raised guidance, and its stock is higher. AIG also beat estimates, but its stock is nearly -10% lower today, and weighing on the financial sector.

The dollar is roughly flat, while gold has reached new highs ($1097) and oil is lower, breaking below $78. Materials and industrial stocks are bucking the weakness and leading the action so far.

Asian markets were higher overnight; the 10-year yield is lower at 3.50%; and the VIX is another -3% lower despite the sellof in stocks, hitting 24.65 which is right at its 50-day support.

Trading comment: The S&P 500 is back above its 50-day average, and holding there so far today. I will probably look to add to some long positions today, while still leaving room to add more if we get a further correction after this bounce runs it course. The market is still oversold, and I think that is acting as support and helping keep the market from falling further on a day like today when the jobs report could have led to a larger selloff.

long SSO, VXX

Retail Sales Show Some Signs Of Life At The High-end

The market is rallying this morning on the heels of several better than expected economic and earnings reports.

Cisco (CSCO) reported strong results last night, and also raised guidance going forward. The upbeat news was met with enthusiasm by investors, and is helping tech stocks lead the action so far today (particularly semis).

Retail sales also showed some positive signs, as high-end chains like Saks and Nordstrom (JWN) both posted larger than expected increases in same-store sales for October. It was the luxury market's first positive reading since May 2008, according to the ICSC. The strongest showings still came from discounters like TJX and ROSS, while the weakest areas were teen apparel companies such as Abercrombie (ANF) American Eagle (AEO), and Hot Topic (HOTT).

There were also more solid economic reports, such as Q3 productivity surging +9.5% (vs. 6.5% consensus) and unit labor costs falling -5.2% (vs. -4.2% consensus). Both of these datapoints are positive for the inflation outlook. Also, initial jobless claims fell to 512,000, down 20k from last week. The Monster Employment Index also ticked a big higher, so hopefully these will translate into a better than expected monthly payrolls report which comes out tomorrow morning.

In overseas news, both the ECB and Bank of England held rates steady at 1.0% and 0.5%, respectively. The BoE also expanded its bond purchase program by 25B pounds to 200B. Asian markets were mostly lower overnight.

The dollar is roughly flat currently, as are most commodity prices; the 10-year yield is also flat at 3.53%; and the VIX is down another -6.1% to 26.02.

Trading comment: The market is getting its oversold bounce that I was expecting, and we still have a ways to go before it gets overbought again. That said, apropos to the charts I showed yesterday, several key indexes remain below their 50-day averages, so I expect to see some resistance if and when they reach those levels. A pullback after that would probably set up a better buying opportunity than today, but I am still make short-term trades in the interim.

long SSO, VXX

What Technicians Are Worried About?

The market is getting a nice bounce today on the heels of coming off extreme oversold territory, and what looks like some relief from the elections last night that maybe the healthcare reform will be more mild, and this has the HMO stocks rallying strong.

Getting to the charts below, you can see from these three examples that many of the key indexes put in double-tops in October; they then proceeded to break below their longstanding 50-day average support; and finally, they broke below their early October lows, leaving a lower low on the charts for the first time since the rally off the March lows began.

These snapshots below are as of Friday, so these indexes have bounced a bit as of this morning, but they are still right near the resistance represented by the lower horizontal line drawn on the graphs below. The first step toward recovery will be recapturing those levels, and converting this near-term overhead resistance into support.

From there, we will need to see the major indexes recapture their 50-day averages. This morning, the S&P 500 is trading above its 50-day, so that is a start. Many of the other indexes still have room to rally before they reach their overhead 50-day averages.

I don't view all of this as ominous a sign as the bears would like you to believe. It's true that this action likely means a longer correction than we have seen in a while, but you never know. A flurry of buying could change things quicker than most expect. Most normal corrections average in the 3-6 week range. If we agree that the market topped on October 19th, than we are currently in Week 3 of this correction. That means it could end soon, or maybe chop around until we get closer to the Thanksgiving holiday.

I have said that you can't just look at the technicals alone, we also need to pay attention to what is happening with sentiment. The indicators I track do show that bearish sentiment has been on the rise, which plays into my thesis that this correction is mostly over.

Today the FOMC meets, so we could see this early rally fade, or pick up steam. These Fed days are tough to guage.

The dollar is lower today, which is really boosting commodities. Oil topped $80, and gold hit new record highs above $1095 before settling in around the $1090 level.

Asian markets were higher overnight; the 10-year yield is higher at 3.50%; and the VIX is -6.4% lower to 26.97.

long GLD, SSO

Monday Morning Musings

The market finished on a nasty note last week. I thought we would see more month-end buying, but instead it looks like it was month-end selling on the part of mutual funds, most of whose fiscal year ends occur in October.

For its part, the Nasdaq suffered its worst weekly decline since the March lows. Many leading growth stocks on the Nazz had been holding up well, but finally succumbed to heavy selling late last week. That said, the chart below shows that the Nasdaq has not been this oversold since March, and that likely means we are due for that oversold rally I have been looking for.

There were some positive economic reports this morning, and that is helping the market forget about Friday's woes. I said last week that the postive Chicago PMI should lead to stronger national manufacturing numbers. Today, the ISM Manufacturing Index for October rose for a third straight month to 55.7. This was better than the 53.0 expected, and well above last month's level of 52.6. A rising ISM has a strong correlation with job growth, so maybe we'll see a further decline in job losses this Friday.

Another solid report was the pending home sales report, which rose for an eighth consecutive month, up +6.1% in September vs. expectations that growth would be flat. This is a very strong number, but it is likely set to weaken when the first-time homebuyer tax credits expire.

The dollar is lower today, which as we have said has led to days when stocks and commodities rise together. Oil is bouncing back above $78, while gold has topped $1060 again.

Asian markets were mostly lower overnight; the 10-year yield is up slightly to 3.41%; and the VIX is -5.8% lower today to 28.90, after closing well above the 30 level for the first time since early July.

Trading comment: In my next post, I hope to take a look at the technical picture, and show you what all the technicians are currently worried about. The major indexes have broken their 50-day averages, which could now act as near-term resistance. Many corrections last in the 4-6 week are, so even if we bounce this week, the market still could need to put in more time before it is ready to run again.

We are in the midst of a correction, and one of the things I watch for is to see how sentiment turns during a correction. I am already seeing signs of rising bearishness in the indicators. I will continue to monitor these signs, and that may help give us some clues as to the duration of this correction. But big picture, this is a dip I would like to use as a buying opportunity into year-end.