MARKET WRAP – STOCKS CLOSE HIGHER
The market closed higher by 0.4% for the day as investors took on a bit of risk on the back of positive retail sales and consumer confidence data. Stocks finished the week with flat gains after sharp declines earlier in the week. Volume was very light and breadth favored the bulls by a small margin. Daily Futures has all the action:
U.S. Economy
The U.S. Commerce Department said that retail sales were up 1.3% in November, much better than expected, and up 1.9% from a year ago. Sales in October were revised down, from a 1.4% gain to a 1.1% gain. The March 2011 eurodollars were down .055 at 98.41.
The University of Michigan’s consumer sentiment index increased from 67.4 to 73.4 in early December, stronger than expected.
Grains and Cotton
The flow of soybeans to China continues: The USDA said today that China bought another 232,000 tons of U.S. soybeans. January soybeans closed up 8 cents at $10.35.
Livestock
The U.S. Meat Export Federation said that beef exports were down 4% in October from a year ago. February cattle closed up 1.10 at 83.20 while extremely cold temperatures in the central U.S. slow weight gains.
The U.S. Meat Export Federation also said that pork exports were down 6% in October from a year ago. February hogs were unchanged at 65.42.
After the close, the USDA estimated this week’s beef production at 477.5 million pounds, up .7% from a year ago. Pork production was estimated at 450.3 million pounds, down 5.1% from a year ago.
Coffee
According to Dow Jones Newswires, Brazil’s weather has been favorable for the developing coffee crop, but it would help if it was drier. March coffee ended down .0005 at $1.4265 in the face of cold U.S. temperatures.
Sugar
March sugar closed up .74 at 24.00, the highest close in seven weeks, supported by the same old story – tight world supplies.
Orange juice
In spite of cold temperatures over most of the U.S., the ten day forecast for central Florida remains safely warm. January orange juice was up a half-cent at $1.2685.
Energies
January natural gas dropped 13.5 cents to $5.163 while bitter cold temperatures cover the northern two-thirds of the U.S. Today’s 6 to 10 day forecast from the National Weather Service expects below average temperatures for the eastern third of the U.S. and above average temperatures for the western third.
Metals
China’s industrial output was up 19.2% in November from a year ago, the biggest annual gain in over two years. In India, industrial production was up 10.3% in October from a year ago, less than expected. March copper closed up 3 cents at $3.1330.
Currencies
The U.K.’s Office for National Statistics said that producer prices were up 2.9% in November from a year ago, as expected.
TPC,
What do you make of the market going up with the dollar? Is the inverse correlation broken?
I am writing off the entire month of December. Volume is so light and there is so little conviction in the trading that it is impossible to read into it too much.
But part of me is starting to ask if the dollar isn’t rising because there is real demand for dollars now. In other words, the US isn’t as unhealthy as some other large regions might be….The questions surrounding Greece and the Euro have taken the bid out of the Euro. A minor reallocation of capital before the downtrend in the dollar begins next year?
I think what you said may be the case, but also like Jim Rogers said, there are just too many dollar bears on one side of the boat right now. Even if dollar’s ultimate fate is death it won’t go down without a fight. My question is about carry trade and the inverse correlation between dollar and stocks. Commodities are selling off like they should with the strong dollar move, but the stocks are still hanging high. Perhaps not only do foreigners demand the dollar, they also want US stocks?
TPC,
I would like you opinion.
There are more divergences among the DOW, NASDAQ, Russell 2K and S&P 500 recently than there were for most of the rally. Today the Nasdaq is down slightly but the Russell did quite well. Do you see this as a sign of a healthy market (i.e. all classes of equities don’t move up and down together – just some more beta than others) or do you see the divergence as the beginning of a breakdown in the market?
As I said to Bgray,
I don’t read into it much because the volume and conviction isn’t here this month. I still maintain that the overriding factor in coming weeks will be a sideways churn that leads up to a pre-earnings rally. January could be quite a good month. I just find it very hard to believe the market will break down before this next earnings season begins….
Aren’t the lack of volume and conviction the basic ingedients for an inflection point?
I totally agree with your logic about earnings but the underlying technicals of this market are going nuts.
I have a list of charts showing death crosses and clear potential head and shoulders patterns. Along with patterns of lower highs and lows on market leaders like XLF and AAPL. AAPL close below its 50 day moving average again today while the DOW was up 65 points.
