By Sy Harding
Street Smart Report Online
Back in October I noted that a window of opportunity would likely open for the then struggling stock market to launch into a typical year-end seasonal rally. My reasoning was that the end of the worrisome third-quarter earnings reporting period, with its warnings from corporations regarding their sales and earnings going forward, the end of the hurricane season, and the probable decline in oil and gasoline prices back to pre-Katrina levels, should improve consumer and investor confidence, and once again allow favorable seasonality to kick in.
So far that is what has happened. Two closely watched consumer sentiment indexes reported this week that the mood of consumers improved quite dramatically in November after being in a funk in September and October.
The University of Michigan reported its Consumer Sentiment Index jumped from only 74.2 in October to 81.6 in November. The Conference Board reported its Consumer Confidence Index also rose big-time, from 85.2 in October to 98.9 in November.
Consumer sentiment should continue to improve for awhile. Gasoline prices, which were pushing $3 a gallon a couple of months ago, came close to dropping below $2 a gallon in some areas of the country this week, before rising a bit toward the end of the week. We are also entering the holiday season when spirits usually pick up anyway.
Meanwhile, on Friday, the Labor Department reported that 215,000 new jobs were created in November, a big improvement over September and October when only 17,000 and 44,000 new jobs appeared. It makes for very encouraging headlines, although economists estimate that it takes 150,000 new jobs each month just to keep up with population and labor pool growth.
Other positive economic headlines this week included an upward revision of economic growth (Gross Domestic Product) in the 3rd quarter, from the previously reported 3.8% to 4.3%, which is raising expectations for the current quarter. It was also reported that Durable Goods Orders rose 3.4% in October, after declining 2% in September (although much of the increase was from military spending not economic expansion). Even the negative report that 3rd quarter corporate profits declined 3.4% was accompanied by a positive interpretation from the Commerce Department, which said that excluding the impact of the hurricanes corporate profits would have been up 7.8%.
As would be expected, the improvement in consumer confidence seems to be translating into more spending, and consumer spending has been the main support for the economy for several years now. Retailers are reporting fairly strong early Christmas season sales (although bargain hunting is driving most buyers to stores offering the deepest discounts and largest rebates).
Reports this week from the real estate sector were mixed and opposite in nature, creating much head-scratching among analysts.
On Monday the National Association of Realtors reported existing-home sales fell 2.7% in October, with inventories of unsold homes rising to the highest level in almost 20 years. However, on Tuesday the Commerce Department issued the surprising report that new home sales rose a huge 13% in October, to a new record. I tend to trust the realtors' numbers more than the government numbers. As David Seiders, chief economist for the National Association of Home Builders, said, "It's likely the report overstates the true pace of home sales because of well known statistical deficiencies in the way the government compiles its numbers."
But the report made for still more confidence-building headlines for consumers.
Yet the stock market failed to respond to the improving economic news with any enthusiasm, perhaps a warning sign. A market that rallies in spite of bad economic news is said to be in a strong bullish mode, while a market that fails to rally in spite of good economic news is said to be warning of pending trouble.
However, there are two other possible explanations for the market's failure to respond to good news this week. They are both in the area of technical analysis, and the market's technical condition often overwhelms the fundamental situation.
Until this week, the market had been up an unusual five weeks in a row, and in the process had become short-term 'overbought' and due for a rest, or even a short-term pullback as short-term traders take their profits. Additionally, the rally carried the major market indexes back up to the top of their two-year trading bands where their previous rallies of the last two years failed. There is a considerable amount of 'overhead resistance' at this level, which market technicians have been watching closely. The market is at a point where it must break up through that resistance area to prove the durability of the rally. If it can do so after no more than a short-term pullback the rally should resume its positive enthusiasm, since November, December, and January are usually the most positive months of the year.
However, the market's halt this week in the area of that resistance cannot be ignored, given that long-term problems like record consumer debt, record Federal budget deficits, rising interest rates, rising inflation, and a real estate bubble that has already begun to burst, have not gone away.
While I continue to believe favorable seasonality will postpone serious problems until next year, a thought further encouraged by this week's improvement in economic reports, it is no time to become complacent. This is not a buy and hold rally. Profits will have to be taken at some point, but hopefully not until the market's favorable season comes to a normal end.
Editor's Note: Sy Harding is president of Asset Management Research Corp., 505 East New York Ave., Suite 2, DeLand, FL 32724, publisher of The Street Smart Report, 1 year, 17 issues, $250 (now in its 18th year of exceptional market research for professionals and serious investors) and The Street Smart Report Online at www.StreetSmartReport.com, 1 year, $225. Sy Harding has been consistently ranked in the Top 10 Market Timers by Timer Digest since 1990. In his 1999 book, Riding the Bear - How to Prosper in the Coming Bear Market, Sy Harding outlined a simple strategy that works in bull and bear markets. Mr. Harding's Seasonal Timing Strategy (STS), continues to significantly beat the Dow and S&P 500, doing so over the last one-year, two-year, three-year, and five-year periods, and back-tested for the last 10, 20, 35 and 50 year periods. It did so with its normal two trades a year, using just an index fund, and did so with half the risk of buy and hold investing, as the strategy is in cash between 4 and 8 months every year. For more information and a Special Trial Offer visit www.StreetSmartReport.com.
