SUMMARY:
- Holiday sales open big, helping trigger a big oversold bounce.
- Stocks take back what was sold off during the Wednesday and Friday worries over Europe.
- SP500 and NASDAQ bounce back from the middle of the August/October range. Room to run, but not that much.
- Fitch lowers US debt outlook to negative.
- Will the stocks that refused to break down now lead back upside?

Great sales trigger a solid surge. 

Wednesday and Friday helped make last week one of the worst Thanksgiving weeks in a long time. Those days investors appeared worried something worse would emerge from Europe and they sold just in case. On Wednesday the indices suffered 1% losses heading toward the close, but then in the last five minutes of trade 1% turned into 2% to 3+% downside. Friday was not as bad but it was hardly good; the indices sold, pushing them further down into the August/October range.

That made seven straight downside sessions on NASDAQ and SP500. That would leave any market a bit oversold, and when the news about weekend retails sales hit it triggered an upside surge. Buyers jumped back in, taking back what was lost Wednesday and Friday on fears about what might come out of Europe. With nothing nefarious from the Continent and US consumers apparently adopting Tom Cruise’s father’s line in ‘Risky Business’ (sometimes you just have to say ‘what the heck.’ Of course that line was modified later in the movie . . .) thanks to the weekend holiday sales, stocks shot to the upside, gapping higher and holding those gains through the session. Indeed after gapping upside stocks did damn little the rest of the day.

SP500 2.92%. NASDAQ 3.52%. DJ30 2.59%. SP600 4.68%. SOX 3.21%.

The move pushed SP500 and NASDAQ up off the middle of their trading ranges, back toward the top of the August/October range. SP500 has about 30 points to the 1220 range many traders watch while NASDAQ has a series of steps back upside, including last week’s gap down point at 2535 (closed at 2527). More likely NASDAQ moves up to 2600 (June low), but given the selloff you have to watch any possible resistance.

THE NEWS

Holiday Sales Kickoff is Encouraging.

Europe has weighed on consumers. The US economy has weighed on consumers. The ‘Arab Spring’ is not looking so ‘springish.’ Talk is of a dollar collapse when it is no longer the reserve currency. Home prices are down and not going to recover for years. Massive debt. Massive unemployment. Yes there may be indications the economy is at least not diving anymore but it is nothing creating a turn.

We have seen this before. Consumers get to the point where they adopt the ‘Risky Business’ line, with the Tom Cruise embellishment, and just go out and consume. After all, if things get as bad as some are saying out there with 20% to 30% inflation rates then their dollar savings won’t be worth much. I doubt as a group they are thinking that deeply, but the point is after consumers get worn down there are times where they just decide to go ahead and buy to assuage their melancholy.

They were buying for certain. Black Friday sales rose 26%. Thanksgiving Day sales rose 18%, likely do to the rise in the number of stores opening on that day. For the weekend sales hit a record $52.4B or a 16% gain. On average consumers spent $398.62 versus $365.34 in 2010.

Of course the success brought about the next question, is it sustainable? It typically is not, at least at that pace, but historically if sales are good to open the season they are good throughout the season barring something catastrophic that dampens the consumption appetite. Thus it is a positive for economic activity that sales were strong. Even if prices and thus margins were low, inventory turnover is an economic positive. If demand holds businesses will have to stock more goods and that helps manufacturers, shippers, etc. The old economic ripple effect. It rippled right on into stock prices as noted.

TUESDAY

After hours Fitch announced it placed the US debt rating outlook to negative though it did maintain its AAA rating overall. A necessary step to a downgrade but not a downgrade. Futures hiccupped on the news but settled down, seemingly taking the news in stride.

Tuesday more economic data is released with Case/Shiller and its lagging home price index. I believe professor Shiller said recently that housing prices would not recover for five more years; don’t quote me quoting him but it was something in that neighborhood.

Consumer Confidence for November is also out and expected to rise . . . to a whopping 42.5 from the thirties. A move higher but still a recession level reading. Any improvement is welcome and with the economic data improving there is hope stirring, but the stock market is waffling once again and I am very concerned this bump higher in data is squashed when the new year begins.

What we are looking at, regardless of the data, is an oversold bounce in the indices. For now that has to be the assumption until proved otherwise. The indices put in impressive moves to start the week. Plenty of momentum that could continue with SP500 heading back to test 1225 over the next couple of sessions. It either makes the break or turns back down. With the break into the prior range, as noted above, it has to prove it can make the break and make it stick.

We can play that move with some upside though partial positions on the stocks that did not break in the recent selloff that broke the indices down into the prior range. Those are the stronger stocks and we picked up some partial positions in them Monday. We will look for opportunity to pick up a bit more if it presents itself, likely after a bit of a pause given such a strong surge higher Monday. Again these would be more trades than long term buys, but if the pattern is solid, i.e. not breaking down in the recent selling, they are in better position to make solid runs if the market gets a bit of breathing room.

Of course given my view on the legitimacy of the move higher, we are also looking at downside plays. There are more than a few for the report though over the next day or two all downside plays likely set up a bit better with a continued bounce higher. If the market cannot just shake off this fall back into the trading range then the stocks rebounding back to resistance will naturally set up as downside plays. The break back into the range is disconcerting for the upside, and it suggests the market is back into range trading in that range at best. That makes the next few sessions quite important for the upside; if the indices cannot make the break back through the top of the range then look for a test of the bottom of the August/October range.