Bizarre stuff for sure.
What if we see a quick correction to S&P 1020-1040 before an earnings induced rally for a lower high?
I guess I suppose the downside will be bought into earnings. Therefore, I think it’s difficult to see stocks falling more than 5% before earnings. If they do it is a gift into January.
As for technicals….As much as I respect the technicals the fundamentals remain the most important factor in my world. This earnings season is looking like it’s going to be robust again compared to expectations. That means stocks go higher. Charts can’t hold a candle to profit margins.
As I’ve said before – a chart is nothing more than a lagging visual representation of the markets underlying opinion of the fundamentals….
I could definitely see that playing out. It depends whether we break out to the upside of 1125 or downside of 1088. That should determine the direction of the next 50-75 points. There’s no way I would be long without a confirmation that we’ve broken the down trendline and the Fib retracement level.
I came across these charts from DecisionPoint that highlight how grossly overvalued the market currently is. Historically, we have a P/E ratio that is three times higher than at the height of the dotcom crash!! Also, if you believe in mean reversion, dividend yields should touch levels around 6% as they have throughout various major and even minor recessions. According to DecisionPoint, we’re looking at an S&P value of 406 if we hit that traditional 6% level. But maybe this time is different…
TPC, I fear you may be taking a bit too much direction from this one tool ( the ER ). That P/E chart is downright scary.
http://www.decisionpoint.com/TAC/SWENLIN.html
Perhaps I am putting too much emphasis on the ER, but it has been so right for the last three year that it’s hard to just ignore it. I largely ignored it for the first 3 months of the rally and it was a mistake.
As for the market PE – well, if expectations remain as low as the ER is showing then that means the current E in the PE is way off and the market is MUCH cheaper than investors are saying. I absolutely hate using PE ratios to gauge market direction….
That market PE chart has nothing to do with expectations and is by no means a short-term trading indicator. But it does give us a great snapshot of where valuations stand today relative to the last 80 years since it ONLY includes reported GAAP earnings. And right now it’s telling us that the market is historically expensive given the deterioration of actual earnings (vs any analyst mumbo jumbo). With the benefit of hindsight, nobody in their rightful mind would have bought tech stocks in particular the last time we had historically high readings. Yet we now have an extreme valuation 3x higher than the last huge equity bubble and few people see giant red lights going off.
Given that the ER still has a positive reading and we’ll likely beat expectations again, the S&P can stay sideways for a little longer. I just don’t see much upside fundamentally given what we’re already pricing in on an as reported basis.
that chart is showing less than $10 in earnings. I don’t think it’s accurately portraying the current earnings picture. Unless I am reading it incorrectly…
It’s $7.51 in twelve month trailing earnings ending in Q2. Full Q3 numbers aren’t out yet but they’re projecting about $12.75, which certainly won’t dent the P/E ratio back to historical norms. Only robust earnings or a further crash ala what Prechter is predicting will return us back to a mean. Maybe it will come in the form of earnings, but I don’t see enough data to back that up.
You have to be careful using backward looking P/E ratios which only cover a very short period of time.
The Shiller PE10 at least gives a smoothed inflation adjusted earings trend.
The Hussman prior peak PE is the most interesting of the charts. The result is similar to to a P/E10 chart. I looks like stocks are certainly not cheap by long-term historical comparison but still have plenty of room to rise provided earnings continue to steadily improve quarter by quarter and interest rates remain low.
The market will likely be in trouble the first quarter that earnings retrench significantly (the market probably won’t react until mid-way through earnings season) or if interest rates or inflation or both spike significantly higher. If somehow inflation really takes hold and the Fed is afraid to kill it, then we may very well see P/Es in the same range as 1974 to 1982, but those P/Es will be calculated in nominal inflated dollars so even if the March lows are broken in real terms, they may not be broken by much in nominal terms.
I rather think that the future may look like the 1960-1980. Widely sideways.
VCC, we’re looking at $60+ for certain next year. I don’t care what the S&P earned last year or in 1980 or in 1929. Tell me what it’s going to earn in 2010 and then I can make some investments. That trailing PE stuff is a rear view mirror indicator.
When will revenues start mattering again? Will another quarter of cost cutting in the face of declining revenues be enough to raise stock prices? Regardless of expectations if revenues are flat or down next quarter shouldn’t that be seen as bad for stocks?