Saturday, December 20, 2008

Stocks Finish the Week Status Quo

SUMMARY:
- Stocks once more give up most of an early gain, finish the week status quo.
- Congress' failure to pass auto bailout legislation leaves the bailout size and requirements at the whim of the Executive.
- LIBOR continues its fall, trying to match pace with the US treasuries.
- Market has some leadership and technical positives to take it higher to New Years.

Stocks bounce as TARP thrown over automakers, but the big gains fritter away.

The announcement of the auto deal came two days later than expected, but expected nonetheless. The Executive branch is throwing $13.4B in TARP funds at GM and Chrysler to keep them solvent a few more weeks. The market was relieved to get the word and futures moved higher. Earnings had something of a positive flavor with RIMM and ORCL bumping their outlooks more than expected. On the other hand PALM dropped the ball, ASML (chips) reduced its outlook, and CTAS (uniforms) missed. S&P downgraded eleven financial institutions including BAC, C, DB and GS. The financials are crushed for over a year, they finally start to bounce back some and S&P finally downgrades them. Good call guys.

Despite the negatives there was a solid rally off the open heading into midmorning. Oil was lower again as the January contract was routed (33.87, -2.35), the dollar bounced back for the second day, and gold continued its pullback after the Wednesday reversal (840.40, -20.20). Gold is interesting. It imploded in October, rebounded and gave us a decent gain with a GLD play we had, and finally made it up to the 200 day SMA this week. That is also a down trendline from the July and October peaks. It turned down right spot on at that trendline.

All of this pushed stocks higher through midmorning with the Dow putting in about 150 points. As on Thursday, however, midmorning turned the dial and the market could not hold onto the nice gains. A lunchtime to afternoon bounce stalled and the indices closed near the session lows. Even with that selloff the indices, sans DJ30, closed positive.

For the week stocks finished higher, aided once more by an early week surge. Just as with the prior week there was a strong start and then the action tapered off into Friday. That left the indices with some gains on the week but a quiet finish and not much farther along, definitely unable to take on the next key resistance level with the fade. No real issues with that; plenty of rest to make the move, and in good position to do it.

TECHNICAL. A second session of an early move and then a fade. Don't want this action to be habit forming. Overall, however, the action was not bad given most indices closed positive and held together decent positions.

INTERNALS. Breadth was positive on NYSE thanks to the continued solid performance the small caps are putting in (+1.62%). NASDAQ breadth fell negative even though the points were positive. Mostly a large cap tech move as ORCL did well and the NASDAQ 100 closed up over 1% versus NASDAQ's 0.77% gain overall. Volume exploded on both NYSE and NASDAQ. That was a function of expiration Friday and some rebalancing on the S & P indices. Nice to see volume up as most of the indices posted gains, but we don't want to read more into it than is there. Overall the week was a low volume one with a spike on Tuesday when the indices rallied. No blowout, just a good gain on good volume and then a lower volume coast the rest of the week.

CHARTS. After a nice Tuesday surge the indices slid laterally into Friday, holding above near support. That is good, but they still have to deal with some key resistance overhead. It is most prominent on DJ30 as the index butted heads with that level, or at least came close, Tuesday and Wednesday. All of the indices are in a tightening lateral move above near support and below the next key resistance level. The move is punctuated by some solid upside volume on upside sessions. That shows there is continuing accumulation, albeit somewhat under the covers. There is still serious overhead resistance that has many pundits glum. Every upside day such as Tuesday the are ebullient. Then they get a couple of slow sessions such as those that ended the week and they turn into glum chums. The action, however, tells us that the new backbone is still in place and that is positive for a Christmas rally (or holiday rally, Winter solstice celebration, etc.; good grief) during the two back to back holiday shortened weeks ahead as the market moves with the current trend.

LEADERSHIP. Small caps were definitely the preferred flavor Friday. Of the positions we bought, all were smaller caps. Really like seeing them step up to the fore given they are growth oriented and need an expanding economy to grow earnings. They move out ahead of the economy, and thus we need to see them continue moving higher as the new year gets underway. That will show the buyers are betting on a firming economy. There are many stocks that have made solid moves higher, stocks from various sectors such as materials, commodities, business services, chips, tech. These stocks are making excellent, orderly pullbacks to near support, and that is setting them up for the move higher once more. There likely won't be many buyers and sellers over the next couple of weeks with the holidays, so an overall strong volume market move is not likely in the cards. Nonetheless, just as we have seen in this generally light volume, these stocks are still corralling the volume as they make their moves higher.


THE ECONOMY

So much for any serious requirements on our $13.4B.

You had to applaud the few republican senators that stood on principal and did not want to bail out the auto industry without some form of restrictions similar to what a bankruptcy court would impose. Problem is, they played their momentary advantage too far, reached for a little too much, and as a result, no deal and no legislation.

That lobbed a softball over to the Executive branch, giving the President and his men the opportunity to do whatever they wanted. Bush did follow a lot of what was in that failed legislative package, requiring proof of solvency and a viable game plan by March 31 or else bankruptcy.

Problem is, the authority is all in the executive without any legislation backing it up. That means when the Presidency changes hands in January the new executive will have complete power to do as he sees fit with the prior plan and what happens in the future. If Congress had struck a palatable deal for all it would take legislation to change plan, not just the stroke of a pen.

Thus we likely threw the $13.4B and another $4B they can grab a bit later right down a hole . . . likely to be followed by more of our money after the automakers fail to make the necessary changes to become competitive. Already the UAW is howling about having to bring its wage structure in line with what foreign automakers with US plants pay their employees. While I agree you don't want the government telling you what you pay your employees, the fact that the automakers came to DC with their hats in their hands (at least the second time around) begging for taxpayer money necessarily requires our government to exercise a bit of control when the feds fork over the dough. That the UAW is howling only tells you that the plan actually has some teeth in it.

In any event, the automakers have some of our cash and will 'endeavor to persevere' over the next three and one-half months and radically change their fortunes. Not too excited I will see my money on this deal. Maybe GM would give me one of those three quarter ton, 4 wheel drive Yukon XL's or a Yukon Denali and we can call it even.


Credit rates continue to improve, need more improvement.

US Treasuries took a pounding this past week as the Fed cut the Fed Funds rate 75BP and pledged the kitchen sink in order to fight deflation and bring the credit markets back to functionality. A bit of a rebound late in the week helped but didn't change things much as the 10 year and 30 year bond yields fell to record lows.

That may help mortgage and other consumer rates, but it is also somewhat forestalling a faster recovery in the overall credit markets. You might ask 'but LIBOR rates are falling nicely'. You would be right. LIBOR fell again Friday with the key 3-month rate dropping to 1.50% from 1.53% Thursday and 1.92% to start the week. Hefty drop.

With LIBOR falling, the TED spread, the difference between 3-month LIBOR and 3-month US Treasury, should be narrowing, making money cheaper and credit more readily available. It is, but the US bond is falling fast as well. In other words, they are moving somewhat together and thus the spread is falling, but not as fast as if the US yield was rising.

As of the start of Friday the TED spread was right at 150BP. That is much, much better than the 434BP in September. It is also still quite high. For example, in 2006 the TED spread averaged 0.36% or 36BP. That puts it just over 4 times more 'normal' levels. Thus there is improvement to be had, but with the US 3-month treasury trading near a quarter of a percentage point, the decline is going to have to come on the LIBOR side. Fortunately it fell 22% this past week and hopefully it will continue to do so.


THE MARKET

MARKET SENTIMENT

VIX: 44.93; -2.41
VXN: 43.5; -2.53
VXO: 45.94; -5.37

Put/Call Ratio (CBOE): 0.82; -0.08


Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

This is a historical milestone in the making. Bulls are impressively low considering we are in general a very optimistic country. The few bulls is a positive indication because it means most everyone that is getting out is out and there is money on the sidelines. In other words the ammunition boxes are full and as the market recovers investors will start opening up the boxes and firing. Little by little they will be forced to put more money into the market and there will be some rushes higher in fear they are missing the train. You relish times when sentiment is so negative because it means some tremendous buys are setting up. This could indeed be the opportunity of a lifetime, and you take advantage of it by buying quality stocks and letting them work for you as long as they will. If we can hold them for years, great.

Bulls: 25.3%. Bouncing up with the modest rise in the market, up from 23.1%. Turning back up above the 5 year low at 21.3% hit in November 2008. Remains below the 35% threshold considered bullish for the market. At this level it is very bullish. This past move down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 46.2%. Down from 49.5% the prior week that saw bear surge from 44.1%. Making a lower high below that 5 year high at 54.4% hit the last week of October. Well above the 35% threshold so still a bullish indication. This move over 50 takes it to the highest since 1995. Extreme negative sentiment. 35% is the level that historically indicates excessive pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +11.95 points (+0.77%) to close at 1564.32
Volume: 2.737B (+33.61%). Volume jumped well above average on the modest point gain, but it was due to expiration. A very quiet week leading up to Friday, and thus the volume surge as positions were rolled.

Up Volume: 1.523B (+1.04B)
Down Volume: 1.058B (-505.461M)

A/D and Hi/Lo: Decliners led 1.04 to 1. Opposite of Wednesday, breadth was negative as the index posted a gain. Large caps were on the move Friday on NASDAQ.
Previous Session: Decliners led 1.63 to 1

New Highs: 7 (-6)
New Lows: 108 (+39)

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

A quiet end to the week that started slow, zoomed on Tuesday, then idled laterally the rest of the way. The 50 day SMA (1579) stopped each low volume attempt to move higher. NASDAQ has made a couple of higher lows, a higher high, and something of a higher high this past week. Made it on the close but still has the early December high to get through (1603) and then of course the 50 day EMA (1631).

SOX (+1.38%) enjoyed a strong move but then gave most of it back Thursday after a series of downgrades of some big names. Nonetheless the sector remains in decent shape with the early leaders making orderly pullbacks to support (e.g. BRCM). Still looking for something from the chips even though several pundits have proclaimed them dead.

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: +2.6 points (+0.29%) to close at 887.88
NYSE Volume: 2.42B (+75.06%). Big volume here as well, aided by expiration and the S&P rebalance of some of its indices. Big volume and SP500 when nowhere. If it wasn't expiration we would be pretty psyched about the volume spike and no movement. The oil spring coiling. As it is, well, just a big volume expiration in a rather low volume market.

