Sunday, December 13, 2009

Maybe No Rally to Year End

- Rotation and stocks rising with a rising dollar: two new themes.
- Retail sales post second month of gains.
- Import prices are rising.
- Jobs are growing . . . in the federal government (along with salaries).
- Commodities dipping, small and mid-caps under accumulation.
- Maybe no rally to year end, but small caps look to be setting up for a good January effect.

Market actually starting to act like a market anticipating economic growth.

This week epitomized the changes taking place in the market, even though they may have just solidified this week. It behooves us as investors to take note of what is happening in the stock market and the markets surrounding it. One of the main changes I discussed on Thursday was rotation. There has been a move out of commodities. Gold had a rough week ($1,115.10, -10.00) after hitting $1,226 just over a week ago. There is a current rotation out of gold, but we have a play on the GLD because it could be trying to bottom and could make a knifepoint turn.

Oil was down sharply ($69.66, -0.88). It may be in a position to bounce as it is reaching important EMAs, but the rotation has been out of these and into medical, business services, and semiconductors. A lot of these are in small cap areas, and the small caps have been consolidating with perhaps some accumulation ready to break them higher for the January effect.

There is a second change in the market that started showing itself on Friday: the dollar is rising. It was just consolidating on Thursday along the 50 day EMA, and now it has broken sharply higher. At the same time, the stock market rose slightly and the small caps gained a bit of ground. The Dow industrials gained ground, and SP500 gained as well. There were no breakouts of the range, but the dollar was up, stocks were up, and bonds were down. The 10 year treasury was strong (3.55%). It surged back up and broke through a key level at 3.5%. Whether it will hold the move remains to be seen, but stocks and the dollar are higher, and the bonds are lower. They are acting as they "should" act if the economy is trying to improve.

The market was mixed overall at the close with NASDAQ down and the NYSE up. Stocks mostly moved higher, however, and moved higher in the small cap area. That is important because they are a growth area, and if the economy were improving, one would expect to see it move higher. SP600 rose 0.95%. Those are key points with respect to the market. There is rotation and it is acting as if there will be economic improvement. You would expect to see improvement in small caps and other growth areas such as semiconductors. Semiconductors had an excellent move over the past two weeks. There is a growth trade and now more of a positive economic trade.

Looking at the SP futures in the morning, there was a huge pop on the retail sales data (1.3% for October, 0.6% expected). October was revised a bit lower (1.1% from 1.4%), but November was quite solid. If you take out autos, it was not much worse (1.2% versus 0.4%). October was revised a bit lower again to flat from 0.2%. There is some downside revision, but not bad overall. Two months of positive retail sales growth had people excited. The futures jumped up, but they did not stay there. They came back and closed the gap. By the time the market got underway, they closed, bounced, and then were back down. It took an afternoon recovery to get SP500 back up to speed.

We tend to import more of what makes our economy go (such as petroleum), so import prices are important. They were supposedly tame at 0.4%, and that matched the prior month. That leads some to say there is no inflation there is not massive inflation, but there is inflation underway. Some financial stations were arguing that if you take out petroleum, then things are better because petroleum is falling in price. They will be better, and they are falling just in time to give consumers a Christmas present that may hold over into the New Year. Oil prices are falling, but they look to be reaching a support level now. It bounced to $80, and now it has gone down to $70. That is the range oil tends to trade in, so it could bounce back up. If you look at the ex-petroleum numbers for import prices, they are up 1.4% on the month and up 3.6% year-over-year. That is inflation. We are not as much of an export nation as we would like to think (although the Obama administration wants to make us an export nation). Imports are still important because we import more when US consumers do well. The problem is that prices are rising, and there is that pesky oil. However, even if you strip out oil, prices are still rising above what the Fed would consider its speed limit. There is inflation out there, and it is not helped by the dollar. If the dollar rallies, it will be better in December, just as oil falling will be better for us in December. That will help things out, but thus far it has not changed the trend, and the import prices were somewhat looked past.

