Sunday, February 22, 2009

SP500 Tests the Bear Lows

SUMMARY:
- SP500 tests the bear lows, market rebounds on Administration comments preferring a private system.
- CPI bucks PPI, remains under control.
- Maybe this is just a quiet bottom
- Greenspan, the Jimmy Carter of monetary policy.
- China and the US: Two different approaches to stimulus is no surprise, but the method of each is.
- Contract law no longer sacred in US? Neither will be the US economy.
- Sword of Damocles (the government) hangs over the market.

More selling, but a test of the SP500 low holds with a government assist.

Two positive opens and crap outs Tuesday and Wednesday, two downside opens Thursday and Friday, and finally the SP500 tested the November closing low. All week there were reasons aplenty for the weakness just as there have been for the past 6 months. The CPI was rather neutral after the hotter PPI, and that was almost a positive. On the other hand, Senator Dodd, Senator Hutchison and Alan Greenspan, the latter having virtually eviscerated any credibility he had, came out and in different ways said bank nationalization was likely a good thing. Earnings provided no relief as LOW missed and guided lower while JCP beat . . . but guided lower. Jumbo loan defaults, those of the wealthier citizens are surging. On top of that you had expiration. Another veritable witch's brew.

The morning started lower, but it was not a breakneck downside capitulation. There was plenty of gloom but it was as if coated with molasses. Indeed stocks bounced off the lower open and NASDAQ turned marginally positive. Then the Dodd comments piled on top of the Greenspan comments and the gains, the few there were on NASDAQ, were spilled. For the second time during this bear market SP500 undercut the 2002 bear market lows. It went further, moving toward the November 2008 closing low.

Just after 2:00ET, however, the Administration, almost two weeks after the Geithner gaffe with his announcement of the lack of a bank plan, finally said something about the banks. An announcement of a plan? Hardly. It simply responded to the Dodd et al comments about nationalization, with the White House press secretary and later a Treasury spokesman saying it was best for the banking system to remain private and in private hands.

The market, so starved for anything to hang onto with respect to the financial sector, surged on the news. That took SP500 right off the November closing low with a nice rebound. It took NASDAQ and its progeny positive. SP500 came within a point of positive, flirting with a reversal. It couldn't hold. NASDAQ couldn't hold. The Dow was not close. Only SOX and NASDAQ 100 managed an ever so modest gain.

A reversal of the SP500's November lows? Not likely. Yes it was a great bounce off of that level, but it was an expiration Friday and volatility is the norm. The 'private banks' statements triggered a rebound. It could very well hold on through the start of the week if the Obama administration is watching and has any snap and follows up with some positive statements about the importance of private banking and, dare we think it, a plan that allows banks and the market to work things out with a government assist? That would be the trigger that launches a strong oversold rally.

As it is, nothing has really changed yet as very anxious and indeed frightened investors await something positive from the Administration that has thus far been extremely negative. Congress is no better. Everyone is tired of the blame game, i.e. the worn out presage to any comment on the economy that the current situation was inherited. With the passage of this massive FDR spending bill, the President now owns this mess. Everyone knew it was bad, the President as well as our Congressmen who all sought our vote for their jobs. They are there and we are waiting for some leadership, not excuses.

TECHNICAL. Intraday it was somewhat typical expiration. Lower start, recovery attempt, then a rollover to new session lows. An afternoon rebound to session highs, a fade to the close but still a close in the upper half of the range.

INTERNALS. Volume surged but it was expiration and that goes with the territory so you cannot claim reversal quality volume. So how about breadth? -3:1 on NYSE even with the reversal. All the NYSE indices were down close to 1% or more and thus breadth was going to be negative with the small and mid-caps far outnumbering other stocks. Indeed that is even more so now given that many so-called large caps are now mid-caps. New lows was the indicator to watch with SP500 testing its low and the SP600 was not that far off the same level. NYSE lows hit anywhere from 360 to 555 to 667 depending upon the service you look at; some serious discrepancy in the data. Nonetheless, it was much less than the 1100 to 1684 (again depending upon the data source) when SP500 was at this level in November when it put in that bear market low. Fewer new lows is an indication of more strength on the test and an indication the consolidation is still holding.

CHARTS. SP500, formerly known as the large cap index, tested the November closing low and rebounded. Financials were its bane again, but when the Administration came out of hiding and out from behind the cycle and hammer and admitted private banks were actually good for the US the financials recovered and thus SP500. Whatever the cause it was a bounce off the old low. Shorts are careful here given the selloff, the test of the old low, and the potential for positive announcements such as Friday. No doubt this was not a reversal on Friday; it was expiration and that accounted for the volume. Could this be a quiet bottom for SP500? No massive volume on this selling, lots of apathy on the way down as many investors are out of the market given the crash and then the 4.5 month lateral move. The market can scare you out, grind you out, or both. This one scared the many into soiling their trading garments and has since quietly worked sideways moving up and down, looking better then worse. The news remains bad and quite scary with the banks in liquidation mode and gloom without positive leadership from DC as the market made the last dip to the November low the past week. With a solid 12 week spread between the November and Friday test, there is plenty of base in place for a double bottom. The market will need a signal that there is a reason to rally in order to set the base bottom, however. The key is the financial system, and that means the plan for the bank bailout is the absolute key for the market. No pressure Washington. Lacking that it is still in position for a heck of an oversold rally.

NASDAQ undercut the January low but then recovered it on the close by a small cap tech or two. It held easily above the December low and it remains in great shape compared to the NYSE indices, particularly if SP500 can find reason to bounce. SOX held the January low itself, rebounding modestly off the bottom of its 10 week trading range. SP600 showed a nice tight doji after testing toward the November low on its Friday low. Pretty sharp selling last week and as with the other indices it is in position for at least a relief move. DJ30 sold lower and recovered to cut 115 points off the low. Led lower and now we see what kind of pop it has if the indices can put together a ripening oversold bounce.

LEADERSHIP. It was a tough week for leadership. The large cap techs took hits and gapped NASDAQ out of a promising higher low. As noted above, down but not out. The chips were tossed out of a good pattern as well but many are finding support at the bottom of the range. Energy was hit as well, but many found support at the bottom of their ranges as well. Steel and other non-precious metals suffered the same fate. Small under the radar issues were some of the best leaders but there were not many. China looks promising. Damage was done and it hurt us, but it was not irreparable.

SUMMARY. SP500 made the test that looked foregone after it broke the January low and DJ30 already hit its low. It tested and gave us a hit on the SPY puts and it and the NASDAQ indices that tested higher support recovered. As of yet there is nothing to turn that market as the credit markets remain tighter still as the stimulus and non-plan for the bank bailout part 2 sapped confidence in the Administration's and Congress' ability to deal with the crisis. Thus a longer term bottom has to prove itself. Until it does that and whether it does or not, the indices are ready for a bounce. If they cannot bounce from this level and breaks them the market has much more serious issues and heads lower.


THE ECONOMY

CPI is tame, PPI was not, gold hits $1000.

At 0.3% CPI was in line and flat year over year. The core rose 0.2% putting it at 1.7% for the year. Not great, not bad, well within the Fed's target range. Gee, glad to see that. It should be given many worry about deflation, even some FOMC members when they mentioned the 'D' word at the last FOMC meeting versus the 'lower inflation than desired' BS we usually hear.

Food was up 0.1%, housing was flat, vehicles rose 0.3%, energy jumped 1.7%, and gasoline 6%. More of the same.

Tame inflation? PPI spiked unexpectedly but the raw and intermediate goods were well under control. Seems inflation is under control. Why is gold at $1000 then? It could be that all of the money printing around the world is getting factored into gold as inflation. It could also be that there is just a whole lot of fear in the world that the major economies are not going to make it, the currencies are going way down in value, and that major structural change is ahead.

Right now gold if the beneficiary of both. There are widely divergent schools of thought as to what will happen to the world economies. It ranges from world depression to just another crisis we confront and move on with little overall change. We have little experience with these types of major, entrenched problems that developed over 20 years of propping up markets much as the Army Corps of Engineers tries to levee and dam major waterways. At some point the perfect storm hits and the tide cannot be contained. The problem with the current storm is everyone knows there is a storm but the understanding of the problems that led to it is not totally known (credit default swaps and their extent, for example) and thus the responses are insufficient, inappropriate, and delays.

Thus you see gold spiking not just for one reason, but for many reasons as buyers with different schools of thought conclude it is the way to go. It is in all cases somewhat an answer to an unknown set of questions or outcomes. You also see the dollar stronger despite gold moving higher. They usually move in opposite directions if there is inflation afoot, but the dollar is rallying even as gold rallies. Foreigners, compared to other currencies, would prefer to hold dollars right now for safety reasons. Again, different buyers from gold and for different reasons as well. Same with US Treasuries. Despite the fear regarding the US, the fear regarding the rest of the world is worse. Bond yields rose for a short while as the stimulus and bank bailout 2 were being formulated. Once they moved from conjecture to actual plans (well, at least for stimulus at least; the bank bailout must exist only in the mind of Mr. Geithner) bond yields fell as investors rushed back to bonds when they realized the US had missed the boat and reverted to Depression era spending.


Greenspan and Jimmy Carter. Brothers in buffoonery.

There should be an 'old public servants home' where former high ranking government officials have to go and spout their inane views. I remember the Carter years and how terrible they were from a standpoint of lack of leadership, competence, economic understanding. The US lost military power, economic power, prestige, influence, jobs, self worth. Bungled economic policies, bungled foreign policy, bungled military operations, cardigan sweaters.

It is always puzzling to me how someone who was so pathetic at managing the affairs of the country, so much so we were called 'the failed experiment during his one term,' and who has such an obvious disdain for the US based upon his statements since leaving office, is given so much credence. He was a failed President that set the US years back in our economic and technological progress. His actions since undermine every administration as he tries to meddle in affairs of state and promote the failed policies of his administration. He goes to Cuba, views a hospital and business that are the only showcase facilities in the country, has a mojito with Castro, and parrots a bunch of anti-American propaganda on cue. Yes I have a hard spot in my heart for Carter. He was President when I was growing up and I saw what his policies did to my father's hard work.

Then we have Mr. Greenspan, the 'maestro' Fed chairman during the salad days of the Clinton years. Got a problem? Cut rates. Things get successful? Better drain the money supply to prevent inflation. Those were his two plays in the game book. The rest of the time he talked and said nothing with the infamous Green-speak. Because of the success of the financial markets during his tenure (other than Black Friday where as his first duty as chairman he jacked up interest rates until the stock market seized up), he was accorded deity status in monetary policy circles. He would go to Congress, engage in puffery, smile coyly as one with far greater knowledge than the subjects addressing him (and sadly, that was true), and admit he was being obtuse because that was his job.

