Sunday, December 23, 2007

The Rally, Part 2

- No real change in the news, but 'The Rally, Part 2' continues.
- Still just a relief move for now, but it is likely to carry through to year end.

After a sharp drop, holiday rally resumed with a Santa Clause run this week.

There was more of the same on the news front, i.e. the good, the bad, and the ugly. The good: RIMM seconding ORCL's earnings; strong spending numbers (+1.1%, a 3.5 year high in growth rate); some M&A activity (PHG buying our play RESP; VIP buying GLDN); Michigan sentiment topping expectations (75.5 versus 74.5 expected); the second Fed auction went off with a lot of bids and the promise of bi-weekly auctions as long as needed. The bad: PCE annual core rose to 2.2% versus the 2.0% expected; Oil spiked to 93.50 (+2.44/bbl) on the new trading contract; MU proved that memory chips are a commodity with its abysmal results. The ugly: CC earnings were much worse than the bad earnings expected and JBL (printed circuit boards) guided lower for 2008, and both gapped sharply lower.

The negatives did not matter. Santa's slay is all oiled up and ready to roll, and despite the gloomy prospects the retail sales figures and the reports we are getting from malls and stores shows consumers are spending. More importantly, RIMM gave the market a second B-12 shot after ORCL's earnings, and that was enough to get all stocks off on the right foot.

The morning was a bit choppy, but it was choppy in a narrow range and holding the gains all along. Then the afternoon kicked higher and it was a race to the top. There was a last hour attempt to sell as more positions were shuffled ahead of expiration, but that dip was bought, driving the indices to close at their session highs. The move capped off a recovery from a week of tough selling touched off by the FOMC's rather timid initial response and two-step approach that stomped all over many traders' toes. Leaders were rattled to start the week, but they came on strong to finish. You always have to like a good closer.

Technically the action was excellent, but expiration and year end tape painting had their fingerprints all over the session.

The market showed high to higher action, i.e. gapping higher, holding the gains, then sprinting home. It even fought off some last hour selling to show it was more than just a bounce without a brain.

Internals: The internals were as strong as the day. Nice 3:1 breadth on NYSE and 2.3:1 on NASDAQ, showing it was not just a large cap tech day, though they had their way with the session as well. Volume exploded above average as a lot of positions were rolled out and closed out as December came to an end given the up and down action. It appeared that traders waited to see if the bounce would die of natural causes, but when it showed it was all perky again they had to act. Volume explosion.

Charts: After playing patty cake with the 200 day SMA all week the blue chips ripped through that level. SP500 continues its advance, but it is still playing catch-up as all its work only got it up to its 200 day SMA. NASDAQ already put that level to bed, gapped over its 50 day EMA, and rallied to close at its 50 day SMA. It is once more eying that July high at 2736 that stopped it short on the second leg of the holiday rally. Great moves, but all of this shows there is still a lot of work ahead as the indices collide with old resistance points. Even with the moves this week the indices are still below their peaks from the last rally leg.

Leadership: As discussed earlier in the week, leadership took a blow on Monday, but that turned out to be the end of the selling. Just as it looked as if the leaders were going to get dragged down into the abyss the selling ended. By the end of the week the same old names that led all of the rallies in the last half of 2007 were leading once more: large cap tech, agriculture, energy, metals, machinery - - all stocks with ties to strong global action . . . AND all stocks that will look really great on the year end reports to investors. The big boys were picking up these shares to spruce up the portfolios; of course they won't tell their investors WHEN they shares were purchased.

Still just a relief rally but likely to carry on through close to year end.

As noted in the 'charts' discussion, this still has the attributes of a relief move from the harsh selling. The Fed is in the game, but it has not been a game changer just yet. It is hard to fight the Fed, but as seen in 2000 and beyond, if the Fed waits too long or is not strong enough in its response it can take a long time to come back around, i.e. after the economy, an of course the market, decline. This is particularly true of financial crunches as we have now.

That said the leaders are hitting stride on some strong volume as portfolios are populated with the strongest of 2007. Shorts are getting squeezed, not in a sudden rush that is prone to failure, but a steady rise all week. That gets them very uncomfortable, and they tend to rush in and cover. While the indices are rapidly approaching levels that stalled them out on the last leg higher, this kind of momentum can ride through light volume periods such as that short week sandwiched between Christmas and year end. Thus we are looking for the move to continue next week.

As noted Thursday night, however, if this does continue on up to the year end we are going to be banking quite a bit of gain and preparing for a pretty unknown January. There are indications that some areas, e.g. China, are ready to move up after correcting nicely. Overall, however, the charts and their character have not changed yet, and frankly SP500 with its financial weighting still looks technically weak. If the financials are not bottoming then the overall market likely still has more work to do. The world is not going to fall overnight and thus we can stay with the strong global leaders as long as they keep moving higher. In the bigger picture, however, we need to be nimble heading into the new year and see what the big money does after it finishes painting the tape. Those recovering leaders of this week and likely next week may get the ax from some big institutions.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Sunday, December 16, 2007

Inflation adds another yoke to the market

- Inflation numbers add extra weight on a weary market as stocks slide lower to end a down week.
- CPI adds inflation worries to Fed woes as some energy pass-through shows up.
- Dollar has its best week against the euro in over 3 years.
- Market's near term fortunes dependent upon successful Fed auctions starting Monday as well as continued improvements in Fed targeted areas.

Inflation adds another yoke to the market.

The stock market was moving higher on the second leg of its holiday rally, rallying right up to the Tuesday afternoon FOMC monetary policy announcement. The Fed disappointed with a 25BP Fed Funds rate cut (25 on the discount rate as well) and a muddled, repetitive statement that dropped a reference to 'forestalling' an economic slowdown and still harped about inflation. Then the next morning it confused and indeed infuriated many, particularly the financial market traders, with a second day announcement that looked, based on the timing, as if it was a reaction to the market's sell off in response to the size of the rate cut. It could not have been; you cannot coordinate that many central banks in a few hours. Still, the rambling statement and the clumsy chronology of the 2-step action plan lost the financial markets' confidence.

On top of that, the second action sent the market into a temper tantrum. The Fed's second phase actions had an immediate and positive impact (LIBOR spreads narrowed and rates fell, the dollar surged, and US interest rates reversed their deflationary path). The key for the next market move is whether the Monday auction (the first of four) will show enough success to start convincing the market the Fed, despite its left-handed bungling of the action that hurt a lot of investors, at least knows what is necessary to fix the problem and only has to learn better timing.

Obviously Friday the market was not over its tantrum. Indeed, it was not going to get over it as the CPI was much hotter both in the core and overall and with the unknowns regarding the Fed auction next week. With fears that the Fed was failing to forestall, or as its statement indicated, maybe giving up attempts to forestall a slowing economy, the higher inflation reading raised the unspoken worry over stagflation. That CPI number showed why the Fed kept language about inflation worries in its monetary policy statement, but just because the Fed was right ironically provided no comfort to the market. The market is worried the Fed doesn't have a clue, yet Bernanke's tenure to this point has for the most part shown he understand economic cycles and their history. As with Alan Greenspan in his early tenure (when many called for his ouster as well), implementation of the knowledge is the shortcoming that time will help alleviate. Unfortunately, we have to live through the seasoning of another Fed chairman. You can study history all you want as Bernanke has, but the transition from theory to reality is inherently sticky.

There were positives with respect to the issues that are worries to the economy and thus the market. As noted, LIBOR rates continue lower and spreads are narrowing. The dollar surged. It was not enough to offset CPI, earnings issues (BDK reported a shortfall in its guidance), and Greenspan started talking about recession again after a 3-month hiatus (inflation chances are "clearly rising" and "economic growth is close to the stall speed"). As the market balanced out the pros and cons, the cons won again. Most everything was down: gold, oil (91.33, -0.92), financials, metals, energy - - it was widespread to the downside. But, as noted below, while down, many stocks such as the leaders we have positions again held up quite well. That shows there is an undercurrent of strength after the FOMC decision, and that shows there is some recognition out there of the positives developing despite all of the angst over what the Fed did or failed to do.

Technically the action was mixed again, but of course the overall bias was to the downside. The market started lower as the futures tanked after the CPI data came in hot. The market spent the first hour and one-half recovering, and NASDAQ actually turned positive while DJ30 and SP500 missed the green by a couple of points. Unfortunately the bids died out midmorning and stocks slid to close at the session lows. NASDAQ squandered 37 points from its high, DJ30 dumped 145 points, and SP500 frittered away 18 points off the high. There was no Wednesday or Thursday rebound off the session lows as the more bearish intraday action returned.

Internals: Breadth was pretty rotten at -3.6:1 on NYSE and -2.8:1 on NASDAQ. Of course, that included a lot of stocks that lost fractional amounts on the session as they held their near support and performed just fine despite all of the market gloom. Volume was again lower, coming in well below average ahead of the weekend. Though the market dropped to close at session lows, the volume shows the sellers were not rushing in to push it lower. It was a lack of any buyers willing to step in following the FOMC's decision and the subsequent selling Tuesday and the failed rally attempt Wednesday. If the sellers are not pushing when they have every reason and opportunity to do so, you look around to see what else is going on. The leadership as discussed below becomes very interesting in this scenario.

