Sunday, July 26, 2009

Market Enjoys Gridlock on Healthcare

- Market had enough reason to sell, but it didn't.
- Market enjoys the gridlock on healthcare and cap and trade.
- EU shows hints of more economic stabilization. So what is new?
- Michigan sentiment on the rise but still quite low.
- Liquidity in control once more but could get a test before further gains.

MSFT stalls the gains but does not lead to a turnover or reversal of the gains.

Microsoft missed on the bottom line and the top line and was gapped lower. As noted Thursday night, MSFT was one of the reasons for the tech move with its renewal of its business given Bing and its new operating system on schedule for August to replace the pathetic Vista. MSFT rallied sharply ahead of its results as investors almost feverishly anticipated its revival. That revival needs some CPR or at least a bit more time for the new operating system to hit the market and spur, hopefully for tech, a new upgrade cycle.

There was other less than rosy news. UK GDP was lousy at -0.8% in Q2, twice the expected -0.4%. DeBeers announced that diamond sales were down the most in 30 years. Thirty years. That is back in the 1970's. More amazing parallels to the past. It repeats again and again, and unfortunately, comparisons to the 1970's are never, ever good unless it is preceded by words such as 'unlike the 1970's' or 'in complete contrast to the 1970's'. I recall that in the late 1970's and the turn into the 1980's investment class gemstones, those that make what you buy in the stores look like paste, lost value for the first time ever. That really put the fear into the ultra-rich that used those as a last safe haven. Yes parallels to the 1970's are never good indications.

This bad news was offset by some decent news. German business confidence rose again in July after a quick June dip. EU manufacturing 'improved' as it fell less than estimates. Many are interpreting this as a turnaround in Europe though as we argued the past few months, stabilization is not a recovery. Indeed we have seen this stabilization now for months. Hitting bottom does not mean a turn. If the same fiscal and monetary mistakes are made again then 'stabilization' can give way to another downside leg.

Michigan sentiment was up (66.0 versus 65.0 expected and 64.6 prior), but at these levels it is still low. It tried to bounce the market but could not in itself do the trick.

It's not the economy, stupid, it is the failing support for national healthcare.

The really good news for the week, however, was the death of the arbitrary and absurd August 'deadline' for a healthcare bill. Friday a leading blue dog democrat walked out of a meeting on the healthcare plan, telling the House leader that the plan was not going to fly. Senator Reed echoed what was said Thursday, i.e. that no vote on healthcare would occur before the August recess. As I noted a few weeks back, the spending was going to damage the Obama administration and that, ironically, it could be saved by failing to get nationalized healthcare passed. The market would rally on that news.

Indeed, when you consider the crappy economic data that is nowhere near where it was when the market and economy bottomed out of the last recession in late 2002 and the low quality of the top line earnings despite the bottom line surprises, it becomes clearer that the market is rallying in large part on the idea that healthcare will not be poisoned by a national healthcare plan. Remember, the UK system and Canadian system were both supposed to be an 'option' to private coverage just as the proposed plan in the US. In both cases the national plan swallowed the private plans. The market sniffed out the growing wave of opposition to this plan and rallied ahead of the news.


INTRADAY. Stocks started weak and sold further. Michigan sentiment tried to bounce it but in itself was not enough. The upside bias took over, however, and the market recovered from midmorning to the close. No major gains but again, in the absence of anything else, the market moved higher.

INTERNALS. Flat breadth and much lower volume to finish out the week after some really strong upside volume Thursday as the indices made the definite break higher. The indices are showing the big volume when it is needed and meaningful.

CHARTS. Nothing really changed Friday following that big break higher Thursday. The indices tried to sell back some but ended up rebounding off the lows; not much downside impetus there. The breakouts over the June, January and October gap points (as the case may be for each index) were solid as money poured into the market after the early summer hiatus following the March to early June rally. Remember all the talk about the head and shoulders patterns on SP500 and the other NYSE indices? They set up, started to break, and then the market reversed. Look at the bigger picture from November to July: that is a reverse head and shoulders on SP500 and DJ30, a bullish pattern. We are already saw the growth sectors breakout (NASDAQ, SOX, NASDAQ 100), leading the way as they should. For now, despite the fiscal policies and those to come, the market is rallying in relief over healthcare and has plenty of fuel with all of the paper money printed by the world's central banks.