The first hint of trouble was after the 2000 crash when he and the Fed asked for submission of empirical data regarding the wealth effect to determine if there really was one. That was one of the main reasons for his desire to drain the money supply to prevent inflation, yet they were not sure it was really true or not. Trillions lost on a hunch. Market traders exercise stricter rules of the game than that or they don't survive. And this guy was in charge of our banking system? Cracks in the armor.

Over the past year you wonder if senility has set in on top of general lack of understanding. You recall Greenspan's testimony before Congress in the fall where he abdicated and otherwise abandoned the free market ideals he supposedly held, saying he was shocked that the market failed to check itself. The market always overshoots for one, and for another he completely left out one of his premises as Chairman that he reminded Congress of during every trip to the Hill: government interference sets up imbalances that cause the markets to act abnormally. Did those brain cells holding that information die? What the markets did was swing the pendulum in the other direction when the props place by the government that built up all of these bad loans (and Greenspan's abnormally low rates for an abnormally long time), and it always swings harder. He forgot the government forced lenders to make these bad loans. How can the free market work as a check or balance when the government mandates otherwise? When the dam broke, it broke. The time for the markets to work was past because the government forced money where it should not have gone.

Then on Friday Greenspan joins the chorus of socialists talking nationalizing the banking system, saying it may be necessary to temporarily nationalize banks to help stabilize the financial markets. So much for comrade Greenspan's market based approach to resolving issues. I suppose when you forget the reason all of these mortgages were made and blame the market for it, it becomes an easy step to say the government needs to go ahead and just take over. Oh yes, and as we know, temporary in government parlance means forever.


China becomes the leading world economy?

What are we seeing right now in the world? What swings are taking place that show structural change and a realignment of economic power? The clearest is frighteningly clear. Communist China is moving to capitalism and free enterprise while the US, the bastion of free enterprise, is moving socialist.

Never happen, right? Just look at the two massive stimulus packages each put into play and you will see the difference. China acted faster than the US. Its package was put in play in 2008. We have tarried in getting it passed and then only 25% of the package hits the economy in the first year. China's package was in the $500B to $600B range. Compared to the size of its economy versus the US economy and the severed issues we are facing, ours is a comparatively small. The lack of size is exacerbated by the package being a lot of spending that even Keynesian zealots admit is not in any way stimulus. When talking stimulus, size matters.

The last point touched upon another key difference. The Chinese package is spending no doubt about it, but it is closer to the US WWII type of spending and good old US tax incentive stimulus of the past with money given to work on projects that will work on the future of the economy and create better jobs down the road. Given China's form of government it cannot be a purely effective stimulus as the investment incentives, but it works for them because their economy is not at the level of development of the US economy.

China needs the damns, roads, bridges electrical systems, water systems, sewer systems, etc. in order to achieve its industrial development. We are well beyond that point of development. We don't need to build museums, conduct bee research, put in Vegas neon signs, Frisbee parks, enhance Amtrak subsidies, further endow the Arts, fund ACORN, and provide digital box conversion coupons to fix our economy. We are beyond the infrastructure building point (and as noted, much of it has nothing to do with infrastructure anyway). Keep it maintained, yes. Improve the grid, yes. Those are worthy. Most of the money does not go to those, however, and when it does it is doled out in inefficient ways such as giving Milwaukee tens of millions to build new school buildings when, due to falling attendance and population levels, it already has 13 vacant school buildings.

We need money invested in new companies, to develop new technologies, the next ones the world needs such as new propulsion for vehicle fleets. The jobs that spring from those investments, just as with the personal computer era that started in the 1980's, are the jobs that raise our standard of living. When we invest this way we build toward the future and not just run on a treadmill, spending money on projects that, when completed, don't add to our job producing capability.

The two approaches to stimulus show the changes in each system. We have forgotten our roots as populist rhetoric holds sway during crisis times. Thus we watch idly as our freedoms are eroded and our money is spent in Depression Era ways that prolonged the Great Depression by 7 years according to most research. Comforting. We also hear how the government will cede the rights it has taken using our tax money once the crisis is over. That has not happened in the history of the US or for that matter any government in the world. Just as we were told that the sixteenth Amendment would never impact anyone in the country other than the ultra wealthy, the promises that the government will give up what is taken is false. Clinton's tax hikes brought in vastly more money than was needed thanks to the explosive economic growth, yet did the government give the extra back to us? No, it spent it.

What about contract law? The rule of law is what has always made the US the recipient of investment money from all over the world. The government is now proposing rewriting mortgage contracts by the millions, but only for those that are in distress. Paid for gratis those who are not in distress. The government will step in and change the terms for the 'benefit of us all.' Compensation contracts are getting rewritten by the government as well. The camel's nose is under the tent and if we sit by and watch it will not stop there. The market knows this and that is why the threat of bank nationalization, even though it is said to be only temporary, sends bank stocks to liquidation levels in terms of their stock prices.

This change is fundamental and if not checked by some sort of populist, taxpayer revolt our two economies will move in opposite directions and a power shift will occur as China rides its industrial and technical revolution higher while we ride our social and governmental shift lower. Those who laugh and say China will never hold to the course are wrong. Too many people getting the taste of economic freedom will ultimately lead to the amelioration of communist control. We need to wake up.


THE MARKET

MARKET SENTIMENT

As discussed Thursday, there is a sense of fate among investors that there is nothing that they can do nor the government. As noted above, that apathy on this slide to the SP500 November lows is how some bottoms in past bears have formed. When no one cares or is so beaten up they have nothing left, the market puts in a bottom when no one is looking. Could happen here, but the market has to anticipate the credit problems will be rectified. The credit markets have locked up again after the stimulus plan firmed up and with the lack of any plan for the financial system.

VIX: 49.3; +2.22
VXN: 47.18; +1.98
VXO: 49.4; +1.61

Put/Call Ratio (CBOE): 1.06; -0.08. Four sessions above 1.0 on the close and the aggregate of all options exchanges closed over 1.0 as well. Definitely a lot of downside betting even as SP500 hits the prior low and holds.


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: 31.1%. Quite the dive from 35.2% it recovered to on the market rebound. Well down from 43.0%, the current top of the recovery as the market rallied off the November low. A rise from 25.3% in December and quickly starting to fall once the market encountered the January selling. Above 35% 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: 41.1%. Spiking from two weeks at 36.3%. Jumping over 38.0%, the recent peak over the past month as bearishness rose again. Hit the 34's on the lows, falling from 38.5% and 46.2% in mid-December. Still above 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.


NASDAQ

Stats: -1.59 points (-0.11%) to close at 1441.23
Volume: 2.564B (+25.99%)

Up Volume: 1.443B (+1.067B)
Down Volume: 1.099B (-523.839M)

A/D and Hi/Lo: Decliners led 2.54 to 1
Previous Session: Decliners led 1.98 to 1

New Highs: 10 (+4)
New Lows: 437 (+162)

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

NASDAQ held over the December low at 1400 and rebounded to hold the January lows (1434). It has put itself in position to hold and bounce off these lows in its 10 week range. Of course has to be viewed as an oversold bounce at this point.

SOX (+0.31%) held the January low and bounced for modest gain. Tough week for the chips as some solid patterns were sent lower but as with the SOX, they held some support and are in position for a short term bounce.

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

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


SP500/NYSE

Stats: -8.89 points (-1.14%) to close at 770.05
NYSE Volume: 2.117B (+42.54%). Big expiration volume.

Up Volume: 511.54M (+125.203M)
Down Volume: 1.598B (+525.108M)

A/D and Hi/Lo: Decliners led 3.07 to 1
Previous Session: Decliners led 2.65 to 1

New Highs: 11 (+7)
New Lows: 360 (+63). Or 555, or 667. Whichever one it is still well, well below the prior November lows.

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

Reached to the November closing low (752) and rebounded to cut roughly two-thirds of the losses. Financials were distributing then the Administrations statements reversed them. Good place for a bounce up to test 800 to 804 as the first resistance.

SP600 (-1.02%) reached toward its November closing low but did not really threaten it. when the market turned, it turned as well and closed at the upper end of its session range. Doji with tail over the prior lows and after this kind of selloff from near 250 down to 213 the past two weeks it is ready to try a bounce.


DJ30

The Dow undercut its November low (7449) on the week and then managed to rebound off that low. Still could not recover the November low and still looks extremely ill. It can bounce with the rest of the market to test the November lows from the downside then what it does from there looks like more downside unless the other indices can generate something positive.

Stats: -100.28 points (-1.34%) to close at 7365.67
Volume: 584M shares Friday versus 301M shares Thursday. Expiration trade.

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


MONDAY

The technical picture is interesting for SP500 and NASDAQ with both bouncing off an important support level on Friday after a tough downside week. Interesting, but it is overshadowed by the next to be announced governmental bailout, particularly the one regarding the banking system. Without some clarity on that the market cannot price in a recovery, just more liquidation values for financials. More than that, without a plan it thinks has a chance of working to resolve the problem, the market cannot price in a recovery. Remember, fixing the credit markets does not solve the economic problems that have developed, it just allows the system to function again.

It has been almost six months, a half year, since the credit markets imploded. To this date they are not fixed. Credit markets are improved from total lockdown but they have not returned to levels that promote unfettered, confident funds transfer and credit acceptance. Over the past three weeks the improvement stalled as the world markets lost confidence in government's ability to resolve the problem.

During this time a lot of economic damage occurred. The world economies are still in impressively hard decline due in large part to a lack of flowing funds at reasonable rates in order to conduct the world's business. The damage continues to accrue as the credit markets continue their cryogenic state.

Thus when Rick Santelli, voicing the frustration of the Chicago floor traders, asked the President if he heard how his latest proposal was received, it was picked up all across the nation. IBD reports protests are arising across the country as citizens are tire of profligate spending and the Chicago-style machine methodology in which the spending bill was crammed down on the country without even being read.

At this juncture the government is not listening. Administration spin doctors were out belittling the protests and commentary, saying they won't be so upset when they need a job. How callous and crass, but how typical. Washington doesn't get it yet again. Citizens view this kind of spending and attitude as CAUSING the problem, not fixing it. If you tax and spend more and more of the small and medium sized businesses profits that pay the vast majority of the taxes, you jeopardize the very businesses you rely on for the tax money and you will ultimately get less tax revenue to spend.