Charts: The week shows a lot for the indices. They rallied up to resistance into the FOMC decision and failed right there when the Fed disappointed. They tried to hold up to finish the week what with the two rebounds off the lows on Wednesday and Thursday, but after the Friday close they are teetering on the edge of another downside leg after the dump on the FOMC decision. DJ30 will try to make a higher low at the 200 day SMA or 13,250, but the patterns for the US indices are again more bearish than bullish after failing at resistance on the FOMC decision.

Leadership: There were not a lot of surges higher on such a down session, but going down the list of plays and stocks that we are watching for opportunities to buy, there are a lot of stocks that are in surprisingly spry shape after the negative four sessions (both in price and in sentiment) in the US indices. That was a continuing theme this week that we discussed every session. May have seemed as if we were beating a dead horse, but their action in the face of the negative sentiment is very important. The leaders showed rubber band action, i.e. stretching down to near support but not breaking. As noted earlier in the week, if you did not hear all of the negative stories about the market and the Fed or see the action in the major indices, you would be pretty excited about the opportunity to move into some great stocks.

Of course you can never forget about or disregard the overall market if it is struggling. But with the split in the global economies, opportunities remain, and quite a few as we can see from the list of strong leaders in good position to move higher. To us that indicates there is a continuing undercurrent of support for these stocks, and if there is improvement in the areas the Fed's second phase approach targets, an oversold market can make a bounce, and these stocks are primed to jump back up, e.g. AAPL, BIDU, CMED, FCX, SNDA, VIP, etc.


CPI heats up, injects stagflation fears.

Consumer prices popped 0.8% (0.6% expected), and the core topped expectations as well (0.3% versus 0.2%). Year over year prices surged 4.3%, 2.3% on the core. That growth rate doubles that in August (2%) before energy prices spiked. This is the highest annual core rate since the 2.9% reading in September 2006.

Gasoline/energy was the biggest component with a 5.7% gain, up 21% year over year. Ouch. Food rose 0.3%, up 5% over last year. Thank you ethanol for pushing up corn prices, the very basis of our diet here in the US. Drugs rose 0.8% for the month, same with apparel. Airline fares spiked 2.6%, and some are saying that is the long-awaited pass through from energy prices.

That looks to be a real problem ahead. Energy prices are up 21% over last year, and they have remained very high for a very long time. As noted earlier last week, the impact of energy prices is cumulative. If they remain high they keep banging into prices and eventually they break through in areas. Airlines have tried to pass on price hikes for several years but have failed miserably. If this one sticks that marks a turning point for prices.

What can the Fed do about that? Can it lower energy prices? No, at least not directly. It can slow the US economy until we all cut back on fuel so much we are living as we did pre-1940's. That may impact the price of oil, but frankly with China, Brazil, India, etc. growing so ravenously, it would not be enough to push oil back into the 40's or 50's. The Fed definitely doesn't want to lower our standard of living in such a manner, but it is torn by the inflation it was worried about on Tuesday in its statement where it emphasized the slowing economy but could not let go of the inflation worries. Then you throw in food inflation on top of that, something driven by the Executive's side of the government thanks to its energy initiative, and the Fed is sweating it out.

Problem is, the Fed cannot accomplish anything if it tries to play both sides of the fence. It has to either attack inflation or attack the slowdown. As we have written over the past year, and as many economic heavyweights such as Bob McTeer are saying, the slowdown and credit issues are the primary concern. You keep inflation in mind, but you solve the credit problems first to get the economy expanding again as that will help alleviate the inflation issues: growth does act as a cure all in most cases.

That takes us back to the disappointment with the Fed action this past week. It has something of this two-faced approach and its statement on Tuesday only underscored the appearance of indecision as to what to attack. That more than anything in our opinion is what really rattled the market. The Fed holds much too much power over our economy and our lives, and thus any appearance of confusion or uncertainty is devastating to investors.

Dollar enjoys a big week.

The dollar advanced the most against the euro since August 2004 on Friday. Indeed, it gained against 14 of the 16 most actively traded currencies. That is on top of a strong week overall that saw the dollar gain 1.6% versus the euro, the largest weekly increase since June 2006. The move got underway in earnest as the dollar broke the $1.4650 resistance level against the euro. The dollar is now down 8.5% versus the euro for the year.

The drivers are two-fold. First, the dollar was down too far, too fast as it moved to the $1.50 level versus the euro. It had to snap back. Moreover, the dollar has been trending lower for an extended period, and we all know that leads to relief moves or even a key reversal that changes the game.

That leads to the second driver: the Fed action. The Fed's rate cut didn't hurt the dollar as many currency traders feared a 50BP move and thus the dollar actually started strengthening on the Fed action. Then the announcement of the swaps and auctions jumped the currency higher as it enjoyed its strongest session in weeks. Then the CPI reduced, at least in currency traders' minds, the likelihood of further Fed rate cuts. That combination of events started by the Fed directly targeting the credit logjam really turned the currency. Add to that the long downtrend and you see a spring that was wound pretty tight.

As a result we could see the dollar at sub-$1.40 by year end. The rally could be just getting started there, however, as the dollar has been underwater a long time and when these moves start to reverse the recovery can be lengthy. If the Fed auction on Monday is a success, then we will see the dollar continue higher and even increase the speed of its gains. Already we are hearing stories of European visitors wondering if they need to think about cutting their stays here in the US shorter. That is how dramatic a move this was in the currency this week. Cannot complain about that, and frankly, despite the market angst over the Fed's actions, this is some pretty excellent news.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Sunday, December 02, 2007

New Month Means New Money

- Bernanke gaps stocks higher but end of month shuffle closes them off the highs.
- The importance of the 50 day EMA shows itself this week.
- New month means new money and we will see if the leaders can move through the prior highs with that boost.

Stocks have all the good news they can handle. More than they can handle.

Big Ben, Uncle Ben, Ben There Done That. Whatever your favorite description of the Fed chairman, the market liked what Bernanke had to say Thursday night when he talked about weakness in the economy and cramping in the credit markets. It seems the economy is something you can talk smack to and no one gets upset. Try doing that around my family at Christmas; you see holiday cheer fly right out the window.

In any event, Bernanke's comments echoing Vice Chairman Kohn's jazzed investors enough to overcome the Dell margin issues and a Goldman Sachs downgrade of key technology stocks. At least at the open. There was other news as well, good and bad, but leaning to the positive. Personal income and spending was half that expected with a 0.2% gain (0.4% forecast), core PCE was in line at 0.2%, and Chicago PMI was quite refreshing with a 52.9 read, bouncing it back above the 49.7 in September and the 50.5 expected. Oil was ripped again, falling to 88.71 on the close, down $2.30/bbl. Not bad, and with the Fed 'troubled' about the return to a credit freeze already, the better manufacturing data was definitely a relief. Not a turn in the economy, but nice to see no back to back sub-50 readings in Chicago.

Again, stocks gained, at the open. They gapped higher on Bernanke bliss, but that was the zenith for the session. After the strong open they struggled all session, sinking through the morning, through lunch, and really dropping mid-afternoon. NASDAQ was the downside leader as the large cap tech leaders went from a strong gap higher to negative. It took a bounce in the last hour to push the NYSE indices firmly positive and drag NASDAQ up off its lows for a more modest 7 point loss and not the 25 point spanking it was rubbing as the last hour started.

Volume was strong on both NYSE and NASDAQ. Distribution on NASDAQ? Accumulation on NYSE? Likely it was just end of the month shuffling. The moves for the week caught many with the pants around the ankles and there were some adjustments to be made to end the month and prepare for the new money to be put to work to start next week. The early move higher was used by some to take some positions off the table. We did some of that as well. There were sellers in there taking their shot as well; by sellers we mean short sellers versus just profit takers. The sharp move left many scrambling, however, and thus the higher volume as the indices closed mixed.

Technically the action left a bit to be desired though it was not a necessarily nefarious session. The intraday action was high to low. Yes the NYSE indices finished positive, but the action was down from the open with sellers using the action to sell and long players using it to take some gains on the week. Weekend, great news from the Fed leading to a big surge; yes, taking a bit of gain was quite normal, particularly given the harsh selling leading into this past week and its rally.

Internals: Decent breadth on NYSE with a 2.4:1 advancing edge. NASDAQ was rather anemic at 1.2:1. Volume jumped sharply. It was the strongest on NYSE outside of one session in the selling in early November. NASDAQ was no slouch either. Mixed signals if you look at whether the indices gained or lost ground, but when you factor in the unexpected surge for most involved in the market along with the month end, the reason for the volume becomes clearer. Thus it was not likely a session where the sellers showed they are going to overrun the market again just yet, but it is also something to watch into next week as the leaders and the indices need to hold their ground if the holiday rally is to continue.

Charts: Advances on SP500, DJ30 and SP500, though the indices could not punch through key levels. SP500 failed to hold a move over the 200 day SMA and DJ30 could not hold the move through the 50 day EMA. Sounds pretty worrisome, but considering that the indices jumped sharply for four straight sessions, the inability to push through that resistance is not shocking, surprising, or otherwise too worrisome.

