Sunday, November 23, 2008

Expiration Ends Rough Week

- 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.


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.



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.


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.


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.




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)


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:



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.



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
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

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
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

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
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

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

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