So we wait for the next pronouncement, knowing that the new Administration is on an ideological course when it comes to government action and presence in our lives. It is sadly very likely that we will have to go through the 1970's-like angst of watching these kinds of programs fail before we remember that, oh yes, this kind of government intervention and tinkering with social processes and markets doesn't solve our economic problems but simply exacerbates the existing ones and creates others as well. A sad prospect, and that is why some are predicting Dow 6000, maybe 4500.

More to the current situation, however, is what happens off of this Friday test of the November lows. The indices are primed for an oversold bounce from this level and we will look at one to play some new positions to the upside as well as let some current positions hit in last week's selling recover as far as they will. The spring is wound pretty tight, and when it goes we could be a hell of an upside bear market rally that may or may not be something more. At this point the market is weak from the uncertainty regarding the bank plan or lack thereof, but it is poised to bounce if a decent one comes down the pipe. That would be the trigger to the oversold rally and we just see how strong it is and what it does at resistance to determine the next leg and appropriate action on our part.

Bear in mind that, despite the down Friday and the corresponding gloom surrounding a bad week for the market, that all of the indices are in their 4.5 month consolidation from the October lows except DJ30. SP500 held the bottom of its range Friday with the NASDAQ related indices well above their bear market lows. Overall the consolidation holds. Thus despite the gloom that even we were feeling on Friday after a tough week you don't want to lose sight of the fact that the consolidation continues. It does, however, need some help in the form of some better policies that are viewed as helping resolve the problems unlike the first attempts of the new Administration.


Support and Resistance

NASDAQ: Closed at 1441.23
Resistance:
1460 is the February low
The 10 day EMA at 1490
1493 is the October 2008 low & late December 2008 consolidation low.
1521 is the late 2002 peak following the bounce off the bear market low
The 50 day SMA at 1533
1536 is the late November 2008 peak
The 50 day EMA at 1541
1542 is the early October 2008 low
The 90 day SMA at 1555
1565 is the second low in October 2008
1569 is the late January 2009 peak
1603 is the December peak
1620 from the early 2001 low
1644 from August 2003
1666 is the January 2009 peak
1752 from 2004
1782 from August 2004
1786 is the November 2008 high. Key level.

Support:
1434 is the January low (1440.86 closing)
1428 is the November 2008 low, the bear market low
1398 is the early December 2008 low
1387 is the 2001 low
1295 is the November 2008 low

S&P 500: Closed at 770.05
Resistance:
800 is the March 2003 post bottom low
804 is the low on the January 2009 selloff
The 10 day EMA at 807
812 is the February low
815 is the early December 2008 low
818 is the early November 2008 low
The 18 day EMA at 821
839 is the early October 2008 low
848 is the October 2008 closing low
853 is the July 2002 low
857 is the December consolidation low
The 50 day EMA at 857
866 is the second October 2008 low
878 is the late January 2009 peak
The 90 day SMA at 878
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
944 is the January 2009 high

Support:
768 is the 2002 bear market low
752 is the November 2008 closing low
741 is the November 2008 intraday low


Dow: Closed at 7365.67
Resistance:
7449 is the November 2008 low
7524 is the March 2002 low to test the move off the October 2002 low
7694 is the February intraday low
7702 is the July 2002 low
The 10 day EMA at 7713
7867 is the early February low
7882 is the early October 2008 intraday low. Key level to watch.
7909 is the early January low
7965 is the mid-November 2008 interim intraday low.
8141 is the early December low
8175 is the October 2008 closing low. Key level to watch.
8197 was the second October 2008 low
The 50 day EMA at 8252
The 50 day SMA at 8321
8419 is the late December closing low in that consolidation
8451 is the early October closing low
The 90 day SMA at 8495
8521 is an interim high in March 2003 after the March 2003 low
8626 from December 2002
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
9088 is the January 2009 peak
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:
7282 is the October 2002 low, the low of the prior bear market.
7008 from February 1997 closing peak
6489 from December 1996 closing peak

Economic Calendar

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

February 24 - Tuesday
Case/Schiller Home Price Index, December (9:00): -18.25% expected, -18.18% prior
Consumer confidence, February (10:00): 36.0 expected, 37.7 prior
Bernanke Monetary Policy Report (10:00)

February 25 - Wednesday
Existing home sales, January (10:00): 4.81M expected, 4.74M prior
Crude inventories (10:35): -138K prior

February 26 - Thursday
Durable Goods Orders January (8:30): -2.3% expected, -2.6% prior
Durables ex-Transportation, January (8:30): -2.0% expected, -3.6% prior
Initial jobless claims (8:30): 627K prior
New home sales, January (10:00): 329K expected, 331K prior

February 27 - Friday
Preliminary GDP Q4 (8:30): -5.4% expected, -3.8% prior
GDP Chain deflator, Q4 (8:30): -0.1% expected, -0.1% prior
Chicago PMI, February (9:45): 34.0 expected, 33.3 prior
Michigan sentiment, revised February (10:00): 56.5 expected, 56.2 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, February 15, 2009

Leadership is Still Leadership

SUMMARY:
- Volatile in a narrow range to end the week.
- Michigan sentiment falls
- China stimulus looks to be working while our social engineering package won't.
- Hard to believe but there are signs of economic improvement.
- Leadership, regardless of why it is leading, is still leadership.

No short covering as indices hold status quo on a down week.

Stocks were all over the road Friday, but they more or less kept it in the lanes. In other words it was up and down all day but the range was rather narrow. Stocks traded on both sides of the flat line all session long and with 30 seconds left in the session the indices slightly positive. Then some late trades dumped stocks into negative territory on the close. Light volume, flattish breadth. Ahead of the 3-day weekend there was no short covering of note, just undecided trade pushing stocks up and down.

There were the usual strong sectors such as chips and some metals, but overall things were quiet. That is not a bad thing; stock after stock on the report, the leaders in the market, held steady in their solid patterns. Hard to be upset with that. As noted Thursday, if not for the Dow stinking the place up even the continuing lethargy in the NYSE indices would not be that big of a deal.

The news was rather quiet though there were quite a few earnings out. Pepsi was in line on earnings and guidance. ANF in retail beat. WYN in hotels beat after MAR missed big. Toyota announced it was buying out 18K contracts of US workers. Michigan sentiment fell to 56.2 from 61.2, missing the 60.2 expected. Some said that it was due to a loss of confidence that the new Administration could handle the economic morass. Of course to buy that you have to believe that most felt the Administration, or any Administration for that matter, could handle the problems we have. China helped out as reports continue to emerge that China's stimulus package is already yielding results.

All of the news was not enough to push stocks positive even with a 3-day weekend and the chance of more policy announcements ahead. There was simply no interest in pushing stocks higher, and the sellers, while not rushing to cover, were not ready to sell aggressively.

TECHNICAL. After some decent closes in the upper end of the daily trading ranges, Friday was a train wreck. Up and down all session with the indices turning negative in the last seconds of the session on a sharp decline that was, frankly, of the same magnitude of the up and down swings all session.

INTERNALS. Sleepy with flat breadth and volume down 16% to 18%. Up and down and nowhere. On the week the price/volume action was a push with the sellers and buyers putting in the same number of accumulation and distribution sessions.

CHARTS. No movement, at least nothing that changed the character heading into Friday. The indices finished lower for the week with NASDAQ, NASDAQ 100 and SOX in the top half of their 4 month range as well as the more recent 4 week range, and the NYSE indices closed in the bottom half of that same range. DJ30 looks quite ill as it bled to a new post-November closing low twice on the week, the second on Friday. It appears to have a date with the November low. SP500 is a relative laggard, but it is also in a rather well defined 4 week trading range from 800 to 875 that is part of a larger 4 month lateral consolidation. Struggling but not wheezing as is the Dow. NASDAQ is in a rather narrow range itself, managing, however, to make a higher low last week at support at 1500. It is not a thing of beauty but it is a solid pattern. NASDAQ 100 is also trying to put in a higher low and it closed on top of its 50 day EMA after holding the 50 day SMA on the lows for the week. Even with RIMM imploding NASDAQ 100 held up well. SOX is very similar to NASDAQ 100, making a higher low at the 50 day SMA. None are in the clear, but the NASDAQ related indices are in a building process while NYSE is in a bleeding process. Indeed, the NASDAQ indices are pinching off as the pattern narrows after making higher lows and higher highs. A break is coming.

LEADERSHIP. Despite the hacking, sickly DJ30 and the SP500 limping along, many stocks continue to show strong patterns and are in position to break higher. Chips, techs, metals, biotech, healthcare, energy, agriculture, Chinese stocks. Many quality stocks are in good patterns that show accumulation (buying). It is hard to turn your back on the market just because the Dow and its 30 stocks is in the toilet. Remember, DJ30 can sell off to the November low and still be in its consolidation. Thus selling to that level is not the end of the consolidation. If it holds at that level, it is an affirmation. More importantly, what will the LEADERS do during that time? Thus far, when DJ30 struggles and falls these stocks are either moving higher or putting in the work on solid bases.


THE ECONOMY

Signs of improvement defy gloom.

No one thinks the economy is worth a damn right now. Why would we allow $800B to be authorized for spending, stimulus or otherwise, to supposedly help the economy if things were good? The Philly Fed came out Friday and predicted -5.2% Q1 GDP growth, revised from -1.4%. Not much hope in Philly.

No one is looking but there are modest signs of improving data. It is not that the data is out and out strong or showing a clear turn. It never does at first. There are subtle shifts that individually mean little. We are seeing many different areas, however, showing improvement, and historically when you get a lot of different areas perking up that is a sign of change. It may not mean a turn right back up, but if it sustains it means the worst is over.

That would not be a surprise. By the time our government acts it is often out of step with the cycle. Or you can take the even more cynical view: why was there such a rush to pass a stimulus bill that was really a social engineering bill without letting anyone see it as promised and indeed required by our law?

In any event, there are signs that the economy may be trying to bottom. Hopefully it is not just a rest station or a pause before more weakness, but some firming that will lead to improvement. Needs to; the stimulus bill is going to be a dud.

Examples. This week we saw several indications that retail sales were not continuing down the sewer as many expected. Same store sales last week were not that great, but as noted at the time they were not down nearly as much as expected. Moreover, some were actually good. Retail sales were out and they rose for the first time in seven months. We tried to tear it apart but could not find any gaping hole or reason that wiped away the strength. Thursday several restaurants reported sales much better than expected. Friday ANF beat street earnings estimates.

