Sunday, January 11, 2009

Leadership Holds Support

- Jobs roughly within expectations, but stocks cannot hold an early bump higher, test back further.
- Weekly jobless claim data once again understates layoffs.
- LIBOR improves nicely, corporate bonds finding buyers. Some hope for a nasty recession.
- A few more stocks break lower Friday, overall leadership holds support as indices near the lick log point.

Market tries, but Friday it could not swallow the jobs report.

The jobs number was almost dead on expectations. At 524K it was high, but lower than the 600K to 700K whisper number fears that the ADP report stoked with its 600+K survey earlier in the week. Seems after underreporting jobs the new changes have overshot the mark.

There were other stories out Friday as well. Earnings continue to trickle out, ready to turn into a torrent. Chevron said Q4 would miss expectations thanks to lower product prices. Guess it didn't see the jump in gas prices this week of 20 to 30 cents after that quick spike in oil prices two weeks back. Of course, oil fell sharply again, ending the week at 40.45 (-1.25/bbl) as the dollar surged to close the week at 1.3470. Just two weeks back it traded at 1.4370. Huge dollar swing, but all it did was get the dollar back to its July/September up trendline, a key test areas this week. APOL, the online educator, drilled earnings by 14 cents and exploded higher. Coach lowered its estimates for the quarter and it gapped lower. Glad we dumped the rest of our positions on Thursday. There is certainly more to come on the earnings.

Fund flows into mutual funds actually bounced higher last week as $6.4B moved in after fading 1.9B the week before. The drain on funds has been steady and, until the past couple of weeks, unrelenting. The withdrawals were slowing, and then a bit of a bump in the market brought in some new cash. Corporate bond sales jumped on the week as well, another indication of money ready to buy as investors snapped up bond offerings at the best rate in 8 months.

The Fed was also out with the Boston bank president saying the recession could extend into the second half of 2009. Is that a shock or a surprise? We just finished the first week of the first quarter of the year. If the stock market has bottomed, a question that is hardly answered by the current small albeit solid and steady rally, you would not expect the economy to bottom until at the earliest mid-second half of the year. The financial stations tend to confuse economic recovery with market recovery. You want to look at signs of the former as confirmation of the latter, but we often get to looking at the economic data as the end and conclude subconsciously that the market cannot recover until the economic data recovers.

That takes us back to the jobs report. It was bad and everyone was downbeat to downright glum. Understandable. The economy is in very bad shape. This is an ugly recession, the worst since the bad one in the early 1980's that capped the decade of 'malaise.' The drop has taken us to those early 1980's levels and it has done so at light speed. It has investors and consumers wondering how long it can stretch out given the drop was so fast. How much time is enough to heal the wounds?

The market tried to rally when the jobs news was not as horrid as the ADP report suggested. It could not hold the move and indeed sold pretty sharply after that early bump. That was without a doubt discouraging as the market could not shrug off bad data even if it was expected to be bad. The action led some to conclude the rally is over as the market was no longer chugging all the bad news and not even belching.

When you look at the technical action, however, that is not the case, at least at Fridays close. Sure there were stocks that broke down Friday, some of which were leaders. That happens in pullbacks. Banks weakened again. Overall, however, the crop of leaders continued to hold support levels even if they did test lower on the session. The indices sold but trade was lower once more and they can still make nice higher lows. They may crack and sell deeper in a continuation of the bear, but the action thus far, while getting you a bit uneasy, has not turned back to the weaker bearish character. The market typically does make you a bit worried, a bit ready to throw in the towel even on pullbacks that hold. That keeps the crowd guessing and keeps stocks climbing the wall of worry. That is pretty damn tall and steep wall right now for sure.

TECHNICAL. Intraday the action was negative. No hidden strength as far as how the indices performed. They gave up an early recovery attempt, sold hard, tried a steady though unspectacular 5 hour recovery, but then gave up that as well in the last hour, closing at session lows.

