Being Street Smart December 23/04
by Sy Harding
December 23/04
SANTA CLAUS CAME TO TOWN!
The traditional Santa Claus rally arrived on schedule this week. The Dow,
S&P 500, and Nasdaq were all up for the week, and after the dismal
summer have now rallied back and broken out to new highs for the year.
The market remains in its favorable seasonal period. (My newsletter’s
Seasonal Timing Strategy triggered its entry signal on October 28, just
three days after the Dow hit its low for the year on October 25).
Economic numbers continue to come in mixed, but with enough positive to
keep investors confident.
This week the Conference Board reported that its Leading Economic Indicator
Index rose in November. This indicator is designed to forecast the economy
six to nine months in advance, and had been down for five months in a
row. The American Petroleum Institute reported crude oil inventories unexpectedly
rose again in the week ended December 17, this time by a large 2.9 million
barrels. That continuing indication that oil supplies are more than enough
to meet current demand, drove oil prices still lower. Perhaps that was
a factor in the University of Michigan’s report that its Consumer
Sentiment Index improved to 97.1 in December from 92.8 in November.
More than enough to produce a jolly holiday season for the market.
However, there was also enough negative news to prevent the market from
running away to the upside.
The Commerce Department reported that Durable Goods Orders, which are
orders for big ticket items, rose 1.6% in November after declining 0.9%
in October. That seemed to be good news until it was realized that aircraft
sales, which have volatile up and down months, had risen a huge 64% in
November, and without that aberration, Durable Goods Orders actually fell
0.8%.
The week’s most troubling news was that new home sales fell 12%
in November. That comes on the back of the previous week’s report
that new housing starts plunged 13.1% in November. Both were the largest
monthly declines in more than ten years.
My worry about those numbers is that the main supports for the economic
recovery of the last three years have been the housing boom, and healthy
automobile sales. A few weeks ago Ford and GM reported their November
sales were so dismal they would have to cut back production for coming
months. And now comes two big declines in housing numbers.
So once again this week there was enough positive news to keep investor
confidence high, but more signs of disturbing trends setting in that could
signal trouble down the road.
Regarding the market’s technical underpinnings, as I noted last
week, market breadth has been impressive, and relative strength and momentum
reversal indicators remain positive and have quite a ways to go before
they would normally become overbought.
However, there are also a couple of worries showing up in the technical
picture. Corporate insiders have again begun to sell their stock to a
significant degree. And investor sentiment has reached an extreme of optimism
and confidence usually present at important market tops. Investor sentiment
is known as a ‘contrary indicator’. That is, investor emotions
are usually at an extreme of pessimism and bearishness at important market
bottoms, made so by the market decline to that bottom. And usually at
an extreme of optimism and bullishness at important market tops, made
so by a substantial rally or bull market.
However, both extremes of insider selling, and extremes of investor bullishness,
are frequently very early in warning of market tops.
For instance, the warnings in the financial press this week about the
dangerous level of investor optimism are primarily based on the Investors
Intelligence investor sentiment readings, which reached a level of 62%
bullish last week, not only above the danger zone of 55%, but at a level
not seen since late January, 1987. That may send shivers down the backs
of investors who were caught in the infamous 1987 crash.
However, investor sentiment cannot be used by itself to ‘time’
the market. While the Investors Intelligence sentiment numbers reached
62% bullish in January, 1987, therefore warning of a major market top
ahead, the market continued to rise. The Dow gained an additional 30%
from late January, 1987 to its August, 1987 high. Only then did the market
begin the decline that ended with the October, 1987 crash.
So, as I’ve been saying for awhile, enjoy the rally as long as it
lasts. It continues to be the season to be jolly. But realize that trouble
may lie ahead sometime next year.
Happy Holidays!
Sy Harding is president of Asset Management Research Corp., publisher
of The Street Smart Report Online at
www.streetsmartreport.com and author of 1999’s Riding The Bear
– How To Prosper In the Coming Bear Market.