Stocks Rally higher , jobs lost , less than expected

Stocks continued rallying just before the closing bell on Thursday, with the Dow dancing on both sides of 10,000 once again, after investors digested better-than-expected jobless claims data and productivity numbers reached a six-year high.
The Dow Jones Industrial Average, which surged over 200 points earlier to top the five-figure mark, was recently up 189 points, or 2%, at 9,991. The S&P 500 gained 18 points, or 1.7%, at 1064, and the Nasdaq was up 45 points, or 2.2%, to 2101.
Initial claims for unemployment benefits fell to its lowest since January. First-time claims fell by 20,000 to a seasonally adjusted 512,000 last week vs. a consensus forecast of 522,000. That's also down from the prior week's revised 532,000. Continuing claims fell to 5.75 million from a revised 5.82 million.
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Boosting markets further were macro figures showing nonfarm productivity grew by an annual rate of 9.5% in the third quarter vs. consensus estimates at 6.5%.
"In these numbers today, we have those that are focused on long-term fundamentals and those that are focused on the short-term trading opportunity both looking for a positive day," says Marc Pado, U.S. market strategist for Cantor Fitzgerald.
In the afternoon, all stocks on the Dow were in positive territory. But Cisco(CSCO Quote), which was adding 3% today following an earnings beat, helped boost the markets. The tech bellwether reported adjusted earnings at 36 cents a share vs. a consensus estimate of 31 cents. In an earnings call, CEO John Chambers gave a hopeful, but cautious, assessment about the economic recovery that had Wall Street cheering.
"John Chambers was successful in calling the bottom last quarter in his markets," says Art Hogan, chief market analyst for Jeffries. "This quarter, he was much more upbeat, not just about the bottom markets but about the middle markets."
Tech stocks were rising in kind, with the NYSE Arca Tech 100 Index adding 2.1% in the afternoon. IBM(IBM Quote) was up 1.2%. Chipmaker Intel(INTC Quote) was ticking higher by 1.8%.
On Friday morning, employment data will again be in focus, as the markets await highly anticipated nonfarm payroll and unemployment rate figures. Analysts anticipate the rate will move higher to 9.9% from 9.8% in September, with 175,000 jobs slashed. With initial claims and ADP figures already in the books, one expert says investors are gaining confidence about what's in store.
"I think part of the selloff from yesterday was about lingering concerns," adds Pado. "So to get some numbers this morning that are supportive of where you had your projections is important."
"Anything over 200,000 [job cuts] isn't going to sit well with people," adds Kenny Landgraf, President of Kenjol Capital Management, speaking of Friday's jobs figures. "It's going to be a volatile day."
CVS Caremark(CVS Quote) was the S&P's biggest decliner, down 21%. Though it beat forecasts in posting earnings at 65 cents a share, the drugstore concern lost billions worth in contracts in its pharmacy benefits segment.
The S&P Retail Index was up 1.5% after a mix of same-store sales numbers came in, highlighted by high-end operators like Nordstrom(JWN Quote) and Saks(SKS Quote) topping expectations.
In other earnings news, Toyota(TM Quote) surprised with a second-quarter profit, while Time Warner Cable(TWC Quote) reported net income of 76 cents a share. Analysts were expecting 75 cents.
Overseas, the Bank of England maintained its key interest rate at 0.5%. After a slide before the announcement, stocks in Europe turned positive. The FTSE in London grew 0.4%, while the DAX in Frankfurt added 0.7%. In Asia, Hong Kong's Hang Seng lost 0.6%, as Japan's Nikkei fell 1.3%.
Crude oil slid 78 cents to settle at $79.62 a barrel. Gold gained $2 to settle at $1,089.30 an ounce.

what company will replace CITI on the Dow Jones ?

With Citi shares trading below $1, the first time since 1970 that a “penny stock” traded on the Dow Jones Industrial Average, it is widely expected that it will be removed from the index.
“The company was added to the Dow in 1997 when it was still known as Travelers, and the last company to be removed from the Dow was AIG last September (when its stock hovered above $1) and was replaced by Kraft Foods.
“It’s also expected that General Motors may be removed from the Dow. GM shares are trading slightly above $1 and there’s speculation it may be headed toward bankruptcy.
“There are other stocks in the Dow that are now a part of Wall Street’s Dollar Menu. In fact, there are currently five Dow stocks trading in the single digit range.
“Who will take their place in the Dow? Mostly likely, another company whose stock is faring better or relatively better in this recessionary environment.
“There aren’t too many of those but if I had to guess, I’d say it would have to be a company with a strong brand name and one that is viewed as influential. Also, one whose shares aren’t trading in the single digits.
“On the technology front, Apple and Google are possible contenders. In the pharmaceuticals/biotech world, perhaps Abbot Labs, Amgen, Bristol, Genentech and Gilead Sciences could be considerations. If terms of other industries and companies, perhaps Monsanto or Amazon?
“Some might argue about the relevance of the Dow as it doesn’t accurately depict what’s happening in the markets because of its limited number of stocks and because it is price-weighted rather than market-value weighted like the S&P 500.
“However, there is still a prestige factor involved in being part of this elite group and any company added would see a boost in volume and possibly price.
“The top editor at The Wall Street Journal, which is published by Dow Jones, decides on changes to the index. It was reported (by Reuters) that they are currently monitoring the situation ‘closely.’
“Who do you think should be included in the Dow and why?”

