The U.S. and European markets rallied today, although it’s hard to pinpoint the exact reason why. U.S. Housing starts came in very strong for November, up 9.3%. Spain had another strong bond auction and the ten-year yield continues to pair back since central banks around the world made their November 30th joint strike on currency liquidity. Looking at earnings, Jefferies Group (JEF) was up 20%+ after its earnings. The stock was up 5% for most of the morning until an interview with Egan-Jones’ Sean Egan in which he detailed cuts in risk levels during the quarter on CNBC. Financials were a big performer in the market due to optimism in Europe, housing, and earnings from Jefferies. The two negatives on the market were 1) earnings from Red Hat (RHT) and General Mills (GIS) and 2) the overhang from the S&P rating resolution announced December 5th; however, that didn’t seem to hold the market back with the S&P 500 rising above the 50-day moving average having the best advancing day since November 30th.
Though there were a lot of moving parts in the market today, I think four issues really stand out. First, the U.S. housing starts data. Like I mentioned on the radio show, expect housing to be a big issue this week with starts today, existing home sales tomorrow, housing prices on Thursday, and new home sales on Friday. That’s a lot of data to get through and 3 out of 4 data points highlight sales, which have been ticking up lately. Pricing has been the last data point that needs some loving so if that starts to rise, I think we should expect a good reaction from the market.
More specifically looking at today’s housing data, housing starts increased to 685,000 (seasonally adjusted annual rate) while permits increased to 681,000 saar (5.7% increase). As we’ve seen since mid-year, the growth is mainly in multifamily starts and permits (apartments). Could there be a possible bubble developing as single family home inventory piles up from foreclosures and people crowd apartment rentals? I’d need to look at the data in more detail. Single-family starts increased 2.3% to 447,000saar and permits rose 1.6% to 435,000saar. The low single-family permit increase points to a near term slowing of single-family starts, but overall, starts have been a big boon to the economy over the past six months.
The ECB will announce the results of its 36-month Long Term Refinancing Operations (LTRO) tomorrow. Recall from the radio show over the past two weeks and my writings that this has the potential of being the game changer Europe needs – a sort of stealth bazooka. Financing investment in the sovereign debt of each European bank’s domicile country (because stats show they’re not investing in their neighbor’s debt) at a 1% rate is the new carry trade…for the banks only. A lot of estimates having been floating around about how much banks will borrow, ranging between €100B and €350B. It won’t matter how much will be borrowed, though analysts say the more the better, but rather how the market interprets the data. So tomorrow could be a big day for Europe and it may qualify the new 36-month tenders as the bazooka Europe needs.
Thirdly, we have some technical levels that I discussed in last week’s Market Observation in the charts that are influencing the market. Those levels are: 81.44 and 81.15 resistance for the U.S. Dollar Index, 1.297 and 1.287 support for the euro, 1567 support for Gold, and 292 support for the CRB Index. You can view where those zones line up on the chart via the article last week here. One of the other topics I discussed last week was the potential for divergence as the S&P 500 and Nasdaq had fallen through the 50-DMA whereas the Transports and Industrials had not. Yesterday, those levels were taken out; however, they whipsawed right back above them today. In fact, I think today was a game changer in the short-term as today’s advance engulfed the trading of the prior four days. Worried about the market rolling over yesterday? Today’s market just whipsawed that idea. In fact, if you look at the short-term technical levels Tom Smith gave yesterday, the market chewed through both short term support and resistance in a matter of 24 hours. He was right when he said to “be careful out there” as the volatility is high, yet the market is essentially flat for the past four months. Trying to go 100% cash or 100% invested at top and bottoms could make an investor feel queasy from trading.
“Short term support for the S&P 500, Dow and NASDAQ are 1208/11,785 and 2525. If all three of those levels give way selling into yearend will likely intensify. Short term resistance numbers are 1232/11,970/2590. A close above all those levels will signal improvement in the near term picture.” Tom Smith, Be Careful Out There
The last issue I want to talk about is the Spanish 3-month note auction which has rippled across the yields of many other sovereign issues. Spanish 3-month debt has fallen down from 5.11% in November to 1.74% due to strong demand and a cooling of default fears. The market is looking at two successful auctions despite sober comments from Mariano Rajoy earlier in the week about the outlook for 2012 and an unemployment rate of 23%. Mariano was voted in based on his program for sweeping budget cuts. Spanish 10-year yields are flirting with sub-5% levels as seen in the chart below and Italian yields dropped 22.5 basis points to 6.61 for their 10-year.
Spanish 10-year yields
Italian 10-year yields
Final Thoughts
Volume has been low over the past month since November 30th’s big uptick. The holidays will be keeping many away or hesitant to make any big moves before year-end. Window dressing has probably already been accomplished by selling losers and buying winners. Additionally, covered calls have probably been written to boost performance and might explain a wimpy VIX at 22.89 despite the selloff over the past two weeks. The volatility index is now four days below the 200-day moving average and a healthy sign for risk-on assets. In addition, despite the dollar’s move above 80, do not get too overzealous with a January high at 81.31 acting as resistance. That too could support commodities and stocks over the next couple of weeks.
I’m expecting some sideways movement in the market over the next week or two before the Q4 earnings season kicks off. Leading into Alcoa’s earnings on the 9th, I’m anticipating another “hope rally” although tech may underperform with Thailand HDD supply problems. We continue to get sober comments from earnings and guidance in the semi group (minus Broadcom) and many are stating inventory and Thailand supply issues are at the heart. While those are short-term issues, they could cause the sector to underperform heading into earnings. Reflecting on today’s sector performance, the leader was energy, then materials, then financials, and industrials. Market perform was consumer discretionary and Technology while the risk-off sectors: staples, utilities, and health care underperformed.
After the close, Oracle (ORCL) missed estimates. The average estimate was for 57 cents on the quarter and they earned 43 cents by GAAP standards and 54 cents by non-GAAP standards. The weakness appears to be in hardware as revenues were down 14% while software revenues were up 2% for new software and 9% for old. They expect things to turn around in the second half based on new cloud products. Nike (NKE) also reported, beating estimates with $1.00 per share versus the average estimate for 97¢. Order futures were up 13%.