INTERNALS. Not spectacularly bad, but no rose petals either. NASDAQ breadth doubled the Thursday gains but to the downside (-2.95:1). NYSE was not that bad, but the -2.4:1 was not a confidence builder. Volume was mercifully lower on both exchanges, continuing the slide in trade as the indices make this test. That furthers the positive price/volume action during the pullback, and that, along with the continuing solid action in the leadership, keeps this pullback in an overall positive technical light. This despite the disquiet and uneasiness everyone is feeling on this fade given the weaker response to bad news.

CHARTS. Thursday left the indices in good position to bounce with dojis on the candlestick chart at near support. Didn't happen. The market had issues with the jobs data even though it was more or less in line with expectations (though the revisions discussed later were a problem). NASDAQ and SP600 gave up the 50 day EMA, and SP600 sold pretty sharply, but both held the next support level. SP500 performed similarly, managing to hold the 50 day SMA on the close. SOX sold but it held near support at the 18 day EMA. In short, all were lower, but held support and remain in position to make a higher low. SP600 is the most worrisome. It is the main growth area and most sensitive to the economy, and it had jumped into a leadership role. It now has wobbly knees. It can still make a higher low, but it needs to hold here. A key indicator in the week ahead.

LEADERSHIP. As noted, most of the leadership groups held up quite decently, e.g. metals, energy, chips, and tech. Financials, particularly the big banks, stunk again. As noted Thursday, they are not leaders right now, but any market rally ultimately has to have them moving upside. Some of the financials that did manage to set up well rolled over as well. Small caps were hit. Despite the weakness in those areas, many stocks remain in good position to continue the move higher. They are reaching the point they need to hold, however, that point where it starts to get uncomfortable. We exited many positions early on in this pullback just in case this bounce ahead of earnings ran into trouble. We kept those in the strongest areas that are holding support and in position to rebound and maintain their uptrends off the November lows. It is time for them to hold the line.


Jobs report headlines in line, but there are always the details, details, details.

-524K was in line with the upwardly revised (at the last minute) -525K expected. Not great, but right on the nose versus the upwards of 700K in whisper losses. The unemployment rate spiked to 7.2% from 6.8%, and that topped the 7% expected. That is the highest rate since January 1983 following that bad recession. Note, however, that the job losses were peaking AFTER the stock market bottomed. We lose sight that job losses peak well after the economic cycle. Problem is, there is nothing in the other data to suggest any kind of turn. Confidence was a bit better thanks to gasoline prices falling and the service ISM was a bit better than expected, but that is it. Signs of economic recovery are very lean for now.

Job losses were everywhere except education and health and a very modest 7K gain in government. The details, however, tell most of the story. October and November losses were revised, flushing an additional 154K jobs for those months. That put the losses over the last four months at 1.9M jobs. Staggering when you consider 2.6M jobs were lost in 2008. That is the most for a year since 1945 (end of WWII) and three-quarters of them came late in the year after the LEH collapse.

The downward revisions show the picture is still deteriorating. Downside revisions mean that things are worse than the experts think they are. When you start seeing upside revisions things are of course much better and improving faster. The experts tend to continue to forecast the trend until they are proved wrong . . . several times. At this juncture they are behind the curve in the respect they underestimated the rapidity of the decline and its momentum. Another aspect to the revisions: when you add them in with the December 524K losses you get the whisper number. Thus even though the headline nicely avoided the whisper, the backdoor from October and November pushed them on up to that level. Hence the investor gloom and poor market action Friday even with a headline number that looked in line.

Hours worked also tell us there is no turn yet and that indeed the picture will get worse. Hours worked fell to 33.3 from 33.5. Just a couple of tenths, but the story told is important. Employers cut hours worked before they cut an employee because an employer does not want to lose a well-trained employee if he or she can help it. The costs on the other side, i.e. rehiring, retraining and lost productivity, are too great. Thus an employer will cut hours worked in an effort to bridge the downturn and hang onto employees. After reducing hours the next step is laying off. If employers are still cutting hours then they are still hanging onto some employees despite all of the announced layoffs. That means job losses will churn even higher over the next couple of months at least unless there is a rapid recovery. As noted above, however, the economic data has yet to show any sign of a turn.

