Stocks Negatively Reverse; Dow Ends Slightly Higher

Week In Review:

The major averages rallied during the first half of the week but the bears showed up in the latter half and erased the gains and sent stocks lower. The Nasdaq, NYSE composite, S&P 500 and small cap Russell 2000 index negatively reversed (open higher and close lower) for the week which is an ominous sign. A negative reversal is a subtle sign that a change in trend may be upon us.

Monday:

Stocks enjoyed healthy gains on Monday which helped send the benchmark S&P 500 index above near term resistance (1100) and to fresh 2009 highs! The US dollar fell after Asian government’s pledged to standby their economic stimulus packages. The 21-member Asia-Pacific Economic Cooperation group, which currently comprises over half of the global economy (approximately +54%), announced that they will maintain their massive economic stimulus packages well into 2010. The greenback fell to a fresh 15-month low which sent a host of dollar denominated assets higher: mainly stocks and commodities!

Turning to the economic front, the US government said retail sales grew +1.4% in October. Several of the country’s largest credit card issuers rallied after reporting charge backs (i.e. bad loans) fell for a six straight month. Elsewhere, Federal Reserve Chairman Ben Bernanke gave a speech to the Economic Club in New York and said economic “headwinds” remain in the economy. He also said that, “Significant economic challenges remain” He went on to say, “The flow of credit remains constrained, economic activity weak and unemployment much too high. Future setbacks are possible.” He also noted that we are in a much better place in Q4 2009 then where we in the same period last year.

Tuesday:

On Tuesday, stocks opened lower but closed higher even as the dollar rallied. Inflation concerns eased after the government released a weaker than expected producer price index (PPI). The headline reading increased +0.3% last month after sliding -0.6% in September. October’s reading was lower than the Street’s estimate of a +0.5% rebound. However, the “big” news in the report was that the core rate, which excludes food and energy, unexpectedly fell -0.6%, following a -0.1% decline in September.

A separate report showed that the country’s manufacturing sector continued to grow, albeit at a very slow rate. At 1:00pm EST, the National Association of Home Builders released their housing market index which was unchanged at 17 in November.

Wednesday:

The bears showed up on Wednesday and spent the rest of the week sending stocks lower. A slew of economic data was released which led many to question the health of this recovery. The Labor Department released a stronger-than-expected consumer price index (CPI) which ignited inflationary concerns. Headline CPI rose +0.3% which was higher than the Street’s forecast for a +0.2% gain.  Core CPI, which excludes food and energy, was unchanged from last month’s reading of a +0.2% gain. However, core prices also topped the Street’s estimate for a +0.1% gain and is the component of the report that the Federal Reserve tends to focus on. The uptick in consumer prices sparked concern that companies will have little room to raise prices this holiday season (which curbs earnings) due to the fact that unemployment is at a 26-year high of +10.2% and wages fell -5.2% in September from the same period last year.

The Commerce Department released a separate report which showed that housing starts unexpectedly tanked last month. Housing starts (a.k.a registrations for new construction for residential housing units), slid -10.6% in October which was well below estimates. Permits for new construction slid -28.9% from the same period last year which led many to question the sustainability of the housing recovery.

Thursday:

On Thursday, stocks got smacked as the dollar continued to rally after the Labor Department said jobless claims (a.k.a the number of Americans filing claims for unemployment benefits) was unchanged at a 10-month low. Stocks also got hit after a report was released that showed mortgage delinquencies surged. So far, since the financial crisis began in 2007, writedowns (a.k.a losses) of mortgage-backed debt has surpassed $1.7 trillion at some of the world’s largest financial firms. The spike in mortgage delinquencies was due to a 26-year high in unemployment and a down tick in wages.

The Mortgage Bankers Association said that out of every six home loans insured by the Federal Housing Administration there is at least one late payment and +3.32% of those loans were in foreclosure last quarter. This was the highest reading for both measures in at least 30 years and bodes poorly for the troubled housing market. Elsewhere, the Organization for Economic Cooperation and Development (OECD) doubled its growth forecast for industrialized nations in 2010 to +1.9%. However, the group said that record debt levels may burden future growth. Separately, the Federal Reserve Bank of Philadelphia released its general economic index which topped estimates and suggests a slight improvement in that region.

Friday:

On Friday, European Central Bank (ECB) President, Jean-Claude Trichet signaled that the ECB will begin curbing its efforts to aid ailing banks. Those of you who have read this commentary over the past 5 years know that we like to analyze the news, yet we pay a lot more attention on how the market reacts to the news. That said, the market has reacted and continues to react rather well to the latest round of economic and earnings data. The vast majority of third quarter earnings are now behind us and the major averages remain perched just under fresh 2009 highs! Barring some unforeseen event, earnings were down for the average company in the S&P 500 for the ninth straight quarter but managed to exceed the average estimate, which is one reason why the markets have reacted so well to earnings. That coupled with the notion that the “worst is behind us” explains the market’s collective “take” on Q3 earnings. In addition, economic data, although not impressive, has improved markedly from this time last year which suggests the global government stimulus packages are working.

The benchmark S&P 500 has surged a whopping +64% from its 12-year low in March as global GDP has rebounded. The two primary concerns regarding this rally is the dearth of high quality leadership triggering technical buy signals and that volume has waned in recent weeks as the market rallied. Most liquid leaders are still holding up well which bodes well for this rally. The universe of high ranked stocks remains very thin which is exactly how this market has performed since the lows in March.