Monday, March 16, 2009

Market Hangs Onto Gains

- Market does what it has to, hangs onto gains heading into the weekend.
- China worried about its US Treasury holdings, announces more stimulus to come.
- LIBOR ticks lower for the first time in weeks.
- Michigan sentiment shows its own signs of thaw.
- Pattern of the week: the explosive Ascending triangle
- Starting the week looking for a follow through while the indices are extended.

Sellers leave early for Spring Break as market holds its gains to the close.

The bulls cannot complain about the action as SP500 and NASDAQ held their gains right up to the Friday bell. Both are bumping at next resistance, but instead of turning right back down in a dive as they would have done, oh say, anytime over the past seven months, they held the gains, all of them, into the weekend. They were not huge absolute numbers with NASDAQ scoring 5 points, DJ30 54 points and SP500 6 points, but then again they were huge in that 162 points on NASDAQ and 678 points on DJ30 for the week did not draw the fire of short sellers. It is just a week of gains off the lows, but this is a notable character change heading into a new week, and in this market we know what can happen: anything.

Friday had its bad news and good news, or good news and bad news depending upon whether you are long or short the market. The Bad: Berkshire Hathaway credit downgraded to AA+. China says it wants guarantees from the US that the couple of trillion dollars in US Treasuries it holds will remain solid. Imports were down again as consumers continue to lay off the imports, something history shows we do in recessions. No surprise there, especially compared to China seeking guarantees. As Hawkeye said to Hot Lips Houlihan in the television's 'MASH' when she asked what kind of guarantees the nurses could get with respect to potential repeated violations, 'what kind of guarantee do you want?'

The Good: China wanted a guarantee on one hand and on the other its premier offered it would adopt additional stimulus. Earlier he pulled a Geithner and did not follow through with the much heralded announcement of more stimulus to come. He does it Friday after slapping some at the US. Don't think China is gaming the markets a bit? More good. Fund outflows from US mutual funds totaled $8.4B for the week. Money leaves the market at the bottom. We have been putting it in and we are already taking gain off the table on this run. It always happens this way and is thus good news bigger picture and smaller picture for us right now.

More Good (had to make a new paragraph): Citi followed GE's Thursday announcement with its own 'we don't need no stinking federal funds' headline Friday morning. Copper and materials prices were up again. Michigan sentiment is thawing (56.6 actual versus 56.3 prior and 55.0 expected), another kernel of better economic data. Three-month LIBOR, after more than a month of gains, ticked down one one-hundredth to 1.32% from 1.33%. It had flattened the prior three sessions and made the first downside tick. Spark up the cigars.

TECHNICAL. Another soft start and a comeback. Not as impressive as Thursday where the indices rose arrow straight all session, but it had its own version. The indices dipped midday into lunch hitting session lows, but then they recovered and rallied on into the close. Good intraday action all week.

INTERNALS. The indices were up modestly on the session and the internals matched the action. Breadth at 1.5:1. No new highs, few new lows. Volume faded back near average on NYSE and put in its first below average session on NASDAQ in over a month. It was Friday after a bear market rally took off, and there simply were not as many participants wandering Wall Street.

CHARTS. Not a lot of change in the chart patterns from Thursday, but as noted above, given the bear market and the sharp rebound this week from the downtrends, that is a victory in itself as the sellers did not come back even as SP500 continued to flirt with the November low. SP500 closed over that level, but not enough to really mean much. It will have to test it this week and then put some distance on it during a second run higher for the break to mean something and for the level to become support once more. NASDAQ moved up to its January low and is somewhat in no man's land above the December low yet below the 1500 level considered key. SOX broke free of some congestion, but it still has overhead resistance. It is, however, in a much better bargaining position heading into a test this coming week.

Speaking of tests, after the rush higher and to resistance the market is a bit extended and could face some downside early next week as the gains are tested a bit by some sellers. The market can do anything at that point. One of the ways we are going to be ready to take advantage of any move is to look at good stocks that test last week's move and then start back up. AMZN, DRIV, QCOM, ISIL and others moved well and tested a bit Friday. If they test some more early in the week and start back up, groovy. We move in with more positions. Others, thankfully, are setting up to make new moves themselves. Need more leadership. If the sellers turn up with their axes and blowtorches, then we have to be ready to play the downside with those stocks that jerked higher in their downtrends to resistance. The market should have more upside momentum, and indeed that would be best for both the upside and the downside (more base building, a better point to play some downside, more base building), but if the rally rolls over time to jump to the downside quickly.

