Stocks Higher, Though without Much Conviction

The Dollar risk trade continued to move US markets at midweek, as the major averaged struggled to gains in collusion with a weaker dollar. By far the biggest move of major stocks was by Apple (AAPL), which gained 7.93 (4.18%) on rumors of an early unveiling of its tablet computer, seen as a competitor to Amazon's Kindle and other so-called electronic book readers. Elsewhere, the mobil internet sector moved mostly higher in concert with Apple's big upswing.

Overall, however, the session was dull, with stocks falling early and only tacking on gains in the final hour. The S&P and NASDAQ spent almost the entire day in the red, while the Dow held a positive position for much of the day. In the final analysis, however, stocks moved higher only when the dollar index began to deteriorate after 2:00 pm, breaking off the general trend of the week.

Dow 10,337.05, +51.08 (0.50%)
NASDAQ 2,183.73, +10.74 (0.49%)
S&P 500 1,095.94, +4.00 (0.37%)
NYSE Composite 7,067.62, +11.36 (0.16%)

Advancing issues beat decliners, but by a very slight margin, 3374-3045. New highs retained their edge over new lows, 185-58, but the margin continued to exhibit weakness, declining for a fifth straight day. Volume was down again to the level seen on Monday, one of the lowest in months, adding some fuel to the bearish argument. The general movement of the markets has been sluggish since the triple tops made last week. Since then, indices have traded in a "no-man's land" with a slightly negative bias, all signs of a tired market that has made tops and should continued to vacillate lower. There needs to be a catalyst to move stocks forward, though none seems to exist. With the backdrop of a possible unwinding of the dollar carry trade, it's doubtful that any significant move higher will be made before the year's end. Stocks are fairly valued - some say overvalued - at the present. A 4-8% decline on fundamentals and profit-taking might actually be helpful heading into the new year.

NYSE Volume 4,684,984,500
NASDAQ Volume 1,837,168,375

Despite weakness in the dollar, commodities continued their downtrend, with crude oil down another $1.95, to $70.67. Oil fell for the fifth day in succession. Gold dropped as well, losing $22.40, to $1,121.00, off nearly $100 since last week. Silver dropped 63 cents, to $17.18, in a full retracement of its upsurge since October.

New unemployment claims will be in focus prior to the opening bell on Thursday, with expectations that fewer than 450,000 Americans signed on for unemployment benefits in the most recent week. If the recent trend holds true, it could make for a difficult day for stocks, as any good news seems to push the US dollar higher, and stocks lower.

One bit of economic news on the day that was slightly overlooked, yet helped stocks out of the red early, was wholesale inventories climbing 0.3% in November, breaking a string of declines, though that news could be discounted by the advent of the holiday season, which usually encourages higher inventories. Though the move was slight, investors viewed it as modestly positive.

There are significant crosswinds making trading difficult, a condition which has existed for more than a month. With so much uncertainty and conflicting signals, traders have become quite nimble, entering and exiting positions with grand alacrity.

Strong Dollar Whacks Stocks, Metals

The continuing saga that is the unwinding of the risk-carry trade on the back of the weaker US Dollar continued today in earnest as the greenback strengthened against a basket of world currencies, most notably, the Euro and British Pound. As strength in the dollar causes speculators who used the currency as free cash as it was falling to sell stocks and cover, US markets took a decidedly negative turn on Tuesday. Also adversely affected were the precious metals, which continued their quite precipitous decline.

Besides the US Dollar story, there was little else to move markets, although a report of declining same-store sales from McDonald's (MCD) and an earnings warning from 3M (MMM) helped push the Dow lower.

Dow 10,285.97, -104.14 (1.00%)
NASDAQ 2,172.99, -16.62 (0.76%)
S&P 500 1,091.93, -11.32 (1.03%)
NYSE Composite 7,056.26, -99.47 (1.39%)

Declining issues overwhelmed advancers, 4488-1987, a measure of more than 2:1, while new highs beat new lows, 217-51, with the margin now having declined for the fourth straight session from a high of 341 to today's 166, or, by more than half. Should the high-low indicator continue to weaken and eventually turn negative, the chances of a severe downturn would increase proportionately. As it is presently, the indicator is flashing only a slightly negative sign, though taken together with other indications, the market may be already past a turning point to the downside.

Volume remained consistently low, as traders seem to have already headed out of town for the holidays. Speaking of which, there are only 16 shopping days left until Christmas, and thus far, retailers have not offered any encouragement. The American consumer is spending with rarely-seen frugality this season, and the numbers may not even be good enough to surpass last year's dismal sales figures.

