Monday, August 18, 2008

Expiration Goes Out Like A Lamb

- Expiration goes out like a lamb as market holds gains for the week.
- New York manufacturing clicks unexpectedly to positive, industrial production lower but hangs in positive territory.
- A state of denial: ECB bankers claim Europe economy 'robust' as it slips toward recession.
- Looking for stocks to wake up to take on next resistance

Quiet expiration week never gets roaring.

You kept expecting some kind of action. It did not come on Tuesday. Wednesday was quiet as was Thursday. Yes stocks were up and down, but volume was tame. It never got the expiration ramp higher. As a result, stocks wandered up and down Friday, starting on the high side, losing the gains, then bouncing up and down the rest of the day. No big gains, no big losses, just status quo, holding most of the gains taken on the week as well as holding key levels crossed during the week (200 day SMA SMA on NASDAQ, 50 day EMA on SP500).

The news was a veritable cornucopia of data. New York manufacturing turned positive, posting its highest reading in 8 months. Production beat expectations, managing to hold positive (0.2% versus 0.0% expected, 0.4% prior). On the other hand, the ECB announced GDP fell -0.2% for Q2. Retail earnings beat the street but guidance was lowered by many, yet the stocks posted gains. KSS bucked the trend, raising its guidance, and joining a familiar pattern among many solid retailers, i.e. clearing the 2008 recovery highs in May, a breakout from a double bottom base. Seeing many old name retailers setting up with similar patterns and breaking higher or ready to break higher.

On top of stock specific news, the recent trends in commodities intensified. The reason: the dollar's gain intensified. Friday it broke through the upper down trendline formed off the Q4 2005 peak. That was just an interim peak off the triple top spanning late 2000 to early 2002. Interesting. That is, of course, when the Bush administration took over. Before Bush dollar at an all-time high. After Bush, dollar at an all-time low. There are many factors at work here, but it also shows that when an administration does not support the currency, the door is open for everything else to take it down.

As the dollar rebounded through that trendline, oil sold off, still unable to bounce, closing at 113.77, -1.24. It is still in position to bounce off of some support at the early May low, but thus far each attempt to bounce has been outstripped by dollar gains. Friday all commodities were pounded; it seemed as if the drive through that trendline took the life out of them . . . along with the decline in European GDP. All of that is interrelated of course as lower world economic output means lower demand for commodities and likely diluted currencies, that strengthens the dollar which further weakens commodities, repeat chorus. As you can see, currency issues are very sensitive, and when the snowball rolls, it gets bigger and bigger. Gold was crushed as well of course, falling below $800 on the close (793.00, -21.50). It managed to hold at the November and December 2007 lows and after such a beating it will likely try a relief bounce.

TECHNICAL. The Friday intraday action was up and down in typical expiration fashion. Overall for the week, however, the intraday movement was improved with general trends from lower to higher with the propensity to drift higher in the absence of any real catalyst. That is how an overall bullish market acts in price terms.

INTERNALS. Breadth was flat as a pancake Friday. Volume was up on NYSE for once this week, but it was still well, well below average so it was nothing major. Indeed the entire week's volume was nothing major. Of course even if it had been up it would be anything to latch onto. The fact that trade was so low, however, is quite interesting. Typically volume runs higher at expiration as those on the wrong side of the trend have to get out or roll over positions. Thus the volume surges. The lack of volume shows that many are already out of those positions contrary to the current trend and thus there is not the need to get out of or roll positions. That means more bullish positioning by investors overall. With bullish sentiment still light and bearish sentiment still strong there is no real issue yet with getting a crowded upside trade. Plenty of money out there to be drawn in by the upside move as more throw in the towel.

CHARTS. NASDAQ took the 200 day SMA back on Thursday and it managed to hold on Friday. SP500 managed to retake the 50 day EMA late in the week. NASDAQ 100 captured the 200 day SMA early in the week, tested it, and started higher again. SP600 blasted higher to start the week, tested and then was racing higher Friday to a new high on this rally. That took it just below the June 2008 peak. Good action for most of the indices, but as noted Thursday, the push off the quick test of the Monday move looks a bit too early to take out the prior highs. That makes us a bit wary of this particular run at the 2008 peak.