LEADERSHIP. There was leadership last week and from the same areas that were leading in December and into early January before the selling started returning ahead of the February gutting. Chips were the one clearly identifiable leadership group. Metals were not bad though a little less flamboyant. Techs are not all pulling together, but they are trying to get to that point. China stocks remained solid. Some smaller business services stocks that led the early moves off the November and December lows (e.g. BR, HMSY) were up. If there was a bigger sector for guns it would have led as SWHC (Smith & Wesson) surged on fears of an attempt to disarm the populace. Sounds alarmist, but given the Supreme Court's 5-4 gun decision last session, nearly taking away a right we have held for 233 years, with this Congress many are quite concerned. Bottom line: Leadership is trying to improve and is improving some. This action is working to build some bases and that is what the market needs. Chips are out front as they were in late 2002 when the market bottomed out of that bear market. Some retailers are moving up as they did at that time as well (e.g. AMZN). Similarities.


We pretty much went through the economic scene Thursday, i.e. the modest signs of improvement in many economic areas: manufacturing, oil finding its bottom, same store and retail sales improving, copper and economically sensitive commodities finding a bottom and increasing, China posting three upside PMI reports, housing markets clearing out in California, Florida and Vegas. Nothing is racing up, but a lot of quite diverse economic areas are showing some bottoming action.

Mind you, all of this before any of the so-called stimulus hits the economy. There is a theory that businesses and people with money are making investments and moving money now versus waiting for the changes in the tax system that start in October, not in 2011 as the Administration says. That could very likely be the explanation for the modest increase in economic activity. If it is, that is not something that will provide ongoing recovery and indeed sets us up for harder economic downside. Kind of like when you are sick, you start to get better and jump up and get back to the old routine, then you relapse and are worse than you were the first time you were sick.

As we have said, there were similar indications in late 2002 and they proved correct. The ultimate indicator, however, were the financial markets and the leadership off the bottom. There were some nascent signs of economic recovery and the markets, despite immense gloom (and indeed that was part of the reason for the move to come), found the floor and shot higher. This market has not shot higher. It is trying to find the floor. Will it find it and shoot higher?

It could. The element here that was not present in 2002 and early 2003 is massive, massive government intervention (a.k.a. meddling) in the markets themselves, in private contracts, in social structure, in tax policy, in healthcare, in private business, and in our form of government. It is extremely difficult for any market to find a bottom when the federal government is moving the floors around under you. Thus we have to be very, very careful here because this is not a carbon copy of the last recession when the government loosened capital restrictions and then relied on the free markets to solve the problem as they have done for 233 years . . . outside the Great Depression when government meddling prolonged the depression by at least 7 years.



As noted above, money flowed out of stock mutual funds to the tune of $8.4B. That is just part of the steady weekly outflows. That is also an indication of a reason for the market to try this bounce and why it might have some more legs. Investors are bailing and historically when the crowd bails out the market is getting ready to move higher.

VIX: 42.36; +1.18
VXN: 41.25; +0.48
VXO: 45.08; +2.32

Put/Call Ratio (CBOE): 0.71; 0

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: 26.4%. Down from 29.7% and at the lowest level since December 2008. 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. 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: 47.2%. Bounced back up after slipping last week. this is the peak for the run this year but is still below the December and October peaks. 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.


Stats: +5.4 points (+0.38%) to close at 1431.5
Volume: 2.064B (-16.51%)

Up Volume: 1.216B (-943.489M)
Down Volume: 798.559M (+516.413M)

A/D and Hi/Lo: Advancers led 1.33 to 1
Previous Session: Advancers led 3.42 to 1

New Highs: 7 (-1)
New Lows: 33 (-68)


An impressive surge after undercutting the November low two weeks back. NASDAQ recovered that low as well as the December low, moving up to the bottom of the January attempt at consolidation (1441 closing). There is still resistance on up at 1500 and some serious price top resistance at 1598. It would be quite surprising to see NASDAQ reach those outer limits on this particular leg. The 50 day EMA (1461) is the closest and quite logical resistance after such a run. What kind of test? Maybe the December low but more likely that old black magic at the November low (1316 closing).

SOX (+1.26%) bounced off the mid-November to start the week and rallied through the 50 day EMA to come within 5 points of a key level at 225. It somewhat triple bottomed off the late February low. Best index in the market, never coming close to its November low. Similar action in 2002 when SP500 held the line as the other indices fell through prior lows. Chips have the bonus of being leaders off lows and as in 2002, though hardly to that scale thus far, they are firmly in the lead of what leadership there is.

