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Remember the year before that in November of 2003? That rally was in part, motivated by President Bush’s “mission accomplished” photo op on the air craft carrier. That calmed the public, since many were worried at that time that the Iraq affair would turn into an ugly, tragic, and expensive military boondoggle without a clearly defined and winnable mission. The day after Thanksgiving air craft carrier speech put everyone’s minds at ease that it was in fact, “mission accomplished”, and the stock market rallied. A year end rally is even more of a sure thing this year, because (as everyone knows), this is a year, 2005, that ends in a “5.” And everyone knows that the “5” years are up years in the stock market. The market is about even so far this year, and since it's time for the year end rally, well, can I make it any easier for you? Just call your broker, or log on and buy stocks, because this one is a lay up. You might as well spend the stock market profits now, because this year end rally is a sure thing. Now we must deal with the matter of picking the stocks. You want a stock that has good “up-go-edness.” You could sift through tens of thousands of stocks, but why waste time? Just go with the blue chip with the most up-go-edness – that would be Google. If you want more of a value play, try Sandisk or Apple Computer. Or even less risky is the Dow Transportation ETF (IYT). These all have good “up-go-edness.” If you want to do your own research, tune into Cramer on CNBC and do whatever research you would feel is appropriate for your “investment” by taking his advice. Could I make it any easier for you? This year end rally is a sure thing! OK, you want to confirm this with a few charts? Here goes. Dow Jones Transportation Index Below is a 3-year weekly chart of the red hot Dow Jones Transportation Index. As you can see the pattern is one of an ascending triangle with a recent breakout. Using measurement principle, the transportation index should reach a vertical target that is about as tall as the double blue line depicted in the chart. That should take the transportation index to about 4,600 or more.
Is it “Mission Accomplished” for the beginning of the year-end rally for the Transportation Index? Maybe not! It is ominous that the most recent rally of more than 10% in 3 weeks has not included weekly trading volume that was more than an average week's volume. An examination of the Dow transports’ component stocks shows that this index can be easily moved by many illiquid stocks, many of which trade less than a million shares in a day (see for a conspiracy theory). The transport index moved to a new high on Wednesday, yet as of Wednesday with 60% of the week completed, the Transportation index has traded less than 45% of a week's average volume. But you must not worry, because the year-end rally is a sure thing. Nasdaq 100 Index The Nasdaq 100 has met its December 2004 highs achieved after the election of George W. Bush. This year, the Nasdaq 100 has made these highs with a dose of high volume of the Nasdaq 100 ETF (QQQQ). Heavy volume of the quadruple Q’s seems to come into the market at key technical levels, and 40 is no exception. Want to review another conspiracy theory? (See article). Whether we get our year end rally should be tipped off by whether the quadruple Q’s can break above 40 in a decisive manner. This is important regardless of whether it gets there as the result of a conspiracy or as a result of free market forces. We should know whether we will get our year end rally soon by whether the Q’s find support at 40, or whether they drop back and remain in their trading range.
NYSE In order to make a bearish point, I went through the universe of momentum indicators that would paint a bearish picture for one of the market leading indices, the New York Stock Exchange Index. It took awhile, but I found a couple. But why make bearish points when a year end rally is a sure thing? These volume and momentum divergences don’t mean squat, because a year end rally is a sure thing!
Russell 2000 The strength in the Dow Transportation index and NYSE index are diverging a bit from the other recently weaker indices. Consider the Russell 2000 small cap index. The one year daily chart suggests that the Russell is struggling with the top of a resistance trendline. It could break decisively above the trendline, but given the sharp nature of the rally so far, at least a consolidation, if not a healthy correction would be in order for the Russell. The recent daily action looks erratic and not consistent with a sustainable rally. I’d even go so far as to suggest that the sharpness of the rally smells like short covering. But this is no matter, because the year-end rally is a sure thing...Isn’t it?
Similar emotional-looking action may be found in the mid-caps. The risk to reward ratio doesn’t look too favorable for buying the mid-cap index at 713 as of Wednesday evening. Yet this conclusion would only apply if I didn’t know that there was going to be a year end rally. Remember, it’s November and the year ends in a 5! A year end rally is a sure thing, I say.
Similar action erratic and emotional looking action characterizes the recent trading in the S&P 500 index. Similarly, the S&P is at resistance.
So even though the “convincing” evidence (November, of a year that ends in “5”) practically makes a year end rally a “sure thing,” we have the benefit of resistance trendlines to confirm whether or not a further rally will occur. Given that the major indices are right at their resistance trendlines, the year end rally should be confirmed or refuted soon by breaks or continuances of the trendlines. I believe there is one more piece of important evidence that may advance us as to whether we will get a year end rally, and that is the action of Cisco. This is an important blue-chip stock that has barely held support at 17 since July of 2004. There was a recent rally that took Cisco from about 17 to 17.8 prior to their earnings announcement Wednesday, after the bell. The stock sold off after hours, yet based on the Wednesday evening action, the sell off was not enough to threaten its long-term support at 17. How the overall market reacts to Cisco’s (initially) negatively received earnings report on Thursday, will provide insight as to whether the year end rally is actually a sure thing. More on that topic is below in “Today’s Market.”
Today’s Market It came practically right on schedule. The 2 p.m. rally within the year end rally within the year that ends in a 5 rally. Stocks staged a strong high volume rally today while GM and Fannie Mae disclosed more honest mistakes of the accounting variety, and Cisco disappointed with their quarterly earnings report. Cisco is holding the important support level at 17. Intel increased their dividend and announced a share buyback. All major indices were led higher by the Dow Jones US Transports which is the index with the best up-go-edness. It is also the easiest index to “move,” given the small number of stocks with several that are illiquid. But it doesn’t matter what is causing the market action; it only matters where you are positioned. With the bond auction completed, bonds rallied from an extremely oversold position. Oil was true to its point-and-figure descending triple bottom breakdown and dropped, and now is showing a vertical price target price of $50 per barrel or less. This may be absurd on a fundamental basis; but what do I know, and who am I or you to disagree with a market trend?
It appears that a drop in oil price and a stock market rally has boosted consumer confidence as shown in today’s government statistics, and this is leading to optimism about the Christmas shopping season that has not even began. The shopping season better be good because the retail sector has already discounted the goodness. That is not to say that even more goodness cannot be discounted. And now bonds have rallied two out of three days. Lower interest rates, lower oil, and a higher stock market – the US consumer trifecta! The rally is here right on schedule. No brainer….right? While gold and silver have seen some turbulence (gold, I must admit is also in a bearish point-and-figure), it is significant that platinum, a less followed precious metal, has broken out in a healthy cup-with-handle manner. I do think that the next big move in precious metals will be up. The 5-year chart of platinum clearly shows a healthy trend, and my gut is telling me that once the trading games are overwhelmed by market forces, gold and silver will go much higher.
Gold Corp. received an analyst downgrade, and for what it is worth, I decided to add to my existing position. After the close, Dell’s results were well-received. I finished dinner, and Dell was down. Let’s see if the QQQQ’s can hold 40. Of course it will. This market is easy right? Have a great evening! Martin Goldberg
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