One caveat remains in place concerning holiday retail sales. Even though last year's figures were horrid, they may have been better than they should have been, given that the stinginess demonstrated by the banks was just beginning to take hold. More consumers were negatively affected in terms of credit during 2009 than prior to the shopping season of 2008. The financial collapse was only then a month or two old, so there was still a good deal of uncertainty and skepticism concerning the true depth of the crisis. It was only in January and February that the real impact of the financial crisis became real for many people. Bear in mind that stocks didn't bottom until March of this year, and the clanging impact of that bottoming is still resonant.

NYSE Volume 5,421,175,500
NASDAQ Volume 1,916,778,500

Commodities fell victim again to the stronger dollar, which, in the long term, is positive. Oil was lower by $1.31, closing at $72.62. Talk of testing the $70 level has been bantered about, but that is nothing but a number. The real test for oil will not occur until it approaches $65, and a stronger US Dollar should provide sufficient impetus to push it through that level down to more reasonable valuations. Yesterday, Saudi oil minister Ali al-Naimi proclaimed that the price of oil was "perfect" at $74/barrel. Today, he is likely a little less sanguine.

Gold dropped $20.60, to $1,143.40, though it has traded lower - down another $15 - after the official print at 1:30 pm. Silver was hit likewise, dropping 58 cents, to $17.79. Nearly every commodity price was lower on the day, with just corn and natural gas bucking the trend.

With just 16 trading days left in the year, the two key dates are next Friday, the 18th, which is a quadruple-witching day for options expiration, and the 31st, the final day of trading for the year. With Christmas and New Year's Day falling on Fridays, the year will end with two short weeks. The 24th will be a morning session only, with the trading floor closing at 1:00 pm. New Year's Eve, the 31st, will be a full trading session.

Bernanke's Remarks Quite Revealing of Future Fed Policy

Federal Reserve Chairman Ben Bernanke reiterated previous comments and provided even more clues to future policy for the nation's central bank. Throughout his prepared remarks to the Economic Club of Washington, Bernanke hinted at a tightening of policy in the future, though he was resolute in never using qualifies such as "near" or "short", keeping any anticipated federal funds rate hike at arm's length, at least. He also mentioned, at various times, that the Fed had other means for reigning in inflation, not limited to rate adjustments, such as repurchasing agreements and liquidation of some assets on the Fed balance sheet.

The improvement in financial conditions this year and the resumption of growth over the summer offer the hope and expectation of continued recovery in the new year. However, significant headwinds remain, including tight credit conditions and a weak job market. The Federal Reserve has been aggressive in its efforts to stabilize our financial system and to support economic activity. At some point, however, we will need to unwind our accommodative policies in order to avoid higher inflation in the future. I am confident we have both the tools and the commitment to make that adjustment when it is needed and in a manner consistent with our mandate to foster employment and price stability.

-- Federal Reserve Chairman Ben Bernanke addressing the Economic Club of Washington

The mopping up of excess liquidity has likely already begun, sufficiently demonstrated by recent moves in currency and commodity markets. On the first day of trading for the week, gold was hard hit early in the day while stocks held onto fractional gains all morning. Following Bernanke's remarks, the markets began to unwind, falling off their highs (up more than 50 on the Dow) to register in the negative as the day ensued.

Gold and silver managed to pare losses, and while the US Dollar was lower against most currencies, it was not by very much as the Euro continued a strong run against the greenback. Stocks continued to struggle along, as they have over the past three sessions. The indices put in hard triple tops on December 2, 3 and 4, and those intra-day high levels have been, and will continue to be, difficult levels to overcome.

Contributing to the weakness is a fairly obvious short-term overbought condition of stocks and the coming end of the calendar year. Many professionals have already locked in substantial gains prior to the month (indeed, many fund managers were through at the end of October) and trading volumes have been thin. Profit taking seems more the order of the day than actual search for value or the staking out of new positions.

Dow 10,390.11, +1.21 (0.01%)
NASDAQ 2,189.61, -4.74 (0.22%)
S&P 500 1,103.25, -2.73 (0.25%)
NYSE Composite 7,155.73, -26.98 (0.38%)

Simple indicators were slightly skewed to a positive bias, with advancing issues outperforming decliners, 3380-3103. New highs finished ahead of new lows, 352-49. Volume was at the low end of the recent range, and, in fact, among the lowest trading volume of the past two months, another sign that overall market participation is on the wane. Similar conditions are being reported on options exchanges.