Up Volume: 1.388B (+1.055B)
Down Volume: 1.005B (-33.676M)

A/D and Hi/Lo: Advancers led 1.78 to 1. The small caps were the big boost. Good.
Previous Session: Decliners led 1.39 to 1

New Highs: 27 (-7)
New Lows: 89 (+11)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

Good surge Tuesday, but it came nowhere near the 50 day EMA (928). SP500 tested the early December high (918.57) but slipped to close at the 10 and 18 day EMA. That also put it below the early October closing low at 899. Dicey area with a lot of former highs and lows that many pundits are very eager to point out. Of course if resistance always held then there would be no recovery rallies . . . ever. Nice quiet lateral action over support. Higher lows, a higher high, and in position to surge higher once more. Like the odds for a breakout to another higher high, but as noted above, two short weeks are not going to give us a very good look at any strong volume.

SP600 (+1.62%) led the market again though the index closed well off its high after tapping near the 50 day EMA (267.34). SP600, SP400, SOX are the indices that have made two higher lows and two higher highs. The children shall lead.

SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg


DJ30

The Dow is the only index on the week that challenged the 50 day EMA (8953), but it really made no attempt to get through this next resistance as it sold right back down to 8500 support after tapping at it. Similar to SP500 the Dow is bouncing up and down in a relatively narrow range, showing good price/volume action. Would like to see a breakout over the 50 day EMA, but with a couple of holiday shortened, light volume weeks, even if it does make the break it won't mean a whole lot. It will need to show it can hang onto the gains in the new year when everyone shows up once more.

Stats: -25.88 points (-0.3%) to close at 8579.11
VOLUME: 550M shares Friday versus 274M shares Thursday. Big expiration volume. The only other solid trade on the week was the Wednesday rally that pushed volume to average.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


MONDAY

A shortened week for Christmas and then again the following week for New Years. Not going to give us a very good look at the market's strength given trade will be light. That does not mean, however, we won't see movement and won't get the opportunity to make some money.

The market has a couple of things going for it to take it through the holidays and on into the New Year. First are the technical underpinnings. Ever since the November low the market has changed. First, even as the indices made new lows for the year, the new lows count did not make new highs for the year. First sign the market was getting sold out. Off of that bottom the price/volume action improved as stocks rallied on strong volume and tested lower volume. With that action the indices started by making a higher low, a higher high, a higher low, and in the case of the smaller indices, a second higher high.

That is all well and good, but it does not amount to a hill of beans unless there are stocks in good position to take on the leadership role. It is critical for any rally attempt to have leadership. Several rally attempts during the 2000-2002 bear market failed due to no leadership at all (just relief bounces from another leg of hideous selling) or no new leadership after an initial spurt. That is one reason this rally is so intriguing even though it is making baby steps (and in a way, baby steps are good because it does not fire off all of its ammunition at once). There is a steady increase in leadership, gaining speed, stepping up to support the early scattered leadership. Infrastructure build-out stocks are improving on all of the Keynesian make-work plans of the new administration (materials, engineering, commodities). That is also part of a re-inflation story given the US Fed's 'all in' push to clear the logjam in the credit markets and US investment. Small business stocks are improving nicely as well, continuing their moves after bolting out to early leadership. Retail continues to perform in the daily gloom you hear about how bad retail sales are this season. Chips have weathered innumerable downgrades to continue higher and actually turn SOX into a market leading index. Insurance is setting up nicely as well.

With this leadership improvement we are continuing to look at upside opportunities we can buy into off of the pullbacks leaders are showing after good surges as well as new leaders coming into the ranks and setting up their first breakouts. In this way we can take advantage of the melt upside toward the end of the year even if low volume persists. When we get to year end and the market has put in some more upside we have to evaluate whether we want to take gain off the table ahead of the return of the majority of investors and the jostling that often occurs to start a new year. If we get a nice rise we will be inclined to take quite a lot of gain off the table and then see what the new year brings. First things first. We birddog the stocks that are ready to lead, and if they make their moves we move in and ride them. As noted earlier, even if overall market volume is low on the move, we will likely see some good volume in these smaller individual names.


Support and Resistance

NASDAQ: Closed at 1564.32
Resistance:
1565 is the second low in October 2008
1579 is the 50 day SMA that stalled NASDAQ last week
1603 is the December peak
1620 from the early 2001 low
The 50 day EMA at 1631
1644 from August 2003
1752 from 2004
1782 from August 2004
1786 is the November 2008 high
1886 is the 90 day SMA

Support:
The 10 day EMA is 1545
1542 is the early October 2008 low
1536 is the late November 2008 peak
The 18 day EMA at 1536
1521 is the late 2002 peak following the bounce off the bear market low
1499.21 is the 2008 closing low
1493 is the October 2008 low. Key low.
1428 is the November 2008 low
1398 is the early December 2008 low
1387 is the 2001 low
1295 is the November 2008 low
1253 is the March 2003 low on the test of the rally off the 2002 bear market low
1108 is the 2002 low


S&P 500: Closed at 887.88
Resistance:
889 is an interim 2002 peak
896 is the late November 2008 peak
899 is the early October closing low
919 is the early December peak
The 50 day EMA at 928
965 is the 2003 consolidation low
995 from June 2003 consolidation peak
1008 is the November 2008 peak
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.

Support:
The 10 day EMA at 886
The 18 day EMA at 883
866 is the second October 2008 low
853 is the July 2002 low
848 is the October 2008 closing low
839 is the early October 2008 low
815 is the early December 2008 low
818 is the November 2008 low
800 is the March 2003 post bottom low
768 is the 2002 bear market low
741 is the November 2008 low
650 on the top and 625 on the bottom of a 7 month range in 1996
475 from 1994 where the market moved laterally for the entire year.


Dow: Closed at 8579.11
Resistance:
8626 from December 2002
The 18 day EMA at 8638
The 10 day EMA at 8658
The 50 day SMA at 8702 stopped the Dow on the prior bounce
8829 is the late November 2008 peak
8934 is the December closing high
The 50 day EMA at 8953
8985 is the closing low in the mid-2003 consolidation
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
9575 from September 2003, May 2001
9654 is the November 2008 peak

Support:
8521 is an interim high in March 2003 after the March 2003 low
8451 is the early October closing low. Key level to watch.
8141 is the early December low
8197 was the second October 2008 low
8175 is the October 2008 closing low. Key level to watch.
7965 is the November 2008 intraday low.
7882 is the early October 2008 low. Key level to watch.
7702 is the July 2002 low
7524 is the March 2002 low to test the move off the October 2002 low
7449 is the November 2008 low
7282 is the October 2002 low


Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

December 23 - Tuesday
Q3 Chain Deflator-Final (8:30): -4.2% expected, 4.2% prior
GDP-Final, Q3 (8:30): -0.5% expected, -0.5% prior
Existing Home Sales, November (10:00): 4.93 expected, 4.98 prior
Mich Sentiment-Rev. , December (10:00): 58.6 expected, NA prior
New Home Sales, November (10:00): 420K expected, 433K prior

December 24 - Wednesday
Initial Jobless claims (8:30): 575K
November Durable Orders (8:30): -3.1% expected, -6.2% prior
Person Income, November (8:30): 0.0% expected, 0.3% prior
Personal Spending, November (8:30): -0.8% expected, -1.0% prior
Crude oil inventories (10:30): 525K prior

By: Jon Johnson, Editor
Copyright 2008 | All Rights Reserved

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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Sunday, December 14, 2008

Wall Street Fraud Reaches Far

SUMMARY:
- Senate votes down auto bailout, massive Wall Street fraud, but economic data not as terrible as expected, and the market bounces back.
- Who is in charge? Federal government in disarray as different branches acting independently and all without constitutional authority.
- Wall Street fraud going to reach far even as irony is thick.
- November retail sales not as bad as feared and core sales rise.
- Market has tested and now needs to resume the upside move.

**NOTE***

Jon Johnson has been under the weather much of the week and this afternoon he threw in the towel for the weekend. We suspect the final straw was the handling of the auto bailout and the Executive branch indicating it would use TARP funds. Mr. Johnson was pretty amped up about this and we are pretty sure that pushed him over the edge so to speak. He did give us his important takes from the session and the week and we put them together for him tonight.

**NOTE***

Three important points Friday, two bad, one good, but the market acts just fine.

Futures were falling like stones on the failure to reach any accord for the uncompetitive US auto industry. It galls most to give arrogant, bad business structures tax dollars that will likely be squandered, but at the same time we like having the tanks and military equipment for national defense reasons. It is not very perplexing but when you fold politics into the mix it becomes a black hole.

That was point number one: the continuing automaker saga, and the market allowing itself to be led by the nose as the prospects for a bailout ebbed and flowed. It was leading the market sharply lower but then the White House and Treasury said 'all options were on the table' to rescue the automakers, and that brought the market up off the lows. If you cannot get what you want from Congress, go to another branch of government. Right now any semblance of constitutional protocol has been tossed in the toilet, evident by the end run around Congress to the President's doorstep. Bush was only too happy to suggest that TARP funds, created to help financial institutions through buying distressed assets, were also available for uncompetitive automakers. Great negotiating tactic. Makes you wonder what it was like in the Bush home raising the two daughters. Did they run from one parent to the next trying to get their way? In fairness we haven't heard what conditions the White House will put on TARP funds (why put any? It didn't put any on the financial institutions), but even senators are hoping some will be put in place. Never a good sign when some leading senators on both sides of the aisle have no idea what the President is contemplating. The carnival in DC is now a three-tent affair and the Constitution is being used as a trash liner. We may never recover from this. Yes we may get out of it without a major financial collapse, but our form of government and the respect it used to have around the world for the rule of law is over. We will all suffer as a result forever.

Point 2. An estimated $50B fraud took place in the money management business, a giant Ponzi scheme perpetrated by the former NASDAQ boss Madoff. Madoff returned 2% to 3% per month for years on end. Some savvy investors with Madoff said they could not tell what he was doing even though they had the trade confirmations. They were just happy to get their monthly positive returns. As it turns out, Madoff was taking the money coming in from the new investors and paying out to the existing investors. At some point it all had to seize up, and the dive in the market was the catalyst as a lot of overseas investors just decided to get out, worried about US hedge funds. The irony of this is that in 3 to 6 months the market will probably be much better off and Madoff would have escaped as new money would have come in. The market impact: not likely much. There are no positions to liquidate because the money never hit the market. Thus no mass selling to raise cash. The cash is gone. It will hurt the investors, but this time it won't hit the market really hard.

