Why the Time Before Thanksgiving Makes Market Watchers Nervous

“Calling the Trend” Column, by George Leong, B. Comm.

Markets paused on Thursday following six straight days of gains. The profit-taking was expected given the rally and overbought technical condition. During the six-day rally, trading volume was somewhat lighter than average, perhaps an indication of investors sitting on the sidelines and waiting for direction. For a sustained rally, you want to see higher volume as an indication of wider buying appeal.

A technical positive was the S&P 500 breaking 1,100 last Wednesday. The ability of stocks to rebound over the last few weeks, after being down as much as 10% for the Russell 2000, is positive. In fact, the NASDAQ, S&P 500, and Russell 2000 are back to 52-week and multi-year highs. The DOW also reached a new 52- week high last week.

While all seems fine as far as the rally goes, I still get a sense that stocks may be ahead of themselves.

Now, as we proceed towards Thanksgiving, all eyes will be on the malls and on consumer spending. This is a critical period for retailers and could help to dictate GDP in the first quarter of 2010. The jobs report, along with continued weakness in the housing market, will likely continue to make consumers think twice about spending. I feel that consumers may hold back this holiday season and wait for perceived bargains to follow in January, as retailers deal with potential bloated inventory.

Watch for the October Retail Sales on Monday, along with numerous reports from retailers, which have largely been mixed. Super retailer Wal-Mart Stores, Inc. (NYSE/WMT) reported decent results, but there have been numerous instances of mixed results. Abercrombie
& Fitch Co. (NYSE/ANF) beat earnings estimates, but saw its sales fall 14.6% year-over-year and its third-quarter same-store sales plummet 18.0%. Macy’s, Inc (NYSE/M) estimated that Q4 EPS was well below Street estimates. We feel that specialty retailers will continue to struggle, while discounters and big-box stores will fare the best.

The key over the next week will be the October same-store retail sales from companies, along with Retail Sales on Monday.

There are obviously still issues with both the jobs and housing markets. News came out that the median price of homes fell in eight of every 10 U.S. cities in the third quarter. This cannot be good for consumer confidence.

I expect selling pressure to surface as markets move higher. Markets have not been at these levels for some time, so there will be some hesitancy. We feel that the post-Thanksgiving shopping season will be key.

If markets stall, you may consider writing some covered calls on your long positions to generate some premium income. Be careful, as this strategy is vulnerable to rallies in the stock and loss of potential profits should the stock price move above the strike price where you would be forced to sell the stock.

The key in this market is to monitor your positions and take some profits on the big winners. The last thing you want is to see the big gains disappear. Always take some profits along the way, especially in a rising market.