Further: Regional manufacturing reports are rebounding from recent lows. The ISM service has improved for two months after its low. The ISM is showing a bounce after hitting a low. Pending home sales and existing home sales are up with existing home inventories well off the highs. Foreclosures jumped but then fell. The price drops and mortgage rate drops in the market have worked to flush out a lot of the weakness in California, Las Vegas, Florida, and some parts of Arizona.

Credit markets are improving. Bond yields rallied with the 10 year topping 3% and the 2 year 1%. They slid back some but are on the bounce and that indicates firming conditions. As reported a couple of weeks back swap spreads are narrowing considerably, a sign of a healthier market. Friday we learned that the junk bond market sales tripled in the latest report to the highest level since June, well BEFORE the major issues in the financial crisis hit.

As noted, any one of these or even two or three is a yawner. All together, however, and it shows there is something afoot. Again it can be just a bump or a pause before things worsen again. Maybe. What we do know is that this is the kind of stuff we saw back in late 2002 when the market showed signs of trying to bottom similar to what we are seeing now. At that time it paid to keep close attention to these and also to leading stocks. We are, as you know, doing both. There are many great stocks from many sectors that are in very good position technically. That is something a weak rally or a failing rally won't have. Interesting.


China economy picks up speed as we use an emergency to forge social policy.

A bit of soap box so skip it if you don't want to hear it. Just a warning.

A 1,071 page bill is being voted on without the 48 hours promised for everyone in America to read it before voted upon. That 'new transparency' is worth the words it was stated with, i.e. nothing. The bill was available at 11PM Thursday night.

China put its stimulus bill to work and of course it didn't need any votes. It was hatched and put into action. That is how a communist system can work: it has some efficiency. Of course we would not trade our system for that just for efficiency.

No, instead our leaders use emergencies and crises to forge policy they would otherwise not survive the light of scrutiny. Obama's chief of staff is on video in November 2008 saying that no crisis or emergency should be allowed to pass without using it to force social agendas that would not otherwise be able to pass. My stomach fell as I saw that. I thought that perhaps it was just Pelosi and company running over the President and inserting whatever they wanted in the bill. Given his chief of staff's comments it is not too hard to draw the lines of concerted action. It confirms every fear the Founding Fathers had in big government: when able it would do whatever it could to grow and foist new regulation and rights limitations on its people.

Never mind that it is chocked full of waste and useless spending that was tried and failed in the Great Depression. That is sickening in itself as we will pour $800B of our money down the drain. What is worse is that we are giving up our right as citizens to have social policies altered without any debate or discussion on the floor of the Congress. The most horrific is the national healthcare foundation that is laid in the bill as discussed Thursday night. Without ANY discussion this was slipped in just as Tom Daschle had advised Obama in 2008. Just as Obama's brass knuckles chief of staff said should be done, the bill was used to change policy.

In short we have been lied to and treated as the stupid sheep our leaders think we are. They don't have the guts to stand up and say what they are doing. They try to be sly and clever and trick us all. That is not the legacy of our Founding Fathers who stood up on principle and on threat of death when they created our country. I have seen political chicanery up close all my life. This is just about the most disgusting abuse of the public trust, at least on this massive scale, ever. As I told my wife, if this continues it won't matter if you stay in the US or go to Australia, Europe or any supposed republic or democracy as we will be the same.


THE MARKET

MARKET SENTIMENT

VIX: 42.93; +1.68
VXN: 43.11; +1.12
VXO: 42.75; +0.95

Put/Call Ratio (CBOE): 0.89; -0.01


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: 35.2%. Held steady for the second week. Up from 34.8% the prior week after a one-week move below the 35% threshold considered a bullish indication. Down from 43.0%, the current top of the recovery as the market rallied off the November low. A rise from 25.3% in December and quickly starting to fall once the market encountered the January selling. Above 35% 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: Held steady at 36.3% as well. Down from 38.0%, the recent peak over the past month as bearishness rose again. Hit the 34's on the lows, falling from 38.5% and 46.2% in mid-December. Still above 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.


NASDAQ

Stats: -7.35 points (-0.48%) to close at 1534.36
Volume: 2.006B (-18.59%)

Up Volume: 840.232M (-812.186M)
Down Volume: 1.171B (+389.112M)

A/D and Hi/Lo: Decliners led 1.14 to 1
Previous Session: Advancers led 1.03 to 1

New Highs: 11 (+3)
New Lows: 98 (-40)

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

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

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


SP500/NYSE

Stats: -8.35 points (-1%) to close at 826.84
NYSE Volume: 1.241B (-16.15%)

Up Volume: 360.295M (-329.712M)
Down Volume: 870.082M (+109.017M)

A/D and Hi/Lo: Decliners led 1.62 to 1
Previous Session: Decliners led 1.16 to 1

New Highs: 2 (-3)
New Lows: 29 (-7)

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

Stats: -82.35 points (-1.04%) to close at 7850.41
Volume: 331M shares Thursday versus 270M shares Wednesday.

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


TUESDAY

Not a great week for the market with that Tuesday drop on the Geithner plan without a plan. After that the indices held their ground, at least outside of the Dow. As discussed Thursday, the drop was on disappointment about the lack of a plan. As seen Thursday, however, as the 'plan' is released piece by piece the market bounces. Thus despite the loss on the week the indices remain in decent shape, particularly NASDAQ and its brethren.

One thing this market has is some solid leadership. While the NYSE indices were down and rather weak, the plays on the report held solid. More than that, they worked on their patterns, building toward another break higher. As noted above there are chips, techs, metals, biotechs, agriculture, energy and others in good patterns that went through the week in very solid fashion.

Some say the leadership stocks are performing because China is recovering. There is already a pickup in materials demand again as China emerges from its post-Olympics hangover. The building binge leading up to the Olympics was at an unsustainable pace. Now that the party is over, the dust has settled, and China has put in a massive stimulus plan directly into its economy, it is moving again and demand for products is up again. Just look at oil. It appears to have bottomed in the mid-thirties.

Okay, so it is China. Or the moon phase. The Steelers winning the Super Bowl. Putin dissing Michael Dell. Do we really care? That might be nice for the history books, but we want to make some money off of stock market moves, and these solid bases in quality stocks say some good things about the upside despite a pathetic pattern on DJ30.

There are lots of theories as to what will happen and why. Friday there was the usual speculation about what point the Dow would fall to. Six thousand was thrown out and that is a plausible level given the 1996 lateral consolidation, but that is a bit high; more like 5600 if that is the case. Before that there is a lot of support at 6900ish. Below that the 1994 year long consolidation at 3900 to 4000 is a possibility. ANY of these could act as support if the Dow crumbles through the November low and the 2002 at 7200. Given DJ30 has come within 250 points of that low in November and has held in the current consolidation, that indicates there is some pretty good support there.

The point: if DJ30 breaks down it is going lower and there is nothing we can do to stop it. We just have to take what the market gives us. Right now it has not crumbled through that level. It has not even made it to that level. It could and even then that doesn't mean NASDAQ, NASDAQ 100 and SOX will follow it all the way down. Indeed there are many of those good leadership stocks in good patterns showing strength. This kind of leadership is unusual for a market that is going lower. They could always crack and follow, but they sure did not show that as something they wanted to do last week when they had, once again, a golden opportunity to do so. Thus we go with what looks and acts strong right now, and there is a rather broad range of stocks that applies to.


Support and Resistance

NASDAQ: Closed at 1534.36
Resistance:
1536 is the late November 2008 peak
The 50 day SMA at 1537
1542 is the early October 2008 low
The 50 day EMA at 1556
1565 is the second low in October 2008
The 90 day SMA at 1566
1569 is the late January 2009 peak
1603 is the December peak
1620 from the early 2001 low
1644 from August 2003
1666 is the January 2009 peak
1752 from 2004
1782 from August 2004
1786 is the November 2008 high. Key level.
1948 is the early October 2008 gap down level

Support:
1521 is the late 2002 peak following the bounce off the bear market low
1493 is the October 2008 low & late December 2008 consolidation low.
1460 is the February low
1434 is the January low (1440.86 closing)
1428 is the November 2008 low, the bear market low
1398 is the early December 2008 low
1387 is the 2001 low
1295 is the November 2008 low

S&P 500: Closed at 826.84
Resistance:
839 is the early October 2008 low
The 10 day EMA at 839
The 18 day EMA at 844
848 is the October 2008 closing low
853 is the July 2002 low
857 is the December consolidation low
866 is the second October 2008 low
The 50 day EMA at 870
878 is the late January 2009 peak
The 90 day SMA at 885
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
944 is the January 2009 high
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:
818 is the November 2008 low
815 is the early December 2008 low
812 is the February low
804 is the low on the January 2009 selloff
800 is the March 2003 post bottom low
768 is the 2002 bear market low
741 is the November 2008 low


Dow: Closed at 7850.41
Resistance:
7867 is the early February low
7882 is the early October 2008 intraday low. Key level to watch.
7909 is the early January low
7965 is the mid-November 2008 interim intraday low.
The 10 day EMA at 8014
8141 is the early December low
8175 is the October 2008 closing low. Key level to watch.
8197 was the second October 2008 low
The 50 day EMA at 8386
The 50 day SMA at 8413
8419 is the late December closing low in that consolidation
8451 is the early October closing low
8521 is an interim high in March 2003 after the March 2003 low
The 90 day SMA at 8560
8626 from December 2002
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
9088 is the January 2009 peak
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:
7702 is the July 2002 low
7694 is the February intraday 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.

February 17 - Tuesday
February Empire State Mfg. (8:30): -24.0 expected, -22.2 prior
Net Long-Term TIC Flows, December (8:30): $20.0B expected, -$21.7B prior

February 18 - Wednesday
January Housing Starts (8:30): 530K expected, 550K prior
Building Permits, January (8:30): 525K expected, 547K prior
Capacity Utilization, January (9:15): 72.5% expected, 73.6% prior
Industrial Production, January (9:15): -1.4% expected, -2.0% prior
Crude oil inventories (10:30): 4.72M bbl prior

February 19 - Thursday
January Core PPI (8:30): 0.1% expected, 0.2% prior
PPI, January (8:30): 0.2% expected, -1.9% prior
Initial Jobless Claims, 2/14 (8:30): 615K expected, 623K prior
Leading Economic Indicators, January (10:00): 0.0% expected, 0.3% prior
Philadelphia Fed, January (10:00): -25.0 expected, -24.3 prior
Crude Oil Inventories, 2/13 (11:00): NA expected, 4.72 prior

February 20 - Friday
January Core CPI (8:30): 0.1% expected, 0.0% prior
CPI, January (8:30): 0.3% expected, -0.7% 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, February 09, 2009

Market Looks to Bank Bailout

SUMMARY:
- Market looks past jobs to bank bailout package next week, puts and exclamation point on the recovery rally.
- Lots of rally converts after Friday. Seen it before, and we made a lot of money as a result.
- Jobs purportedly give Congress more motivation and supposedly a compromise is reached.
- Signs of improvement amidst signs of implosion
- Looking for a pullback before the next run but will need some selling on the news to blunt the new found momentum.