Improving jobless claims last week prove illusory.

Thursday we wondered if the second week of fewer new jobless claims meant anything substantive. It did, but not in the sense that things were improving. We are hearing that the reason jobless claims fell last week after falling the week before on misfiring seasonal adjustments is that the state systems were so overwhelmed with filings that they could not supply the feds with all of the data. Oh boy. That means the next couple of reports are likely to be real donnybrooks. Hey, we are down in the gutter. Might as well set some records and benchmarks here for compare future recessions to.

Credit has to recover before any stimulus can work, and by golly it is doing that.

Mortgage rates, LIBOR, corporate bonds.

Weeks and indeed months back we wrote, and likely too frequently as we obsessed over the unprecedented credit problems, that the credit markets had to recover and get back to some sort of normal flow before any economic recovery could take place. Makes sense. You can have all of the tax and other incentives you want, but unless the government is putting money in your bank account like, say, some big bank or automaker, you are not going to take advantage of incentives if you cannot get the credit.

There is improvement, yea verily solid improvement, in the credit markets. Ever since the Fed announced its TALF plan to purchase mortgage backed securities and small business credit instruments mortgage rates have softened. When the Fed announced the New York Fed was buying MBS a week ago mortgage rates cracked. Thursday you could get a 30 year fixed mortgage for 5.01%, a record low. That decline has fueled a rise in mortgage activity although things did slow last week in anticipation of more federal action to lower them further. That shows one of the downsides to a lot of intervention: you create an expectation of intervention and that keeps consumers from getting on with buying and selling as they would normally do.

LIBOR rates slid all week and really fell on Friday. The overnight rate is at 0.10%. The 1-month fell to 0.37% Friday from 0.39%. It was close to 2% in early December. The key 3-month rate (used to calculate the TED spread, the difference between the US 3 month and the LIBOR 3 month) tumbled to 1.26% from 1.35% Thursday, and that was down from 1.41% from Wednesday. That is down 100 basis points since early December. As noted a week back, that puts the 3-month below the mid-2004 levels.

Corporate bonds were relatively hot commodities last week as some big names such as GE floated issues to gauge the market's appetite. Sales totaled $41B, the best week in 8 months. That even topped the $32B for the same week in 2008, long before the credit freeze struck full force. Spreads narrowed nicely as well thanks to the improved demand. Narrower spreads indicate more confidence in the economic future as less risk protection is demanded. This week underscores the improvement in the corporate bond market the past 6 weeks, a very important money source for large corporations.

The bottom line is that the credit market is improving, and it is doing so on several fronts from interbank to corporate to consumer. This free flow of credit is necessary before any stimulus can work to repair the economic damage the credit freeze caused. It is not a cure for the damage from the freeze (physician heal thyself). The extra liquidity pumped into the system can be a form of stimulus, but as we saw in 2000 to 2003, Fed liquidity is not a catalyst in bad times (the old 'pushing on a string' argument). It takes fiscal stimulus in the form of capital investment incentives to stimulate the economy out of recession. That is why I scratch my head a bit when I hear calls from some conservatives that there is enough stimulus already. I also scratch my head when I hear democrats complaining about Obama's proposed tax incentives in his package, the only part of the package that will potentially have any real lasting impact. Once more it is going to be an ugly battle in DC, and hopes of a stimulus bill agreement by mid-February appear rather optimistic.



VIX: 42.82; +0.26
VXN: 43.84; +0.61
VXO: 42.6; +0.64

Put/Call Ratio (CBOE): 1.03; -0.04. Third session above 1.0 on the close. As soon as there was some selling, the put buying for speculation and downside protection jumped higher.

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: 41.8%. Continuing the rise, up from 38.5% the prior week and up from 25.3% hit in mid-December. This puts bullishness above the 35% threshold below which is considered bullish. It does not mean the action is now bearish. That level is up at 55%. Bullishness bottomed on this leg lower at 21.3% in November 2008. This last leg 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: 34.1%. Declining rapidly, down from 38.5% the prior week and off from the 46.2% hit mid-December. That puts it below the 35% level considered bullish for stocks, but as with bulls, still well below the level considered bearish for stocks. Bearishness hit a 5 year high at 54.4% the last week of October. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment on this move. 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: -45.42 points (-2.81%) to close at 1571.59
Volume: 1.95B (-2.35%). Volume remained below average as on Thursday, declining again as the index sold. Price/volume action is still positive for now, what you want to see on a pullback.