LEADERSHIP. Some new tech faces are showing up and shaping up to move higher out of some good bases. They are not breaking to new highs necessarily (though some are), but they are coming out of downtrends with good bases. Very similar action in the retailers as noted above. Internet was moving nicely as well on the week. These new areas are joined by some of the early leaders in this move, particularly healthcare/medical/drugs, biotech, and trucking. Weak areas included heavy construction, commodities, machinery, agriculture: all have ties to the overseas economic plays, and given the weakness these economies are getting blistered to the downside. The former Big 3 leaders are in steep corrections.

SUMMARY. The key for the week ahead is how SP600 (small caps), the leader in this rally, reacts as the prior 2008 peak, just 6 points off that level. Foreign markets are weakening as their economies sag, and thus the US industrials with those multinational ties are weaker; they have lagged on this rally and lagged bad. Now that alone would not necessarily benefit the small caps: if money leaves one sector it doesn't have to go to another. If, however, the US economy is already pulling out of its shallow recession these stocks would indeed lead as they are now. Thus if they power through the June recovery high that is a very good sign for this rally and indeed for the economy. On the other hand, if the index rolls over hard as it did in June right after making that breakout, indeed the day after, that means this rally is likely over unless the laggard SP500 throws in with NASDAQ and moves up into the lead. That requires the financials to recover, and that would mean the economy would be recovering so the small caps would lead as well . . . you can see that the small caps have to do well.


We were not kidding: Europe is really slowing.

When I wrote earlier in the year that Europe was seriously slowing I received a lot of mail wondering what planet I was living on. What we were hearing, despite a dinner in Paris running US $1,000, was a real slowdown in manufacturing output and some worry among the average person on the street. That has cascaded over the past two months, resulting in a -0.2% Q2 GDP growth rate.

Of course the European Central Bank (ECB) has, at the same time we were hearing of slowing in Europe, ratcheted up its rhetoric with respect to inflation and how it was rising and it had to be stopped. That is its mandate: control inflation. There is no counterbalance to that as in the US, i.e. ensuring price stability while achieving maximum sustainable growth rates. Thus when it sees inflation it talks loud about stopping it.

That is unfortunate. As discussed Thursday night and many times prior, inflation rises as the economy slows, not vice versa as many old school textbooks preach. What happens when economies tank is that inflation jumps. In countries where there is a weak central bank it tends to explode. Eventually it fades, but that is after the economy collapses. In the 1970's our economy was as stagnant as a small pond in a hot southern dry spell. Yet inflation was running wild. When our economic activity was spurred by tax incentives and reduce regulations, inflation fell. It remained under control for two decades until this spike that had its roots in the 2000-2001 recession and interest rates were held at 1% for much too long by the Greenspan Fed.

As for Europe, with its sole inflation fighting mandate, it has to attack inflation. In doing so it has thwarted dozens of economic expansions on the continent. That is why 3% growth is rip-roaring in Europe. That is why Europe never grows more than 3% because once it gets that high the ECB assumes, just as the US central bank in the late 1920's, that inflation has to follow. It starts hiking and not surprisingly truncates the expansion.

In this situation it is even more unfortunate as Europe is truly in a slowdown and does not need the ECB to hike rates. The rhetoric was strong on Friday, however, as ECB officials, despite the 'sudden' drop in GDP, characterized the economy is in a 'robust state' and that the 'economic dry spell should not mislead us into talking up the danger of recession.' As the kicker to the statement it was said that inflation risks had worsened. Of course they have; as discussed, inflation picks up as an economy slows. It picked up as our economy slowed the past year. That is normal. What you have to do is encourage growth to get out of it not stomp the life out of what life is left in the economy.



VIX: 19.58; -0.76
VXN: 22.52; -0.08
VXO: 21.5; -0.61

Put/Call Ratio (CBOE): 1; +0.13. Moved up to average as expiration rolled around. This looks to be the only indication there was an expiration, i.e. a lot of put activity as the indices moved higher.

Bulls versus Bears:

For the second time this year bears are crossing above bulls, doing so basically where they did in March on their way to much more extreme readings just about the time the market made the March low and started the last rally. Positive for the market and if SP500 is going to hold the long term trendline is the place to do it.