Leadership: Some more leaders emerged Friday even as some of the early leaders from NASDAQ struggled. Good sign as that shows some money actually spreading out and not just a narrowly concentrated short covering rally. Sure there is some short covering driving this; after that kind of selling that is a given. The fact that new leadership caliber stocks popped higher on strong trade once more even after a few days of solid rallying shows continued new buying as it did not occur in a narrow, initial short covering orgy. Some early leaders, e.g. AAPL, GOOG, RIMM came under pressure after good runs, but they were the early leaders and were fighting off a GS downgrade of leading techs. It will still be important to see how they hold up this week as they test this move. Want to see them hold their gains then rebound to take on and preferably take out the October or November highs, whichever the case may be.

The 50 day EMA proves key once more.

Even as the indices sold on heavy volume we noted over the past week how some of the leaders in the prior rally had sold as well, but they were not breaking down in the same manner as the indices. They had faded but they were holding around their 50 day EMA, not rallying, but refusing to give up this level. That had our attention, and indeed on Tuesday we stocked the report with several prior rally leaders that looked ready to move higher. Indeed they did. We did the same on Wednesday and Thursday.

So what is the deal with this level? There are certain support points that the big money in the market, the mutual funds, insurance companies, pension funds and the like use to either buy more of their stocks, sit on the sidelines, or sell. The 50 day EMA is one of those points. In strong uptrends following breakouts the 18 day EMA is an important point early on as it shows whether or not a stock's breakout is still strongly supported. The 200 day SMA is a make or break point where a stock either holds and tries to repair the damage or breaks and heads lower and lower in a major correction.

The 50 day EMA is more of an intermediate level. Stocks have definitely come under pressure but are not being totally dumped. There is something there, some big money refusing to sell, holding them up. We noted during the week the former leaders were milling about the 50 day EMA: GOOG, MON, ISRG, SOHU, AMT, AAPL, VIP, etc. The fact that former leaders held this key level was a positive as it showed the big money not totally bailing out on them. That suggested a rally coming as we noted. We put them on the report and then they started to break higher. Ah the power of the 50 day EMA.

Now after that break higher off of a key support level we have to look ahead and see what is next. That would be the October and/or November highs these stocks hit before they were knocked back to the 50 day EMA. That is natural resistance for these stocks as it stalled them out on the prior move. As some approached that level Friday they stalled; after 3 to 4 upside sessions, however, that is normal. The litmus test is this week as they rest and then turn back up to take on those levels. If they can punch through that tells us the Ho-Ho rally has more legs. If not, it may have made its run and is going to fall short of the actual holiday and forecasts some more, as the Fed would say, 'turbulence' ahead.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Sunday, November 18, 2007

The Fed Was Talking Tough On Friday

- Up and down expiration ends positive with no real fanfare.
- Fed changes its focus on the week and was talking very tough on Friday.
- Foreigners still cool on US assets for the second straight month.
- Light holiday trade into Thanksgiving may allow stocks to make an interim bounce. Stocks bounce up and down in typical expiration fashion.

We expected volatility on expiration and that was the case though it was not a violent whiplash session. Futures were flat in the very early morning, but they jumped sharply on news of CSCO enhancing its buyback by $10B, an HPQ upgrade, and some dollar support from Paulson that was more than the now trite 'strong dollar is good for the US' one liner.

It was surprising to see the futures improve given the other side of the ledger that was less than inspiring for stocks. The earnings outlook continued to weaken as SBUX blamed higher milk costs due to higher grain prices due to using our corn for producing ethanol. Of course no one is going to cry because a $5 cup of joe costs a bit more. The story may change, however, as milk and other food staples surge in price because our government forces us to use our corn to produce fuel that only the corn producers love. In addition to SBUX, ANN and KSS provided weak outlooks as well. No word as to whether they blamed ethanol or not. Foreign purchases of US instruments was weak for a second straight month. The Fed-speak was negative with Krozner saying the Fed expected weakening economic data but that the data would not lead to rate cuts. Bummer.

The futures held up into the open, but as soon as the bell rang and stocks started higher, they started selling back. Before things even started expiration volatility showed up. Stocks started higher then sold to negative within the first half hour. Double bottomed, then rallied back to the opening high, a 44 point round trip for NASDAQ, 140 points or so on DJ30. Then it was back down in the afternoon with SP500 and DJ30 hitting session lows with a couple of hours to go. NASDAQ held well above its session low. They were set to close lower but a sharp short covering surge in the last hour pushed the large cap indices positive. That made the session look better, but there really was not a lot there.

We did not get too involved because expiration Friday is an untrustworthy mistress. Positions are shuffled, rolled over, closed, etc. There are many undercurrents driving stocks other than good old buying and selling just to own or to get out of a position. We did take some nice gain on some downside plays (SBUX and CMI), putting the early plunge to negative to use. After that we did not do much, just watched what sectors were trying to establish leadership, how support and resistance were holding, and how the indices reacted to same. NASDAQ and its large caps may be trying to set up for an interim bounce above the 200 day SMA, but the Friday action didn't change the outlook of the market overall.

Technical. The action was overall rather lackluster for an expiration Friday. As noted, it did not change the character of the market, but expiration rarely does. The indices bounced positive to negative all session, managing a positive close on that last spurt of buying. Decent intraday action.

Internals. Volume was stronger, but that is expiration's calling card. After a week of declining, but still above average trade, a bounce higher on options expiration was nothing unexpected. Breadth was negative even as the large cap indices closed positive. All that shows is that the move was led by a few large caps, i.e. a narrow rebound into the close.

Charts. The indices bounced off the lows for a positive close, holding the recent lows on the test. That holds out the possibility of an interim bounce on the light volume Thanksgiving week, particularly with NASDAQ still above its 200 day SMA. SP500 and DJ30, however, are still below that key level as the tug of war between NASDAQ and the NYSE large caps continues. For the moment the large cap techs look as if they could make the bounce, but after that there is more work to do before a sustained run can set in once more.

Leadership. Some of the alternative energy solar stocks are trying to shine the light to the upside. As noted, some large cap techs are trying to put in an interim bottom at the 50 day EMA; after some pretty nasty selling the pressure has abated for now. With the low volume Thanksgiving week they could pull off an interim bounce. After that the sellers will take their shot once more, and after any bounce we will be looking at some more downside positions to play another bout of weakness.


Bernanke announces course change, Krozner drives it home.

With little coverage during the week the Fed changed its focus from the core PCE to the overall inflation number, i.e. including food and energy in its target as it battles inflation. Of course with the overall rate running in excess of 3% that puts inflation back at the forefront of Fed activity. Just when inflation at the core rate showed it was really under control with several months of the annual core PCE at 1.9% and 1.8%, the Fed changes the game and now all bets are off.

Why the change? Pressure. Bernanke just explained to Congress a couple of months back as to how the core was historically a more reliable inflation indicator. Yet now they are suddenly very important. Maybe it was oil flirting with $100/bbl and the 1% rise in food the past few months (thanks to ethanol) that pushed the Fed to the notion that energy was going to bleed over into consumer prices. It certainly is not the inflation data suggesting that. Outside of some specific areas inflation has been on the decline. Thus there is not a lot of bleed over from energy, at least as the government measures it. If you look at boat prices or basically anything that uses petrochemicals in a significant portion of its manufacturing prices you see the inflation. It isn't just education and healthcare; there is more though it is not surging inflation.

Doesn't really matter the reason. The Fed has made the change. If it was not enough that Bernanke announced it, Krozner filled in the gaps on Friday. Sure the Fed still saw the economy as heading lower near term. Krozner called it a 'rough patch.' The sub-prime and credit issues were going to cause further economic declines. The Fed anticipates the consumer will lower spending. Krozner clearly stated, however, that weaker economic data does not equate to rate cuts.

That makes a count of 3 Fed officials and the last FOMC policy statement stating that no more rate cuts are coming anytime soon. The market has never been the same since the 25BP rate cut, as it builds in a significant economic slowdown based on the sub-prime and credit issues and the Fed's response. The Fed has shifted from heading off economic slowdown as its first goal back to inflation fighting.

We will see if it is right as it was in August of 2006 when it paused its rate cuts. At that time, however, the stock market started a strong7 month rally. It tested in March, putting in a double bottom, then was off and running again. Now it looks to have peaked, however, with some twin peaks and extreme volatility even as the indices hit new highs. That first round of selling was when the credit issues piled on top of the sub-prime worries, resulting in the massive selling volume in July and August. The market recovered to a new high, but then the Fed, after starting with a 50 BP rate cut to stave off trouble, cut just 25BP, and the market saw that as not enough to make the difference, and the selling has resumed.

To recap: Fed announced a pause in August 2006 and the market runs 12 months. It announces a 25BP rate cut and says it is done cutting. Market sells off in heavy distribution as leaders break their uptrends. You make the call.

Industrial production plunges, no one wants US securities.

Industrial production is falling off again. It faded early in 2007 as that second half 2006 slowdown continued. It came out of the slump in Q2 and Q3 as the economy recovered. Now the credit issue has slowed the economy again and now production is down, falling 0.5% when a 0.1% gain was expected. Largest drop in 9 months.