NYSE Volume 4,780,842,500
NASDAQ Volume 1,894,192,500

Commodities continue to slide, with oil down to 2 1/2 month lows, down $1.54, to $73.93. Gold, which was down as much as $29 during the day, fell $5.50, to $1,164.00. Silver was down 14 cents to $18.38, though, like gold, losses were far greater earlier in the session.

Most of the indications currently in play are calling for nothing greater than sideways trade, which, by itself, puts pressure on the downside. With the general consensus that the markets are tired and trading slow, the potential for some spillage is evident. If the current short-term climb in the dollar continues, spurred along either by better US economic news or a flight to currency safety, the bet for stocks is presently neutral to lower. Chasing performance at these elevated levels goes against the most fundamental tenet of investing: buy low, sell high.

It's obvious that the professional traders are, or already have been, selling.

Grand Jobs Number Rally Spoiled by Risk Trade

When the November Non-farm Payrolls were announced at 8:30 am, coming in far better than even the most wide-eyed optimist could have anticipated (a loss of only 11,000 jobs, when the expectations were for a loss of 125-150,000), the various futures markets exploded to the upside signaling a higher open and the beginning of what should have been an outstanding rally in stocks.

While stocks initially responded, with the Dow up more than 150 points at its zenith, the US Dollar was also busy rallying against foreign currencies on the positive news. Just before 11:00 am, stocks had begun to slip, and before noon, they were in negative territory. In all, the Dow swung a full 200 points, registering the lows of the day at a 50-point loss.

Not only were the November jobs numbers staggeringly positive, but October's figures were revised as well, reflecting an improving unemployment picture in the United States. The official unemployment rate also dropped, from 10.2 to 10%, not an enormous movement, but one which offered a glimmer of hope as the year and the decade draws to a close.

However, the risk trade was being unwound by the good news, which is just one of the evil elements to dealing in free cash. Once the money begins to cost more, the game must end quickly, and, as is the usual case, with a good deal of messiness along the way. Thus, we are now encountering a condition in which the more good news is announced concerning the US economy, the worst it will affect stocks, if the dollar is a beneficiary of the news. In more mundane times, stocks improved in price as the dollar gained value. In the risk trade, the opposite is true. Stocks purchased with free, or declining money, go higher. The net result is a zero sum, though the feeling along the way is euphoric. Obviously, such a condition cannot maintain indefinitely, and today was just another part of the great unwinding.

While stocks managed gains, they were paltry compared to what the would have been under normal circumstances.

Dow 10,388.90, +22.75 (0.22%)
NASDAQ 2,194.35, +21.21 (0.98%)
S&P 500 1,105.98, +6.06 (0.55%)
NYSE Composite 7,182.71, +25.66 (0.36%)

Simple indicators reinforced the overall trade. Stocks were, at the high, more than 5-1 in favor of advancers, but managed to finish the day with just better than a 2-1 edge. Advancers were better than decliners by a score of 4508-1991.

NYSE Volume 6,935,438,000
NASDAQ Volume 2,237,404,500

Taking the most significant hit was gold, losing $49.30, to $1,169.00, and even another $12 lower after the official 1:30 pm close. Such was the case with silver as well, which dropped 61 cents, to $18.52. Oil fell 99 cents, to close at $75.47 per barrel.

The perversity of the risk trade is such that it will do damage to assets of all kinds as it is unwound, despite the true value of those underlying assets. It's a simple proposition. As the dollar rises, speculators must cover their positions, and do so by selling assets, causing them to fall. Just as they rose artificially as the dollar weakened, they will fall without any regard to fundamental value as the dollar rises. Eventually, an equilibrium will be reached when the trade is fully unwound, which could be a matter of months, depending on hedges and various other financial games, and there will more than likely be a few hedge funds which blow up in the process, though they will likely be small (we hope).

In the end, there will be more bargains for the patient, who wait out the end of liquidity and invest in appropriately undervalued assets. It's not going to be very pretty. Good news will turn stocks South, sometimes, and bad news may send them soaring. It's a very difficult trading regimen for the average investor to fathom. Surely, more than a few home traders will be scratching their head on today's abrupt turn-around, but that's what we have currently and we must live with it.

Maybe the best advice of all is to take profits and wait it out. There should be more rational investing periods in the future.