NASDAQ 100 posts a higher high, leads market through jobs report and toward bank bailout announcement.

The jobs report was terrible at -598K but with all the gloom and worry about the economy, the whisper was again well over 600k. On top of that an additional 311K jobs were added to 2008 via downward revisions, ballooning the 2008 losses to 2.97M. Bad, but not as bad as the 500M jobs Speaker of the House Pelosi says will be lost if the spending bill is not passed (someone tell her the US population is just 305M; must be a hell of a lot of undeclared workers out there). Kidding aside, this was the most since the 1970's and shockingly, half of the 2008 losses occurred in Q4. The plunge after the credit crisis is staggering. LIBOR wasn't any better though it wasn't worse. Not great news but then again, not worse than imagined.

That data was countered by China announcing another major stimulus plan. Commodities, particularly copper, surged in response. Futures were somewhat below fair value but rose into the open despite the bad news, and by the bell were positive. Stocks gapped higher at the open, shot higher quickly, and then kept on heading higher. During the session definitive news came out regarding the bank bailout to come. An announcement would come at noon Monday and would include a 'bad bank' to buy bad assets. In addition, some foreclosure mitigation measures are to be announced later in the week. That kept the upside burn as investors anticipate the aid to come. 3% gains on solid volume capped a week of upside.

For the week there were key developments. Of course the market rallied, putting in a higher low and some higher highs on NASDAQ 100, NASDAQ and SOX. Commodities jumped with copper rising 15%. Nickel prices (used in stainless steel) surged. Oil is holding its recent lows, looking as if it has put in a bottom for now. Bond yields are up, a historical indication of improving economics. The 2 year bond closed at 1.00%; not long ago it was trading at 0.2%. There is some inflation fear mixed in there as well, but that is not the only reason yields are rising. There was even some good company news. GLW, flat panel maker, sees demand rebounding in Q2. Retail same store sales were down but better than expected with even some upside guidance.

TECHNICAL. Intraday action saw a straight run higher. The afternoon stalled the move but it did not stall the gains as the indices closed near session highs. This caps a week of much better intraday action, but it was late in the week that improvement showed up. Okay, we will take it.

INTERNALS. Excellent upside breadth at 4.9:1 on NYSE, 2.9:1 on NASDAQ. Volume slipped after the strong Thursday trade, but it was still strong and still well above average. Very good upside trade to close out the week and accompany some important price moves. Again many were calling this short covering and there was no doubt some short covering once the market started moving higher. As noted Thursday, however, there was positive price/volume action in a broad range of leaders and that means they were under accumulation. Add in the indices were in 4 month consolidations and showing improving price/volume action that says there is long term buying ongoing. Positives.

CHARTS. Thursday NASDAQ 100 moved to a higher high, leading the way for the rest of the market. Friday it was on point again, moving past the January closing high. Very solid. NASDAQ followed, clearing the late January high and the December closing highs. SOX blew past 225 marking the December peak. Solid action in techs. NYSE was up but from where it came from it could not match the techs. SP500, DJ30 and SP600 all finally moved past the October low. No higher highs, no change in character. The question ahead is whether they will tag along or end up as anchor chains. With some key financials moving up as well (GS, MS, regionals) there is some upside pull. All in all the developments are a big positive. The indices put in a very solid and somewhat lengthy lateral consolidation, weathering bad headline after bad headline, weak earnings reports, and political nonsense. Just about when the frustration was too much to take with the selloff after the follow through session in late December (and indeed it was for many), the market breaks higher showing great fundamentals.

LEADERSHIP. Part of that nice consolidation was the leadership. It had its ups and downs, but through the consolidation it mostly held on. When the follow through was roughed up some took on water and went under. Most held their patterns, repaired any damage, and this week broke higher ahead of the rest of the market just as leaders should. Moreover there was diversity. Key financials were up, early tech leaders had rested and then took the lead again. Metals, energy, industrials - - the 'over there' trades from 2007 - - showed life once more as well. Good moves all around .


Use your head, not your gut.

The following discussion is intended to demonstrate a point about watching what the market is actually telling you, the signposts it leaves along the way, regardless of what your emotions or the emotions of the now many financial stations and news stations fan within you. It is not intended as a bragging session about seeing a good bottom shape up. It has just been a gratifying week to see the moves after hanging tough during the trying times, and all of you who hung in as well took a huge step to becoming seasoned investors. Congratulations.

After Friday there were a lot of converts to the rally, extolling the virtues of the market. Many, as late as Friday morning, were still saying it was the same old bear market. Recall that Thursday evening some were saying the move was not broad, something a scan of market movers would have shown incorrect. After Friday many were jumping on the bandwagon. After a week of upside, Thursday's break higher by NASDAQ 100, and Friday's surge by the techs, some finally saw the good moves. Cramer was one of the negative ones even after Thursday. At least Friday when he extolled the virtues of the move he admitted he had been down on the market. Hey, maybe we really are going into full recovery if Cramer will admit it was not he that single handedly turned the market, the economy, an asteroid heading directly toward earth, etc. Kind of makes you worried when they all buy into the move after it has rallied for a week. Lends some credence to our view, discussed later, that some giveback next week when rumor turns to fact will likely occur.

It is easy to poke fun at them as we watched them buy our stocks and send our positions higher and higher. In reality it is not easy to cut away the emotions, the frustration of a long consolidation that seems to undermine each positive move. That, however, is the key to market success. Things were dicey. We said each night the indices had a big hole to dig out of. The underpinnings were improving but it is a long struggle not only for the market but for us as investors. Fighting off the frustration is tough. That is how it is at inflection points. Many pundits were talking with their gut feelings and not looking rationally and coolly at what the market was showing us.

We said there was still a lot to prove, but that there were high caliber stocks setting up good bases and consolidations and indeed moving higher. Price/volume action was improved. A higher low was put in and attempting to be cemented. Dicey yes, uncertain for sure. But instead of letting emotion control we looked at what the indices were showing (e.g. NASDAQ and SOX relative strength) and what the leaders were showing (and there were leaders).

Most importantly, not only did we see this, we did not let our emotions dissuade us from putting our money to work. We bought the leaders as they flashed the 'buy me' sign. Not just a day, but a series of buys over time as they set up and broke out. Thus on Friday we were letting the rest of the investors push our stocks and options higher, making us money. We took a lot of gain. We didn't' buy anything. We could have, but after five upside sessions and a Friday gap higher we knew we should focus on locking in some gains and then picking up new positions after the rush higher on the rumor of a bank bailout and stimulus deal became fact and profits were taken. Then we can move back in as others sell, picking up stocks that gapped away from us at a better price and be in position for the next move upside after the test.

We have seen this before in other market bottoms. We talked about it a couple of months ago as we compared the 2002 through 2003 bottom. Remember we said people were getting frustrated and selling out because the market was going nowhere? It was building a base, consolidating while showing good price/volume action and great improvement in leadership. After getting beaten up since Q4 2007, however, it is hard to overcome the notion this is just another blip in the bear. Nonetheless we saw what the market was showing and we were buying even though you wanted to keep the Pepto on the desk with you. But we had seen this before and knew it had real potential. Thus we kept calm and bought leaders as the broke higher, and Friday we were reaping some reward.

Cool thing is, now all of the converts are saying the rally will continue to surge. As noted above that likely means there is a test to come early in the week when rumor becomes fact, and after the first of the week pullback we can step in and buy good stocks that we passed on Friday at better prices than we could get chasing the gap higher.


THE ECONOMY

Jobs really bite, get some republicans to knuckle under and favor the spending bill.

The jobs report with its outsized losses was simply sauce for the goose. Stimulus fever is already all over DC and it is now, as reported Thursday, more a political issue than economic concern. Each side wants its type of stimulus. The democrats want spending and bigger government while the newly reformed republicans want to block bigger government (apparently figuring they made it big enough under Bush) and leave more money with those who earn it and make the jobs and the products and services that make economy go.

It has finally come down to just a partisan push. The usual fence sitting republicans (Collins and Specter) were swayed by cutting the bill back down to the size the House proffered (remember that the Senate boosted it close to $1T), feeling they did something important by keeping it the same size. Interestingly Olympia Snow, usually an easy convert, was a holdout but finally conceded though she did not join in on the self indulgent back patting in front of the cameras. Many republicans gave up because they realized it had become a political objective after Obama woke up and realized that the stimulus was not going to pass even with his senate majority given the Pelosi bill was so loaded with partisan crapola ($50M to ACORN; couldn't get it in the TARP so lets put it in the stimulus bill, right?) that nearly everyone in the US outside of DC was turning against it.

When it became political it was over because of the majorities in Congress. Throw Specter and Wilson a bone so they could get in front of the cameras and proclaim how they had come together and built a consensus (as if all democrats and 2 republicans a consensus be) and you have your bill. Of course a consensus to jump off a cliff doesn't make it a good decision now does it? They claim the senate version is 42% tax cuts now, but what kind of cuts? Not all tax cuts are equal, and from what we see there are none of the 'use it or lose it' tax incentives needed to get people to actually spend the money on things that lead to capital investment and thus economic growth that produces lasting jobs. Friday evening the talk shows were filled with the spending plan supporters fending off those wanting more tax cuts. Heard yet another one say that tax cuts were discredited as a means of stimulus. Hmmm. Early 2003 saw the second round of Bush tax cuts and these had the right kind of tax cuts, i.e. incentives to invest in the US. The stock market surged off the Q1 test of the October to December rally off the low almost to the day the taxes were passed. That was in anticipation of the quick impact of these tax incentives. If they did not work then why did Q3 GDP explode 7.4% higher? Discredited? How about proved?

Anyway, figured there was a snowball's chance in hell of getting a real stimulus bill out of Pelosi's 'everything you ever wanted to pass but couldn't without a crisis bill to sneak stuff in' spending package. What can you expect from someone who says 500M jobs will be lost by the 300M total people living in the US? Sad that we are going to shoot the money down the hole. As some are saying on the radio talk shows now, the only way to stop the runaway government started by the Bush administration and already accelerating under Obama is to cut off the funds with everyone choosing not to participate in our so-called voluntary income tax system. Stop feeding the fat man as Ronald Reagan said about our federal government.