LEADERSHIP. Energy, retail, commodities, industrials, chips and techs enjoyed solid weeks even if some did not participate as much Friday thanks to MSFT. Indeed the MSFT could likely be the catalyst to a pullback for NASDAQ after a 12 day winning streak and a similar 2 week run on SP500. There is plenty of leadership right now. It just needs to step back after this run, take a few breaths, consolidate, and then set up for the next run.

SUMMARY. After trying their hand in June to early July, sellers have lost their nerve and are unwilling to commit and challenge the liquidity driven upside. That liquidity is now actively moving into the market once more after the rest following the initial move off the March low. With this liquidity we can see moves continue that should stop and consolidate. Thus we will look for any opportunities such as tests of trendlines and breakouts to enter additional positions. New breakouts can also show up as we know the market moves in waves with new stocks stepping up after the leaders spring out and rest.

Even with the liquidity we can get a pullback such as the 1-2-3 pullbacks seen in late March and in April as the market rallied. Those gave opportunities to move in to the leaders and catch the next nice bounce higher.

The near term problem is the move has been very steep just as the initial move off the March low. Indeed this move is amazingly similar to that initial run off the March low in its steepness and unrelenting upside. Now we can and should see a couple of days of testing back to the trendline such as the 10 day EMA and then a resumption of the rally. Again, we use the pullback to pick up shares in stocks such as RIMM that are set up well to rally higher once more.



VIX: 23.09; -0.34
VXN: 24.67; -1.2
VXO: 23.06; -1.01

Put/Call Ratio (CBOE): 0.93; +0.06

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 36.7%. Rebounding as you would expect as the market put in its second week of rallying. After falling to 35.6% last week the market bounce caught up with sentiment. Hit a high of 47.7% mid-June on the run from the March lows. Steady rise from 36.0% in late April. Barely over the 35% threshold, below which is considered bullish. Of course it will jump after this past week. Has to get up to the 60% to 65% level to be bearish. Dramatic rise from 21.3% in November 2008, the bottom on this leg. 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: 35.6%. Bears matched last week's 35.6%, showing that the bears are not convinced by this rally. That is a good indication for the market as there are bears still holding back their money. When the market rallies more it continues to find new fuel from the bear's money as they pitch in and buy to the upside. Nice surge higher from 30.3% in early July. Up from 23.3% in mid-June. Still well off the 37.2% and the 37.1% in mid-April as the rally continued higher. Cracking above the 35% threshold considered bullish. Still off the high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: 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). That was a huge turn, unlike any seen in recent history.


Stats: -7.64 points (-0.39%) to close at 1965.96
Volume: 2.191B (-24.83%)

Up Volume: 1.182B (-1.316B)
Down Volume: 1.014B (+469.233M)

A/D and Hi/Lo: Advancers led 1.23 to 1
Previous Session: Advancers led 3.25 to 1

New Highs: 81 (-54)
New Lows: 12 (+3)





Stats: +2.97 points (+0.3%) to close at 979.26
NYSE Volume: 1.025B (-26.61%)

Up Volume: 639.531M (-521.251M)
Down Volume: 353.97M (+128.467M)

A/D and Hi/Lo: Advancers led 1.75 to 1
Previous Session: Advancers led 4.64 to 1

New Highs: 85 (-56)
New Lows: 65 (-32)




Stats: +23.95 points (+0.26%) to close at 9093.24
Volume: 214M shares Friday versus 247M shares Thursday.



As noted in the 'Summary' above, the liquidity is back in town and driving stocks higher similar to the start of the rally back in March. It has made that similar initial move off the bottom of the range at 875 SP500. As with that earlier move a quick test would be normal and then a move higher.

Would this be a week or two week test? It could be if earnings worries sink in, but the earnings got it going, and what we saw happen at the end of the week re the healthcare debate quite likely usurped the earnings theme. It triggered the money move back into the market and now instead of a week or so pullback a 2 or 3 day test is more in line if the liquidity is truly back.

Therefore we are going to look for more upside. As seen late in the week, despite the apparent need for a pullback the upside plays kept setting up. We are going to continue looking for those although the surge higher put many good stocks in extended buy positions. Thus a short 1-2-3 pullback (i.e. 3 days, maybe 2) to near support sets them up for buys that we want to take if offered. Banked a lot of gain the past week, still have a lot of good positions working for us, and looking to put some more money to work given the changes driving the market.