This one is not.

Fear Overwhelms Market in Final 1/2 Hour

After hugging the flat line for almost the entire session, investors took to the sidelines in the final 1/2 hour of trading on Thursday in advance of Friday's pre-market November Non-farms Payroll report. Stocks had held up well through most of the session, even in light of a poor reading from ISM Services, which slipped back from expansion to decline in the course of one month, dropping from 50.6 in October to 48.7 in November.

That initially caused some slippage at 10:00 am when the report went public, but stocks quickly regained their footing and vacillated along the break even mark for most of the day afterwards. Prior to the opening, investors received good news on employment, as the Labor Dept. reported another decrease in initial unemployment claims, dropping to 457,000 for the most recent week.

Other news was mixed, though mostly negative. Productivity was revised downward for the third quarter from 9.5% (which was a bit unbelievable) to a more tepid 8.1%. Retail sales from a wide swath of national retailers was horrible, however, with many of the top mall stores reporting November sales down anywhere from 2-20% from a year ago. The combined figures showed a decline of 0.3% from last November, a horrible showing, considering last year's sales were down 7.7% from 2007. The only area showing any strength were discounters, though not all of them were posting positives.

These numbers reflect a growing concern that the entire recovery has been built on liquidity, the main beneficiaries of such largesse being the banks and Wall Street. As such, it's no surprise that while Main Street's interests wither and die, stock race higher and banks - like Bank of America - are able to find the means to pay back all $35 billion in TARP funds doled out by the feds last year.

Consumers are not spending as though times are good. Clearly they are not and this is being reflected in poor showings at the mall and department stores during the holidays. Even though Black Friday and Cyber Monday offered some hope, beyond those high promotion days, the US consumer seems already hunkered down for the holidays, intent on not splurging and running up more debt. The simple fact of life is that many consumers have no more credit with which to spend, either having reached their limits, already defaulted or had their lines reduced by the ever-popular banks and credit card companies.

Cracks are beginning to appear in the media's recovery story everywhere, though the most notable statement on the financial condition of the world can be found in the price of gold, which continues to reach new highs as a put against all fiat currencies.

Today's setback for equities should not be taken lightly. There are many indications that the US recovery is not as robust as many would like to believe, and, as goes the US, so goes much of the rest of the world. The hardest hit areas will be in developed nations such as Europe and Japan. The dislocations caused last week by the cries for help from Dubai may have been the canary in the coal mine, with more horrific debt stories still to come.

Time will tell, but today's market response in advance of November jobs data is not encouraging.

Dow 10,366.15, -86.53 (0.83%)
NASDAQ 2,173.14, -11.89 (0.54%)
S&P 500 1,099.92, -9.32 (0.84%)
NYSE Composite 7,157.05, -65.37 (0.91%)

Simple indicators, which reverse course in the final hour of trading, underlined the sell-off in graphic detail. Declining issues outpaced advancers, 4235-2215, a nearly 2-1 margin. New highs exceeded new lows, 448-90, though those figures are highly suspect due to the level of late-day selling. Most of the highs were reached early in the day and erased in the late portion of the session. Volume was not dramatic, holding at the usual levels. The one caveat is that the last time sellers beat down the averages in advance of a jobs number - on October 1 - the report came in as expected and the indices quickly recovered to their previous highs.

This time around, the market is looking for a loss of just 125-150,000 jobs during November, though whispers have circulated suggesting only 100,000 jobs lost for the month. Any number under 100,000 would surely repudiate today's late-day selling and spark a rally on renewed confidence, though it appears that the gloom and doom crowd has thus far had their way. Tomorrow's Non-farm Payroll Report and the official unemployment rate will be released at 8:30 am.

NYSE Volume 5,517,375,500
NASDAQ Volume 2,011,226,125

Oil once again finished lower, losing 14 cents, to $76.46. To the surprise of nobody, gold gained again, up $5.20, to $1,218.20. Silver did not respond in kind, losing 22 cents, to $19.11. Copper and platinum were likewise priced lower. Gold has truly set its own course.

Almost unnoticed was the US dollar trade, which was stronger against the Yen and Pound, but weaker against the Euro, resulting in a small gain on the Dollar Index. That also helped the bears beat down stocks by limiting the risk (or risk-free, as it should be identified) trade off a weaker dollar. should the dollar resume its decline, stocks would once again become the investment of choice, consequently trading higher.

Not all, but much will be revealed before tomorrow's opening bell.