Of course the feds act just as things appear to be turning.

Pretty much on cue the government gets the fever pitch to push stimulus just as things appear to be turning. Surely I am joking, right? I mean all of the headlines discuss the downward economic spiral that is heading to Depression. Obama said without the bill we faced economic 'catastrophe.' I posit that with the bill we are in greater jeopardy because it could stall the economic bounce that is trying to occur right now thanks to the fed sucking money out of the private sector into government programs that massively expand the federal government, not just temporarily, but permanently.

How could things be better given the bad headlines? ISM services is up two straight months. Regional PMI manufacturing reports are showing the volatility and bounces that appear at turns. Despite the reportedly horrid retail environment, same store sales did not collapse as anticipated and indeed many retailers affirmed guidance or in many cases actually guided higher. Friday GLW, the flat panel maker, said that it saw a bounce for Q2. On top of that you have swap spreads narrowing. Bond yields are rising. That can signal inflation worries given all of the free and easy spending, but with all of the other improving indications, it is clearly reflecting an improving outlook. The commercial paper market is improving. Oil and commodities prices appear to have bottomed. Overseas stocks in China and elsewhere are jumping once more.

These are all leading indicators. As with the market over the past several weeks the data is still dicey and there is still a long way to go, but there is improvement in areas that historically have indicated economic turns coming. As is historically the case as well, Congress is focusing on lagging indicators, e.g. jobs. Not that the right kind of stimulus would not hurt. Some of those Reagan tax credits for investment in the US would be very timely. Problem is, since Reagan no one in the Presidency has understood what makes a free enterprise economy great. Clinton at least didn't kill it immediately, buying time with his capital gains tax cuts after raising marginal rates. He did kill it, however, with the pay down of debt, bleeding money from the economy. Bush didn't get it. He did some good in 2003 but he grew government dramatically, undoing any good he may have started. The ignorance train continues with Obama. It may take another 20 years to dig out of this hole we are digging.


THE MARKET

MARKET SENTIMENT

VIX: 43.37; -0.36
VXN: 41.95; -1.35
VXO: 42.79; +0.08

Put/Call Ratio (CBOE): 0.71; -0.04


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: 35.2%. Up from 34.8% the prior week after a one-week move below the 35% threshold considered a bullish indication. Down from 43.0%, the current top of the recovery as the market rallied off the November low. A rise from 25.3% in December and quickly starting to fall once the market encountered the January selling. Above 35% 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: 36.3%. Falling from 38.0%, the recent peak over the past month as bearishness rose again. Hit the 34's on the lows, falling from 38.5% and 46.2% in mid-December. Still above 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.


NASDAQ

Stats: +45.47 points (+2.94%) to close at 1591.71
Volume: 2.439B (-4.32%)

Up Volume: 2.008B (-131.22M)
Down Volume: 404.602M (-2.966M)

A/D and Hi/Lo: Advancers led 2.88 to 1
Previous Session: Advancers led 1.82 to 1

New Highs: 7 (+2)
New Lows: 62 (-63)

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

Broke through the 50 day EMA, the December closing highs, and the 90 day SMA though it could not take out the intraday peaks at 1600. A higher high, however, the first in the move since the early January rally fizzled. NASDAQ now has another month under its belt since then and is making another run. Excellent volume and great leadership on this move are lending support.

NASDAQ 100 (+2.60%) broke to a second higher high on this move, clearing the January closing high (1275) and making a new higher high on the rally off the November low. Key move. A leading move. The other indices need to follow.

SOX (+3.56%) cleared the key 225 level that marks the December peak and the late January peak. Higher lows and a higher high. Still the early January peak to clear but running well.

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

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


SP500/NYSE

Stats: +22.75 points (+2.69%) to close at 868.6
NYSE Volume: 1.612B (-1%)

Up Volume: 1.48B (+305.064M)
Down Volume: 123.594M (-306.883M)

A/D and Hi/Lo: Advancers led 4.89 to 1
Previous Session: Advancers led 1.86 to 1

New Highs: 34 (+4)
New Lows: 66 (-31)

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

Cleared the October closing low and broke into the upper half of the consolidation range. Still well, well below the deeds the techs are pulling off. Heck, even still below the late January peak (878). Lots of work to do and has to drag a lot of the financials with it. Perhaps the banking bill can give it a B-12 injection.

SP600 (+3.59%) broke through the October low as well but it too is below the late January peak, the 50 day SMA, the 50 day EMA, the December peaks . . . you get the picture. Small caps have lagged and that is disappointing as you want to see them starting to take the point given the nascent turn in economic data. The stimulus package is not stimulus for small businesses. No businessman I have interviewed sees anything that will make him or her spend money to expand or promote business. That is the downfall of this plan. Without the jobs providers spending on business and creating more jobs there won't be any serious, lasting job creation. Thus the hesitancy of the small caps.

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

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


DJ30

Coming off the short double bottom from the January low and the early February low. Volume up the past two sessions, up solidly. Some promise here as it clears the October closing low but as with the other NYSE indices, it is one step at a time with 8500 the next key level and that is just a prelude to serious resistance at 9000 from the December and early January peaks.

Stats: +217.52 points (+2.7%) to close at 8280.59
Volume: 396M shares Friday versus 390M shares Thursday.

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


MONDAY

Monday the plan for the bank bailout is revealed, one of the main reasons the market was rallying to end the week, or at least had the extra hot sauce on the upside surge. A bad bank will be formed to buy up to $500B in assets. With the new restrictions on everything a bank accepting help has to agree to many are going to try and avoid taking any money. GS and MS have already said they are going to get out from under the TARP as fast as they can and they shot higher as a result. They were two of the institutions forced at gunpoint (or is it the Paulson bazooka point?) to take the original TARP funds. I guess we will find out what institutions are really in the crapper because any bank that can avoid it will.

We are concerned that given the solid 5 day rally through Friday and the key breaks over some resistance by the NASDAQ indices, when the rumor of the bank bailout and the spending bill become fact there will be some profit taking. Hence when we had some solid gains on Friday we took them.

With this kind of breakout and explosive upside move there is always the possibility it can just keep going. When NASDAQ broke higher in March 2003 after a 3.5 month pullback to test the initial rally off the low (3.5 month, 4 months just recently) it exploded 12% in 5 sessions with most of the move coming on two days. A similar move would put NASDAQ at 1635 on this move, another 43 points higher or the equivalent of Friday's move. Thus we feel that given the reasons for the break higher and the week of rallying already under the belt that the market is closer to taking a pause than doubling the move already made without one.

The fact that many of the converts Friday night were talking of a continued strong rally is only evidence that there will be a pause. They missed the signs showing the rally was laying its foundation, and now that they missed it they want to get on the bandwagon quickly. Thus we look for a pause once the rumor becomes fact and the great compromise in the senate is revealed to be just another reconfigured spending and welfare bill (i.e. giving tax 'cuts' to those that don't pay taxes).

That will be a dose of reality that will force some profit taking. We watch to see how the stocks hold up, how they come back to test those Friday gaps higher. We anticipate they will fill the gap and/or hold near support in some form and set up new entry points for us. We can position ourselves well once more for the next run higher with this kind of test.

It will be tumultuous once more. One thing this consolidation has shown us is that, despite the ability to absorb bad news and allow good stocks to move higher, it can still throw curves. That is why many did not believe what the market was showing. A break higher by NASDAQ 100 and NASDAQ will tempt some sellers as did the last breakout. Once more we need to keep our wits, let the market test, and then take what it gives us.


Support and Resistance

NASDAQ: Closed at 1591.71
Resistance:
The 90 day SMA at 1591
1603 is the December peak
1620 from the early 2001 low
1644 from August 2003
1666 is the January 2009 peak
1752 from 2004
1782 from August 2004
1786 is the November 2008 high. Key level.
1948 is the early October 2008 gap down level

Support:
1569 is the late January 2009 peak
1565 is the second low in October 2008
The 50 day EMA at 1558
1542 is the early October 2008 low
1536 is the late November 2008 peak
The 50 day SMA at 1530
1521 is the late 2002 peak following the bounce off the bear market low
1493 is the October 2008 low & late December 2008 consolidation low.
1434 is the January low (1440.86 closing)
1428 is the November 2008 low, the bear market low
1398 is the early December 2008 low
1387 is the 2001 low
1295 is the November 2008 low


S&P 500: Closed at 868.60
Resistance:
The 50 day EMA at 877
878 is the late January 2009 peak
889 is an interim 2002 peak
896 is the late November 2008 peak
899 is the early October closing low
The 90 day SMA at 901
919 is the early December peak
944 is the January 2009 high
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:
866 is the second October 2008 low
857 is the December consolidation low
853 is the July 2002 low
The 18 day EMA at 850
848 is the October 2008 closing low
The 10 day EMA at 846
839 is the early October 2008 low
818 is the November 2008 low
815 is the early December 2008 low
804 is the low on the January 2009 selloff
800 is the March 2003 post bottom low
768 is the 2002 bear market low
741 is the November 2008 low


Dow: Closed at 8280.59
Resistance:
8419 is the late December closing low in that consolidation
8451 is the early October closing low
The 50 day SMA at 8467
The 50 day EMA at 8477
8521 is an interim high in March 2003 after the March 2003 low
8626 from December 2002
The 90 day SMA at 8700
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
9088 is the January 2009 peak
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:
8197 was the second October 2008 low
8175 is the October 2008 closing low. Key level to watch.
8141 is the early December low
The 10 day EMA at 8128
7965 is the mid-November 2008 interim intraday low.
7909 is the January low
7882 is the early October 2008 intraday 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.