Looks as if the slowdown just gave birth to a more serious slowdown. This is the latest in a series of key data that is really showing a struggle in the economy. Slower Chicago PMI, declining ECRI, plunging dollar, distributing stock market. With the Fed on the sidelines it is unlikely things will get all that more positive.

US Securities getting lonely.

On top of that, support from foreigners is waning. For the second straight month buying of US financial instruments is down. It was down $26B in September, but that was better than the $70B decline in August. It is a good thing exports are rising as rapidly as they are thanks to a still solid global economy and a still weak US dollar.

Unfortunately, they are not able to rise fast enough to get rid of the massive imbalance in the current account and thus the US still needs foreign investors to finance our buying. The Chinese and Indians realize that they are getting wealthier and that they can buy some of their own goods. Their governments are diversifying to other countries' assets in addition to the US as well. That means selling dollars to buy currencies of other countries, and that brings more dollars coming home, and that means lower dollar levels and the potential for more inflation. It is not a pretty picture, adding to the really bad pile of muck left by the last Fed that the current Fed has to mess with.

No Greenspan bashing tonight.

That opens the door to more Greenspan love notes about how that Fed printed too much money and has left the US with issues that are going to be painful to deal with. No doubt that is true, but does that mean Greenspan is to blame?

The Fed has a dual mandate: keep a steady currency (i.e. low inflation) while growing the economy at its fastest sustainable rate. With the Federal government running up huge tabs on Social Security and Medicare, just to name two entitlement programs, and amassing debts that we simply cannot pay as a result (surplus or no surplus), Greenspan HAD to print money to keep things going. He didn't like doing it. Think. How many times did Greenspan go before Congress and plead the case that the entitlements were out of control and had to be fixed? He spend his last several years doing just that.

Why did he do it? Because he knew what was coming in printing all this money. But his mandate said that was all he could do. Sure, he could have broken outside of his authority as authorized by Congress, but unlike the Federal courts, to his credit he did not. He pleaded with Congress to act, but it did not, and that left him no room but to print money. If he broke rank as many wanted him to do he could have let the economy tank and let the US suffer some pretty awful deflation as the unfunded entitlements wrote down the economy, forcing savings the old fashioned way after our financial markets collapsed as a result of the write down.

Greenspan stuck to his mandate to the end. Bernanke is doing the same, but the irony is, even as he talks of more reporting this week to open transparency, he is changing the focus to inflation when it is not really a major issue. We speculate he is setting up for some kind of epic fight to raise the currency and balance the current account. Could get interesting as the Chinese say. For certain the market does not like whatever it is smelling.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Monday, October 29, 2007

Financials come back to life

- Techs pick themselves back up and financials come back to life, delivering a strong 1 - 2 punch.
- The rest of the world views the US economy as a leper. Expecting a market breakout as a result.
- FOMC decision is on tap for Wednesday and a 50BP cut will spring the next leg.

Market finds some additional leadership as indices attempt to end the choppy earnings trade.

You have to love it you diligently take positions in stocks when they show you it's time to buy even though the market action is questionable. After you move in, the reason why stocks were telling you to buy in then appears when the good news hits and other investors rush in to buy and drive your stocks higher. That is what occurred Friday.

Looking at Friday in isolation, the action was no different from the up-and-down movement seen day today over the past two weeks. The forces that cause the movement, however, changed somewhat. With Microsoft's blowout earnings, technology was back in the leadership mode, coming back from some wobbly sessions over the past week, but this time technology was not playing lone Wolf. The financial stocks finally stepped up to the plate and were taking their cuts as well on the heels of Countrywide Financial's prediction that it would return to profitability in Q4. That gave S&P 500 a new shot of energy lacking for the past two weeks. For once, it was not just Goldman Sachs leading the financials while all others sold off.

The earnings and forecasts of profitability were more than enough to take the sting out of a falling Michigan sentiment report (80.9 versus 82.3) and once again surging oil prices ($91.86, +1.40). Futures were sharply higher, and stocks indeed opened the session with gaps to the upside, even S&P 500.

Unfortunately, as is often the case with strong opens, stock started to sell almost immediately. It is always a risk that a strong open is used by sellers to unload positions, particularly when the market is as choppy as it has been over the past two weeks. NASDAQ lost 32 points off of its opening high right before lunch started on the east coast. That was not a good move given that one of the main reasons for the gap higher was the Microsoft earnings. Once more, however, the market found its bottom midmorning (at least by Central Time zone standards) and started to rebound. The market continued to rebound into the close, fighting off a rather eat last our intent to sell the stocks back down, and closing at or near session highs. It was good to see S&P 500 are really pushing hard into the close and moving to a new session high as the closing bell rang.

Technically, the action was solid overall, particularly on NASDAQ and S&P 500. Stocks started higher, but as noted, they immediately started to move lower. As they have done most all week, however, they resumed the move higher into the afternoon. Even though S&P 500 and DJ 30 struggled to move higher on the week, this low to high action intraday shows that there is some underlying strength in the market as buyers moved in on the lows to accumulate shares. You can call it the Fed bid or just plain old buying on the dips, but either way there was steady buying as the indices held key support during the week (e.g. S&P 500 testing 1490).

As for the internals, breadth improved nicely on both NYSE and NASDAQ on Friday, but it was really lopsided to the downsides for most of the week. Volume dropped off on Friday, but it still held the elevated levels that showed up to Fridays back. As discussed Thursday, volume improved as S&P 500 tested key support at 1490. That increased volume showed that big money was stepping in at that support level and buying into stocks. Thus, even though volume was lower on Friday, we do not view that as an overall negative, though we would've preferred volume to surge as stocks broke higher.

The charts showed a pretty good picture for a change after some pretty weak action during the week. NASDAQ broke over 2800 that acted as resistance for the past two weeks. It did not break to a new post-2002 high, but it was a key move as the index installed at that level. S&P 500 broke over the late September highs that represented the left shoulder in a potential head and shoulders topping pattern. The Dow is not quite bear, however, though it did rise nicely on some very solid upside volume thanks to Microsoft. Once more the indices are breaking up a potentially toppy pattern as they've done on many occasions during the runs higher this year. The rather striking feature of the Friday move higher is that with this move you can see an ascending triangle building on DJ 30. It still has a ways to go, but it is making higher lows below a rather constant peak for the past four months.

With respect to leadership, once more technology took the lead gratis Microsoft, but as noted above, financials were there as well, gratis CFC. It was finally not just Goldman Sachs leading higher in the financial sector, and that hold out some hope or S&P 500 as the market moves out of October and into the last two months of the year. China was hotter than a pistol as EJ, CTRP, BIDU, and EDU to name a few posted strong gains. Metals continue to rebound, in agriculture came back to life as well. Energy was not bad either, but given that oil prices were surging higher last week is not all that strong. The drillers, the tar sand plays, independents, and natural gas producers performed well, but service companies and large integrated companies continued to struggle. Leadership is not really spreading out across the market, but instead just returning to the prior leadership after it paused during this last pullback... with the addition of some financials.


One of the reasons the Thursday night report was chock full of typos was that I was traveling and having to use a new voice recognition software program that still has some bugs in it. After having a bout in the hospital couple of weeks back, I was playing catch up on some economic research that I was undertaking when I had to make that unexpected visit to the hospital. I've been traveling around the country to certain real estate locations to ascertain the status of the commercial and housing markets. First, in the formerly hot housing areas such as Phoenix and Sarasota, Florida, the market is as bad as you hear. In Sarasota for instance, but was told by many in the industry, but they're typically 200 300 houses for sale in any given month. That is the land to 800 to 1000 units over the past six months. When you look at several similar markets across the United States, you understand that the housing market is definitely in a deep slump.

In addition to looking at housing markets, we also were talking with many visitors to the United States from foreign countries. Almost unanimously, the people we spoke with, while more than happy to be here to take advantage of shopping opportunities given the weak US dollar, had absolutely no interest in investing in the United States right now. Over and over we were asked when would things improve in the United States. Almost to a person the view was, things were too weak in the US for money to work here.

That kind of negative sentiment would love to hear. Just as with the stock market, sentiment about an economy can get to an extreme level and indicate that a turn is coming. Right now the sentiment in the rest of the world is that the US economy is bad and getting worse with no end in sight. That kind of sentiment starts brewing the recovery as the smart money starts moving in long before sentiment changes. There are indications that the worm may be turning a bit. The Countrywide CEO may conjure up images of a used car salesman, but he is CEO of the largest mortgage lender, and he is no fool. He indicated that there is liquidity returning to the market, and he has changed his forecast to profitability, not sometime in 2008, but in Q4 2007. Moreover, some very savvy people, Florida region were telling us that the market was very near a bottom, and that another quarter of bad results would likely see the money starting to move quietly back into the area. There are some waiting as patiently as possible to move in, but you get its the sense that some very smart people were already a bit itchy to take action.