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: 34.0%. Looks as if it held even for the week, but we will have to verify this data further. If so it is still below the 35% level and thus bullish though moving up well off the lows. Jumped up from 30.0% closing in on that 35% level, below which is bullish. Still bullish though a long way up from the 27.8% on the low this round. Hit 31.9% a month back and the 30.9% low hit in March. Steep drop from a rebound high at close to 50% on the run through May. In March the indicator did its job with the dive below 35% and the crossover with the bears. Now it is going above and beyond. Bulls and bears have crossed over again, doing so even before the prior lows are hit. The bulls and bears were eye to eye in mid-February and have crossed. 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%. Holding flat as well, making the new data suspicious given the market rise. A steep drop the prior week from the 50.0% peak on this move 2 weeks back. Still well above the 35% threshold so still a LOT of bearishness out there. This bounce off the July lows is instilling some confidence, however. A steady rise to 50% on this move: 48.9%, 47.3%, 44.7% and 39.3% before that. A steady, strong rise. Well above the bullish level and the highest since 1995. Again, that is one of the best indications that sentiment is getting extreme on the negative side. It is again past 35%, the level that historically indicates too much pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March that was up from an already freakishly strong 43.3% the week before. Up sharply from a low of 19.6% on the last rally. 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.


Stats: -1.15 points (-0.05%) to close at 2452.52
Volume: 1.776B (-6.02%)

Up Volume: 846.361M (-579.202M)
Down Volume: 913.75M (+542.915M)

A/D and Hi/Lo: Decliners led 1.1 to 1
Previous Session: Advancers led 1.56 to 1

New Highs: 92 (+12)
New Lows: 76 (-11)


NASDAQ gapped higher to end the week but it could not hold the gains, closing flat. The week saw NASDAQ test and then break through the 200 day SMA (2430) though volume on the move was quite low. NASDAQ cleared the interim highs that could have held it in check and formed a right shoulder to a head and shoulders pattern. Instead it broke through and is now looking at recistance at 2475 (tested Friday), 2500, and then the May and June double top peaks at 2550. This move over the 200 day SMA needed a bit more testing before continuing, and we may see that at the start of the week. It has moved very well and is a leader, and this week will be important in shaping what happens with this rally as the summer draws toward its end.

NASDAQ 100 (-0.35%) formed a beautiful cup with handle base the past 10 weeks and then broke out Thursday though volume was nil. It needs more to send it higher and we will not be surprised to see a bit of a pullback for some more testing this week before it makes another true run at next resistance at 2000 (closed at 1957) and the June peak just over 2050.




Stats: +5.27 points (+0.41%) to close at 1298.2
NYSE Volume: 1.176B (+16.59%)

Up Volume: 737.794M (+71.196M)
Down Volume: 428.751M (+94.928M)

A/D and Hi/Lo: Advancers led 1.1 to 1
Previous Session: Advancers led 1.73 to 1

New Highs: 52 (+22)
New Lows: 94 (+9)


Truly an up and down week for SP500 as it tried to get on track and provide some support for NASDAQ and SP600. IN the end it managed to close over its 50 day EMA after taking it early then giving it up. It is continuing its higher lows and is in decent position to break higher once more, but it is truly struggling to string together several good sessions. The financials have to contribute at some point or the rally will not hold. The patterns overall in financials, however, remain poor.

SP600 (+0.17%) enjoyed a stellar week though most of it was frontend loaded. Big surge then a quick test before rallying again Thursday. Friday it hit 400, just 2 points below the June peak before fading to flat. Too much too soon form the look of it and a pullback this week would not be surprising. Holding 390ish on that move would be nicely done for another run with some authority to try that June peak.

SP600 Chart:



Really struggling. It is trending higher as well with those higher and higher lows, but after breaking the 50 day EMA and extending that move Monday, it gave it up on Tuesday and never recovered it though it moved over that level Thursday and Friday intraday. Industrials on the index are weighing it down as prospect for their overseas sales dim.

Stats: +43.97 points (+0.38%) to close at 11659.90
VOLUME: 215M shares Friday versus 159M shares Thursday. Up Friday but well below average all week.



Economic data includes PPI, housing starts, and the Philly Fed as the high points. Commodities, oil and the dollar will continue to have their influence as a major dynamic. Financials are going to direct SP500's move. Then there is the action on SP600 and NASDAQ, the leaders in this rally.

Problem is, they both need the financials to wake up and help out. The patterns in many big name financials, however, after perking up some, have failed to continue building good patterns. That leaves a big hole in the rally that the growth stocks have filled thus far, but they are facing a key test just ahead.

As discussed, SP600 is facing the June high and with the move to this point it is extended and the modest pullback Tuesday and Wednesday was not really enough to give it a good springboard over the June peak. There are no indications of a breakdown, and there is still good leadership in place and forming up, but looking ahead the trade is light, we are approaching the end of summer, a traditionally tough time for stocks heading into September and October.

