The S&P 500 ended a five-day winning streak by closing down just a touch on Thursday.  The Dow Industrials gained a little ground thanks to nice gains from Chevron and Exxon shares as crude oil crossed $91/barrel to end the session at $91.51.

For the holiday-shortened week, the markets were closed Friday, the Dow and S&P 500 extended their weekly winning streaks to three; the NASDAQ is up for four straight weeks; mid and small caps are up for five straight. 

Basic material and energy shares were the best-performing groups – the CRB Index extended its winning streak to four sessions and this measure of commodity prices is up 25.81% since Bernanke signaled QE2 was coming in late August.  

Financials were the worst of the six major industry groups that closed down for the day. 

There aren’t many people thinking this market can go down, and the bulls are nothing short of ebullient.   Even those leaning bearish are talking about 5-8% declines at worst and the latest investor sentiment readings have reached multi-year bullish heights.  Investor Intelligence’s advisor sentiment reading now has bulls at 58.8% (highest level since the 2007 all-time market peak when it hit 62%).  Such group-think is a great contrarian indicator.  This time though it’s intensely tough to gauge things with the Fed so determined to keep the stock rally alive. 

Market Activity for December 23, 2010

Jobless Claims

Initial jobless claims fell 3,000 to 420,000 for the week ended December 18, which was in line with expectations.  The previous week’s reading was revised up to 423,000 from the 420K previously estimated – so the upward revisions continue, for the 33^rd of the past 34 weeks in fact.  The four-week average rose 2,500 to 426,000.

Continuing claims fell as the standard issue (the first 26 weeks of benefits) declined 103K to 4.064 million and emergency claims (that extend out to as long as 99 weeks) fell 152K to 4.678 million. 

Bottom line: The story remains the same.  The trend in initial claims has improved as we remain below that 450K level that took so long to break through.  However, this level suggests neither strong nor consistent job growth and with emergency claims still at 4.5 million-plus the long-term unemployment problem persists. 

Durable Goods Orders

Durable goods orders fell 1.3% in November (expected to fall just 0.5%) and follows a 3.1% decline in October, revised up from -3.3%. 

However, the report was actually better than that as orders rose 2.4% when excluding transportation components (better than the 1.8% increase expected).  This followed a 1.9% decline in October, revised up from the -2.7% initially reported. 

It makes sense to focus on the ex-trans figure because it removes the very volatile commercial aircraft component, which slid 53.1% in November – and to illustrate how volatile this segment can be, it followed a 7.1% decline in October and a 112.6% surge in September. 

Autos and parts orders were also down, off by 2.9% last month, marking the fourth month of decline for the segment.

The very important non-defense capital goods ex-aircraft orders reading, which is the proxy for business spending, rose 2.6% in November.  This wasn’t enough though to make up for the 3.6% decline in October; the figure is flat since June. 

Personal Income and Spending

Personal incomes rose 0.3% in November (better than the 0.2% expected) but the vital private-sector wage & salary component couldn’t follow October’s strong 0.5% increase with a solid result, up just 0.1%.

The increase in income was fueled by a 0.7% increase within the proprietors’ income segment (driven by a continued surge in farm income as agricultural commodity prices are flyin’).  Personal income from assets also helped out, rising 0.9% as interest income rose 1.1% for the month thanks to the increase in rates – and December will be another good month for this component.  And of course, government transfer payments also helped as they rose 0.3% for the month.

Personal spending outpaced income for a third-straight month, rising 0.4% (missing the expected 0.5% increase).  The cash savings rate eased back for a fifth-straight month to 5.3% from the 6.3% back in June as households feel better about things thanks to rising stock prices. 

The consumer has delivered a strong holiday season.  Can it last?  The payroll tax rate reduction will certainly help, but higher gasoline prices could sap that stimulus, and a reduced foreclosure process delay will also present a headwind for consumer activity.  (The average number of days past due for loans in the foreclosure process is 475, meaning you’ve got millions in their homes rent-free for 16 months – and one in six of these delinquent borrowers haven’t made a payment in two years.  This has to also be assisting spending results.)

New Home Sales

New home sales rose 5.5% in November to 290,000 at a seasonally-adjusted annual rate (SAAR) following October’s downward revision 275,000 (and just 1K above the all-time low hit in August; it was previously reported at 283K last month).  The results missed expectations even as the November reading came off of that downwardly revised October reading as the estimate was for a 6.0% rise.

The number of new homes for sale fell to a new 42-year low and the months worth of supply figure improved to 8.2 from 8.8 in October.  While improvement, the months worth of new-home supply remains on the high side (30-year average is 6.1 months). 

Also, the new-home market will remain in a very troubled spot as it must contend with distressed properties from the existing-home segment – and we’ll see an increase in foreclosures in 2011 (possibly a rush in the first half as the pipeline is even fatter due to the moratorium from what’s been called “foreclosure gate” -- those cases alleging fraudulent foreclosure processing); adjustable-rate mortgage resets will also haunt the housing market. 

The median price of a new home jumped 8% last month to $213,000, following the 14% slide in October – down 19% from the 2007 peak. 

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Have a great day!

Brent Vondera, Senior Analyst