NSM beat the street on the top and bottom, and UTX substantially raised its guidance and shot higher. There is good news with the forecast for 2010, and it benefited the market. Initial job claims come out on Thursday and then they reverberate through Friday. As you know, they were higher on Thursday (474K versus 455K expected), but it was still below 500K. Continuing claims fell (5.1M versus 5.46M the week prior). Everyone thinks things are great, but there are problems with jobs when you look beyond the headline numbers. There is a category posted called emergency continuing claims, and they rose 430K for the week. They are six times where they were this time last year. Continuing claims are not getting any better; people are just falling off the rolls of standard claims and going elsewhere. Every time Congress extends unemployment benefits, they have to go back to the small businesses and ask them for more money. It is a double whammy: Not only do they not have money to hire people, but they also have to pay for the people they have already laid off. They would probably love to hire them back, but if there is no work, that is not going to happen.

Congress does not have an issue because there are plenty of jobs there. USA Today reported that the fastest growing segment of jobs in the country is in the federal government. They are adding 10K jobs per month during a recession. The average public sector job earner makes $40,331 per year, while the average federal government employee makes $71,206. It is a rapidly growing area, and they are paying top dollar. The Department of Transportation had one employee making more than $170K before the stimulus package was passed; after the stimulus package was passed, there are 1,690 transportation department employees making more than $170K. The FAA chief got a $100K + raise thanks to the stimulus package. That money is not being used to create jobs; it is being used to pad the pockets of federal workers. When the FAA chief got 100K + raise, how many other federal government employees got such raises? 1,700. In the middle of a recession when millions of people are losing their jobs, federal employees are not only getting more jobs, but they are getting massive pay raises. This should be bothering people. It certainly bothers me as a taxpayer.

There is a proposal with the healthcare bill to cut the Medicare age requirement down to 55. How can they cut $500B + from Medicare, then lower it to the age of 55 and add approximately 30M people onto the Medicare rolls? It does not seem like the plan is to make it work at all. The new Senate bill has been measured by a non-partisan group, and they found it will cost a lot more and is going to put more people out of coverage than in it. With that kind of logic going on in Washington, it is hard to believe the economy will turn around. The economy tries to do what it wants without Washington it can help or hurt, and Washington has not helped. The economy will try to make a recovery out of it anyway, although it is going to be a slow, pathetic recovery by past standards. It will try to pull it together for 2010 and at least get it going through the summer. After that, there may be a double dip, but that is in the future, and lord knows our Senators and Congressmen cannot look that far into the future.

Gold was down, the dollar was up, and bonds were down. Things are at least looking right in the world of the stock market.



The internals were not much to crow about for the session. The small caps tend to represent what the advance/decline line is going to be. NASDAQ 1.4:1 advancers, NYSE 1.9:1 advancers. Those are the small caps helping kick in with their nearly 1% gain on the session. Looking at SP500 and the representation of the NYSE volume, you see it was a week of declining volume. It was the same story with NASDAQ. There was an upside day on Thursday, but it was still in a very low range of below-average volume. Again, they are range trading, and that is the kind of volume to expect in a range trade. It is not necessarily a bad thing.


The SP500 had an up and down week. It was down at the beginning, held the bottom of the range, bounced back up, and was trading in the top half of the range to end the week. No relative change. There have been five weeks now of trading laterally. Some of the SP500 stocks are being sold, and some other stocks in the NYSE are being accumulated.

NASDAQ is an interesting play because it gapped higher on the session up toward the top of the range and then reversed. It closed off its lows and closed basically flat. It is still trading in the top half of the range, but it is trying to make that higher low and is not able to get the breakout of the ascending triangle it has formed. It has been banging around in a narrowing range, and the breakout will occur over the next week or two. It is going to be interesting because it will be a catalyst coming for the rest of the market. It is a growth area --- semiconductors and small caps have been performing better. If there is growth coming, it should break out to the upside. The market is going to tell what the economy will do, and we are seeing some of this in the small caps. I think they are under accumulation because when looking at leadership, there are many small caps in good shape. I think they are under accumulation and, if you look at the SOX, you see it had a super two weeks. It leveled out this week and is consolidating, but it is holding over the peaks that it broke through, looking very strong.