NASDAQ 100 (+0.33%) never took out its November low either and it rebounded up to resistance at the 50 day EMA and 1200 to end the week. It could put in a double bottom here and provide a second layer of leadership off the low.




Stats: -5.81 points (-0.77%) to close at 756.55
NYSE Volume: 1.611B (-10.73%)

Up Volume: 995.183M (-699.546M)
Down Volume: 601.279M (+513.569M)

A/D and Hi/Lo: Advancers led 1.54 to 1
Previous Session: Advancers led 7.72 to 1

New Highs: 7 (0)
New Lows: 62 (-50)


The financials led SP500 off of its new bear market low, taking the index just back up above the November low (752 closing). That is the point everyone is watching. Cleared it right? Yes, but not by enough to mean anything. It will come back to test it and the question is whether it goes up onto 800 resistance first. That is the best upside scenario, a higher test and then a test of that November low. A hold there makes the old low key support and a good point to move up and attack next resistance. We see this week if the sellers come out with the ax.

SP600 (+0.97%) recovered as well and moved right up to its November closing low to end the week. The small caps are going to get a close watch this week, not by many, but we will watch. We have to because they are one of the market canaries. They don't necessarily have to lead the market higher, but they need to be in there pitching and following closely along. If they start to sell, unable to make a definitive move through the bear market low, that puts the rest of the market at risk as they are then broadcasting the economy is not ripe to recover. With the financial and credit markets still in chaos, that is not too hard to believe.


The Dow enjoyed a good week as well, but it was so far down in the barrel that a 10% moved from the Monday close only took it up to the late February consolidation, still well below the November low at 7552. If SP500 continues higher to start the week and tests 800, then the Dow will likely go on up and test the November low and then things get interesting with what kind of test it brings on.

Stats: +53.92 points (+0.75%) to close at 7223.98
Volume: 479M shares Friday versus 488M shares Thursday. Still very strong volume as the Dow continued its move higher. Some longer term buying, a lot of short covering, but as we often say, all rallies start with short covering.



The market showed no ill effects to end the week. No sellers were ready to come in. A new week always brings the possibility of sellers returning, but sellers have to feel they are in a good position to move in and start selling. SP500 is just over the November low; not a bad place to try and sell some. The SP600 is at its low, unable to make the move through; a sign it is the weakest in the litter and thus a target.

But is there enough oversold pressure released from this four days? Likely we see the Dow try on up to 7500, SP500 to 800, and NASDAQ to near 1500. It may not do it right out of the box but start back up after another day or two of rest. That would not be unusual and gives some strong movers off the lows a chance to finish the 1-2-3 pullbacks they started on Friday (e.g. DRIV, ISIL, AMZN). Then it starts back up and heads toward those levels.

We can keep riding this move higher with our current positions, a few new ones set up to move well and quickly, as well as those that led early and make a quick test. Then when the indices approach these levels we evaluate the move with its volume and chart patterns as well as the leadership. That would be, regardless, a great point to take some more gains off the table.

If the sellers come back with their blow torches blazing Monday or Tuesday, well, that changes the game a bit from the get go. Close down the upside that was in rebound mode versus breakout mode, and even close the upside that is pretty solid but not impressively so. Put on some more downside plays. Do the same thing if the indices move up to those next resistance levels and then get flattened by a bunch of sellers in Mack trucks heading south.

The market is trying to pull itself up off the mat and it may not be successful. There is leadership and more trying to emerge; a spanking from the Friday close on high volume will likely tamp that out those trying to emerge. It is a real drag trying to come off the bottom. You cannot trust it, you cannot put your faith in it. At the same time you cannot trust the downside and put your faith in it either, because it has had too much fun and its avarice often leads to its own downfall just as the upside's greed ultimately exhausts all buyers. So close to the bottom you cannot trust another selloff, but if the Dow is going to 5700 or so, then the bottom is not that close.

So you play the good patterns and ride them to logical targets, upside or downside. We have made money on this bounce and will make more as it continues to those next resistance levels but it is important not to sink your teeth into the belief this is the bottom or this is just a bear market rally. In 2002 we saw similar signs as here, liked the odds, and more importantly liked the patterns. We played those patterns to the upside through December, then had to close them all while the market tested. It did not show a renewed bear from the technical action, however, despite the almost three months it dragged on. It was tough to hang in their. We even made some money on the downside but the price/volume action and action in some solid leadership stocks kept us saying the upside was coming. It did.