Point 3. The economic data was not as bad as feared. PPI fell 2.2% overall and rose 0.1% on the core. That makes 4 months of declining producer prices, a positive for business profits. Retail sales fell 1.8%, and while that makes five months of consecutive declines, they were not as bad as expected (-2%) nor as bad as October (-2.9%). It did not hurt that gasoline sales fell 14.7%, the largest decline on record. THE KEY: Core retail sales ROSE 0.5%, the first rise since July, right before all of this brown stuff hit the fan. Many, many sectors rose: Electronics 2.8%; health/personal care stores 1%; clothing sellers 0.8%; sporting goods 2.8%; department stores 2.1%; general merchandise 1.2%.

Point 4. The market took the bad news and instead of the Dow being down 400 points as it looked like in the wee hours of the morning, it and the other indices opened much tamer and rallied back to the upside in a steady albeit jagged move and closed positive. Yes there was an assist from the free wheeling President that never met a spending bill he did not like (or veto that he liked, for that matter), but the result was as we have seen before in this rally: some bad news tries to knock the market back but then the market swallows it and rebounds. The shorts simply could not take advantage of this amazing stroke of good luck that hit just as the indices were testing and were in a vulnerable position. The sellers would have feasted just 5 weeks back but on Friday this early Christmas gift was returned unopened. It was no big reversal session on the indices, but it was a big day in that once more the sellers could not grab onto a perfect selling opportunity. Winds of change are blowing stronger and stronger.

TECHNICAL. Once more some good intraday action with the lower open and then a steady, session long rebound to positive. Volatile but a steady, unbroken climb in the face of bad news. The new backbone is growing a bit stronger.

INTERNALS. Mediocre at best, but it was a reversal session from a very weak start so breadth was so-so (1.9:1 NYSE, 2:1 NASDAQ). Volume was lower and still well below average where it resided all week but for Monday (on the NYSE) when the indices jumped higher. The rest of the week was a lateral consolidation and Friday was a weak start but solid recovery. Positive for th upside.

CHARTS. The test continued as the indices started lower, moving well below the 10 and 18 day EMA, but then reversed to close over those near support levels. On the lows all of the indices easily held above the prior lows. That means they are looking to make another higher low here, building more of a positive picture. In addition, leadership came from the growth indices with NASDAQ scoring a 2.2% gain, SOX A 4.71% gain, and the small cap SP600 a 2.62% gain. Want to see the growth indices leading as that would signal the economy is going to be turning up in the future, that the trough is here. Not tat that point just yet; they still have to prove they are ready to lead and actually start leading.

LEADERSHIP. Growth areas were perky. Chips were up. Techs were solid. Some industrials put in some good work. After a pullback this week to test prior moves, they were moving back up and we saw some of the small business services rebounding as well (e.g. EPIQ, ACM). As discussed earlier in the week these are early cycle stocks. If they start moving again that is a positive for the economy and thus the market.


THE MARKET

MARKET SENTIMENT

VIX: 54.28; -1.5
VXN: 51.91; -0.15
VXO: 57.78; +0.67

Put/Call Ratio (CBOE): 1.04; +0.06. Moved back over 1.0, a bullish indication, even as the market reversed and moved higher. That is a positive indication as the put/call ratio is a contrary indicator: as it goes higher and closes over 1.0 that suggests anxiety or worry is hitting extremes.


Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

This is a historical milestone in the making. Bulls are impressively low considering we are in general a very optimistic country. The few bulls is a positive indication because it means most everyone that is getting out is out and there is money on the sidelines. In other words the ammunition boxes are full and as the market recovers investors will start opening up the boxes and firing. Little by little they will be forced to put more money into the market and there will be some rushes higher in fear they are missing the train. You relish times when sentiment is so negative because it means some tremendous buys are setting up. This could indeed be the opportunity of a lifetime, and you take advantage of it by buying quality stocks and letting them work for you as long as they will. If we can hold them for years, great.

Bulls: 25.3%. Bouncing up with the modest rise in the market, up from 23.1%. Turning back up above the 5 year low at 21.3% hit in November 2008. Remains below the 35% threshold considered bullish for the market. At this level it is very bullish. This past move down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 46.2%. Down from 49.5% the prior week that saw bear surge from 44.1%. Making a lower high below that 5 year high at 54.4% hit the last week of October. Well above the 35% threshold so still a bullish indication. This move over 50 takes it to the highest since 1995. Extreme negative sentiment. 35% is the level that historically indicates excessive pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +32.84 points (+2.18%) to close at 1540.72
Volume: 1.903B (-7.18%). A week of below average volume. It was higher on the upside sessions and lower on the consolidation and downside sessions so the price/volume action was a positive. Just needs some serious volume, however, i.e. above average volume.

Up Volume: 1.366B (+1.13B)
Down Volume: 519.724M (-1.277B)

A/D and Hi/Lo: Advancers led 2.03 to 1
Previous Session: Decliners led 2.86 to 1

New Highs: 3 (0)
New Lows: 110 (+27)

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

Gapped lower and then rebounded through the 10 and 18 day EMA near support. That kept the index above the late October low at 1500ish and if it holds, puts in another higher low in the move off the November low (the second higher low; racking them up here). That is how it starts but again, NASDAQ needs to show stronger trade on the upside as NASDAQ moves up and tries to take out the 50 day EMA (1646).

SOX (+4.58%) held key support at the 10 and 18 day EMA that is coincident with the late November peak and the late October low. It bounced off of that Friday after a nice orderly test to that level. From the doghouse to attempting to lead the recovery higher. A late start but making up ground.

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: +6.14 points (+0.7%) to close at 879.73
NYSE Volume: 1.434B (-2.42%). Low volume reach lower and recovery. Strong above average volume the first session of the week on the strong move higher, then lower, below average volume the rest of the week as the NYSE indices tested.

Up Volume: 1.019B (+795.662M)
Down Volume: 407.912M (-824.309M)

A/D and Hi/Lo: Advancers led 1.88 to 1
Previous Session: Decliners led 3.56 to 1

New Highs: 29 (+1)
New Lows: 81 (-6)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

After closing near the 10 and 18 day EMA Thursday, SP500 reached lower in the early session, undercutting those levels. It came close to the late October low but held above that level and reversed to recover the 10 and 18 day EMA, closing with a modest gain. Nice test and is now in position to continue the rebound, making a higher low in the process.

SP600 (+3.62%) small caps gapped lower, tested lower, but held the October low and reversed. They closed over near support at the 10 and 18 day EMA that they gave up on the Thursday close. SOX edged the small caps for the upside lead Friday. SP600 is still questionable here; needs to put in a strong week ahead to show it is back in the game and getting money put its way once more. The 50 day EMA is a key level it needs to take out, about 20 points north. It will take quite a move to get there so once it does it will likely need to take a pause that refreshes before continuing on. Has to get there first and on Friday there were some small caps bouncing back nicely from selling that week.

SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg


DJ30

As with SP500, the blue chips reached lower from the 8500 support level, held above the late October low, then recovered positive and just over the 10 and 18 day EMA on the close. Nice doji reversal though volume was still low overall. Still in position to make the move higher after this week of testing. Indeed, it is time to make the move higher.

Stats: +64.59 points (+0.75%) to close at 8629.68
VOLUME: 271M shares Friday versus 290M shares Thursday. Above average volume Monday then well below average the rest of the week. Good quiet consolidation action. Now it needs to show something in the last full week of the year this coming week.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


MONDAY

Big week of economic data, but the market faced a big week of data two weeks back and rallied into the teeth of ugly results. It will have the chance to do the same again, but . . . there could be some improving numbers. There is not a lot to base that upon, but November retail sales were better than expected in the face of terrible sentiment and jobs data. Many dismissed the retail results as a one-time rebound after two bad months, but pundits ALWAYS DISMISS any changes in the data when they are convinced things are very bad or very good. Viewed as aberrations, they are explained away as relief moves or something similar, then summarily dispatched. We will see if improvement comes in on the regional manufacturing reports as they were the first responders out of the last recession. Not looking for major sea changes, just nibbling at the edges that suggest something could be up.

Are we just whistling past the graveyard in so doing? Not really. There is some market improvement in terms of gains and in terms of keeping a stiff upper lip in the face of really bad news. There is leadership in some very interesting areas such as retail, business services, chips, technology, and commodities. The dollar is a worry (closed at 1.3372 Euros, still falling) and its decline is driving oil higher (though it closed lower Friday at 46.60, -1.38). On the other hand, LIBOR rates continue falling with the overnight at 0.12% Friday (flat from Thursday), the 1-month rate at 1.04 (down from 1.20% Thursday and 1.83% just Monday), and the 3-month at 1.92% (2.00% Thursday, 2.19% Monday). Good movement that is picking up speed finally at the 3-month level. With mortgage rates holding lower after last week's sharp decline and with gasoline prices down 60%, there is a serious undercurrent building.

With that setting it is no surprise the market is growing more backbone, bit by bit. We bought into new positions even if it was Friday, and we are going to continue looking at positions this coming week. Not all stocks move at once. As we have written many times, they break higher in waves with early leaders, more staid leaders, and the tag alongs. Different sectors and groups within sectors move at different times. Thus it is hogwash when you hear you have to be in the market at the initial rush higher or you miss out. With stocks leaving the station at different times during a solid upside run you have many opportunities to step in and make money to the upside.

PCLN is a stock we bought into originally (on the current rally) back in mid-November. It moved from the low fifties to 70 for us then tested for a couple of weeks. Friday we bought some more as it broke higher off a test of the 18 day EMA as it looks ready for another leg higher following that first solid run. Same stock, different leg, different wave. In a healthy market it is joined by more and more stocks that rally for the first time as PCLN, an early leader in this move off the bottom, makes its second run. It should give us another couple of runs higher similar to the first one if this rally has legs. For now it is getting the leadership stepping up in such a way that is does look as if it has some desire and ability to continue to move upside. We are going to look at more of these for next week and a bounce up off of this test.