NASDAQ has its ascending triangle, the SOX is breaking to a new high, and there are the small caps consolidating laterally and trying to set up a move. We will see many good small caps positions when we look at leadership. There are the mid-caps, similar to NASDAQ, setting up an ascending triangle. The SP400 is setting up an ascending triangle and trying to make a higher low right now. Those are growth areas, and they are improving. If the economy is going to pick up, these indices are going to break out ahead of that.


The USO is lower and oil fell. During the week, some of the energy stocks that had rebounded after falling were showing signs of heading back over. HAL rebounded up to the resistance point at 28 and is struggling. It is showing a doji at resistance on a light-volume rebound after heavy-volume selling. It will roll back over. You can see the same thing in general in the OIH. It sold off early in the week, rebound Wednesday and Thursday, and a hangman doji at resistance on Friday it looks like it will head lower as well. BTU is showing some wear and tear, but it has not broken down completely. It did recover at the end of the week, but it was a low-volume recovery and it could head back lower. As it made a high in November, MACD was unable to make a high, rolling over at a lower level. That shows a weakness, and there was a selloff. We will see how this bounces. It has tried to come up to the 78% Fibonacci, and if it comes back up there again and stalls, it is definitely a downside play.

They say economic recoveries have a copper roof to them. FCX is somewhat of the bellwether of copper, and it is rolling over. Similar to other stocks, there was a high with MACD, there was a new high, and MACD failed to make a new high. There was a crash lower on volume, an attempt to hold near the 50 day EMA and some support, but the downside volume was stronger. It looks like it is ready to roll over and make a serious drop, possibly down to the 65 range. We will be looking at that as a short play for the weekend. It is the same story if you look at PCU. There is a double top --- I would have loved for this to hold down at the 78% Fibonacci, but it did not. It does not matter because the weakening MACD gapped lower on volume, there was a weak test, and it is ready to roll over as well.

Steel is still looking solid, and even AA had a good day because it upped its guidance. You would think that commodities would be moving higher given a better economic outlook for the US, but some are and some are not. Some have had great runs and are victims of their own success and of the strengthening dollar. Bear in mind that they do not necessarily cut against the idea that the economy will be improving in 2010.

GS bounced up Wednesday and Thursday, and it looks like it will try to roll back over. Some of the banks that were down Thursday tried to rebound. WFC gapped lower and recovered a bit of ground, and BAC recovered some ground as well. The financials are trying to bounce back. LM had two very difficult days on Wednesday and Thursday, but it recovered a bit of ground on Friday. Somewhat of a snap back in the financials, but they still are not great-looking patterns.

DOX has had a great run and is coming back and testing. It looks like that could be a play. It traded below the breakout point on the low Thursday and snapped back. Buyers picked it back up and it held up on Friday. It could give a buy. FALC has a trend reversal ongoing, and it is trying to set up and make a break. INFA is trying to make a breakout of an ascending triangle. SNIC had a nice breakout, and now it is testing and holding over very orderly pullback. A lot of these are in the business software area, and they cater to small businesses and increasing productivity. LFT is performing well, had a nice break higher, and has a nice flag in progress. I am looking for ABCD patterns this week and for flag pullbacks on the small caps. I am also looking for rollovers from some of the big caps and the sectors in energy and metals that rallied back a bit after breaking lower but are not able to consummate the recovery through resistance. That is going to give us some excellent opportunity.

FLOW had a break higher and a nice pullback a great flag. We have seen a lot of this catalog and retail stuff (such as VVTV) doing well. XING has a nice base, a break higher, and it is testing. It is volatile but just an example of what is going on. There is rotation. Money is coming into these and you can see the volume moving up.

