December retails better than expected

SUMMARY:
- After a weak start stocks close higher once more, showing no fear ahead of the 3-day weekend and earnings.
- December retails better than expected, but not better than expected.
- Huge week for economic data, huge week for earnings.

Stocks fight off early selling, refuse to give up gains ahead of long weekend.

After several upside sessions and a NASDAQ breakout stock futures were lower Friday. It wasn't just a reflex action by the sellers after a strong move. AMD warned as to its quarter, and that threatened the tech sector, especially chips and the SOX which was the only index to close lower Thursday. Retail sales were stronger than expected for December, and while that is a positive for the economy, investors live pretty much in a cold war state with the Fed that sometimes flares into a hot war. Right now this pause has turned it back more to a cold war, but the Fed's finger is still poised over the rate hike button, and the stronger retail sales were viewed as trying the Fed's patience. Strange isn't it? We all hope for a stronger retail season and when it comes in better than expected we then worry it might goad the Fed into another rate hike. Man, being an investor is sometimes akin to walking on eggshells around cranky, demanding in-laws.

Oil was rebounding as well, though it was quite modest (52.99, +1.11) compared to the tail kicking for the week. Bond yields were up sharply after retail sales (4.84% 2 year, 4.71% 10 year), and they rose further as the shortened bond session wore on (closed at 4.88% versus 4.77%). Notice how bonds yields are on a surge as the bond market wipes out any chance of a rate cut? Bond yields are rising to meet the Fed, not vice versa. Thus while many fear the Fed, rates are doing the Fed's work for it. Bernanke has to be pleased, not anxious.

That set a negative stage and stocks were indeed lower midmorning, but oil did not surge higher and AMD, well, Intel is selling a lot of old chips on the cheap, and that has to be slicing into AMD's margins. The market seemed to figure that out and stocks overall rallied with even SOX turning just positive at the close.

NASDAQ and SP500 continued their moves and again closed at new post-2002 highs. DJ30 hit an all-time high. SP600 was no leader and has yet to break up its toppish pattern, but it continued its solid bounce off the 90 day MA. As noted, SOX was no leader either, but it managed to recover positive and the downside shakeout and recovery likely did it some good for the continuation of this move.

Technically it was an important week as NASDAQ broke out from its 2 month lateral consolidation to a new post-2002 high. It was set up by the accumulation in NASDAQ as shown by its relative strength and the action of some solid leaders that started to break higher ahead of the rest of the market. Volume was strong as was breadth on the breakout.

Friday the move showed its momentum and strength when it refused to give up to the early sellers and rallied into a 3-day weekend. Volume was lower but still solid on NASDAQ; fitting given that NASDAQ is the key leader on this move. There were not a lot of breakouts Friday, mainly because a lot of stocks were posting excellent moves that continued prior breakouts. Those breakouts were the result of money reallocating in the market to technology over the NYSE large caps. The money started to leave those stocks late in 2006 and then the accumulation started this year. NASDAQ has emerged as the leader, though NASDAQ 100 was making the moves early on. Thursday and Friday, however, overall NASDAQ took the lead as the move spread out as the solid breadth shows. It has dragged DJ30 and SP500 with it, indeed all of the major indices, but their moves Friday were on lower, below average volume. They are not the leaders right now even though they both posted new highs.

The breakout was strong: it built up with the action we noted at the time was accumulation, leaders started to move ahead of the overall market, and when the breakout came breadth was strong, and volume surged. It is likely to test some after the strong break higher, but with the strength it is showing it has the ability to climb further from here for a couple of sessions before it tests the breakout. The move was strong, and money has not left the market, it is just moving to new areas in anticipation of further economic and thus market gains. Thus while we do expect a test, we don't expect a major setback unless earnings come in worse than expected. There have been some warnings (e.g. MOT, AMD) but not any unusually high amount.


THE ECONOMY

December retail sales be government expectations but not retailers.