We play this one the same, way, i.e. taking what the market gives on the runs while keeping an eye on the bigger picture of economics and market technical action. Seems basic, but it is always a fight to keep things in perspective in the heat of the battle, particularly when there is a serious crisis with the government intervening anew every few days.


Ascending Triangle: Seeing it set up off of the November to February lows and these can yield explosive breakouts.

This pattern is known by its series of higher highs below a constant, flat top. Draw a line through the tops and an up trendline through the rising lows. It narrows from left to right, forming something of a right triangle laying on its side with the hypotenuse on the bottom side. As with any base you like to see the volume quiet down as it moves through though you prefer to see more rising days on rising trade versus falling days on rising trade as that shows overall accumulation during the base. You can count up the weeks of price gains on rising trade and compare to the weeks of price declines on rising volume and determine if there was overall accumulation or distribution during the pattern. You want a majority of up weeks on volume.

Take a look at the following chart to see what we are talking about:

You can see the triangle shape setting up. The pattern builds pressure from below, and when the top is blown the breakouts are explosive:

Here is another one to check out. You should recognize this one as well and get a bit jazzed by it:

Support and Resistance

NASDAQ: Closed at 1431.50
1434 is the January low (1440.86 closing)
1460 is the February low
The 50 day EMA at 1461
The 50 day SMA at 1480
1493 is the October 2008 low & late December 2008 consolidation low.
The 90 day SMA at 1503
1521 is the late 2002 peak following the bounce off the bear market low
1536 is the late November 2008 peak
1542 is the early October 2008 low
1565 is the second low in October 2008
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

1428 is the mid-November 2008 low
The 18 day EMA at 1391
1398 is the early December 2008 low
1387 is the 2001 low
1316 is the November 2008 closing low
1295 is the November 2008 low
1271 from is the March 2003 low, 1253 intraday
1262 from July 2002
1192 is the July 2002 intraday low
1114 is the October 2002 low, the bear market low

S&P 500: Closed at 756.55
768 is the 2002 bear market low
The 50 day EMA at 797
800 is the March 2003 post bottom low
804 is the low on the January 2009 selloff
812 is the February low
815 is the early December 2008 low
818 is the early November 2008 low
839 is the early October 2008 low
The 90 day SMA at 842
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
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
919 is the early December peak
944 is the January 2009 high

752 is the November 2008 closing low but it is not broken and done away with
741 is the November 2008 intraday low
The 18 day EMA at 741
722 is a December 1996 low
681 is the June 1996 intraday peak, 673-71 closing
665 from August 1996
656-654 from January, April 1996
607-05 from November 1995

Dow: Closed at 7223.98
7282 is the October 2002 closing low in the prior bear market.
7449 is the November 2008 low
7524 is the March 2002 low to test the move off the October 2002 low
The 50 day EMA at 7663
7694 is the February intraday low
7702 is the July 2002 low
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
The 90 day SMA at 8169
8175 is the October 2008 closing low. Key level to watch.
8197 was the second October 2008 low
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
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

7197 is the intraday low from October 2002 bear market
7115 is the February 2009 closing low
The 18 day EMA at 7105
7008 from February 1997 closing peak
6528 is the November 1996 peak
6489 from December 1996 closing peak
6356 is the April 1997 intraday low

Economic Calendar

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

March 16 - Monday
March Empire Manufacturing (8:30): -32.0 expected, -34.65 prior
Net Long-Term TIC Flows, January (9:00): $34.8B prior
Capacity Utilization, February (9:15): 71.1% expected, 72.0% prior
Industrial Production, February (9:15): -1.2% expected, -1.8% prior

March 17 - Tuesday
February Building Permits (8:30): 510K expected, 531K prior
Core PPI, February (8:30): 0.1% expected, 0.4% prior
Housing Starts, February (8:30): 453K expected, 466K prior
PPI, February (8:30): 0.4% expected, 0.8% prior

March 18 - Wednesday
February Core CPI (8:30): 0.1% expected, 0.2% prior
CPI, February (8:30): 0.3% expected, 0.3% prior
Current Account Balance, Q4 (8:30): -$136.7B expected, NA prior
Crude Oil Inventories, 03/13 (10:30): +749K prior
FOMC Rate Decision (14:15): No change expected

March 19 - Thursday
03/14 Initial Jobless Claims (8:30): 654K prior
Leading Indicators, February (10:00): -0.6% expected, 0.4% prior
Philadelphia Fed, March (10:00): -40.0 expected, -41.3 prior

By: Jon Johnson, Editor
Copyright 2009 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

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