Support and Resistance

NASDAQ: Closed at 1540.72
Resistance:
1542 is the early October 2008 low
1565 is the second low in October 2008
1620 from the early 2001 low
1644 from August 2003
The 50 day EMA at 1646
1752 from 2004
1782 from August 2004
1786 is the November 2008 high

Support:
1536 is the late November 2008 peak
1521 is the late 2002 peak following the bounce off the bear market low
The 18 day EMA at 1519
The 10 day EMA is 1518
1499.21 is the 2008 closing low
1493 is the October 2008 low. Key low.
1428 is the November 2008 low
1398 is the early December 2008 low
1387 is the 2001 low
1295 is the November 2008 low
1253 is the March 2003 low on the test of the rally off the 2002 bear market low
1108 is the 2002 low


S&P 500: Closed at 879.73
Resistance:
889 is an interim 2002 peak
896 is the late November 2008 peak
899 is the early October closing low
The 50 day EMA at 935.61
965 is the 2003 consolidation low
995 from June 2003 consolidation peak
1008 is the November 2008 peak
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.

Support:
The 18 day EMA at 876
The 10 day EMA at 876
866 is the second October 2008 low
853 is the July 2002 low
848 is the October 2008 closing low
839 is the early October 2008 low
815 is the early December 2008 low
818 is the November 2008 low
800 is the March 2003 post bottom low
768 is the 2002 bear market low
741 is the November 2008 low
650 on the top and 625 on the bottom of a 7 month range in 1996
475 from 1994 where the market moved laterally for the entire year.


Dow: Closed at 8629.68
Resistance:
The 50 day SMA at 8794 stopped the Dow all last week
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
The 50 day EMA at 9010
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
9575 from September 2003, May 2001
9654 is the November 2008 peak

Support:
8626 from December 2002
The 10 day EMA at 8611
The 18 day EMA at 8598
8521 is an interim high in March 2003 after the March 2003 low
8451 is the early October closing low. Key level to watch.
8141 is the early December low
8197 was the second October 2008 low
8175 is the October 2008 closing low. Key level to watch.
7965 is the November 2008 intraday low.
7882 is the early October 2008 low. Key level to watch.
7702 is the July 2002 low
7524 is the March 2002 low to test the move off the October 2002 low
7449 is the November 2008 low
7282 is the October 2002 low


Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

December 15 - Monday
December NY Empire State Index (8:30): -27.0 expected, -25.4 prior
Net Foreign Purchases, October (9:00): $66.2B prior
Capacity Utilization, November (9:15): 75.9% expected, 76.4% prior
Industrial Production, November (9:15): -0.5% expected, 1.3% prior

December 16 - Tuesday
November Building Permits (8:30): 700K expected, 708K prior
Core CPI, November (8:30): 0.1% expected, -0.1% prior
CPI, November (8:30): -1.3% expected, -1.0% prior
Housing Starts, November (8:30): 730K expected, 791K prior

December 17 - Wednesday
Crude oil inventories (10:30): 400K prior

December 18 - Thursday
November Leading Economic Indicators (10:00): -0.5% expected, -0.8% prior
Philadelphia Fed, December (10:00): -40.0 expected, -39.3 prior

By: Jon Johnson, Editor
Copyright 2008 | All Rights Reserved

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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Monday, December 08, 2008

Stocks Rally in Face of Bad News

SUMMARY:
- Stocks stare down terrible jobs data, rally again in the face of bad news.
- After worst week ever for the market in October, indices are hanging in, improving their position.
- Hartford insurance announces everyone is wrong about its future, rallying the insurers singlehandedly.
- Jobs numbers are the worst since 1974. Or are they?
- Budding strength ready to morph into something better.

More new-found strength in the face of bad news.

The big news was the monthly jobs report. It was bad at -533K (-335K expected) and the prior two months were notched lower by 199K total. Total dejection permeated the pre-market financial stations with former Treasury Secretary Snow calling the report 'terrible' and stating the feds had to go all out and do 'whatever it takes' to stimulate the economy. Snow wanted everything from tax incentives to more of the same kind of monetary and socialist interventions. Every guest was similarly downcast. Things were bad and going to get worse was the common theme.

Stock futures were down, but they were not down commensurate with the news. In the pre-market alert we noted once again the market was handling bad news relatively well. Not great, not surging in the face of the news, but hanging in their with a bit of strength. Stocks opened lower but immediately started to bounce. That didn't last long as the sellers came at them again. They pushed the indices lower once more. They pushed them to the Monday low. Do or die, lick log, fish or cut bait. If they failed here it was over. They held. That triggered short covering as well as a session long rise into the close. The market has had spine sightings the past week after the initial rally off the 2008 lows. The action of rallying in the face of bad news, really bad news, shows that the market is sold out for at least the short term if not more.

TECHNICAL. A little spine is a good thing. A few weeks back I was talking about the market needing to start showing some upside bias even when the market overall was not necessarily on the rise. There could be continued up and down action, but you want to start seeing the upside win out at the end of the day. There could be bad news but the market did not waiver and then get the 18 wheeler treatment like an armadillo on the road at night. All week the economic data dumped on the market. ISM terrible. ISM services, terrible. Auto sales horrid. ADP jobs pathetic. Challenger layoffs awful and thousands more were announced later in the week making next week downright painful. Jobless claims were a mere ugly prelude to a 34 year low water mark in non-farm payrolls. Outside of Monday, however, the market fought back from every gut punch. Friday it overcame bad news even before the market opened as futures just were not that bad in the face of really atrocious news. It toyed with the sellers in the morning before rebounding from a second selling attempt. When that attempt to sell failed the washout was complete and stocks rallied to the close.

INTERNALS. Not bad, not great. You can classify Friday as a follow through on the NYSE indices on the heels of NASDAQ doing the same, though as with NASDAQ, it was not that strong thanks to some rising but so-so volume. Trade did reach average on NSYE, so there was a bit more umph to the move. Breadth was decent at 2+:1. A follow through but the lack of real power taints the ultimate upside that can be achieved without something stronger this week. Without that, this move makes it hard to say it is THE bottom, but it is much more than the market has shown since the serious selling started.

CHARTS. The action all week was important, but Friday summed it all up, tying up the loose ends of the week. Specifically, the selling into midmorning took the indices down to the Monday low. When the sellers could not push the indices lower the rebound was on and it took the indices back through the 18 day EMA resistance. That has been violated on both sides of the line this week more than the underage drinking law on Spring Break, but it still means something. NASDAQ moved through some resistance near 1500 on the close as well. SP500 still has 900 to clear, the level that stalled the last move in late November. DJ30 the 18 day EMA as well as some interim resistance at 8500, but it too has some serious issues at 9000, 9600, etc. Digging out of a hole it tough business and there is plenty of work ahead. When you consider that the week of October 6 to October 10 was the worst week EVER for the market and that a month later the indices are basically flat and showing some resurrected strength, you can see the reason for a bit of optimism in the midst of all the gloom.

LEADERSHIP. Still a long way from a plethora of solid bases ready to ride the swell of the indices higher, but that is not really necessary at this point. As seen in prior recoveries, there simply needs to be some good stocks in position to make rallies and lift the market higher, allowing other stocks to fill in behind with base formation. This past week there were good stocks making the move, some of them from good patterns, some from simply solid consolidation patterns. Some solid, familiar names: AMZN, LOW, DLTR, COH, VX, FLR, MCD, AAPL. Some broad shoulders to lift the market. In addition a lot of smaller stocks were doing some great work: QCOR, CBST, EPIQ, HMSY. Sectors are also starting to work other than just individual stocks. Retail is attempting to come around, rallying on bad same store sales results. Airlines are shaping up and some are moving. Financials are moving higher and setting up. Some techs are doing the same. Insurance is suddenly performing: Hartford said Friday that its business and balance sheet was nowhere near as bad as many outsiders say it is. Some good work is being done, and they are in and are getting in position to move upside.


THE ECONOMY

Predictions of $25/bbl oil.

Remember $200/bbl oil as a lock last summer? Remember AMZN was to go to $500? Well, AMZN did, but that was the mark of the top. When those kind of predictions start coming in after what is already a massive move, there is more froth than on a cappuccino. As the $200/bbl predictions hit, oil rolled over. It is down 70% from its peak.

Now the pendulum has swung full to the downside. Friday a MER analyst said that if China goes into recession among other things that oil would hit $25/bbl. Not that $25 seems that much more, but it is another 38% move lower and overall an 83% decline from peak. A massive move and now predictions of a lot more. Oil is getting sold out.

Not that no one would mind seeing oil head lower, but after a 25% drop this week to a close at 41.64 (-2.13), expecting a lot more downside near term is a stretch. Moreover, $40ish oil is really good if it stays. Once there is sign or even anticipation of economic recovery, however, oil will start back up. Not as much as before; that was mania driven by the belief China, India, Brazil, etc. would never see recessions. Yes and the US market rally in the late 1990's was driven by fundamentals. Everyone believing that stand on his or her head.

Thus oil is going to bounce near term, but the downtrend is not going to end anytime soon. It will likely hang around for quite some time in this range, and again, that is acceptable for the economy and thus consumers.


Terrible jobs numbers, but let me tell you, back in my day . . .

Unemployment hit 6.7%, a 15 year high. Not as bad as the 10% unemployment of the 1970's thus far. On the other hand, the monthly jobs loss (-533K) was the worst since December 1974, and we all know that the 1973-74 recession and the 1970's malaise was the worst since the Great Depression. September was revised to -403K from -284K. October was a write down as well, falling to -320K from -240K. Another 199K more lost, bringing the 3-month total to -1.256M. Impressively weak and worthy of the 1970's comparisons.

Or is it? Yes and no. The numbers of jobs lost measures up, but you also have to figure the size of the overall jobs pool. As the economy has grown impressively since 1974, the job pool is much larger. That makes the same real number of jobs losses proportionately less: bigger pool, same number of jobs lost, less of an impact. To even things up, the monthly jobs loss would need to DOUBLE to have the same impact as in 1974. Thus while the numbers are by no means pleasant and we pray for every person and family suffering a job lost, the impact on the economy is not the same.

