Thursday, December 6, 2007
With The Wind At Its Back
by David Yu
The market has the wind at its back. A slew of economic data that seemed to be hitting all the right spots.
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The Labor Department reported jobless claims decreased by 15,000 last week, which was the lowest since the beginning of September.
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ADP payroll services reported 189,000 new jobs added in November.
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The Labor Department reported an increase in productivity and a decrease in wage pressure.
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The ISM reported an expanding service sector performance reading of 54.1. While readings above 50 indicates expansion, this was believed to be just the right number that supports the Fed's further rate cut.
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The factory orders for October increased by 0.50%.
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Government coming to the rescue of subprime mortgagors.
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The Dollar bounced back with a vengeance while previously released data showed economy expanding at nearly 5% and the inflation appeared statistically benign.
Come Tuesday, there's another 0.25%-0.50% expected rate cut by the Fed as icing on the cake. Over a short span of just 8 sessions, the Dow had gained more than 800 points, and the S&P had gained more than 6% from the November 26 intraday low. The surge of the Dollar against the Japanese yen since November 26 indicates investors' expanding risk appetite -- see the mini Dollar-to-yen exchange rate chart on the upper left as a risk aversion meter.
Both the Nasdaq and the S&P had crossed above their respective major resistance levels at 2700 and 1500. The QQQQ had also broken through the 52.25 resistance that I had mentioned on Monday. And, as short sellers started to unwind their short positions, it opened up a very profitable trading opportunity.
While this show of force is nothing short of spectacular, the fanatic pace of advances on low volume is starting to make me feel somehow apprehensive. I'm not convinced of buying and holding just yet. On a significant upday like this, all 3 major indices ETF's showed only 50%-60% of their 30-day average volume. And, they've been in decline since the market began rallying on November 26.
But that wasn't the only thing that didn't feel quite right. The Nasdaq also hasn't provided its usual leadership role in this rally. The sideway movement of the Nasdaq to the S&P ratio indicates the Nasdaq's relative underperformance (see 30-day 60-min chart - Chart 1 below). The Nasdaq's New Lows also continue to outpace the New Highs by about 2 to 1 today.
Chart 1
Unless the tech-heavy Nasdaq begins to pick up the pace, I'm concerned whether this rally may turn into a techless rally. A techless rally is a legless rally.
And, I wished the Nasdaq's the only quirk. But that wasn't the case. The money flows also appeared quite peculiar. Despite the back-to-back triple-digit climb over the past 2 days, the Dow had actually experienced negative money flows. This had kept the Dow's cumulative money flows in the negative territory (see Chart 2 below). I had to check and re-check the reports a few times to make sure that I read them correctly. In fact, the Dow's negative money flows occurred 7 out of the last 10 days.
Chart 2
The Dow's 4-week simple moving average Money Flows chart (Chart 3 below) doesn't look any better either.
Chart 3
The broadest market index, The Wilshire 5000 Index that incorporates almost all publicly traded companies headquartered in the U.S., also experiences similar negative money flows (see Chart 4 below).
Chart 4
I then turned to AMG Data's latest equity fund cash flows report for validation and found similar patterns of cash outflows. Excluding ETF transactions, equity funds report net cash outflows totaling -$3.301 billion in the week just ended yesterday, 12/5/2007 (see Chart 5 below).
Chart 5
And another $47 billion went into money market funds rather than equities (see Chart 6 below). This was the largest since the inflows of $63 billion in the week ended 11/7/2007, when the 2nd leg of the correction took place.
Chart 6
The market's got everything going for it right now. It has shown the determination to move higher, but it may be lacking the internal strengths (and money) to sustain this current run. With the wind at its back, we'll see how much longer this rally carries on. If this is as good as it gets, then it may be next to impossible to have a near perfect game like this again, where the confluence of all the "just-right" data arriving at just the right time.
I'm still in the holiday getaway mood. I'm not sure if I'd be around this weekend to write. We'll see.
Finally, how 'bout them Warriors for suffering Bay Area sports fans!!! Go Golden State Warriors!
email: dyuguard-2@yahoo.com