Up Volume: 470.431M (-922.858M)
Down Volume: 1.461B (+854.702M)

A/D and Hi/Lo: Decliners led 2.95 to 1
Previous Session: Advancers led 1.49 to 1

New Highs: 15 (-1)
New Lows: 17 (+4)


Unable to hold a modest bounce at the open and giving up the 50 day EMA (1609) right off the bat and settling much lower at the 18 day EMA. That puts it just below the December peaks. This keeps NASDAQ in the range of support for it to make another higher low and resume the move higher. These support levels are not hard steel, meaning that the move is not over if there are modest breaks or the index trades in the general range.

SOX (-3.26%) was a relative loser, slipping back through its 50 day EMA, but it held the 18 day EMA support level on the close. Holding at the 50 day EMA would have been great, but the 18 day EMA is not bad at all as SOX tests right at the trendline off the November/December lows.




Stats: -19.38 points (-2.13%) to close at 890.35
NYSE Volume: 1.159B (-3.17%). Volume was below average all week. It rose as the NYSE indices rose, however, and backed off as they sold back. That continues some positive price/volume action though overall volume remains lower then you want to see when the indices moved higher.

Up Volume: 169.239M (-580.148M)
Down Volume: 983.436M (+553.779M)

A/D and Hi/Lo: Decliners led 2.38 to 1
Previous Session: Advancers led 1.67 to 1

New Highs: 29 (-1)
New Lows: 59 (+4)


The large cap SP500 struggled under the selling of the financial stocks. SP500 fell to close at the 50 day SMA, basically the level it needs to hold and make a higher low to continue the move off the November low. SP500 did crack the November/December up trendline on the Friday close, but it also held a key level in the 50 day. Early next week will tell the story on how SP500 holds. The drag from the financials is undermining it.

SP600 (-3.88%) did not perform well Friday. It had shown solid relative strength with a hold at the 50 day EMA on Thursday. Then it dumped down Friday, falling below the December peak and to the 50 day SMA. It is 5 points or so above the late December lows. As with SP500, it is at a point where it needs to find some support, hold its ground, and continue the rally.

SP600 Chart:



The blue chips continued to lag, weighed down by their financial components. The Dow broke to new low ground on this decline, but it is well above the late December low (8364 intraday). Want to see DJ30 hold at 8500ish and make the turn there, but it is not leading by any stretch other than showing more downside weakness.

Stats: -143.28 points (-1.64%) to close at 8599.18
VOLUME: 204M shares Friday versus 226M shares Thursday. Volume fell, about the only silver lining.



Friday did not lead to the renewed bounce as the jobs report rattled investors. Some early rally leaders struggled and broke lower though most managed to hold up quite decently despite the market selling. It was somewhat frustrating, and it ratcheted up the worry about the rally's longevity. Skepticism is a positive . . . as long as the technical aspects remain healthy.

No doubt the rally is getting fully tested. There were some breakdowns and financials are again weak. The fight this week will be between the financials with the renewed downside from the big banks (e.g. JPM, WFC) and the rebound strength in commodities and the other infrastructure stocks, as well as chips, tech, and energy. There is also a key battle with the small cap index and whether it can recover from the Friday decline and make a higher low here.

The market is making it uncomfortable, raising that wall of worry once more as investors deal with the latest batch in a continuing bout of weak economic data. On top of that Q4 earnings are just cranking up, and investors are pensive. They know this will be the sixth consecutive month of declining earnings as S&P forecasts a 14% drop. What else is worrying investors? Dissention among the democratic party about the proposed stimulus package and its use of tax cuts, the one element that made it palatable to republicans and gave it a chance of actually working. Thus the market was a bit more pensive to end the week.

