Tuesday, November 10, 2009

Desperately Seeking Confirmation

Following the new 52-week and 2009 highs set by the Dow Jones Industrial Average on Monday, investors were put into a quandary on Tuesday, one which will likely be resolved at some time this week. The question on the minds of most traders is whether or not the rally has sufficient energy to first, sustain current levels, and, secondly, to move to even higher ground in the immediate future.

In search of an answer to those questions, technical analysis should provide the most propitious resolution. From two to four separate indices should provide either confirmation or counterweight to the Dow's new closing highs. The most important of these is probably the S&P 500, which, on Monday, closed at less than 5 points off its own closing high of 1097.91, which was the level recorded on October 19. It may be splitting hairs, but a close above that is a vital element, necessary to move the overall indices higher.

Next on the list is the Dow Jones Transportation Average (^DJT) which made its own closing high (4045.11) on October 20, but has since backed well off, finishing today more than 100 points lower than that level (3916.91). A certain paradox comes into play with the relation to the Industrials, as their prior peak was on October 19 (1092.19) and was confirmed by the Transports the following day.

So, the Industrials have moved ahead, alone, and seek a partner for confirmation. One explanation is that the Dow moved in solitary fashion as a brief flight to quality and safety, and the fundamentals for the other parts of the market are not strong enough to keep pace. The Industrials are just 30 stocks, most of which are paying high quality dividends - taken together yielding better than 3.5% - whereas the S&P 500 is much broader (500 stocks). The Transportation index is comprised of just 20 stocks, a good number of them airlines, which have suffered badly through the economic downturn and have yet to recover. Thus, the confirmation may be a bit of a stretch at this juncture.

As a proxy for the airlines, consider Priceline.com (PCLN), the travel discounter, which today announced 3rd quarter operating results and blew away estimates, sending shares up more than 30 points (17%) on the news. This company might be more useful in determining the overall market strength of the Transports, being a much more efficient model than the airlines themselves. Also adding to the no-confirmation-needed argument is FedEx (FDX), which projected today that their busiest day this year - December 14 - would also be their busiest day EVER!

While FedEx is a component of the Dow Jones Transportation Index, Priceline.com is not, though maybe it's time for the Transportation index to "get up to speed" with the evolution of technology in transportation. Given that argument, the Transports would have blown through their previous highs and provided confirmation to the lonely Industrials.

Further down the pecking order are the NASDAQ and NYSE Composite, the two broadest measures of the market, both of which reached closing highs on October 19 of 2176.32 and 7222.21, respectively, and have yet to return to those levels, though they are not far off of them.

All of this sets up a very interesting scenario for Veteran's Day, in which the stock markets are open, but all banks and bond markets are closed, so, if one thought stocks were "going on alone" this week, without the aid of economic or corporate reporting, Wednesday will be a real loner. Maybe some of those bond-trading titans will lend a hand over at the NYSE.

On the day, only the Dow finished in the green, though the losses suffered by the other indices were marginal.

Dow 10,246.97, +20.03 (0.20%)
NASDAQ 2,151.08, -2.98 (0.14%)
S&P 500 1,093.01, -0.07 (0.01%)
NYSE Composite 7,126.42, -8.91 (0.12%)

Declining issues finished ahead of advancers, 3594-2180. New highs finished ahead of new lows, 315-85. Volume was low again, a signature of this week's trading.

NYSE Volume 4,508,971,500
NASDAQ Volume 2,010,213,625

Crude oil lost 38 cents, to $79.05. Gold gained $1.10, to $1,102.50, but silver continued to lag, down 26 cents, at $17.23.

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