Sunday, January 07, 2007

Market Showing Signs of Weakness

Market Action:
The December jobs’ report released on Friday morning just prior to the opening bell provided a better picture of employment than the market expected.  The report indicated that 167K jobs were created in December (let’s not get into the specifics of the birth death model and all of that).  

The number was expected to be 100K so there were 67K more jobs than expected—yes, I did that all without a calculator, amazing.  On top of that, November’s number was revised upward by about 22K so now we’re talking almost 100K additional jobs than the market might have considered.

So, what happened?  Well, the market decided to focus on the possible negatives of the Fed not being able to lower rates any time soon.  With that attitude the bonds fell hard on the news (pushing rates higher) and the stock futures dropped in concert with bonds.  

The stock market opened with a thud and then traded in a pretty narrow range, lower, but not much movement aside from that opening drop.  The last hour of the day did bring some buyers to try to lift the prices going into the weekend but that effort was modest.  

As we write this tonight, around 10 o’clock CST, we can see that the Asian markets are “catching up” with the Dow’s 80+ point drop on Friday.  Both the Japanese market, measured by the Nikkei Dow, and the Hong Kong market, measured by the Hang Seng index, are down over one percent in early Monday trading.  Meanwhile, our futures are indicating nothing much going on here.

Friday’s market gives us some idea of the vulnerability of the prices after several months of run up.  We have suggested that the late 2006 highs might be broken by the Dow and probably not by the other indexes we follow.  After the big spurt last Wednesday when the Dow did indeed break its previous high, it failed to hold the high and didn’t register a new closing high.  None of the others, SP500, RUT, COMP, NDX, has made a new high relative to the highs put in over the past couple of months.  

What that means is the market is tired and is having trouble moving up in spite of the overwhelming bullishness that we hear about almost everywhere you care to look.  In fact, as you well know, to the contrarians around (we wouldn’t know who we’re talking about, would you?) that bullishness alone is enough to suspect this market is done going up.  Even the VIX is moving off the multiyear lows it set last month.  

We continue to expect gold to pull back along with the mining stocks.  With that in mind we thought we would keep better track of the mining stocks by adding the HUI to our list below.  We are looking for a low somewhere between 250 and 270 but it may be lower than that.  The HUI closed out 2006 at 338.24 and closed last Friday at 314.12 for a seven percent loss in three days.  We are watching for you.

Dow Industrials:  12,398.01  -82.68
VIX: 12.14
HUI:  314.12
QQQQ:  43.85
RYVNX:   16.69
RYAIX:  21.22
RYCWX:  35.82
TLT:  89.22
BEGBX:  13.62

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