Support and Resistance

NASDAQ: Closed at 1965.96
1984 from late September
2099 is the mid-September low
2169 is the March 2008 double bottom low

1947 is the October gap down point
1897 is the October post gap intraday high.
The 10 day EMA at 1902 is worth watching given the strength of the move
1880 is the June peak
1862 is the July peak
The 50 day EMA at 1805
1786 is the November intraday high
1780 is the November 2008 closing peak
1773 is the May intraday peak
1770 is the mid-October interim peak
1673 is the prior April peak
1666 is the intraday January 2009 peak
1664 is the May 2008 low
1661 is the April 2009 prior peak
The January closing peak at 1653 (intraday)
1623 is the early April peak
1620 from the early 2001 low
The 200 day SMA at 1620
1603 is the December peak
1598 is the February 2009 peak, the last peak NASDAQ made
1587 is the March 2009 high is getting put to bed again
1569 is the late January 2009 peak
1542 is the early October 2008 low
1536 is the late November 2008 peak
1521 is the late 2002 peak following the bounce off the bear market low
1505 is the late October 2008 closing low.
1493 is the October 2008 low & late December 2008 consolidation low

S&P 500: Closed at 979.26
The November 2008 peak at 1006
1106 is the September 2008 low

956 is the June intraday peak
The 10 day EMA at 947
944 is the January 2009 high
935 is the January closing high
932 is the July peak
930 is the May peak
919 is the early December peak is bending
The 50 day EMA at 914
899 is the early October closing low
896 is the late November 2008 peak
888.70 is the April intraday high.
882 is the early May low
878 is the late January 2009 peak
The prior April peak at 876
The 200 day SMA at 871
866 is the second October 2008 low
857 is the December consolidation low; cracking but not broken
853 is the July 2002 low
848 is the October 2008 closing low
846 is the April peak
842 is the early April peak
839 is the early October 2008 low
833 is the March 2009 peak
818 is the early November 2008 low
815 is the early December 2008 low
805 is the low on the January 2009 selloff. KEY Level
800 is the March 2003 post bottom low

Dow: Closed at 9093.24
9088 is the January 2009 peak. Not entirely broken
9387 is the mid-October peak
9625 is the October closing high
10,365 is the late September low

8985 is the closing low in the mid-2003 consolidation
8934 is the December closing high
8878 is the June peak
8829 is the late November 2008 peak
The 10 day EMA at 8802
The 18 day EMA at 8674
8626 from December 2002
8588 is the May high
8581 is the July peak
8521 is an interim high in March 2003 after the March 2003 low
The 50 day EMA at 8496
8451 is the early October closing low
8419 is the late December closing low in that consolidation
8375 is the late January 2009 interim peak
8315 is the February 2009 peak
8307 is the April 2009 intraday high
8221 is the May 2008 low
8197 was the second October 2008 low
8191 is the prior April peak
8175 is the October 2008 closing low. Key level to watch.
8141 is the early December low
The early April intraday peak at 8113
The early April peak at 8076
7965 is the mid-November 2008 interim intraday low.
7932 is the March 2009 peak
7909 is the early January low
7882 is the early October 2008 intraday low. Key level to watch.
7867 is the early February low
7702 is the July 2002 low
7694 is the February intraday low
7552 is the November closing low. KEY Level.

Economic Calendar

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

July 27 - Monday
New Home Sales, June (10:00): 352K expected, 342K prior

July 28 - Tuesday
Consumer Confidence, July (09:00): 48.7 expected, 49.3 prior
S&P/Case-Shiller, May (09:00): -17.80% expected, -18.12% prior

July 29 - Wednesday
Durable Goods Orders, June (08:30): -0.5% expected, 1.8% prior
Durables, Ex Transportation, June (08:30): 0.1% expected, 1.1% prior
Crude Oil Inventories, 07/24 (10:30): -1.80M prior

July 30 - Thursday
Initial Jobless Claims, 07/25 (08:30): 585K expected, 554K prior

July 31 - Friday
GDP-Adv., Q2 (08:30): -1.5% expected, -5.5% prior
Core PCE, Q2 (08:30): 2.4% expected, 1.6% prior
Chain Deflator-Adv., Q2 (08:30): 1.0% expected, 2.8% prior
Employment Cost Index, Q2 (08:30): 0.3% expected, 0.3% prior
Chicago PMI, July (09:45): 42.0 expected, 39.9 prior

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

Jon Johnson is the Editor of The Daily at

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