We took gain early in the week as the market ran higher, and we protected gain on positions that struggled, closing those failing to hold support. We still have significant positions in the leader groups and note this weekend there are many still in excellent position to rebound. There is a loggerhead this week with earnings and some breakdowns to end the week versus the continued strength in the commodities/infrastructure sectors along with the techs. If the rally is going to maintain its steady build in strength, that fight will be resolved this week.

We continue to look for good upside opportunity if the technical underpinnings hold up next week and the leading sectors rebound with force off their test lower. The indices are somewhat split at this point with respect to their indications. NASDAQ, SP500, SP400 (mid-caps) and SOX remain solid in their pullbacks while SP600 went from solid to problematical on Friday. DJ30 has the same look as SP600, but it has just followed along the past several weeks after leading the initial move off the lows. If the week starts rocky it is better to close out plays that struggle to hold support and see how the pullback plays out. If the indices break their trends off the November low the character changes. The rally off the lows would no longer be in place. That means we then have to watch for a test of the broken trendlines, and if the indices roll back over at that point then we move back into the downside. Not too wild about that idea. Would much rather see the market continue higher as an indication this recession is winding down and that people will be getting back to working and feeling better about life. If, however, the downside is what the market is going to give, then that is what we are going to have to take.

Support and Resistance

NASDAQ: Closed at 1571.59
The 18 day EMA at 1574
1603 is the December peak
The 50 day EMA at 1609
1620 from the early 2001 low
The 90 day SMA at 1737
1644 from August 2003
1752 from 2004
1782 from August 2004
1786 is the November 2008 high. Key level.
1948 is the early October 2008 gap down level

1565 is the second low in October 2008
1554 is the 50 day SMA
1542 is the early October 2008 low
1536 is the late November 2008 peak
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

S&P 500: Closed at 890.35
896 is the late November 2008 peak
The 18 day EMA at 897
899 is the early October closing low
The 10 day EMA at 903
The 50 day EMA at 916
919 is the early December peak
965 is the 2003 consolidation low
The 90 day SMA at 979
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.

889 is an interim 2002 peak
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

Dow: Closed at 8599.18
8626 from December 2002
The 50 day SMA at 8667
The 10 day EMA at 8743
8829 is the late November 2008 peak
The 50 day EMA at 8854
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
The 90 day SMA at 9353
9575 from September 2003, May 2001
9654 is the November 2008 peak

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.

January 9 - Friday
December Average Workweek (8:30): 33.2 actual versus 33.5 expected, 33.5 prior
Hourly Earnings, December (8:30): 0.3% actual versus 0.2% expected, 0.4% prior
Nonfarm Payrolls, December (8:30): -524K actual versus -525K expected, -584K prior (revised from -533K)
Unemployment Rate, December (8:30): 7.2% actual versus 7.0% expected, 6.7% prior
Wholesale Inventories, November (10:00): -0.6% actual versus -0.7% expected, -1.2% prior (revised from -1.1%)

January 13 - Tuesday
December Treasury Budget (2:00): -$33.0B expected, -$48.3B prior

January 14 - Wednesday
December Retail Sales (8:30): -1.1% expected, -1.8% prior
Retail Sales ex-auto, December (8:30): -1.2% expected, -1.6% prior
Business Inventories, November (10:00): -0.5% expected, -0.6% prior
Oil inventories (10:30): 6.68M prior

January 15 - Thursday
Initial jobless claims (8:30): 467K prior
December Core PPI (8:30): 0.1% expected, 0.1% prior
PPI, December (8:30): -1.9% expected, -2.2% prior
Philadelphia Fed, January (10:00): -35.0 expected, -32.9 prior

January 16 - Friday
December Core CPI (8:30): 0.1% expected, 0.0% prior
CPI, December (8:30): -1.0% expected, -1.7% prior
Capacity Utilization, December (9:15): 74.7% expected, 75.4% prior
Industrial Production, December (9:15): -0.8% expected, -0.6% prior
Michigan Sentiment-Prel, January (9:55): 60.0 expected, 60.1 prior

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

Jon Johnson is the Editor of The Daily at

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