Retail sales over the Christmas month gained 0.9% versus the 0.7% expected. November was written down to 0.6% from 1.0%, however. Ex-autos it rose 1.0%, much better than the 0.5% expected, but again, November was revised lower (0.7% versus 1.1%). Electronics, despite deflation in many items such as flat screen televisions, rose 3%. Gas rose 3.8% in the month as oil rebounded. Clothing was supposedly in lousy shape, but posted a sold 0.6% gain. General merchandise tacked on a solid 0.9%. Those are solid numbers and though not blowout they somewhat dispel the myth that the holiday season was weak. Of course, with a Fed afraid of a strong economy, showing a stronger than expected consumer helped spook investors early on.

Give with one hand, taketh with the other?

While the government measured some solid holiday sales the National Retail Federation was disappointed yet again. Sales were up 4.4%, not bad at all, but 5.0% were expected, and that stamped the season as 'modestly' growing. Warm weather was blamed as well as the decline in the housing market. NRF expects sales to show 'subdued gains' thorugh the first half of 2007. Who do you believe?

The Boat Show Indicator. Who needs a strong housing market?

Every year we survey the many boat shows in January. It is one of our best indicators of what the consumer is really thinking. A boat for most of us is the definition of a nonessential purchase. You may feel you just cannot live without a boat, but you know the saying, the happiest two days of boat ownership are the day you buy it and the day you sell it. Thus it is a good measure of just what the consumer feels about the future.

There are phases in the cycle that can be confusing. The luxury end holds up well at the end of an economic cycle after everything else falls off; it is the last to slow down. It is also the first to pick back up. The swing group is the middle and lower end. The high end gives you a heads up and the low end tells you the cycle is well underway.

The past two years, despite economic growth, have been mediocre shows for the middle level. The low end did well last year while both the low and mid-level did poorly in 2005. This year the shows are reporting big sales. Just about every mid-level seller has sold his show inventory and has backlog orders. The low end is popping as well. The high end remains strong as it has over the span of the past few years. Thus, the boat show indicator shows a confident consumer spending money on some big ticket items. That means they feel good about their jobs, housing be damned, and that means they will continue to spend. After all, they have their houses given the multiyear boom in that sector, and now they want to take out their boat.

It is not necessarily a leading indicator, but as noted, with the middle sector coming on strong there is no major slowing in the economy at this stage.


THE MARKET

MARKET SENTIMENT

VIX: 10.15; -0.72
VXN: 16.56; -0.46
VXO: 10.24; -0.35

Put/Call Ratio (CBOE): 0.75; +0.03

Bulls versus Bears: Bulls are still easing back but still remain above the key 55% level. Bears continued their decline, and this time they broke below the 20% level and that is considered bearish. If you get too many bulls and too few bears, there is no ammunition on the sidelines to keep shooting the market higher.

Bulls: 55.4%. Bulls ticked modestly higher from 55.3% after declining the past several weeks from 59.6% (down from 56.5%, 58.8% and 59.6% at the high on this last spike). Still above the 55% level for over two months. Came within a whisker of the January 2006 peak at just above 60%.

Bears: 20.7%. Bears faded, mirroring somewhat the move in bulls. Down from 21.3% after jumping back above the 20% level for a week. That level is considered bearish. Still struggling to trend higher after a steady slide (20.6%, 21.3%, 23.9%) from the 37.1% hit in July (the highest level in this entire cycle), now so far in the distance you can barely see it. Hit a new post-2002 high in that late June move, eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).

NASDAQ

Stats: +17.97 points (+0.72%) to close at 2502.82
Volume: 2.147B (-12.21%). Volume was lower but still well above average as NASDAQ continued its breakout run. Lower trade is not a bad thing in some situations. January NASDAQ volume is strong with only one below average session. There has been a lot of ongoing accumulation and the breakout midweek moves were very strong on trade. When you have a week of strong trade you don't get too picky about whether it was lower on a particular session as long as it remains solid. That is the case with NASDAQ. Solid upside trade, solid price/volume action.