February 6 - Friday
January Average Workweek (8:30): 33.3 actual versus 33.3 expected, 33.3 prior
Hourly Earnings, January (8:30): 0.3% actual versus 0.2% expected, 0.4% prior (revised from 0.3%)
Nonfarm Payrolls, January (8:30): -598K actual versus -540K expected, -577K prior (revised from -524K)
Unemployment Rate, January (8:30): 7.6% actual versus 7.5% expected, 7.2% prior
Consumer Credit, December (14:00): -$6.6B actual versus -$3.5B expected, -$11.0B prior (revised from -$7.9B)

February 10 - Tuesday
December Wholesale Inventories (10:00): -0.7% expected, -0.6% prior

February 11 - Wednesday
December Trade Balance (8:30): -$37.0B expected, -$40.4B prior
Crude Oil Inventories, 2/06 (10:35): 7.2M prior
Treasury Budget, January (2:00): -$75.0B expected, -$83.6B prior

February 12 - Thursday
02/07 Initial Jobless Claims (8:30): 610K expected, 626K prior
Retail Sales, January (8:30): -0.3% expected, -2.7% prior
Retail Sales ex-auto, January (8:30): -0.4% expected, -3.1% prior
Business Inventories, December (10:00): -0.6% expected, -0.7% prior

February 13 - Friday
February Preliminary Michigan Sentiment (9:55): 61.5 expected, 61.2 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, February 02, 2009

Financials Hold Up Nicely

SUMMARY:
- Month ends on a low note, matching the month.
- Inventories help Q4 GDP salvage a 27 year low. Guess it could have been worse.
- Chicago PMI improvement gone with the economy.
- Pet project spending bill goes to Senate in need of its own rescue package.
- Stocks break lower but financials, even with the 'bad bank' snag, hold up nicely.
- Negative sentiment is pumping up again.
- Ready to test the January lows, but can a new 'bad bank'-like proposal rekindle enthusiasm to hold that support?

Rebound attempt can't find anything to bank on.

Stocks tried to rally early and get back that blown follow through thanks to the Thursday selloff. GDP was not as bad as expected thanks to rising unsold inventories (only a government report could score higher on unsold goods), but it was still the worst showing in 27 years. Michigan sentiment was a bit more positive; I guess an auto bailout will do that. Chicago manufacturing was a disappointment as the blip higher the prior month rolled back over.

The higher open held a bit of promise, but it didn't last. The indices turned over and sold off through midmorning, turning negative. A bounce try looked decent; stocks turned at midmorning, often a turning point for the intraday action. A respectable recovery was underway at lunch and was picking up strength. A story about a snag with the 'bad bank' proposal (pricing issues that stymied the Bush administration as well) and the possibility it was indefinitely on hold cut that rebound off at the knees. The indices immediately tanked, failed a relief bounce, and headed to new session lows at the close. A down finish on the last trading day of a down month to start the year.

TECHNICAL. Intraday the market started positive, but the sellers hit and by midmorning stocks were in the red. A bounce attempt through lunch almost got them positive, but an afternoon rollover took them to session lows. After flipping back to bearish action Wednesday, the market remained that way to close the week.

INTERNALS. Modest downside breadth for a change after the Thursday -7:1 or so on NYSE (-2.7:1 NYSE, -2:1 NASDAQ). Not horrific, but the volume rallied, returning to above average on both exchanges. Distribution, i.e. higher volume selling than buying, shows investors were in the stock dumping mode on Friday as stocks turned harder to the downside and broke some potential support. A distribution session shortly after a rally makes a break higher is typically not bullish for that rally.

CHARTS. The key move of the week was the Wednesday follow through on volume but then the Thursday and Friday turn back from resistance. NASDAQ rallied to resistance at the 50 day EMA Wednesday, just below the December peaks and indeed clearing them on a closing basis. Turned back. SP500 showed similar action though not quite making the 50 day. It broke lower and fell through the October closing low. Ditto SP600 and DJ30. SOX started the downturn in better position, so it is a bit better overall after the Thursday and Friday selling. It is nothing to get all excited about, however: chips led the move higher but got roughed up Thursday and Friday on some earnings disappointments. Without their leadership the indices stumbled and broke that potential support at the October closing lows. The head and shoulders tops in the indices look to be heading toward completion if not already there. A test of the January low appears inevitable given the momentum after rolling over. That will be an important test.

LEADERSHIP: As noted the chips fell off leadership pace to end the week. Without them and with the financials and the rest of the market back under some pressure after before and after the bad bank news headline the rally just ran out of steam. Metals fell as they suffered selling pressure as well. With the leadership pretty much all in a general pullback the market was weak. Most leaders managed to hold up well enough, continuing the pullback from Thursday, still holding their general consolidations. You see, many leaders were out in front on the Wednesday rally session, and with this end of week selling are right back where they started from, i.e. back in their patterns or consolidations. They are still livable here, but they are going to have to find some support here as well.

SUMMARY: It was one of those weeks where you have a break higher and things look good, then it gets thrown back at you. We expected some pullback after a 4 day move higher and solid Wednesday surge, but Thursday was more than a pullback from a price standpoint, and Friday the indices broke some potential support on higher, above average volume. That of course is not bullish action; as noted at the time it shows that buyers left and stood by idly on Thursday as the market sold and then on Friday sellers took over as volume jumped back above average. Looks as if a test of the January lows is up next, the point where the indices found some backbone and rallied. That didn't work and how the indices handle those lows will be a fulcrum for the next move.


THE ECONOMY

GDP terrible but not as terrible as thought.

The 3.8% loss was the worst in 27 years, meaning back in the bad recession to start the 1980's that ended the 1970's malaise. A major benefit of that recession was that it broke inflation. With all of the spending, money printing, and more spending right now, I think it is safe to say there won't be any victory over inflation, and indeed the real risk is the worst inflation seen since the 1970's. Not a pleasant thought train as it takes you around in circles and does not get you out of the problem. Lends some credence to those arguing we should just let the downturn run its course and clean out the pipes. But, that is not going to happen, at least not without us first spending several trillion dollars that we don't have.

In any event the -3.8% was better than the -5.5% expected. Of course but for the government's fictional method of gauging economic output GDP would have been -5.1%. When the government figures out put it adds inventories. When the economy is starting to boom and production surges while sales are still strong, then that is a somewhat accurate way of measuring economic activity. When the economy is slowing or as in this case belly flopping, rising inventories are not a good measure of economic activity. Inventories balloon because no one is buying. Manufacturing has curtailed production but inventories are still rising because buyers curtailed consumption faster. Thus the data is doubly inaccurate as it registers more activity when actually manufacturers and consumers are both slowing.

Consumer spending fell 3.5% in Q4 on top of the 3.8% Q3 decline. That is the first back to back 3% declines in spending since 1947.

The PCE inflation measure fell 0.1% for the quarter the largest decline since 1954. The fall in commodities prices led the fall in inflation. Core prices rose 0.6% in the quarter, and that was the slowest pace since 1962. You want stats? You've got stats.

Business investment fell 19%. That pretty much sums it up. No one was spending, manufacturing was falling, and businesses, a big driver in the economy because they not only spend on capital equipment but then use that to make goods and provide services that require jobs, slowed their capital investments even further. Incredibly rapid decline. Incredibly deep decline.


Chicago PMI turns further south.

The last round of regional PMI reports suggested, or more accurately hinted, at a turn in manufacturing. Friday the January Chicago report didn't support any notion of a trend change. It came in at 33.3, less than the 34.9 expected and the 35.1 in December. Of course December was revised higher from 34.1. Positive revision. Worth watching, but at these levels it is not going to turn any heads.

What it did turn was more economists gloomy. There is no doubt the economy is in the crapper. The question is when will it reach the treatment plant and turn into something more appealing. After the pathetic durable goods orders Thursday most economists Friday were in the towel throwing mood as in throwing in the towel on the economy and any recovery in the economy. You would think it will never recover.

Or at least it will take a while. We are hitting really low historical levels in economic activity, and if the spending bill is passed versus a stimulus bill, we could be in a lateral stagnation for years to come. Unlike the early 1980's that some of the current numbers are matching, the proposed stimulus is not the kind that causes immediate investment in the US in new equipment and funding of new ideas and products. It is make work and pork-laden. As noted Thursday, if government spending created a lot of jobs, why do we ever hesitate to just ratchet up government spending any time there is a worry jobs are started to turn scarce. Why not? Because it just doesn't work that way.


Here's to a stimulus bill versus a spending wish list.

$1B for Amtrak. You know Amtrak, right? The subsidized rail boondoggle that has lost money non-stop since inception and bleeds tens of millions a year from our pockets? A bad business in line for $1B of your dollars.

$2B for child care subsidies. Laudable, but stimulus? $50M for the National Endowment of Arts. Sometimes when I am stimulated I paint or draw something. That doesn't mean the economy jumps or 10 jobs are created when I do. $650M for digital television converter box coupons. $400M for global warming research. I thought Obama and Al Gore saw eye to eye that there was global warming and that we are causing it. Why research it further? Both say a consensus of scientists believe that GW exists and that we cause it and thus conclude it is proven.

Of course the consensus of scientists are always right. It was a consensus that said the earth was flat. A fellow named Columbus went out on his own and proved the consensus wrong. A consensus said the sun revolved around the earth. Galileo was almost burned alive for saying otherwise. A consensus said the sound barrier could not be broken. A consensus said we would be out of oil by the 1990's.

The point: scientific advancement is not done by consensus. It occurs when someone that does not buy the conventional wisdom or as in the case of global warming, looks objectively at the data, finds the truth is otherwise. NASA data shows the sun heated up recently, but that data is not taken into account in the global warming theories. Ocean temperature readings show the oceans are cooling in many places. Mount Kilimanjaro glaciers have receded and advanced several times over the past 100 years, yet it is ALWAYS below freezing on the top of the mountain. Could it be the active volcano beneath the glacier on the mountain that is the cause? As my brother always used to say when working on a motor, check the easy stuff first. Change the spark plugs before tearing up the carburetor. Let's look at the facts we already have before spending another $400M.

This is not stimulus. Stimulus that produces jobs is getting individuals and businesses to take risks and invest in the US, i.e. in their businesses, in their lives, etc. Tax incentives do that very nicely because it puts money immediately into the hands that use it. Some say that tax cuts are not good because the recipient may not use it. That is true with the 'rebates.' If you are scared for your job you squirrel it away. No, you have to make it 'use it or lose it' tax breaks. A tax credit for buying new equipment, investing in a start up, putting money into an investment in the financial markets. If you act, you get the tax break. And the best is a tax credit because that comes off the bottom line of taxes. If you don't use it you send the money to the government. If you use it you get the investment as well as don't send the money into the government. Only the truly ignorant don't take advantage of these.

You can also cut the corporate tax rate. That would lower the cost of goods to consumers of all kinds. It would free up capital for investment and expansion. Money would be unlocked as it would flow into corporations for R&D, innovation, production, and oh my goodness, jobs.

What won't work? A tax credit for hiring someone. That has been tried and even the democrats say it doesn't work. Why not? Because hiring someone is a HUGE outlay in time and dollars, and it does not go away. Business has to improve of the job will be lost shortly after creation, i.e. once the tax benefit is used up. The only way it would even come close to working is providing a credit in the amount of the first year's cost. That is way too high for the result. You need to use the multiplier effect of investment credits to generate jobs versus just trying to pull a job out of the air. Let's face it, if there is no need for an employee because business is slow you are not going to hire one unless you get a credit worth every penny you spend on the new employee. That just isn't going to happen.