That line of reasoning dovetails with the unemployment rate. It is a percentage of the workers in the jobs pool, and that makes it apples to apples. The 6.7% is the highest since the 1991-92 recession (it topped out in October 1993; it is a lagging indicator that follows the economic cycle), but it is well off the 10% rate in the early 1970's. It basically confirms that the non-farm payrolls decline does not represent the same impact as the 500+K in 1974.

So we have delved into the vagaries of 1974 versus the present. What does it mean? Signs of a bottom given things are so bad on a jobs lost basis? Does it mean things have to get worse to be the equivalent of 1974, i.e. -1M jobs per month? Or does it mean this economic slump is not as bad as the 1970's?


What the jobs report tells us.

It doesn't tell us a damn thing other than the jobs market is bad. Now there is some in-depth, rocket science-like analysis. But that is exactly what it tells us because jobs are lagging and they don't tell us anything about the future. They are not, as some suggested Friday, able to tell the future by how bad the past is (that is, how many jobs are lost or how high the unemployment rate gets). The horrible litany of economic data the past two weeks coupled with the fact that jobs lag the economy simply means that the economic bottom is not here yet. It may be ready to turn given the new actions by the Fed and Treasury that finally brought mortgage rates lower this past week, but it has not shown up in the market.

It usually just gives us hints and whispers it is turning, such as modest improvements in manufacturing that may just show up in the sub-indices within the overall regional measurements. We will notice those but no one will give them much credence at the time because things look so bleak no one can possibly believe it will make a difference. Diving prices paid are giving short shrift right now even with the ISM prices paid falling to the twenties; major re-pricing of costs is ongoing, and that means more profitability.

As often noted here, the market will make the turn first. Yes the market overshoots on the upside and the downside, and that is the argument many use to say the market is not really the best leading indicator. Does it really matter if it overshoots, however? That is not what is being measured, i.e. how high or low it goes. It is whether it is turning and showing real underpinnings of strength versus just a bounce. That is what tells the real story. In early 2003 almost 100% of the pundits said the market was rolling over into another bear decline after that late 2002 double bottom and rally. We saw many fine patterns developing during that consolidation of the 2002 run. Price/volume action was great. Patterns were forming up well. It took a lot of courage to step in when they broke higher, but NASDAQ was up 70% in short order and we made a lot of money on that move because we were ready to jump when the stocks moved, no matter how bad the economic data was and how pessimistic the investment climate was.

Thus we are watching this current showing of new strength with keen interest. Not a lot of great patterns yet though there are some good ones showing up. This looks more like the October part of the bottom that set up for a nice run higher that was the lead in to a real character building shakeout while the other patterns formed and the bear market was finally wrung out after the initial double bottom jump. Plenty of work to do, plenty to prove, but we see patterns building, and with some better leadership we are very interested in playing this move and seeing how it develops subsequent to this run.


LIBOR drops a bit more, mortgage rates adding a missing ingredient.

The overnight LIBOR rate tumbled once more, falling to 0.28% Friday, down from 0.52% Thursday and 1.09% Monday. The key 3-month held steady at 2.19% Friday, down from 2.22% Monday. Not a huge move; needs more of course.

Mortgage rates are a key group coming into play now that the Treasury said it is going to buy consumer, SBA, and mortgage assets and the Fed set up a swap facility for the same. On top of that there is the Treasury plan to offer 4.5% mortgages to new home buyers. If it had said ALL citizens for refinancing and new purchases then the results would have been much bigger. It is not finalized; after letting my House reps and senators know my unvarnished thoughts (as have millions across the country), maybe that will change. Some say it costs too much to do that. Versus what? Giving banks $300B to hand out bonuses? Give me a break.


Treasury yields show strength as well.

After an historic drop in Treasury bond yields that saw the 2 year fall to 0.81%, suddenly they bounce in the face of terrible jobs news. Friday the 2 year rose to 0.94% after showing 0.82% Thursday and o.85% after the jobs data. Despite the bad news, no rush to the safety of treasuries Friday. Instead investors bought stocks.

The 10 year bounced back as well. It fell into the 2.54% yield range Thursday, the lowest yield in decades for the 10 year. Friday it bounced and closed at 2.72%. Not the high for the week but it looked into the abyss and climbed back up.



THE MARKET

MARKET SENTIMENT

VIX: 59.93; -3.71
VXN: 58.96; -3.63
VXO: 62.94; -7.24

Put/Call Ratio (CBOE): 0.92; -0.02


Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

This is a historical milestone in the making. Bulls are impressively low considering we are in general a very optimistic country. The few bulls is a positive indication because it means most everyone that is getting out is out and there is money on the sidelines. In other words the ammunition boxes are full and as the market recovers investors will start opening up the boxes and firing. Little by little they will be forced to put more money into the market and there will be some rushes higher in fear they are missing the train. You relish times when sentiment is so negative because it means some tremendous buys are setting up. This could indeed be the opportunity of a lifetime, and you take advantage of it by buying quality stocks and letting them work for you as long as they will. If we can hold them for years, great.

Bulls: 23.1%. Diving to almost record lows again, falling from 29.0% last week after bouncing up into mid-November. Hit 31.9% after bullish sentiment rose steadily off the 5 year low of 21.3% hit to start November. Rapidly approaching that level again. Remains below the 35% threshold considered bullish for the market. At this level it is very bullish. This past move down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 49.5%. Surging as bulls tumble, rising from an already high 44.1%. RiNot many believers, a positive indication. Blasting higher after dipping from the 5 year high at 54.4% hit the last week of October. It is on its way there again. Well above the 35% threshold so still a bullish indication. This move over 50 takes it to the highest since 1995. Extreme negative sentiment. 35% is the level that historically indicates excessive pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +63.75 points (+4.41%) to close at 1509.31
Volume: 2.222B (+7.98%). Volume was up as NASDAQ tested and moved higher. Unfortunately it was still well below average, unable to crack that barrier or even give it a scare all week. Improving price/volume action (up on upside sessions, down on downside sessions), but not blowout buying strength.

Up Volume: 1.89B (+1.543B)
Down Volume: 315.96M (-1.381B)

A/D and Hi/Lo: Advancers led 2.21 to 1
Previous Session: Decliners led 1.92 to 1

New Highs: 1 (-3)
New Lows: 173 (+45)

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

Gapped lower, sold down close to the Monday low, but it held and reversed. Took out some price resistance at 1505 and the 18 day EMA (1500) for the second time since the rebound starting, making a higher low along the way. It is firming, setting up for a solid move higher. This week it needs to deliver that move and it has set itself up nicely to do that.

SOX (+3.17%) is still below the 18 day EMA, having yet to enjoy even the modest success of the other indices. It is, however, moving laterally in a nice range and is poised to make the break higher. Good move Wednesday, and it is or should be an early upside sector in a recovery cycle.

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: +30.85 points (+3.65%) to close at 876.07
NYSE Volume: 1.62B (+10.27%). Volume moved up to average. It was basically average Monday on the selling and Tuesday on the rebound. Not much difference here, but volume was up on a good upside session, and that put this move in something of a follow through category though a rather modest one in need of some positive reinforcement this coming week.

Up Volume: 1.379B (+1.058B)
Down Volume: 231.975M (-910.319M)

A/D and Hi/Lo: Advancers led 2.51 to 1. Good but not great, not a Dylan Rattigan 'holy crap' type improvement.
Previous Session: Decliners led 3.03 to 1

New Highs: 31 (-5)
New Lows: 128 (-5)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

The large caps sold hard Monday then clawed back into Thursday where they gave some ground. Friday they gave more ground, all the way down to the Monday low (well, almost). When they held the financials bounced and the index jumped. Closed at session highs on rising, average trade. Down for the week but in position to take on the late November high and early October closing low at 900. A move over that level gives SP500 an important higher high that will take more shorts out of the index. It is still in the process, but it has some snap in its jab this time around.

SP600 (4.32%). Small caps were not the market leaders Friday but they were right up there with the growth indices, what you want to see if the market is starting to factor in economic expansion. Been here before have we not? Looks good, moves well, gets hammered. As with the rest of the market the small caps are showing a bit different look this time around, coming back above the 18 day EMA quickly after an initial run through that level and fade. In position to make the move as well.

SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg


DJ30

The Dow reached all the way down just past the Monday low and then reversed back through the 18 day EMA and 8500. Volume moved to just over average. Still below 9000 and the 50 day EMA (9075), but DJ30 put together the best pattern over the past few weeks (or more accurately, held together better) and is in good position to lead. Good meaning it still has a lot of work ahead of it, but it is in position to make the upside move. Money flow has turned upside. Needs some help from the financials that have rallied up to resistance, a critical test ahead for them and the rest of the market this coming week.

Stats: +259.18 points (+3.09%) to close at 8635.42
VOLUME: 346M shares Friday versus 280M shares Thursday. Solid volume, the best in 8 sessions, is helping the index push higher.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


MONDAY

Some more important economic data this coming week, but no one is holding their breath for a sudden turn in the economy. Inventories, trade balance, PPI and importantly, retail sales and Michigan sentiment. Again, no one is expecting a big turn in the data and we will see if the market can move higher once more in the face of weak data.

Why would the market move with such bad economic data? The expectation of better future data. We discussed it last week, but it is worth repeating: the Treasury and Fed appear to have hit on the right areas to get key rates moving lower, i.e. focusing on the consumer, small business, and mortgage markets. That brought mortgage rates down and it started moving LIBOR lower as well.

Is that all driving things? No. At the end of the week we heard a lot more talk about the need for a stimulus package now, not later. The Bush administration is reportedly meeting with congressional democrats and republicans on what type of stimulus is needed. Bush will want supply side (the rebates on the demand side early in the year did nothing but temporarily bolster buying), the democrats will want to focus on the demand side. What we hear is that a stimulus package will include both and it will be massive. Hearing talk of $1T in stimulus, that in addition to the over $7T in bailout/TARP/TALF money already out there.

Hey, if you are putting that kind of scratch in play, what is another little trillion? It is clear that stimulus is needed as we said back in October: it is not enough to just free up credit given that it took so long to start to work and that some severe economic damage is done. Once the credit flows there needs to be a reason for businesses and consumers to seek it. Thus tax incentives to buy capital equipment, durables, etc. as well as a reduction in marginal rates. It was the catalyst during the Reagan years, the combination of stimulus that resulted in investment in the future of the US and we reaped the rewards of those seeds planted for 20 years.