Expiration week saw some solid moves from some good stocks in good bases. Leadership has improved but is still relatively thin. Volume is of course very light. That simply means we have to be flexible and realize that a light volume rally even with some good leadership will have to morph at some point into more strength or fall into another test. SP500 and DJ30 broke to new 2008 lows on the last selling, and typically that is tested before a lasting advance transpires. NASDAQ and SP600 did not make new lows, however, and that means they don't need another test as there was no new low.

With this dichotomy in place with implications in both directions we do what we have been doing. We watch SP600 closely as it sets up below the June peak. We watch leadership and how it holds up and what kind of volume it gets. Most leadership is holding up well though the rails hit some tough sledding last week. We take advantage of the upside in strong, individual stocks when they show good moves. Overall SP600 and NASDAQ could pull back some more here, but we will keep looking for good opportunities in these leading areas until they indicate otherwise.

At the same time we will be ready to close up plays if things start to turn. Would rather be safe overall if the rally starts balking; we can always get back in. We are also going to start looking at more downside plays and have them ready if the low volume rally does roll over, e.g. MOS that we saw Thursday tap the 200 day SMA and then dive lower Friday. In this way we keep on our toes as to what the market can do at this point, what tendencies in past similar situations suggest, and simply take what the market gives whether it breaks to a new recovery high for the year or fails and rolls over for another test lower.

Support and Resistance

NASDAQ: Closed at 2452.52
2483 is the mid-June interim peak
2500 from interim August 2007 lows and early May 2008 interim peak
2551.50 is the May peak; 2550 is the June peak
2603 is the early January gap down point

2451 is the August closing low
The 200 day SMA at 2430
2419 is the January 2008 peak and the early February peak
2392 is the April 2008 peak
The 90 day SMA at 2390
2388 is the June 2008 low
2386 is the August 2007 intraday low
2378 is the mid-February peak; 2379 from the October 2006 peak
2370 from the April 2006 peak
The 50 day EMA at 2361
2346 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2340 from the March 2007 low
2286 is the first April 2008 gap up point.
2261 is a March 2008 interim low
2202 is the January 2008 low
2155 is the March 2008 low

S&P 500: Closed at 1298.19
1317 from the February low
1320 is a 50% retracement of the May to July selloff
1324 is the April low
1331 is the June low
1349 is an ancient trendline
The 200 day SMA at 1369
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1387 is the April 2008 intraday high
1396 is the February 2008 peak
1406 is the August and November 2007 closing low

The 50 day EMA at 1294
1285 is the recent July peak
1270 is the January low
1257 is the March low
1244 is an August 2005 peak
1240 to 1221 are September 2005 peaks1234 is the July 2006 low
1234 is the late July low
1224 is the June 2006 low
1176 from the Q4 2005 lows
1167 is the January 2005 low
1154 from the May 2005 lows
1142 is the 2005 closing low

Dow: Closed at 11,659.90
11,670 is the May 2006 intraday high; 11,642 closing
The 50 day EMA at 11,679
11,731 is the March 2008 low
11,982 is a 50% retracement of the May to July selloff
12,050 from the March 2007
12,070 from the early February 2008 lows
The 90 day SMA at 12,098
12,250 from late March 2007 lows
The 200 day SMA at 12,460
12,518 is the August intraday low
12,573 is the mid-February high
12,743 is the November low
12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 2007
12,786 is the February 2007 peak
12,845 is the August closing low
13,092 is the December 2007 intraday low
13,133 is the May 2008 high

11,644 is the 2004/2005 up trendline
11,634 is the January intraday low
11,388 is the prior August low
11,317 from March 2006
11,131 is the late July 2008 low
11,061 from February 2006
10,912 peak from March 2005
10,854 from December 2004
10,701-10,705 from July 2006, July 2005

Economic Calendar

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

August 19 - Tuesday
Building Permits, July (8:30): 949K expected, 1.091M prior
Housing starts, July (8:30): 963K expected, 1.066M prior
PPI, July (8:30): 0.6% expected, 1.8% prior
Core PPI (8:30): 0.2% expected, 0.2% prior

August 20 - Wednesday
Crude oil inventories (10:35): -316K prior

August 21 - Thursday
Initial jobless claims (8:30): 450K prior
Leading Economic Indicators, July (10:00): -0.2% expected, -0.1% prior
Philly Fed, August (10:00): 62.0 expected, 61.2 prior

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

Jon Johnson is the Editor of The Daily at

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