There is a turning point in the citizenry, however. New poles show that a majority disfavor the proposed stimulus. Why? Because they see it as unnecessary spending on things that will not benefit them one bit. How will contraception help create jobs? Is the National Endowment of the Arts going to spend all that money on employees it doesn't need? If things are as bad as they appear do we really need to get converter boxes for everyone? Just put off the changeover to digital until times are better. I combed the bill and there is not one thing the average small business person would benefit from. It is an amalgamation of wish lists that some congressmen have held for years and years, waiting for the opportunity to scoop the cash out of the public coffers (a.k.a. your wallet or purse). This is it. We are about to shoot another $1T down the hole with no economic benefit. Insane.


THE MARKET

MARKET SENTIMENT

The market is wearing on everyone but we are always interested when it becomes obvious it is wearing down the professionals. When the traders on the floor in New York or Chicago or the trading desks become exasperated and dejected, that is worth noting. Friday we heard comments about Wal-Mart not working anymore, and that runs counter intuitively to the recession/discount relationship. WMT is getting torn down as well because it was a refuge for money and was propped up a bit too long. That money is coming out and WMT is down. That is fine because the visible big names have to be taken down before this is over. Look at XOM. It reported big results but it was down on the session. It has held its gains while all other energy stocks fell. It is acting as a refuge for money as well. It might start coming out now as it could not move on rather impressive earnings. This shows that the necessary tearing down of icons is occurring.


VIX: 44.84; +2.21
VXN: 44.93; +2.35
VXO: 45.85; +3.91

Put/Call Ratio (CBOE): 1.03; +0.08. Back over 1.0 after an almost 2 week drought. Will need several more sessions over 1.0 to make a difference.


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: 34.8%. Back below the 35% threshold and that becomes a more bullish indication. Down from 38.7% the prior week and a substantial drop from 43.0%, the current top of the recovery as the market rallied off the November low. A rise from 25.3% in December and quickly starting to fall once the market encountered the January selling. Remains above the 35% threshold for the second week, 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: 38.0%. Rose modestly from 37.6%. Right back up from 34.4% after a 2-week decline to the 34's from 38.5% before that and off from the 46.2% hit mid-December. Back above 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.


NASDAQ

Stats: -31.42 points (-2.08%) to close at 1476.42
Volume: 2.126B (+7.57%). Volume was back up as NASDAQ sold again. This time there was distribution and on the heels of the follow through that is not a good indication for the rally attempt.

Up Volume: 404.246M (+151.726M)
Down Volume: 1.681B (+18.604M)

A/D and Hi/Lo: Decliners led 2.05 to 1
Previous Session: Decliners led 3.55 to 1

New Highs: 6 (-3)
New Lows: 113 (+27)

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

Broke below the October closing low on rising volume. A test of the January low (1434) looks on as it does with SP500 after Thursdays session. The test of the 50 day EMA on Wednesday and the turn back down has formed a lower high and that right shoulder to a 7 week head and shoulders. That more bearish near term pattern held sway, knocking back a NASDAQ attempt to break it up with the follow through session. Thus it looks downside near term but it is also still in the 3.5 month lateral consolidation since the selling started to slow in October.

SOX (-1.92%) sold as well. It tried to move higher but hit the 50 day EMA and stalled. It too is in a head and shoulders. SOX tried to break up the pattern with the Wednesday close above the December peak, but it could not hold as some key chips fell hard. Still in better position than the other indices as it was up faster, but it still has its work cut out for it as the indices have all set up the same patterns nearer term.

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

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


SP500/NYSE

Stats: -19.26 points (-2.28%) to close at 825.88
NYSE Volume: 1.51B (+5.18%). As with NASDAQ, rising and above average volume on the selling as SP500 made a clear break lower. Distribution.

Up Volume: 208.214M (+85.7M)
Down Volume: 1.29B (-19.038M)

A/D and Hi/Lo: Decliners led 2.71 to 1
Previous Session: Decliners led 6.7 to 1

New Highs: 28 (-1)
New Lows: 125 (+33)

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

Tried to hold the October low Thursday but gave it up big on Friday. Heading to the January low (804.30) as SP500 breaks lower from its own head and shoulders. Now it is a question of where it holds in the 3.5 month consolidation range. Can it again hold at the 800 level and set up an intra-pattern double bottom or will it need to go on down and test the low in November. We are playing the move down to the 800 level with some SPY puts and then we see how it reacts at that level. Interestingly, the financials were in quite decent shape Friday. They were down but they were not rolling over hard along with the indices. That was one of the most interesting features of the session. Even with the news on the 'bad bank' hang up the financials did not lead the dive lower. Some of the big names held some support and were actually positive on the session. If they show some strength here that changes the dynamic of the Thursday and Friday selling in terms that they were not as potent as they appeared.

SP600 (-2.12%) gapped lower and closed near the low. Same pattern as other indices, i.e. the 7 week head and shoulders as part of the larger 3.5 month consolidation. Heading toward the January low quickly. Some good support at 225, a key support point.

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

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


DJ30

DJ30 sold off again on rising average volume and is already back at the January lows. Likely to break this level and the Dow could be the first to hit the November lows. It has been a laggard on this entire move, never really getting a good push off the January consolidation. It can sell to the November low and not really hurt much else. If the financials hold, however, it will have something to lean on given its financial contingency.

Stats: -148.15 points (-1.82%) to close at 8000.86
Volume: 303M shares Friday versus 247M shares Thursday.

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


MONDAY

The market heads into the new week on a bearish note with the reversal of the Wednesday follow through session and the crack below the October closing lows on all the indices. The nearer term patterns for the indices are head and shoulders tops and that indicates more downside momentum. Indeed we expect SP500 to test the January low, and indeed most indices should do that.

That level, however, is the fulcrum for the next move. As one of the traders here says, it will make it or break it, meaning it will determine the next several weeks for the market. If it holds that is the surprise and sends the indices up to the January highs. If it fails they run down to test the November low. That still leaves them in their consolidation ranges, but it puts a new aspect in the mix, i.e. the jump off point between a nearer term recovery or a much longer bear market.

If the financials show the same kind of moxy in the face of selling pressure as they did Friday they may be turning a corner. They had every reason to sell given the news about the 'bad bank' but many closed the session positive, rising off session lows to do so. They acted as if there will be some kind of plan. The talk is an insurance or guaranty plan. Heard that before? That is what the House republicans wanted in the original TARP. Seems as if they were more prescient than the Wall Street professionals in charge of the back room deals that gave away hundreds of billions of our tax dollars. Something will have to be announced whether a blend of 'bad bank' and guarantees or something else. If they assume a real leadership role that changes the market dynamic as they have held the throttle for SP500 for many months.

Thus you bet we are watching the likes of JPM, GS, WFC, MS. What about C and BAC? Don't think they really matter now. They are kept banks now and they are on the liquidation trade because their stock will be worthless due to the federal ownership. It is a long shot but the action Friday was interesting.

As the indices test the January low we will watch the leadership that is currently testing back with the market and see how it holds support. Best case is if it holds the same pattern, waits out the test of the January lows and can break back to the upside. Many are making good tests putting them in buying position if the indices can find support and once gain move higher. A bounce off January support is a solid indication, but after this reversal off of a solid follow through the character is more bearish. As long as our positions hold support that is fine.


Support and Resistance

NASDAQ: Closed at 1476.42
Resistance:
1493 is the October 2008 low & late December 2008 consolidation low.
1499.21 is the 2008 closing low
The 50 day SMA at 1518
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
The 50 day EMA at 1564
1565 is the second low in October 2008
1603 is the December peak
1620 from the early 2001 low
The 90 day SMA at 1624
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

Support:
1434 is the January low (1440.86 closing)
1428 is the November 2008 low, the bear market low
1398 is the early December 2008 low
1387 is the 2001 low
1295 is the November 2008 low


S&P 500: Closed at 825.88
Resistance:
The 10 day EMA at 845
848 is the October 2008 closing low
853 is the July 2002 low
The 18 day EMA at 854
857 is the December consolidation low
866 is the second October 2008 low
The 50 day EMA at 885
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 90 day SMA at 920
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:
839 is the early October 2008 low
818 is the November 2008 low
815 is the early December 2008 low
804 is the low on the January 2009 selloff
800 is the March 2003 post bottom low
768 is the 2002 bear market low
741 is the November 2008 low


Dow: Closed at 8000.86
Resistance:
8141 is the early December low
8175 is the October 2008 closing low. Key level to watch.
The 10 day EMA at 8191
8197 was the second October 2008 low
8419 is the late December closing low in that consolidation
8451 is the early October closing low
The 50 day SMA at 8471
8521 is an interim high in March 2003 after the March 2003 low
The 50 day EMA at 8569
8626 from December 2002
8829 is the late November 2008 peak
The 90 day SMA 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
9575 from September 2003, May 2001
9654 is the November 2008 peak

Support:
7965 is the mid-November 2008 interim intraday low.
7909 is the January low
7882 is the early October 2008 intraday 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.

February 2 - Monday
December Personal Income (8:30): -0.4% expected -0.2% prior
Personal Spending, December (8:30): -0.9% expected, -0.6% prior
Construction Spending, December (10:00): -0.9% expected, -0.6% prior
ISM Index, January (10:00): 32.0 expected, 32.4 prior

February 3 - Tuesday
December Pending Home Sales (10:00): 0.0% expected, -4.0% prior

February 4 - Wednesday
January ADP Employment Change (8:15): -515K expected, -693K prior
ISM Services, January (10:00): 39.0 expected, 40.1 prior
Crude Oil Inventories, 1/30 (10:30): 6.2 min prior

February 5 - Thursday
1/31 Initial Jobless Claims (8:30): 592K expected, 588K
Productivity-Prel, Q4 (8:30): 1.0% expected, 1.3% prior
Unit Labor Costs, Q4 (8:30): 3.0% expected, 2.8% prior
Factory Orders, December (10:00): -3.0% expected, -4.6% prior

February 6 - Friday
January Average Workweek (8:30): 33.3 expected, 33.3 prior
Hourly Earnings, January (8:30): 0.3% expected, 0.3% prior
Nonfarm Payrolls, January (8:30): -500K expected, -524K prior
Unemployment Rate, January (8:30): 7.5% expected, 7.2% prior
Consumer Credit, December (14:00): -$2.3B, -$7.9B

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

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

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