We feel that is another reason the market is stirring. As noted last week, almost to the day the second Bush stimulus package passed the market took off to the upside in anticipation of what the incentives would do to economic growth. The market is trying to bounce in a manner similar to October 2002 before it went into an almost 3 month consolidation of that move that led many to believe there was another bear market rollover in progress. That set up the great patterns, and when the stimulus was passed and the Iraq war was under way the market took off in anticipation of growth. The set up is there, but of course as with the indices there is still a lot of work to be done to get us there. It does appear, however, that both sides agree something major is needed and the die is being cast right now.

With that we are continuing looking at solid plays ready to move upside. As noted above, many solid names moved well last week, a very good indication for the market overall. More will unfold as the market moves and we will continue to focus on those to get us into position to ride the move higher. We already have some great positions working for us and as the rally unfolds more will come to the fore. We will watch for them and be ready to pick them off as they do.


Support and Resistance

NASDAQ: Closed at 1509.31
Resistance:
1521 is the late 2002 peak following the bounce off the bear market low
1536 is the late November 2008 peak
1542 is the early October 2008 low
1565 is the second low in October 2008
1620 from the early 2001 low
1644 from August 2003
The 50 day EMA at 1659
1752 from 2004
1782 from August 2004

Support:
The 18 day EMA at 1500
1499.21 is the 2008 closing low
1493 is the October 2008 low. Key low.
The 10 day EMA is 1476
1428 is the November 2008 low
1398 is the early December 2008 low
1387 is the 2001 low
1295 is the November 2008 low
1253 is the March 2003 low on the test of the rally off the 2002 bear market low
1108 is the 2002 low


S&P 500: Closed at 876.06
Resistance:
889 is an interim 2002 peak
896 is the late November 2008 peak
899 is the early October closing low
The 50 day EMA at 946
965 is the 2003 consolidation low
995 from June 2003 consolidation peak
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.

Support:
The 18 day EMA at 867
866 is the second October 2008 low
The 10 day EMA at 858
853 is the July 2002 low
848 is the October 2008 closing low
839 is the early October 2008 low
815 is the early December 2008 low
818 is the November 2008 low
800 is the March 2003 post bottom low
768 is the 2002 bear market low
741 is the November 2008 low
650 on the top and 625 on the bottom of a 7 month range in 1996
475 from 1994 where the market moved laterally for the entire year.


Dow: Closed at 8635.42
Resistance:
8829 is the late November 2008 peak
8985 is the closing low in the mid-2003 consolidation
The 50 day EMA at 9076
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
9575 from September 2003, May 2001
9656 is the November 2008 peak

Support:
8626 from December 2002
The 18 day EMA at 8522
8521 is an interim high in March 2003 after the March 2003 low
The 10 day EMA at 8477
8451 is the early October closing low. Key level to watch.
8141 is the early December low
8197 was the second October 2008 low
8175 is the October 2008 closing low. Key level to watch.
7965 is the November 2008 intraday low.
7882 is the early October 2008 low. Key level to watch.
7702 is the July 2002 low
7524 is the March 2002 low to test the move off the October 2002 low
7449 is the November 2008 low
7282 is the October 2002 low


Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

December 9 - Tuesday
October Pending Home Sales (10:00): -2.3% expected, -4.6% prior

December 10 - Wednesday
October Wholesale Inventories (10:00): 0.2% expected, -0.1% prior
Treasury Budget, November (2:00): -$193.0B expected

December 11 - Thursday
Initial Jobless claims (8:30): 530K prior
November Export Prices ex-ag. (8:30): -1.2% prior
Export Prices ex-oil, November (8:30): -0.9% prior
Trade Balance, October (8:30): -$54.0B expected, -$56.5B prior

December 12 - Friday
November Core PPI (8:30): 0.2% expected, 0.4% prior
PPI, November (8:30): -1.8% expected, -2.8% prior
Retail Sales, November (8:30): -1.4% expected, -2.8% prior
Retail Sales ex-auto, November (8:30): -1.7% expected, -2.2% prior
Business Inventories, October (10:00): -0.1% expected, -0.2% prior
Michigan Sentiment-Preliminary , December (10:00): 58.0 expected, 55.3 prior

By: Jon Johnson, Editor
Copyright 2008 | All Rights Reserved

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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Monday, December 01, 2008

Sellers Remained Sidelined

SUMMARY:
- Late upside move takes market positive as sellers remain sidelined.
- NASDAQ lagging on this rebound.
- LIBOR continues its rise.
- This week we see if the sellers return.

Upside bias takes over again.

Stocks started weak with all futures lower and indeed the indices starting the day lower. The Indian bombings seemed to have a delayed impact though they were known on Wednesday. It didn't help that LIBOR rates continued their climb (overnight 1.16% versus 0.99%; 1-month 1.90% versus 1.43%; 3-month 2.22% versus 2.18%) as investors ran to US treasuries and the dollar rebounded sharply from its sharp correction (1.2690 versus 1.2896 Wednesday).

The indices fell back, but SP500 and DJ30 held the 18 day EMA. NASDAQ was the question mark as it lagged noticeably, undercutting its 18 day EMA. The indices traded on both sides of the flat line all day with DJ30 positive, SP500 hugging the flat line, and NASDAQ negative. Even with the indices struggling at the 18 day EMA after four upside sessions, however, the sellers stayed home. In the last hour DJ30 moved from up 30 points to close up 102. DJ30 pulled SP500 positive almost 1%, and it even managed to drag NASDAQ back from the red. NASDAQ 100 did not make it, closing down 0.62%. Techs lagged all day long, the anchor chain on this move.

Indeed, techs will be worth watching closely as the new week starts. They are a growth index and if this rally is going to last it will need some growth stocks to join in. It will also need the financials to continue higher, but when you look at the charts of major financial institutions they are at very critical points. After 4 days of rebounding they are just below the 18 day EMA resistance. Whether SP500 can continue its move depends upon the financials doing likewise, and that means breaking their downtrends.

All of this leads up to an important coming week as the indices try to put in a follow through session to the rebound started two Fridays back. The sellers have not come back in on this rebound and that is giving many on the financial shows confidence to call yet another bottom. The indices are certainly at a critical point after the run higher took them just through the 18 day EMA. A bit of a pause would do the upside some good, i.e. fading to the 18 day EMA over 2 to 3 sessions. If the sellers cannot push back into the equation then this upside has more legs and we will add to our upside positions as well as take some more upside on the indices. AAPL and RIMM are setting up for another upside break, and if they take off sharply that is a good indication for the rest of the market as they will help lead NASDAQ higher.


THE MARKET

MARKET SENTIMENT

VIX: 55.28; +0.36
VXN: 56.05; +0.79
VXO: 59.81; +1.24

Put/Call Ratio (CBOE): 0.88; +0.13

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 30.9%. Modest decline from 31.9% after bullish sentiment rose steadily off the 5 year low of 21.3% hit to start November. Remains below the 35% considered bullish for the market. It was at this level in early October just as the market started to dive lower. This move down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 43.6%. Bears continue to decline, dipping from 46.1% last week and 48.3% the week before. Still falling form the 5 year high at 54.4% hit the last week of October. Well above the 35% threshold so still a bullish indication. This move over 50 takes it to the highest since 1995. Extreme negative sentiment. 35% is the level that historically indicates excessive pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +3.47 points (+0.23%) to close at 1535.57
Volume: 798.972M (-59.53%)

Up Volume: 420.7M (-1.419B)
Down Volume: 345.895M (+221.6M)

A/D and Hi/Lo: Advancers led 1.96 to 1
Previous Session: Advancers led 3.82 to 1

New Highs: 8 (+2)
New Lows: 53 (-76)

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

Managed to hold its gain just over the 18 day EMA resistance. NASDAQ 100 is showing a doji right below that level, but if AAPL follows through on its improving pattern it will help the large cap techs hold the line.

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: +8.56 points (+0.96%) to close at 896.24
NYSE Volume: 787.017M (-44.72%)

Up Volume: 529.802M (-751.353M)
Down Volume: 247.092M (+112.886M)

A/D and Hi/Lo: Advancers led 1.99 to 1
Previous Session: Advancers led 5.34 to 1

New Highs: 12 (-6)
New Lows: 49 (-42)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg


DJ30

The clear market leader posting its fifth upside session. It has cleared the 18 day EMA but will likely need a test before it moves higher, especially if its financial components fade back from their rally to near resistance.

Stats: +102.43 points (+1.17%) to close at 8829.04
VOLUME: 155M shares Friday versus 279M shares Wednesday. Even with the half day this was a low volume session.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


Support and Resistance

NASDAQ: Closed at 1535.57
Resistance:
1542 is the early October 2008 low
1565 is the second low in October 2008
1620 from the early 2001 low
1644 from August 2003
The 50 day EMA at 1715
1752 from 2004
1782 from August 2004
1882 from October 2003
1900 is the gap down point in October; from August 2004
1912 from April 2005
1947 is the point where the market gapped down from in October 2008
1984 is the late September low
2070 from September 2008

Support:
The 18 day EMA at 1526
1521 is the late 2002 peak following the bounce off the bear market low
1499.21 is the 2008 closing low
1493 is the October 2008 low. Key low.
The 10 day EMA is 1491
1428 is the November 2008 low
1387 is the 2001 low
1295 is the November 2008 low
1253 is the March 2003 low on the test of the rally off the 2002 bear market low
1108 is the 2002 low


S&P 500: Closed at 896.24
Resistance:
899 is the early October closing low
965 is the 2003 consolidation low
The 50 day EMA at 967
995 from June 2003 consolidation peak
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
1075 from August 2004.
The 90 day SMA at 1105
1106 is the late September low
1133.50 is the mid-September 2008 low
1200 is the July 2008 intraday low
1244 is an August 2005 peak

Support:
889 is an interim 2002 peak
The 18 day EMA at 876
866 is the second October 2008 low
The 10 day EMA at 862
853 is the July 2002 low
848 is the October 2008 closing low
839 is the early October 2008 low
818 is the November 2008 low
800 is the March 2003 post bottom low
768 is the 2002 bear market low
741 is the November 2008 low
650 on the top and 625 on the bottom of a 7 month range in 1996
475 from 1994 where the market moved laterally for the entire year.


