Week In Review: Leaders Get Hit As Market Churns

Friday 12.04.09

Market Commentary:

Stocks ended the week higher as investors digested a slew of economic data. On Friday, stocks edged higher after the government released a stronger than expected jobs report. Volume, an important indicator of institutional sponsorship, was higher than Thursday’s levels on both major exchanges. The fact that the major averages closed in the lower half of their daily ranges on heavier volume could be interpreted as churning- which is not a healthy sign. Advancers led decliners by a 2-to-1 ratio on the NYSE and by well over a 2-to-1 ratio on the Nasdaq exchange. There were 45 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, one more than the total of 44 issues that appeared on the prior session. Leadership among high-ranked growth stocks had dried up in recent weeks, so the expansion in new highs this week has been a welcome improvement. New 52-week highs solidly outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange.

Mon-Friday’s Action:

On Monday, stocks spent most of the session in the red but buyers showed up in the final hour which helped the major averages close higher on the day. Monday was the first full trading session since the Dubai news spread during Thanksgiving. It was encouraging to see the major averages rally as investors largely dismissed the Dubai news. Elsewhere, the Chinese government reiterated its stance regarding its stimulus package after India announced its economy grew at a very healthy rate of +7.9%, which topped estimates. In the US, the National Retail Federation released a report that showed that holiday traffic was up from the same period last year, but the average shopper spent $343.31 in stores and online over the Thanksgiving holiday weekend, less than the $372.57 spent last year.  The group reaffirmed its forecast for a -1% decline in spending for the holiday season.

On Tuesday, stocks rallied around the globe after Dubai World said it took “constructive” steps to restructure nearly half its debt. HSBC released a report showing that Chinese manufacturing, rose in November. This echoed the Institute for Supply Management (ISM)’s manufacturing index. The ISM said US manufacturing rose in November for a fourth consecutive month which is a healthy data point for the global recovery. Turning to the housing market, the National Association of Realtors said the number of contracts to buy previously owned homes in the US unexpectedly rose +3.7% in October.

Stocks ended mixed on Wednesday after ADP Employer Services, the country’s largest private payrolls company, said US employers slashed -169,000 jobs last month. This topped the Street’s forecast for a reading of –150,000 and led many to question the government’s official reading which was released on Friday. Before Thursday’s open, the Labor Department said that 457,000 jobless claims were reported last week which was just under the Street’s estimates. Stocks were up for most of the day but a late burst of selling sent stocks lower in the final hour which was not a healthy sign. Finally, before Friday’s opening bell, the Labor Department released a much stronger than expected jobs report. The report showed that US employers “only” shed -11,000 jobs last month (not a typo) while the unemployment rate fell to -10%. This smashed the Street’s estimates for a reading of over -100,000 and analysts believed that the unemployment rate would hold steady at +10.2%.

Dollar Up; Gold Down:

The dollar rallied sharply after the jobs report was released which put pressure on a slew of commodities, mainly gold. Gold plunged sharply today which dragged a slew of gold related stocks lower. Remember that gold has been one of the strongest performing groups in recent weeks and now that it has begun to fall, a new group will need to emerge to carry stocks higher. If you want more commentary on gold: Join The Sarhan Analysis today!)

Price & Volume Action:

Initially, stocks rallied on the jobs report but sellers quickly emerged which put pressure on the market. Longstanding readers of this column (since the early part of this decade) know that we focus much more of our attention on how the market reacts to the news then the news itself. The fact that market churned today (also considered a distribution day) leads us to question the underlying health of this rally. Furthermore, it was disconcerting to see several high profile leaders such as Apple Inc. (AAPL) and Netflix (NFLX) get smacked on Friday.

Apple, one the strongest stocks since the March lows, triggered a technical sell signal on Friday when it violated support (its well defined 8-month upward trendline and its 50 DMA line). This was the first time since the March low that Apple closed below support which bodes poorly for this rally.  It was also worrisome to see volume surge as the stock fell which indicated that large institutional investors were unloading their positions, not Aunt Mary or Uncle Bob. That coupled with the recent questionable action in the major averages and the dearth of leadership, suggests this rally is “under pressure” which means that defense is king.

Don’t Miss Out!

Saturday morning (12.05.09) we will be publishing a special report on why the jobs report is important for Wall Street.