The stock market typically show the move start before the actual recovery begins. The market is always leading in its view of the economy. Perhaps the moves in the homebuilders, mortgage lenders and the financials on Friday is the start of such a move. It is still much too early to determine that, but with the Fed actively in the game and likely cut another 50 basis points on Wednesday, there is very good reason for the stocks to start moving higher. In the market in general, you can see former leaders took a pause over the past two weeks to a month starting to move once more. There were fears of a global slowdown on top of the US slowdown. Given that the US still plays a dominant role in the world economy even with a slowing economic picture here at home. These indications that the weakest US economic sectors are bottoming might be one of the reasons that we're seeing the materials, metals, agriculture, and other early leaders starting to move once more as the market sniffs out the recovery long before it is evident.

We can prognosticate a bottom if we want to, but that really doesn't do us much good. We can think whatever we want and the market won't give a damn. All we can do is get the best lay of economic landscape and then look to see what the market is doing and whether or not that corroborates what we think we see. In the end, however, the market tells us what to do because as we've said, the market is the best economic prognosticator.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Sunday, October 21, 2007

Stock Market Giving the October Surprise


- CAT gives up on the US economy, raising further mortgage & credit fears and fueling expiration Friday selling.
- Oil runs to $90 but energy balks: too high for its own good?
- Lots of recession talk, and after 5 upside years that is normal. What the market is telling us about it.
- Market giving the October surprise we discussed last weekend.
- Looking for some leaders to hold up and others to recover from some fear-driven expiration selling.

Market gets some CAT-scratch fever on fears of a slowing economy.

GOOG, AMD and indeed most all techs have posted some good numbers thus far, but on Friday that did not really matter as some industrial stocks undermined the good work put in by tech. CAT, MMM, and HON failed to impress though their numbers were not bad. What was bad was the commentary, the words that accompanied the results. CAT said the recovery in the first half of 2007 would fade in the second half of the year. More than that, it could threaten the rest of the world economy, in effect dragging everyone with us. With some anecdotal evidence that Europe was slowing (and it was purely anecdotal; the UK reported a 3.3% GDP growth rate), the impact was devastating on a market that was already in pullback mode, trying to find some footing to continue its breakout move.

Instead it was more of a breakdown. Stocks started lower, tried the traditional (of late) midmorning bounce, but failed the attempt. It failed it horribly. There were many negatives on the session, at least there were many that were repeated all day on CNBC and other financial stations. On top of the CAT comments there were calls that the US economy was going into a 'doozy' of a recession. It was the 20th anniversary of Black Friday and the comparisons during the day were ad nauseam. There was the weak dollar with the dollar index hitting a new low and again, comparisons to 1987 when the dollar was weak as well.

All of this led to a snowball selling effect, and in the afternoon when there was no rebound as in the prior sessions there was the definite smell of panic as shares were dumped and the indices went straight down to the close without even trying to bounce or otherwise come up for air. Oh there was a 3 minute or so blip in the last 15 minutes once the sell on close orders cleared out and there were no buy or sell imbalances on the NYSE board, but that was washed over in a last wave of selling.

Technically the action was about as weak as you can get it. A low open that only got worse as the day progressed, knifing lower in the afternoon right into the bell. The indices all lost more than 2.5% with the small caps pushing 3% (-2.98%). Nothing like economic and recession worries to skewer the smaller issues that are so economically, and specifically US economically, dependent. The internals were commensurately weak with surging volume on the selling (3 out of 7 distribution sessions on NYSE, 4 out of 7 on NASDAQ). A sad fact is that the only really strong volume outside the Fed rate cut day has occurred on the downside, just as in the July and August sell off. Breadth was -5:1; weak anyway you cut it.

The charts also told a weak story as SP500 and DJ30 dove through their 50 day EMA and into the May and June trading ranges just before the July and August breakdown. NASDAQ is still hanging in there above its July high and thus holding its breakout, but it is a very tenuous save. Now 200 of the Dows downside was due to just 7 stocks, and more than half of that was attributed to just three. That, however, does not change the outcome and it certainly doesn't explain the massive weakness in SP500 and the small caps.

Leadership was mixed. Energy was just coming to life the past week once more and then Friday it suffered a blowout. SLB reported great earnings but it was torched. There were calls oil would reverse sharply, and along with the recession talk (recession means less demand for oil) the energy stocks got hit as well. Industrials were slaughtered after CAT spoke its mind about the economy. Financials were of course lower with the renewed worries regarding the economy and CAT's comments about the housing industry.

On the other hand techs were remarkably solid. Of course, tech earnings have been solid, indeed strong (e.g. GOOG, NOK, INTC, YHOO). Amazing what some solid earnings can do for a stock and a sector. Interestingly, techs led the move higher and looking over many of those same stocks on Friday, they held up very well, holding their uptrends and just making normal tests. Metals were also quite strong. Yes they were lower, but they were just testing, setting up nicely for a new break higher. It remains to be seen whether they continue their normal tests or succumb to the selling in the other sectors, but on Friday when investors were throwing everything out the window, these stocks were holding the line. That is a nice plus, and we are looking at these areas for when the selling winds down.

Friday was a classic example of why we take gains on the way up, i.e. after the strong runs in stocks when they start the moves we anticipated. Even though the move looks strong, when a stock makes a strong surge over a few sessions it is prudent to lock in some gain, particularly with options. In a market where the economics still look good and the Fed is on investors' side, the market can still react adversely. After all, the Fed tends to lead the economy, selling off before there are many hints of an economic decline. That is why you have to look at what the market does as opposed to relying on your own conclusions and emotions. Friday smelled of panic, especially in the afternoon when no rebound transpired. With the very heavy negative technical indications, however, you cannot just write it off to panic and assume things will be back up next week. The market was consolidating nicely until Friday when it was clocked and the breakouts in the NYSE were given up. This may just be a new buying opportunity in the making, but we have to see how this coming week pans out, particularly watching how the remaining leaders hold up.


Oil blitzkrieg balks at $90/bbl.

Energy broke higher in September after a good base, and after a three week test of that initial run, it started to break higher again this past week. As oil moved toward $90/bbl that started to pull some of the major integrated companies along with the service and independents that had already broken higher. The high prices also got the tar sands and other alternative energy plays moving again.

As oil hit 90, however, if immediately came back. That did not kill the energy stock advance, not until SLB announced some solid results and got slammed. The results were better than expected but nonetheless SLB blew up. It took the other service stocks with it, the particular sector that really led energy higher. Now on the positive it did not take down the rest of the energy sectors. There was some selling in the independents as they are considered a bit riskier, but they did not fold up their patterns. The majors sold some as well, but they also held up. The tar sands and other alternative energy stocks held up just fine. It was not a washout, but the leading sector took a hammering.

What is the deeper story here? Is there a deeper story? The first thing that you think of is oil approaching $100/bbl. Boone Pickens said that might be the choke point but he quickly followed with a general denial of just at what point the economy would seize up. Good reason too as he believed it was a lower point last year. Not criticizing him; he has made billions for himself and his investors. Just pointing out that the economy has changed such that quantifying oil's impact on its output is very difficult.

Thus you look at how everything reacts when it reaches certain points. It hit 90 the past week and it immediately pulled back. The service stocks, despite strong earnings, gapped lower. The stock market struggled all week and then went into a tailspin Friday. There is a point where oil becomes too expensive and the economy stalls as a result. Call it the 1970's syndrome when it surged due to the embargo and western economies seized up into recession. Again in the early 1980's when price hit its all-time high (and that is still the champ in inflation adjusted dollars even with this spike higher) the economy recessed. Price just got too high and the economy couldn't handle it.

When you have $90/bbl oil and then add a housing bust, a credit crunch, a tanking dollar, protectionism, and talk of ending the economic policies that brought about the prosperity, it is tough to keep things going. When you think about it, that is a harsh laundry list of negatives for any economy to withstand. It is easy to fall into the trance many are in that recession is inevitable. It doesn't look great, but it hasn't for a couple of years. The acid test is what the stock market does. This last week was a nice pullback until Friday. Now it is a question mark as to whether the market will recover or will roll over and end the expansion. The latter seems improbable, but lets look at the issues at hand.

What is the market saying about the economy.

Lots of talk Friday about a market crash and a doozy of a recession. As noted, that helped fan the selling frenzy. Up until Friday the market was running higher and making rather orderly pullbacks with strong leaders plowing the road ahead. Definitely positive action. Even with Friday and the sharp sell off there is no reason to panic based on that event alone. Sharp sell offs are rather normal in continuing runs higher, though Friday, for just one session, was a bit extreme with all indices down more than 2.5%. That was a spanking. Nonetheless, even after Friday with SP500 and DJ30 plunging, it was not a breakdown. NASDAQ still holds its breakout, and as noted, some good solid leadership basically ignored the selling.

But market, and thus the economy, has some issues. In July and early August we discussed how the VIX was rising even as the indices made new highs. The last time that happened was in late 1999 and early 2000 and the market topped in March. Volatility did fall as the market rallied out of the August selling, but it held above the average level for the past 3.5 years and has rebounded close to 23 with the Friday selling. That is a sign to be watching for events such as Friday to develop into something worse.

There was heavy distribution in the summer selloff. Massive volume at record levels never seen on NASDAQ or NYSE. The recovery lacked any volume and indeed volume remained below average on over 90% of the recovery. To be fair average volume surged thanks to that record volume, but the point is the selling volume far surpassed the trade as the market recovered. That has been the major weakness of this recovery. Without a doubt much of the July and August volume was panic selling over the credit crisis, but it shows investors are ready to sell en masse if the conditions are right. After 5 years of economic expansion, investors are a bit more skittish.