Dow: Closed at 8829.04
Resistance:
8985 is the closing low in the mid-2003 consolidation
9200 is the July peak in the 2003 consolidation
The 50 day EMA at 9217
9323 From June 2003 peak
9575 from September 2003, May 2001
9814 from August 2004
9937 from May 2004 low
10,100 to 10,000
10,127 is an April 2005 low
The 90 day SMA at 10,206
10,215 from Q4 2005
10,365 is the new 2008 low
10,459 is a September 2008 low
10,827 is the July 2008 intraday low

Support:
8626 from December 2002
The 18 day EMA at 8573
8521 is an interim high in March 2003 after the March 2003 low
8451 is the early October closing low. Key level to watch.
The 10 day EMA at 8491
8197 was the second October 2008 low
8175 is the October 2008 closing low. Key level to watch.
7965 is the November 2008 intraday low.
7882 is the early October 2008 low. Key level to watch.
7702 is the July 2002 low
7524 is the March 2002 low to test the move off the October 2002 low
7449 is the November 2008 low
7282 is the October 2002 low


Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

December 1 - Monday
October Construction Spending (10:00): -0.9% expected, -0.3% prior
ISM Index, November (10:00): 38.0 expected, 38.9 prior

December 2 - Tuesday
November Auto Sales
Truck Sales, November

December 3 - Wednesday
November ADP Employment (8:15): -173K expected
Productivity-Rev. , Q3 (8:30): 0.9% expected, 1.1% prior
ISM Services, November (10:00): 42.6 expected, 44.4 prior
Fed's Beige Book (14:00)

December 4 - Thursday
11/29 Initial Jobless Claims (8:30)
Factory Orders, October (10:00): -2.7% expected, -2.5% prior

December 5 - Friday
November Average Worksheet (8:30): 33.6 expected, 33.6 prior
Hourly Earnings, November (8:30): 0.2% expected, 0.2% prior
Nonfarm Payrolls, November (8:30): 300K expected, 240K prior
Unemployment Rate, November (8:30): 6.8% expected, 6.5% prior
Consumer Credit, October (15:00): $2.7B expected, $6.9B prior

By: Jon Johnson, Editor
Copyright 2008 | All Rights Reserved

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

Technorati tags:

Sunday, November 23, 2008

Expiration Ends Rough Week

SUMMARY:
- Expiration bounce ends a rough week.
- NY Fed president as Treasury Secretary gives the market a bit of certainty.
- Never have so many SP500 stocks traded for so little.
- LIBOR decline stalled as financials sink lower, banks fail.
- Sentiment indicators are still at extremes.
- Market starts the test of a serious breakdown that will tell the economic future.
- Investors in no-man's land during this test.

After a volatile session, a stressed market rallies late on some decent choices.

The November selloff is as ugly as October. October saw the emergence of some very serious issues confronting the US and world economies. The market was grappling with the developments and the attempts to find a course to correct the problems. There was a rally into the election and then the selling resumed because there was no change in the problems, a lame duck administration and Congress that cannot really initiate any new major policies, and an unknown President-elect. What little we knew about the next President was enough unsettle the markets.

After another wrecking ball hit the stock market this week, however, futures improved at the open. The only early news was a comment by the Fed's Lacker that the US economy could gain momentum in 2009. That was better than what Tuesdays FOMC minutes revealed, i.e. that economic growth may be negative in 2009 with 'normal' economic activity levels not until 2011. After the massive selloff the market was ready for a bit of short covering ahead of the weekend, and this news was enough to push the futures up and hold the market around positive all day. It was a typical expiration, however, in that the market traded up and down all session. All the way into the last hour it was up and down, up and down.

The key for us was there was no initial selloff at the open to really get things oversold and in that rebound mode we have seen on several occasions. Thus the up and down gyrations and that kept us from rushing into a lot of new positions on the indices though we did buy some gold ETF's early. That action continued all session. Almost all session.

Turns out we could have gone ahead and entered some index plays as some news played out well for the market. After wanting to lay low and wait to take any action until later, the President-elect realized he had to step up and get involved now as the lame duck President and Congress just doesn't have enough clout in matters of this magnitude. At the start of the last hour of trade he allowed news as to his pick for Treasury Secretary (New York Fed President Geithner) and Trade Secretary (New Mexico Governor Richardson). Geithner is well respected and has experience from the Clinton administration. Richardson is a free trader, and that really encouraged those with doubts about Obama's trade views. On top of that there is talk of a 'prepackaged bankruptcy' for the automakers versus a plain vanilla bailout (gee, amazing we can bailouts as plain vanilla; how times have changed). That is very appealing to many opposed to the auto execs Gulfstream 4 flights into DC thinking they could get $25B with just some bull talk about how they were really innovating and changing and just got caught short by a weak economy. If you believed them, but for the weak economy they were the movers and shakers in the industry.

This one-two (or is it one-two-three?) punch pleased investors and brought in some buyers. When that happened the shorts, already primed to do cover ahead of the weekend, jumped in. All you could see was the vapor trail. The indices went ballistic, this time to the upside. Have seen it before both to the upside and downside - - this week. When the market reaches a tipping point in the last hour the rush is rather breathtaking. Without any flush out preceding it, however, the Friday rush is likely just another oversold bounce in progress, something we have seen both ways all during this selling with the downside winning out. At this juncture there was nothing to suggest this was nothing more than an end of a bad week, expiration assisted oversold bounce to test a major breakdown. That was a mouthful.

TECHNICAL. Intraday action was up and down in what is considered a typical expiration session but something that seems to rarely occur on expiration anymore. Then an explosion upward on the news and the pre-existing propensity to rally that session given the need to short cover after a brutal week.

INTERNALS. After -11:1 breadth on the NYSE selling, the 1.8:1 advancing breadth Friday on 6+% gains was paltry at best. Paltry is likely too nice. New lows were lower but still strong (-1350 on NYSE) as the indices pushed lower again with all hitting new lows for 2008 before recovering. Volume was mixed but still very strong. Chalking that up to expiration.

CHARTS. DJ30 recovered over the early October low. Just missed an outside session, but it looks ready to continue higher toward near resistance at the 10 day EMA. SP500 and NASDAQ rallied as well, but they are well below their prior lows and didn't do a whole lot in retaking them. SP500 did move back over the 2002 bear market low, however. The other indices are in even worse states of disrepair. It is pretty clear the indices are testing the breakdown and they are doing it, at least on DJ30 and SP500, by retaking the lower levels just given up. They can move past those and still fail when NASDAQ and company get back up to their levels and run out of gas after expending all of their bounce energy just to get back to where they sold off. If there is nothing more to drive them at that point, they fail and sell some more. Nothing yet indicates this scenario is not the one currently in place.

LEADERSHIP. Stocks that were crushed all week bounced back some on Friday, but that is not leadership. Some great leaders that moved lower on the week sold lower Friday and then rebounded sharply to close. They are from a variety of sectors though mostly defensive (QCOR, EMS, ADM, CASY). The ability to hold their patterns in the selling is impressive. If there were more of them that would be even more impressive. This selling is taking out many of those stocks that set up lateral consolidations or short double bottoms after the October selling. The list of potential leaders grows thin, and a market without leadership founders.


THE ECONOMY

SP500 large caps are not so large.

Never have so many of the SP500 stocks traded below $10 per share. 105 is the count as of last week. The focus is on Citi and its woes, but it is not alone. Many say the plethora of large cap stocks less than $10 is the buying opportunity of a lifetime. May very well be. Question is, when does the time period start? If the economy is as bad the market is trying to indicate (the SP500 undercut of the 2002 bear market lows), that opportunity may be here, but opportunities may get even better, some may go out of business, and we all may be some years older before the opportunity's benefits really become realized. The key is all in the timing and there is nothing yet to indicate timing is right.


LIBOR Remains Stalled.

One thing is certain, and that is business for those companies will not improve until the credit crisis is on the way to being resolved. Not resolved, just on its way. The market handicaps ahead of time and it will be moving higher before it is clearly apparent we are out of the woods.

How do we know there is a long way to go? When all of the world central banks put in lending guarantees and about a dozen different lending facilities the LIBOR rates started to fall. The fall started slow but started to grow. The drops started to click off 15 to 20 BP a session. As we wrote last week, when Treasury changed its focus and officially dropped plans to purchase bad mortgages LIBOR stopped falling.

This week LIBOR stopped falling and even started moving higher on some terms. The overnight rate surged Friday to 0.70% from 0.44%. The 1 month and 3 month were lower on the week, but they stopped falling and the 3-month moved higher to end the week (2.16%). At the same time corporate credit yields shot higher. As reported Thursday, Berkshire Hathaway debt prices soared this past week. The credit market is as bad or worse than it was when Bernanke and Paulson ran up the Hill to see Congress.

This credit freeze is getting extremely serious again. Citi is pushed to the edge and is holding an emergency meeting this weekend to try to figure out the best route to take. Its fall this month is extraordinary, from 15 to 3.77 on the Friday close. Word is there will be a brokered deal with the US as the broker where Citi will be spin off assets, merge, or be purchased. Another bank, Community Bank of Georgia, went under Friday after the market close. It is being taken by a Virginia bank. Credit is locked up once again, spreads are wide, and corporate bond prices are surging. The $700B certainly has instilled confidence in the financial markets.



THE MARKET

MARKET SENTIMENT

Sentiment levels are still extreme. They hit extremes in the October selling, plenty enough to put in a bottom given bulls/bears, put/call, VIX. The market did not bottom on this last attempt, however. Sentiment hits highs first then the market bottoms. Sentiment levels are climbing high again, understandable as the indices all hit new lows. The sentiment remains at levels commensurate with a bottom. The size of the problems confronting the economy are so vast that sentiment is remaining high and may remain high for some time before the market is ready to turn back up.

VIX: 72.67; -8.19
VXN: 71.2; -9.44
VXO: 76.17; -11.07

Put/Call Ratio (CBOE): 1.12; -0.21. Five closes over 1.0 on the week. Plenty of negative sentiment remains.


Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 30.9%. Modest decline from 31.9% after bullish sentiment rose steadily off the 5 year low of 21.3% hit to start November. Remains below the 35% considered bullish for the market. It was at this level in early October just as the market started to dive lower. This move down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 43.6%. Bears continue to decline, dipping from 46.1% last week and 48.3% the week before. Still falling form the 5 year high at 54.4% hit the last week of October. Well above the 35% threshold so still a bullish indication. This move over 50 takes it to the highest since 1995. Extreme negative sentiment. 35% is the level that historically indicates excessive pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +68.23 points (+5.18%) to close at 1384.35
Volume: 3.166B (-0.75%). Volume remained expiration high Friday. Sold on high volume Thursday, rebounded on high volume Friday. Low volume most of the week and then trading distribution and accumulation. Doesn't change the problem.

Up Volume: 2.486B (+2.249B)
Down Volume: 536.764M (-2.392B)

A/D and Hi/Lo: Advancers led 1.37 to 1. Rather pathetic upside breadth though it was a reversal session and breadth tends to lag.
Previous Session: Decliners led 5.86 to 1

New Highs: 3 (+1)
New Lows: 1219 (-51). Ramped up Thursday and Friday. Makes sense as NASDAQ hit new lows well below the early October levels.

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

Gapped higher but it was up and down, up and down all session, turning negative a couple of times before the final surge higher. NASDAQ was slaughtered on the week and it posted a relief bounce on some short covering ahead of the weekend. A firmly established downtrend is in place and this bounce did not change that.

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: +47.59 points (+6.32%) to close at 800.03
NYSE Volume: 2.373B (+10.52%). Strong volume as the NYSE reversed off the new lows for the year. Usually good news but this was expiration.

Up Volume: 1.892B (+1.761B)
Down Volume: 476.494M (+267.172M)

A/D and Hi/Lo: Advancers led 1.77 to 1. Same as NASDAQ: pretty mild breadth for such big price gains.
Previous Session: Decliners led 10.22 to 1

New Highs: 42 (-3)
New Lows: 1349 (-335)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

Managed to recover the 2002 bear market low (768) on the 6% surge. Similar to NASDAQ, SP500 broke to a new 2008 low Wednesday and then took out the prior bear market low Thursday. It is now in the relief bounce mode and how well it does on this move takes its temperature as to what it is going to do when it hits resistance. Also as with NASDAQ SP500 is in an established downtrend and it will take something significant to turn the tide.

SP600 (+5.71%) was not the leader but it was not bad. It plowed under the prior lows first and was just slaughtered. This bounce is a start to getting back to where it can just see resistance. On the other hand, it has plenty of room to bounce higher to get to the 10 day EMA and that can present an upside opportunity for a trade.

SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg


DJ30

Strongest move of the market, recapturing the early October low (7882) in a powerful move as those stocks that led the downside Thursday led the upside Friday (e.g. XOM). Huge volatility both directions. Now DJ30 is going to try the bounce to the 10 day EMA (8289) and even try 8500ish on this bounce. It is in better shape than the other indices but after blowing the bottom out of the 2008 lows it has to prove it can reverse and continue the move. Unlike SP500, DJ30 is still holding above its 2002 bear market lows. Has to start somewhere, and not to beat a dead horse, but DJ30's pattern is one that can produce a nice classic double bottom where the right leg undercuts the left and never comes back.

Stats: +494.13 points (+6.54%) to close at 8046.42
VOLUME: 569M shares Friday versus 528M shares Thursday. Very high expiration related volume to end the week.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


MONDAY

Monday the President-elect officially introduces his cabinet choices. As noted, two of those picks helped the market run higher late Friday. The market won't likely get much more mileage out of these announcements; nice to know some competent, somewhat market friendly people are put in place, but after that something has to be done. It will take unprecedented cooperation between the current administration and the incoming one to get something done before January 20. After this pre-honeymoon the market is going to have to take care of business in dealing with harsh reality of tight credit and dicey financial institutions and lending almost 2 months after the TARP.

Plenty of economic data this week, the kind the financial stations and rags like to debate. Existing and new home sales, another read of preliminary Q3 GDP, Consumer and Michigan confidence, durable goods orders, Chicago PMI, and personal income and spending. Lots of data. Lots.

Of course it is not likely to be positive. There are no indications the data should be turning. We would possibly see some improvement in regional manufacturing before anything else; saw it edging up in late 2002, but the market had put in its bottom and was running higher at that point. Not many thought it was a bottom but it was running higher and the regional manufacturing data started to tick higher. Before we see any economic data improvement we need to see some kind of reversal and move more than what the market has shown the past several weeks.

So with these breaks lower the market has some regrouping to do. Thanksgiving week is often a positive, though it was not in 2007. The market had peaked in October and it sold into the holiday though it did bounce on the half day Friday. The indices are definitely primed to continue the oversold bounce into next week, and a holiday week is a perfect one for it to do so.

The market is now staging for its next move. As noted Thursday it is in no-man's land after breaching serious support and then rebounding to test. The breach of the lows is a game changer, particularly on NASDAQ, SP500 and SP600; DJ30 is still decent as noted and could pull off a surprise. The market is still in the process of rebounding, however, and until it decides its direction it can leave you high and dry. Obviously the market is tending to the weak side as all of November has shown. It can turn right back down Monday as the Friday move was once again something of an aberration: some normal short covering after a harsh selloff and before the weekend turned ridiculous. It can still bottom what with all of the extreme sentiment and internal indicators, but they have not turned the tide yet and thus the burden is squarely on the upside to prove itself. That means another rally, a follow through session about a week later, and some leaders to push higher.

What to do in this environment? Slow it down, look at solid patterns, pick a few really good plays and go with them when they move. There is an upside move in progress, but do we chase it up after that last hour on Friday? If there is a test that holds and turns back up we can do that, but it still has to be treated as a short term move given the downtrends in all the indices outside DJ30. We can use index plays to take advantage of that, but it depends upon your tolerance; things are very volatile right now. We can always pick the good patterns that survived the test and grab them when they move, e.g. HMSY and GLD. There are others such as PETS that used the selling to test and recovered. Even these, however, are not immune. If the market continues to drill lower these stocks are not going to hold up. Thus if we get some decent gain we take at least some of it off the table.

As the market rallies in this bounce we also watch for stocks and indices that rally but show signs of stalling such as lower volume, tapping resistance and fading, intraday reversals near resistance. We are particularly watching SP500, NASDAQ, and SP600 as they recover toward their prior lows broken last week. If they stumble there we can expect another run lower as the downtrend reasserts itself. That is a move we can play with some gusto.


Support and Resistance

NASDAQ: Closed at 1384.35
Resistance:
1387 is the 2001 low
1428 is the November 2008 low
The 10 day EMA is 1471
1493 is the October 2008 low. Key low.
1499.21 is the 2008 closing low
1521 is the late 2002 peak following the bounce off the bear market low
The 18 day EMA at 1539
1542 is the early October 2008 low
1565 is the second low in October 2008
1620 from the early 2001 low
1644 from August 2003
The 50 day EMA at 1751
1752 from 2004
1782 from August 2004
1882 from October 2003
1900 is the gap down point in October; from August 2004
1912 from April 2005
1947 is the point where the market gapped down from in October 2008
1984 is the lat September low
2070 from September 2008

Support:
1295 is the November 2008 low
1253 is the March 2003 low on the test of the rally off the 2002 bear market low
1108 is the 2002 low


S&P 500: Closed at 800.03
Resistance:
800 is the March 2003 post bottom low
818 is the November 2008 low
839 is the early October 2008 low
The 10 day EMA at 843
848 is the October 2008 closing low
853 is the July 2002 low
866 is the second October 2008 low
The 18 day EMA at 877
889 is an interim 2002 peak
899 is the early October closing low
965 is the 2003 consolidation low
The 50 day EMA at 983
995 from June 2003 consolidation peak
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
1075 from August 2004.
1106 is the late September low
The 90 day SMA at 1119
1133.50 is the mid-September 2008 low
1200 is the July 2008 intraday low
1244 is an August 2005 peak

Support:
768 is the 2002 bear market low
741 is the November 2008 low
650 on the top and 625 on the bottom of a 7 month range in 1996
475 from 1994 where the market moved laterally for the entire year.


Dow: Closed at 8046.42
Resistance:
8175 is the October 2008 closing low. Key level to watch.
8197 was the second October 2008 low
The 10 day EMA at 8289
8451 is the early October closing low. Key level to watch.
8521 is an interim high in March 2003 after the March 2003 low
The 18 day EMA at 8536
8626 from December 2002
8985 is the closing low in the mid-2003 consolidation
9200 is the July peak in the 2003 consolidation
The 50 day EMA at 9319
9323 From June 2003 peak
9575 from September 2003, May 2001
9814 from August 2004
9937 from May 2004 low
10,100 to 10,000
10,127 is an April 2005 low
10,215 from Q4 2005
The 90 day SMA at 10,336
10,365 is the new 2008 low
10,459 is a September 2008 low
10,827 is the July 2008 intraday low

Support:
7965 is the November 2008 intraday low.
7882 is the early October 2008 low. Key level to watch.
7702 is the July 2002 low
7524 is the March 2002 low to test the move off the October 2002 low
7449 is the November 2008 low
7282 is the October 2002 low


Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

November 24 - Monday
Existing Home Sales, October (10:00): 5.05M expected, 5.18M prior

November 25 - Tuesday
Q3 Chain Deflator-Preliminary (8:30): expected, prior 4.2%
GDP - Preliminary, Q3 (8:30): -0.6% expected, -0.3% prior
Consumer Confidence, November (10:00): 39.5 expected, 38.0 prior

November 26 - Wednesday
Durable Orders, October (8:30): -2.5% expected, 0.8% prior
Initial Jobless Claims, 11/22 (8:30): expected, prior
Person Income, October (8:30): 0.1% expected, 0.2% prior
Personal Spending, October (8:30): -0.6% expected, -0.7% prior
Oil inventories (10:30): +1.6M prior
Chicago PMI, November (9:45): 38.5 expected, 37.8 prior
Michigan Sentiment - Rev., November (10:00): 58.0 expected, 57.9 prior
New Home Sales, October (10:00): 450K expected, 464K prior

By: Jon Johnson, Editor
Copyright 2008 | All Rights Reserved

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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