Up Volume: 1.483B (-162.445M)
Down Volume: 647.548M (-125.452M)

A/D and Hi/Lo: Advancers led 1.66 to 1. Breadth was not as strong as on Thursday, but it was not just a large cap session as NASDAQ 100 gained just 0.54%.
Previous Session: Advancers led 1.94 to 1

New Highs: 104 (-47)
New Lows: 5 (-37)

The Chart: http://www.investmenthouse.com/cd/^ixic.html

Another solid session for techs as they continued their breakout move to a new post-2002 high. Volume started jumping Tuesday as NASDAQ ran in place, trying to get some footing. It continued to build as it started higher, then surged as it made the break on Thursday. A good week with leadership starting the action early, volume moving higher on the gains and holding higher, and some nice breadth after several 1:1 sessions on gains (the large caps started the move and now it is spreading out to all techs). Another upside session or two and then it likely gets some profit takers pushing in to the picture. If we see that move we will be taking some money off the table as well, but letting some positions run.

SOX (+0.03%) recovered from an AMD-induced gap lower, but it was no barn-burning session. That is okay. SOX broke through some resistance Wednesday with a strong move but it did not join in the Thursday NASDAQ breakout. Even as such, it is not a bad move because it tapped at the 10 day EMA on the Friday low and then recovered, kind of a 2-day handle to a 7 week cup. This is good shakeout action that is setting it up for the next run higher.

SP500/NYSE

Stats: +6.91 points (+0.49%) to close at 1430.73
NYSE Volume: 1.526B (-8.69%). Lower average volume was a bit disappointing because unlike NASDAQ, NYS volume has been less than stellar on this test and rebound. Money has moved out of the NYSE indices, but it has not abandoned it. Indeed Thursday there was some accumulation. Overall, however, NYSE price/volume action is indicative of a weaker market sector, one that is tagging along versus forging ahead as SP500 did during the July to December run.

Up Volume: 1.05B (-126.124M)
Down Volume: 457.476M (-17.754M)

A/D and Hi/Lo: Advancers led 1.97 to 1. Still impressive as once more the small and large caps worked together to close out the week.
Previous Session: Advancers led 2.38 to 1

New Highs: 173 (-27)
New Lows: 4 (-12)

The Chart: http://investmenthouse.com/cd/^gspc.html

SP500 hit a new closing high Friday, just missing the post-2002 record from December (1431.83). Not showing a ton of strength, more like riding NASDAQ's coattails. Right now those are some strong coattails. It will be interesting to see how SP500 handles the December high, but good momentum as it follows NASDAQ indicates it will at least crack through.

SP600 (+0.74%) continued its rally as well after bouncing off the 90 day MA to start the week. A game recovery, but still well off the early December high and still below the lower high made in late December. Backing off and looking at the pattern over the past year this action could be the formation of a handle to a cup base that stated in May 2006. It has made a long bounce off the bottom of the 'handle,' and that often creates a problem with the breakout; typically that is resolved with another test that puts in a higher low. From there you get the breakout. We will see how this rather toppish look over the past two months pans out, but if it does make that higher low and then we will be on breakout watch. Now if SP600 breaks out after this action that would be a big indication of an improving economy as 2007 continues.


DJ30

The blue chips continued higher, moving to a new closing all-time high. Volume was up, above average for the second session. DJ30 simply refuses to give up now that its tech components are alive and helping out the financials. In this market that is a powerful combination, and it helped rescue the Dow from its choppy period to end 2006.

Stats: +41.1 points (+0.33%) to close at 12556.08
Volume: 256M shares Friday versus 261M shares Thursday.

The chart: http://www.investmenthouse.com/cd/^dji.html

TUESDAY

Long weekend with the King holiday Monday. Stocks held up well going into this long weekend, indeed posting another solid rally session after fighting off an early session selling attempt. Can it continue? Sure. The breakout was solid as the new leadership flexed its muscles. It showed no indication it was tired Friday and has the momentum to continue higher though a long weekend can cause foggy investor memories as to just why they were so gung ho the prior week.