There is also a big divergence among sectors in the market. Retail, housing, and other consumption related stocks are in the tank, declining even as the overall market rises. Energy, materials, metals, technology, agriculture, etc. are hitting highs. Divergences never go on forever. Remember in the 1990's the large cap techs were leading and no small caps were following? It took a nasty yet quick bear market in 1998 to get everything working together in harmony.

These current divergences have a huge difference, however, to those in the 1990's. Back then the US was THE game in town. The world was producing goods and selling them to us. Japan was in its depression after the 1980's when we were phobic about Japan buying up all of the US. It did, then those assets went down the tubes and we had the money and the property. Sweet deal. Makes you kind of wonder why we are all bent out of shape now about foreign purchases. It always tends to work out when the economy turns over and the house keeps everything. In the current situation the foreign countries are expanding sucking up all of the materials, thus driving prices, and those of the stocks dealing with these materials, higher. The consumer and retail sectors are languishing because of a slower US economy vis- -vis the rest of the world. After a 5 year run that is hardly unexpected. Thus the divergence is not the big issue that some make it out to be.

Okay, so the divergence is not anything to fret, but the rising VIX on the new highs and the heavy selling volume versus the rebound volume are significant market issues. Still, even with those the market is not breaking down. This pullback is thus far similar to others. It is the fact that it comes after a long expansion that makes each pullback worrisome to many pundits. How it responds to this selling given that there are some important issues is the key to how it moves going forward. Thus we want to see how this expiration sell off pans out in the week ahead. The market dug itself into a hole with that move and now we see how it responds.


Mercifully next week the economic data dies down somewhat, leaving earnings as the main focus. They would be the focus in any event given this is the heaviest week of the season for S&P results, but there won't be the distraction of a lot of economic data.

Thus far S&P earnings are running at a -1% clip versus last quarter. Outside of technology the picture is just not looking that promising. Indeed even with all of the positives from tech the industrial earnings are overrunning the good news. The fear has to be that the foreign economies will start to slow either due to getting just too hot, because oil has moved too high, or some combination of both. Coupled with the grim expectations recently expressed about the US and its economic future, there was some selling that, combined with expiration Friday, became some panic selling.

Looks as if this is the October surprise we talked about in last weekend's report. No weakness in September and a run right up into earnings. Earnings at first did not live up to the run, but then they almost pulled it off when tech started coming in and giving credence to the run higher. When industrials, the shoe-ins for strong results given the world economic expansion, did not serve up results topping expectations, the pullback started, and Friday it started to have the look of a correction.

This is, however, somewhat typical action for an October. There can be selling in September that continues in October until it bottoms, or there can be a run to October that then turns into selling as we have here. We are looking for some more selling after this recent turn to the downside, but when DJ30 gets to its trendline (which won't take long at this rate) and SP500 tests the 1490ish range we will look for some kind of upside answer. That is not much further at all and we could see some undercutting of those levels, but a hold generally near those would be the start of a recovery to take the markets higher to the end of the year.

The question is what will leadership look like when this is over. Will the same guard take up the point or will a new crop rotate in? Tech held up well Friday as did metals and ag, and both of those led the move higher thus far. We keep looking for the move to spread out and it tried to do so, but it never really caught on. Now with the small caps getting clubbed the logical choice is tech along with those other leading sectors that are holding up (and that does not rule out energy despite SLB's collapse Friday).

Of course we have to see how this week pans out. Given expiration Friday and the more emotional reaction to the CAT comments you would surmise that the Friday selling was overdone. Indeed the market tends to always overshoot in the short run. Thus we could see stocks try to start back up early in the week given expiration is over. Whether they try to bounce or fade a bit further, the key is to be patient. When casting a fly you have to be patient and let the line move through its pattern after your arm movement lest you rush it and pop your flow off your tippet. Same with pullbacks; you have to let them run their course as a harsh sell off is often met with a relief bounce that does not last. You can get caught moving in too early, and then when it fades back again you are susceptible to second guessing and doubt that pushes you into bad decisions even as you look at the charts and see things are going as you would expect. It is one thing to look at a chart without money at risk versus looking at one when you are significantly invested. The goal is to always look at a chart with the mindset of the former, but it is a constant battle to do so.

That is one good reason why it is a good practice during these times to move in piecemeal, i.e. if you see a move you like, don't go all in on the first bounce. Put some money to work, and see how it pans out. If it moves on up then add when there is a test. If it moves lower you are not killed, and when the bottom does come again you can add to your position and get a better overall price. If it does not bottom you can sell and not be hit as bad.

In short, adjust to the times. Back in September when the energy and metal stocks set up beautiful bases and tests we were going all in on the plays and we made a ton of money. That was a situation where everything was perfect. Now things are jumbled at best, and it is prudent to move slowly and cautiously, taking advantage of moves when they show up, but realizing the set ups are not as sure. Remember, these are the times that are not going to make you rich but they can hurt you. In other words, during this kind of action the risk/reward ratio is not as good. It behooves us to recognize that and to be patient and let the plays come to us whether upside or downside. Everyone was running to go short Friday and more will be doing so to start the week. It is best not to rush after it but let it test; if it fails the test then you move in. Otherwise you are chasing the bus and just after you catch it, it slams on the brakes.

We still see some great stocks in good position, and if they continue to show nice, easy pullbacks to test their last moves we are going to be ready to move in. Indeed we have some for this week that we are looking to do just that. If they show the moves, great. If they are not ready we will wait on them and adjust the buy points based upon their moves. There are a lot of earnings coming this week, and right now the market is going through the initial phase of the season where it makes its first strong move based on the results. This one is down. It will have to run that course, and if say tech earnings continue to come in strong the selling will wind down and then the second phase will take control. If tech remains solid then those earnings will propel that sector and start the move toward year end. What we will do is be ready to move into the leaders that are holding the line and setting up new bases for the upside, and if there is a weak bounce in the market overall or in certain sectors, we can use the bounce to bird dog some downside plays. Again, it is a time to be patient and let the move mature, then be ready to move as it concludes and the next phase begins.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Sunday, October 14, 2007

Economic data helps stocks stage a rebound

- Economic data helps stocks stage a decent, albeit low volume rebound.
- The moves early this week will be the market's direction for the next leg.
- October surprise, albeit short term, may be in store.

Stocks rebound, but in line with the presidential candidates out there we have to ask where's the beef.

Futures were decent on some deal news (ORCL wants to buy BEAS) and a general rebound in the market following the whiplash session Thursday that saw strong early gains turn into strong late losses. The idea of some deals acted as something of a salve, but alone that would not do the trick. Now when retail sales came out and beat expectations and some rather draconian predictions from some of the more negative pundits (0.6% actual versus 0.2% expected; 0.4% ex-autos versus -0.4% expected) and core PPI rose 0.1% versus the 0.2% expected. Golly Wally, the economy is just not rolling over as so many expect.

The market started higher on that news and a half hour later was goosed a bit higher by the Michigan sentiment report that was a bit lower than expected (82.0 versus 84.0), but after the stronger early data it seemed to play a good foil, i.e. diluting the prior data for the Fed's use and enjoyment.

Stocks opened higher and surged into lunch. Then they moved laterally from lunch to close, gyrating in a rolling range. It took a last half hour surge higher to push them back up to the session highs, but they made it. They recovered some of the Thursday losses, and it was the usual group of leaders doing the leading. It was a good response, but it was not all that powerful.

Technically it was a decent answer to the Thursday reversal, showing a solid price rebound, especially on NASDAQ and even more so on NASDAQ 100 (1.73% gain). The indices gapped higher, moved further upside, fought off some modest selling attempts, and closed right at the session highs. The internals were mediocre. Volume was lower after that strong Thursday reversal surge. Breadth lacked any enthusiasm or punch. Good price moves but not a lot of beef so to speak.

As for the charts, the indices showed inside days or what is known as a Hirami in Japanese candlestick charting. Hirami means 'body with a body', i.e. where the current session high and low traded within the prior session's high and low. That is an indication of indecision, particularly after a well established trend. The way a stock or index moves after such an inside day or hirami historically tells the direction of the next move. It doesn't say that a trend is broken or otherwise, just that the near term direction is moving that way. People get into trouble trying to stretch such indicators further than they can be used.

Combined with that wild, out of left field spike in selling volume Friday, that makes the direction to start the coming week important. Friday the leadership was bouncing back, but as noted, the moves were not all that powerful in many cases. Thursday showed there are sellers out there, ready to strike when they see an opportunity. Thus far they have not been willing to step in front of the upside train. They had some success Thursday, and the Friday buying response was rather tepid. That will embolden them to take some more shots.

NASDAQ remains in need of a breather after it led higher, and the Thursday reversal was likely not enough. Indeed, the Friday action was as we expected, i.e. higher as a response to the selling, but not really showing us one way or the other if the uptrend was back on after Thursday tried to buck it off. With earnings opening up the spigot wide open this week we can expect some more attempts at bucking the uptrend, particularly given the run from upside through September and into mid-October.