Dow 4,000 ?

There are few steadfast investing principles. Dynamic markets constantly change and investors must be willing to adapt their strategies. However, one rule we should always follow is to trade with the primary trend. Trying to trade against the underlying current of the market will surely result in losses. Those doing so think of themselves as contrarians. In reality, they are foolish.
For months in my weekly newsletter EPIC Insights, I have repeatedly stated that the primary trend is bearish. When stock markets worldwide hit synchronized lows in November 2008, we were given notice. During the subsequent rally, markets began diverging and raised hopes that the primary trend was changing. This week that hope was crushed. As the chart shows, last week markets pushed to synchronized 2009 lows, on many occasions violated their 2008 lows, and have reinforced the primary trend as bearish:
Index Prior Low Date of Low Recent Low Date of Low New Low?
Dow Jones Industrial 7,552 11/20/2008 7,366 2/20/2009 Yes
Dow Jones Transport 2,989 11/20/2008 2,699 2/20/2009 Yes
NASDAQ 1,316 11/20/2008 1,440 1/20/2009 No
S&P 500 752 11/20/2008 770 2/20/2009 No
Wilshire 5000 7,451 11/20/2008 7,750 2/20/2009 No

FTSE 100 3,781 11/21/2008 3,889 2/20/2009 No
DAX Index 4,127 11/21/2008 4,015 2/20/2009 Yes
CAC 40 2,881 11/21/2008 2,751 2/20/2009 Yes
NIKKEI 225 7,163 10/27/2008 7,416 2/20/2009 No


With a primary bear market, we are unable to predict either the duration or severity of price declines. Instead, we turn to past experiences to guide us. Unfortunately, nothing in the past indicates promise for the immediate future.
For the economy, the current downtrend has already reached levels of prior deep recessions. However, as the storm clouds continue gathering we should expect this downturn to be more severe than any since the Great Depression. With indecisive policymakers who have used all traditional stimulative actions (i.e., interest rate reductions from the Federal Reserve and increased spending from the Federal government), we face an uncertain world with few concrete answers. Having used debt to finance our lifestyles for nearly 60 years, Americans are being forced to reduce debt and curtail spending. This combination should result in more economic malaise over the coming months.
Looking at stock market performance over prior bear markets, as shown in the following table, the picture this time around is equally bleak.
Bear Market Date of Market Date of Value
Market Peak Peak Bottom Bottom Lost Duration
1929 Crash 381 9/3/1929 41 7/8/1932 -89% 714 days
1968-1970 985 12/3/1968 631 5/26/1970 -36% 368 days
1973 -1974 1,052 1/11/1973 578 12/6/1974 -45% 482 days
2001-2002 11,338 5/21/2001 7,286 10/9/2002 -36% 347 days
NASDAQ 5,049 3/10/2000 1,114 10/9/2002 -78% 648 days
Current 14,165 10/9/2007 7,366 2/20/2009 -48% 344 days

While the current bear market has erased 48%, in line with the declines seen in most bear markets, the duration of 344 days is the shortest on record. If you follow the belief that this bear market is unwinding 60 years of excess spending, we should expect the Dow to lose at least 70% from peak to trough and the bear market to last in excess of 600 days. Combining these data points, the market may not bottom until the Dow approaches 4,000 sometime in the next 9 to 12 months.
Finally, most major bear markets do not end until prices have reached bargain levels. This often equaled a P/E multiple near 6-7 and a dividend yield in the same area. Currently the Dow sports an estimated P/E of 11 and a dividend yield of 4.3%. In order to achieve bargain levels, the Dow would need to trade near 4,000.
The picture painted here is very ugly. Most investors have a great deal of difficulty accepting the belief that the Dow could trade to such levels. I hope I am being overly cautious, but fear my analysis will prove correct. With such a drastic selloff predicted, earning meaningful returns will be difficult. Becoming excessively short stocks will provide the opportunity to be forced from your position by unexpected bear market rallies, while going long stocks that seem cheap will lead to losses and frustration as those cheap stocks become cheaper. Instead, I will stick to my core competencies as a value investor and search for cheap stocks that offer limited risk and outstanding return potential. However, I will not buy these shares blindly but will look to use index exposure to hedge all my risks.
Continuing a theme used in last week’s fundamental trade, I advise readers to become more short of the broad market. Last week, we shorted SPDR Trust (SPY) and iShares MSCI EAFE Index Fund (EFA) with excellent results. This week’s trade entails using options on SPY as a means to profit. Using a September 2009 expiration, I recommend shorting the SPY 77 calls (ROQ+IY) and using the proceeds to buy the SPY 77 puts (ROQ+UY) as this week’s fundamental trade. Cover 5% of your portfolio with this trade (six contracts for my portfolio).
By EpicAdv