There is a boatload of economic data this week: several regional PMI reports; PPI; CPI; housing starts; sentiment. Even with all of that the primary focus will be earnings. The season got underway last week but this is the week things really get interesting as more technology reports (e.g. BRCM) and that will be the near term force on this move by NASDAQ. Longer term NASDAQ is looking for an improving economy and thus earnings situations; thus the breakout. That longer term action is buffeted near term by other events such as earnings. Thus, if we get more of an upside move on this rally we will ride it until it starts to waffle. Then we will book some of the gains on those positions that have built up nice returns.

As noted Thursday, many solid, leader stocks began their moves before NASDAQ started its breakout move. Many have not paused on this move higher similar to NASDAQ. Thus many are not in position to provide us new entry points. A bit more upside, we take some of the gain off the table and then wait for the test. Then we can look to pick up the strong leaders as the come back up off of those profit-taking pullbacks.

One thing we can always consider after a strong run are some call sales against stock positions we own. We anticipate just a modest pullback, so a call sale is problematical. If a stock has gone ballistic, however, it will tend to come back harder and we can look at a call sale there. Indeed we like those because the drops are typically quick and we can make the sale and then buy it back after a few downside sessions send our stock to support. This is a great way to pick up some extra 'rent' money on a stock that is ripe to pullback. We sell the call (typically at or slightly in the money to get a good premium and the current month or the next month), let the stock fall to near support, then buy it back. The difference between what we sell it for (selling high) and then buy it back for (buying low) is the cash that goes into our account. It is a sweet deal; renting out your stock when you know it is going to start to struggle and make those inevitable pullbacks to support.


Support and Resistance

NASDAQ: Closed at 2484.85
Resistance:
2493 is an interim peak from February 1999
2523 is price resistance November 2000

Support:
2471 is the December 2006 high
2468.42 is the November 2006 high
The 50 day SMA at 2424
The 50 day EMA at 2413
2412 from June 1999 low
2384 is an interim peak from January 1999
2379 is the October high.
2376 is the April high, the former post-2002 high
2368 is the early October handle high.
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
2316 from interim tops in January and March 2006 trading range
2300 represents some price support

S&P 500: Closed at 1430.73
Resistance:
1432 is the December 2006 high
1444 from February 2000
1475 from peaks in December 1999 and January 2000

Support:
1425 is an interim high from November 1999
1419 is the July up trendline
1408 is the November high
The 50 day EMA at 1402
1401 is a low from April 2000
1390 is the October high.
1389 is a low from November 1999
1378 is a low from May 2000
1371 to 1373 is the December 2000 peak and the January 2001 peak
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February
2002 low at 1360.

Dow: Closed at 12,514.9812556.08
Resistance:
Remains roughly 8.5% above the 200 day SMA. It has been choppy after hitting that degree of separation in late October, but is has not sold off.

Support:
12,499 is the December intraday high.
12,361 is the November 2006 high
The 50 day EMA at 12,285
October high is 12,167
11,986 is price support from mid-October and the early November low.
11,865 from the early October consolidation
11,750.28 is the pre-2000 all-time high

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

January 16
NY Empire State PMI, January (8:30): 20.0 expected, 23.1 prior

January 17
PPI, December (8:30): 0.6% expected, 2.0% prior
Core PPI (8:30): 0.1% expected, 1.3% prior
Net foreign purchases, November (9:00): $82.3B prior
Industrial production, December (9:15): 0.1% expected, 0.2% prior
Capacity utilization, December (9:15): 81.8% expected, 81.8% prior
Crude oil inventories (10:30): -4.99M prior
Fed Beige Book (2:00)

January 18
CPI, December (8:30): 0.5% expected, 0.0% prior
Core CPI (8:30): 0.2% expected, 0.0% prior
Housing starts, December (8:30): 1.575M expected, 1.588M prior
Building permits, December (8:30): 1.510M expected, 1.513M prior
Initial jobless claims (8:30): 299K prior
Leading Economic Indicators, December (10:00): 0.2% expected, 0.1% prior
Philly Fed, January (12:00): 3.0 expected, -2.3 prior

January 19
Michigan sentiment, January prelim (10:00): 92.0 expected, 91.7 prior.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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