Indeed, with the lack of selling pressure and the run into the earnings we could very well see a version of the October surprise, i.e. some selling in the midst of the run higher as investors digest the early rounds of earnings results. The indices broke higher, clearing to new all-time highs on SP500 and DJ30, and new post-2002 highs on NASDAQ. The small & mid-caps have yet to make that move. A sharp, relatively fast October pullback would set them up for a run into the end of the year, and with the action seen Thursday as well as the run from the August low, such a move would actually be healthy for a nice sprint to year end.

Thus it is best to be cautious here with the runners that have come a long way on this move. Thursday the leaders that had run the hardest the past three weeks were the stocks taking the hardest hits. That is normal, but the strength of the selling shows there is something behind the scenes that needs venting before too much more upside. Again, we have to be a bit cautious with those positions; if they start showing more higher volume weakness it is best to take some more gain off the table and then let them test and see how they shake out and if they set up for new buys.

That doesn't mean there are not opportunities out there even as these runners take a deserved break. We have seen money rotating around the market; it did that Thursday when a lot of big names were getting sold back. That will likely continue to happen and we are looking for new buys on stocks emerging from bases, pullbacks or consolidations that get some of the money thrown their way when the leaders test.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Monday, October 08, 2007

Will Fed cut another one after stronger jobs report?

- SP500, NASDAQ ride in-line jobs report, August revisions to new post-2002 highs.
- Jobs report: Okay, so what if the government was off by 93,000?
- Will Fed cut another one after stronger jobs report?
- Still a lot of negativity regarding the market even as indices break higher.
- With the continuing economic re-recovery, time for industrials to resume their move, and small caps are trying to help as well.

Just right jobs report pushes SP500 to a new high.

The market was set up to move higher and looking for a trigger. The in-line jobs report (110K versus 100K expected) and a rather massive revision to August (+89K from -4K) provided the spark to break the indices higher. Well, it provided the spark, but it was not an explosion higher. Part of the powder didn't ignite. SP500 broke to a new all-time high and NASDAQ added a lot to its earlier move to a new post-2002 high. DJ30 was up, but its move was nowhere near its large cap brethren, and after pushing to a new high intraday it faded. Held a gain, but a mere shell of the other indices.

The jobs report was the keynote address, but there was other news pre-market, some good, some not so good. RIMM was up on its results; once again after hours action does not necessarily represent what happens during the full session. RIMM dragged AAPL along with it along with some other big techs. On the flipside, NBR (drilling) guided lower due to a falling North American rig count. MER warned re its Q3 due to heavy write-downs in assets related to the sub-prime issues. Outside the jobs report, life goes on as usual.

Stocks started higher out of the gate. The dollar started higher as well, pushing oil a bit lower and keeping a lid on the energy stocks again. After that higher open the action was up and down through midmorning. Then the market broke from that range and headed nicely higher. Some word that the commercial paper market was improving as a few companies were placing their paper, and the Fed's Kohn had some decent things to say about the prospects of more Fed action.

The upside move paused over lunch, but stocks were back up into the afternoon session. Techs were the dominant leaders but the small caps were up nicely as well. Metals started to move in the afternoon, one of the leadership groups on the last leg that backed off and was lagging on the current attempt. They were still not blowing things away as some late profit taking took back some of their nice gains. As noted, energy was lagging; still set up well, but thus far unable to take up the leadership mantle it had on the market's last leg higher. That left it to the techs, and they did an all around decent job at holding the gains together.

Technically the action was solid . . . for the most part. SP500 broke to a new all-time high, testing the move intraday and then closing with room to spare over the July high, completing the move out of the cup with handle base. NASDAQ did the same, i.e. breaking out from its cup with handle base as well. It already broke to a new high to start the month and quarter, and the Friday break higher was an exclamation point on that move.

Volume was up and actually not bad on NASDAQ. It topped 2 billion share, approaching the levels hit as NASDAQ started its stronger move higher in mid-September. Still below average, however, given the huge volume during the July and August selling that jacked up the average level of trade. NYSE volume was up as well, but it was rather puny, coming in less than the Monday new money for the month trade. Breadth was great at 3:1 NYSE, but that doesn't really make up for the chronic lack of volume on NYSE.

Notably lacking was DJ30 with respect to a move to a new high. As noted above, it put in a decent move but it could not hold above Monday's peak that took it to a new high. SP600 didn't make a new high either, but unlike DJ30, it was running hard toward the old high, posting the best move in the market outside of NASDAQ 100.

Leadership was clearly in the hands of a few tech stocks such as RIMM and AAPL. Techs continue to perform well in general, though the large cap techs are dominating. Once more, however, the small caps were there as well, posting strong moves as the economy continues to look as if it is going to once more resume its growth plane. As we have discussed, the economy was emerging from a mid-cycle slowdown in Q2 and into Q3 when the credit freeze hit. That really hammered the small caps as the fear was the credit issues would stall the economy, and small caps have to have growth, solid growth, to prosper. They are surging back up, leading the market in percentage moves all week, and that is an indication that the economy is emerging, once again, from a pause and has good growth potential ahead of it.

You won't hear much of that kind of talk on the financial stations. For one thing, there is still a lot of pessimism about the US economy in general. The litany of terrors is cited every day: sub-prime, credit, weak dollar, inflation, declining consumer. You even hear how the market is a poor indicator of future economic performance. Don't tell that to the market back in 2000 when it pitched over and the economy collapsed after it. And of course the rally that started off the October 2002 low and the surge that preceded the huge gains in GDP in Q3 2003 was not forecasting the return to prosperity. Throughout US economic history you have market rallies followed months later by surging economic growth. Yet some still pick at the time or two that growth lagged longer than usual, claiming that is the rule rather than the exception. That is fine. As long as there are those out there refusing to acknowledge fact and remain negative, that is good for the market rally as the market moves its best when there is a lot of doubt and worry. This has been a strong move higher, befitting the amount of issues and worries covered each hour of each trading session on the financial stations.


Jobs report shows August report was wrong. That is what is so right about it.

You have to wonder. The government reports a loss of 4K jobs in August when expectations were for a gain in the 140K range. A month later it issues an 'oops' report, noting that jobs were actually up 89K; nothing like a 93K miss. We figured the August number was an outride, i.e. just plain did not reflect reality, and that was the case. It certainly doesn't add to the already crumbling confidence in the government's ability to collect and compile data about the economy or anything else for that matter.

As for the September report, it was basically in line at 110K versus 100K. With the revisions to the prior two months 118K non-farm jobs were added back in. Average hourly earnings rose 0.4% versus the 0.3% gain they have held for months. That put the year over year level at 4.1%, a very solid expansion considering all of the talk we are hearing about how US wages are terrible. Of course that raised comments about 'wage-led' inflation. For once we would like to have an expansion with some wage increases without having to hear about this bogus, unsubstantiated theory.

Even with the upside revision that brought cheers from many commentators, the market did not run higher because the results were strong. No, the numbers were still quite weak, just not the gut-punch level the initial August report of negative growth suggested. The revision suggested no collapse, but the overall numbers were weak. 89K? Even if that was reported in August it still would have been a big letdown versus the 140K expected. No, all the revision did was put the numbers in the 'just right' category for the market given its desire for continued Fed rate cuts.

Will the Fed still be ready to keep cutting them?

Indeed, despite the 'whew' many were letting out Friday and the talk of a strong economy as evidenced by the jobs report, quite frankly it showed nothing of the sort. To backtrack some, recall how some said the August jobs report and the initially reported 4K jobs loss was why the Fed cut rates. If you believe that, then the revision to +89K would prompt you to conclude that the Fed would not cut again and probably be looking for the opportunity to 'take back' that cut. We heard that on Friday from the uninformed or the shallow thinkers.

The Fed did not cut because of the jobs report. Bernanke's writings show he knows jobs are a lagging indicator, and the other more leading indicators simply did not jibe with that jobs report. As we said at the time, the Fed cut rates because it feared that the credit freeze on top of the sub-prime concerns would stall the economy and lead to recession as such contagions had done in the past. Friday FOMC member Kohn confirmed this with his candid comments as to why the Fed cut by 50 BP: the Fed cut in order to offset tight credit and promote growth, noting it was better to respond too rapidly versus too slowly. He noted that with core inflation trending lower (core annual PCE growth at 1.8% last month) the Fed had room to work with.

As we noted at the time, the weak August jobs number was additional cover the Fed could use to cut rates if it wanted to. Kohn's comments confirm this. Given the Fed cut to prevent a further contagion from leading to recession, the fact that jobs 'recovered' is not going to change anything with respect to whether the Fed cuts rates again or not.

Remember, the Fed was saying before the credit freeze hit that the economy would grow below its potential. Bernanke said this to Congress in his son of Humphrey-Hawkins testimony, and several other Fed presidents and governors echoed this position. After the credit crunch hit the Fed had even less reason to believe the economy would improve its growth, i.e. it likely expected growth to slow even more as a result. Thus with the Fed viewing the economy with even less momentum than before, the jobs revisions won't impact its view regarding rate cuts.

