Sunday, December 23, 2007

The Rally, Part 2

- No real change in the news, but 'The Rally, Part 2' continues.
- Still just a relief move for now, but it is likely to carry through to year end.

After a sharp drop, holiday rally resumed with a Santa Clause run this week.

There was more of the same on the news front, i.e. the good, the bad, and the ugly. The good: RIMM seconding ORCL's earnings; strong spending numbers (+1.1%, a 3.5 year high in growth rate); some M&A activity (PHG buying our play RESP; VIP buying GLDN); Michigan sentiment topping expectations (75.5 versus 74.5 expected); the second Fed auction went off with a lot of bids and the promise of bi-weekly auctions as long as needed. The bad: PCE annual core rose to 2.2% versus the 2.0% expected; Oil spiked to 93.50 (+2.44/bbl) on the new trading contract; MU proved that memory chips are a commodity with its abysmal results. The ugly: CC earnings were much worse than the bad earnings expected and JBL (printed circuit boards) guided lower for 2008, and both gapped sharply lower.

The negatives did not matter. Santa's slay is all oiled up and ready to roll, and despite the gloomy prospects the retail sales figures and the reports we are getting from malls and stores shows consumers are spending. More importantly, RIMM gave the market a second B-12 shot after ORCL's earnings, and that was enough to get all stocks off on the right foot.

The morning was a bit choppy, but it was choppy in a narrow range and holding the gains all along. Then the afternoon kicked higher and it was a race to the top. There was a last hour attempt to sell as more positions were shuffled ahead of expiration, but that dip was bought, driving the indices to close at their session highs. The move capped off a recovery from a week of tough selling touched off by the FOMC's rather timid initial response and two-step approach that stomped all over many traders' toes. Leaders were rattled to start the week, but they came on strong to finish. You always have to like a good closer.

Technically the action was excellent, but expiration and year end tape painting had their fingerprints all over the session.

The market showed high to higher action, i.e. gapping higher, holding the gains, then sprinting home. It even fought off some last hour selling to show it was more than just a bounce without a brain.

Internals: The internals were as strong as the day. Nice 3:1 breadth on NYSE and 2.3:1 on NASDAQ, showing it was not just a large cap tech day, though they had their way with the session as well. Volume exploded above average as a lot of positions were rolled out and closed out as December came to an end given the up and down action. It appeared that traders waited to see if the bounce would die of natural causes, but when it showed it was all perky again they had to act. Volume explosion.

Charts: After playing patty cake with the 200 day SMA all week the blue chips ripped through that level. SP500 continues its advance, but it is still playing catch-up as all its work only got it up to its 200 day SMA. NASDAQ already put that level to bed, gapped over its 50 day EMA, and rallied to close at its 50 day SMA. It is once more eying that July high at 2736 that stopped it short on the second leg of the holiday rally. Great moves, but all of this shows there is still a lot of work ahead as the indices collide with old resistance points. Even with the moves this week the indices are still below their peaks from the last rally leg.

Leadership: As discussed earlier in the week, leadership took a blow on Monday, but that turned out to be the end of the selling. Just as it looked as if the leaders were going to get dragged down into the abyss the selling ended. By the end of the week the same old names that led all of the rallies in the last half of 2007 were leading once more: large cap tech, agriculture, energy, metals, machinery - - all stocks with ties to strong global action . . . AND all stocks that will look really great on the year end reports to investors. The big boys were picking up these shares to spruce up the portfolios; of course they won't tell their investors WHEN they shares were purchased.

Still just a relief rally but likely to carry on through close to year end.

As noted in the 'charts' discussion, this still has the attributes of a relief move from the harsh selling. The Fed is in the game, but it has not been a game changer just yet. It is hard to fight the Fed, but as seen in 2000 and beyond, if the Fed waits too long or is not strong enough in its response it can take a long time to come back around, i.e. after the economy, an of course the market, decline. This is particularly true of financial crunches as we have now.

That said the leaders are hitting stride on some strong volume as portfolios are populated with the strongest of 2007. Shorts are getting squeezed, not in a sudden rush that is prone to failure, but a steady rise all week. That gets them very uncomfortable, and they tend to rush in and cover. While the indices are rapidly approaching levels that stalled them out on the last leg higher, this kind of momentum can ride through light volume periods such as that short week sandwiched between Christmas and year end. Thus we are looking for the move to continue next week.

As noted Thursday night, however, if this does continue on up to the year end we are going to be banking quite a bit of gain and preparing for a pretty unknown January. There are indications that some areas, e.g. China, are ready to move up after correcting nicely. Overall, however, the charts and their character have not changed yet, and frankly SP500 with its financial weighting still looks technically weak. If the financials are not bottoming then the overall market likely still has more work to do. The world is not going to fall overnight and thus we can stay with the strong global leaders as long as they keep moving higher. In the bigger picture, however, we need to be nimble heading into the new year and see what the big money does after it finishes painting the tape. Those recovering leaders of this week and likely next week may get the ax from some big institutions.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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