Given the Fed's moves ahead of and during the credit crunch and the Kohn comments, it is pretty clear that the Fed, through Kohn (and likely others to come this week) is outlining why the Fed will likely cut at the next meeting here in October. In short, the Fed was worried about sub-trend growth before all of these issues hit, and now that they have hit and the Fed has cut in response, a few more jobs added due to a revision are not going to change its course of action. The only real question is whether the Fed cuts another 50BP or just 25BP. If the leading economic data continues to improve and show a second re-acceleration out of the mid-cycle slowdown, 25BP is likely the number. Much depends upon how the credit issues improve before that meeting, however. If they are not better, the Fed will do what it has to in order to get that market opened up to avoid any chance of a slowdown leading to a recession.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Tuesday, September 04, 2007

Does Bernanke Need Glasses?

- The news was good enough to close out the week with gain.
- Bernanke speech shows his eye is on the ball, but does he need some glasses?
- Inflation as measured by the PCE continues its positive trend.
- The game starts anew this week with higher volume and a load of economic data.

Stocks start strong and hold it to the close.

Bernanke was still warming up in the bullpen when the latest round of inflation data was released, the July PCE. It posted a second consecutive month at 1.9% year/year, within the Fed's comfort zone. Incomes came in at 0.5%, topping the 0.3% expected and pushing the year/year gains to 6.6%. That is not the crappy growth rate we are supposedly suffering through according to those on the campaign trail. Of course truth is typically the casualty of politics. In any event, even with Bernanke still to come investors appeared quite chipper as futures jumped sharply on the data.

There was another goose to the pre-market trade as the President's office announced President Bush would present a proposal to help alleviate some of the mortgage issues. The prospect of the executive office working in conjunction with the Fed had investors almost downright giddy. Futures were up in the 20 point range on NASDAQ and SP.

Of course, there is always the issue of whether a very strong open can hold, particularly when the market is still in a choppy mode, still trying to find its footing, and a major address by the Fed chairman is still to come. Indeed, stocks started to test immediately after the strong open. They were still positive but off their highs when the Bernanke text was released. The immediate reaction was lower, but it was not a dive downside, and after the market got over the fact that Bernanke was not ready to cut on Tuesday it rebounded. Didn't hurt that Chicago PMI was 53.8, topping expectations of 53.0.

The issue was still being decided when the President took to the microphone and put forth some of his ideas. He expressly said no bailout was planned, but that there were some things that could be done to help those stretched thin get through the tougher times and remain in their homes. He wants to extend FHA protection to roughly 80K mortgages, provide temporary tax abatement on taxes due when you refinance at a lower home cost, and better enforce predatory lending laws. Nothing all that spectacular, just something to show he was not as aloof as his father and that the government was doing more than just relying on the Fed and its interest rate stick.

The combination appeared to work. The indices double bottomed and rallied into lunch. A midday pause and then they rallied higher into the close, tailing off modestly in the last 10 minutes. The result was a solid gain for the session, but even with that the market closed mixed for the week, having to make a good comeback from the early week selling to do so. The Friday surge maintained their attempts at setting up some upside patterns off the bottom of this selling bout. It was no affirmation of a bottom in place, but it certainly showed that the hedge funds were not in selling once more to end the month as we feared would occur. With the Fed announcing it was in the game and the administration now wanting to gain some points with an "I feel your pain approach," that kept the sellers at bay, at least to end the month.

Technically the action was solid intraday. It gapped, tested, held on, and then rallied in the afternoon to close near session highs. Once more breadth was strong; it was strong on all of the sessions that showed a trend the past week and Friday was no exception with a 5.8:1 reading on NYSE. Volume was mixed but again low; Friday it was NYSE's day to show better trade, but still it was well below average.

That low volume is just right for forming bases, and after that hard selling that drove the indices lower to end July and start August, the low trade is consistent with base building: hard selling to start, then calming down on the bottom of the pattern. There is the negative connotation as well, the high volume dump, low volume recovery; that often ends with more selling before it is resolved.

The Friday action also left the indices at some prior highs in August or other key resistance such as the 50 day EMA where they stalled before. The low volume on the recovery to these levels leaves the move open to selling when everyone gets back into the market after Labor Day. That is the official start of September, and that is typically a tough one for stocks. As discussed Thursday, in 2006 it was no issue at all; in 2004 and 2005, however, there was some sizeable downside as the market worked on a bottom. Hmmm, seems somewhat familiar. For certain the increase in volume will mean the moves made are more meaningful.

The positive through all of this is the continued solid performance of market leaders such as AAPL, GRMN, BCSI, ZUMZ, NVDA, SLB, DO, etc. They are up but they are not trading on anemic volume when they make their solid moves. That is the backbone or the foundation of this market, whichever analogy you prefer. If they continue to hold their ground in the weeks ahead, that is a solid positive for the market.


Bernanke saying the right things.

The Fed chairman delivered what some styled the speech of his career. He did an admirable job of once again sticking to script and managing to please the market as well. As we felt he would, he reiterated the points in the Schumer letter, but there was more as well, an expression of a deeper understanding of the Fed's role.

Bernanke's speech can be broken down into four parts. First there was a discussion of the issues facing the market, a restatement of the Fed's recognition in its August discount rate cut that the danger to the economy held precedence over any inflation threat. Second, he reaffirmed the easing bias or at least the non-inflation bias. Third, he copied from the Schumer letter, saying the Fed stands ready to act if necessary. Fourth, the Fed stands ready to act, but he does not specify just how.

Some called it the Rorschach speech: you could see in it what you want. Indeed, when boiled down the 'action' part of the speech said that if the Fed felt it needed to act it would act. Now that is groundbreaking. In sum, just as the Schumer letter stated, the Fed stands ready to act if necessary.

There was a very important statement that showed the current Fed's views on when and why to cut rates. Bernanke stated it was not the Fed's job to rescue investors from poor investments. That has been the howl among many detractors with respect to any Fed action. He answered that with the most concise, salient response we have heard from a Fed member in decades:

"It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy."

"Well-functioning financial markets are essential for a prosperous economy. As the nation's central bank, the Federal Reserve seeks to promote general financial stability and to help to ensure that financial markets function in an orderly manner."

This is the kernel, the chewy nugget, the prize in the Cracker Jack box. The Fed is not there to rescue bad investments, but when those bad investments threaten the rest of the economy, it is the Fed's duty to step in and assure that the financial markets work as they should. Thank you. Clarity at last. Thus the Fed is watching how the financial markets are functioning. It saw they were showing signs of serious strain and stepped in with liquidity injections and then a discount rate cut. They were going to the heart of the matter, i.e. thawing the credit freeze with money, versus just cutting rates as a first step. Just as Bernanke cleaned up the Greenspan inflation hangover by lowering money supply that Greenspan allowed to expand even as he hiked rates, Bernanke is going to the heart of the credit problem by creating liquidity where there was none, thus allowing the financial markets to function and resolve the issues.

The irony of this is that many are hurling jibes at those of us who take the position the Fed should act, saying that we are crying for intervention when things go wrong while we say 'stay away' when things appear fine. That is a shallow view that misses the mark: when certain events disrupt the orderly function of markets the issues cannot be resolved on their own without threatening the broader economy. It is incumbent upon the Fed to grease the gears so the markets can trade and resolve the issues. That is all we want and that is what the Bernanke Fed is trying to accomplish versus slashing rates as the first visceral reaction to the credit issues. As somewhat of a proof as to the soundness of this plan, note how the markets calmed down once the Fed started injecting funds and then cut the discount rate. The bank to bank rates dropped and deals started to get done, i.e. loan packages started to change hands again. It is not fixed; a lot can still go wrong, but the Fed is doing its job by watching and stepping in as needed to help the markets function.

Inflation read gives Bernanke the room he needs.

The core PCE for July came in at 0.1%, down from a revised 0.2% reading in June, and matching the April and May reading. That kept the year/year core reading at 1.9% for the second month. Critics will quickly say it is just barely inside the Fed's 1% to 2% 'comfort zone,' implying it could take off higher next month if the Fed is not standing with its foot on the economy's throat.

But that view ignores what has transpired the past 23 months. Way back in early 2006 we wrote that it looked as if inflation pressures, not inflation, peaked in the fall 2005. The pressures were abating though actual inflation was still rising: squeeze a full tube and even after you let off it continues to squirt out until the pressure is worked off. Thus over the last 2 years inflation has peaked and then has started to fall. Once it started the fall, the drop from a 2.6% core reading less than a year back has been rather rapid. The trend is down; it is not about to ratchet back up out of control. This is the fallacy of putting so much faith in a number and not looking at trends and the underlying facts.

So what does this mean? It means inflation is not something the Fed should worry about, and this admission with the discount rate cut that it is no longer putting inflation first is a relief. We only hope it did not wait too long to make this change. Not from the inflation standpoint; we were not worried about that at all anymore. If you look at the past 6 months the annualized core PCE is 1.5%. For two years inflation pressures have fallen, and now inflation itself is falling MUCH FASTER. In another 6 months the annualized inflation rate will be at 1.5% or lower and the 6 month reading will likely be near 1%. Inflation? It doesn't just flair up in a month and thus run out of control. The pressures abated, it has started to trend lower, and it is starting to really fall over the past 6 months.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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