There is ongoing accumulation as the overall market moves laterally. Big volume is coming in, and there are nice, long, low-lying consolidations where you see they have been buying all along. Then there is big volume moving in as they make the break. There is a lot of money flowing into small caps, and that is what happens in rotation. That is why the growth areas are moving higher.



VIX: 21.59; -0.73
VXN: 22.38; -0.75
VXO: 20.53; -0.44

Put/Call Ratio (CBOE): 0.9; -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.

Bulls: 50.6% Up from 44.4%. Moving to a high on this last run, matching the levels from September and October. Hitting highs again just as SP500 bumps prior peaks yet again. Believers may have waned but the liquidity did not. Still well over the 35% level that is the threshold for what is considered a bullish climate. It does not mean things are necessarily bearish; that takes a reading in the 60% range. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. 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.

Bears: 17.6%. Bears are leaving the building the past three weeks, falling sharply from 26.7%. This is the lowest level of the entire rally and is at a bearish level. Just in time for the SP500 testing the prior peak. Peaked near 28% on this round, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a 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: -0.55 points (-0.03%) to close at 2190.31
Volume: 1.698B (-10.44%)

Up Volume: 901.543M (-134.906M)
Down Volume: 841.681M (-41.915M)

A/D and Hi/Lo: Advancers led 1.43 to 1
Previous Session: Decliners led 1.57 to 1

New Highs: 59 (-36)
New Lows: 24 (+2)





Stats: +4.06 points (+0.37%) to close at 1106.41
NYSE Volume: 1.003B (-4.7%)

Up Volume: 677.677M (+24.696M)
Down Volume: 319.151M (-63.611M)

A/D and Hi/Lo: Advancers led 1.89 to 1
Previous Session: Advancers led 1.55 to 1

New Highs: 290 (+53)
New Lows: 42 (+9)




Stats: +65.67 points (+0.63%) to close at 10471.5
Volume DJ30: 189M shares Friday versus 195M shares Thursday.



It is another week closer to Christmas without a sign of real movement in the indices. Whether you are talking about the SP500 or SP600, they have been moving laterally for five weeks. There are two forces at work, particularly in the big cap areas: the managers wanting the market to go upward to the end of the year, and those that want to keep the status quo and are being defensive and selling into rallies. They are canceling each other out right now, and we are moving laterally in the range. Then there is the rotation into other areas. Commodities are heading lower and many industrials are struggling. Areas that led the market higher are struggling as the dollar strengthens, but they had a healthy run. Money is rotating and moving into many of the smaller areas. The small caps and mid caps are harbingers of economic growth, so we are setting up for the January effect and a run higher by the small caps. In January, mutual fund managers traditionally buy the smaller caps where they have more chance of big gains through the year. You can get better percentage gains on stocks that are smaller in price. Smaller cap can move versus a lot of the big names that have run higher and move slowly when they do make moves because their growth is not as big as the small caps. Their percentages cannot be the same, so we can see bigger multiples built into the small caps. They can make big runs, and then they are sold off after they make those runs and fund managers look elsewhere for the rest of the year. They try to get their growth stocks bought in December and January, then let them run higher and then sell them off by the summertime. That is the way it typically works, and then they look for consumer stocks at that point. This is the rotation that fund managers go through.

Things are playing by the standard rulebook right now. That shows NASDAQ setting up with an ascending triangle that could make the breakout because it is a growth area. The mid-caps are setting up an ascending triangle because it is a growth area. The SOX already broke into a new high out of a ragged, ugly pattern because it is a growth area, and now we are waiting for the small caps to do the same and confirm what is going on. It may take until early January when they start moving, but they are definitely under accumulation, and we have definitely been putting them on the report and will continue to do so. We will also continue to take advantage of the stocks that have rallied but have run out of buyers (e.g., in commodities and some of the metals).

We are taking what the market gives. Right now, it is going to give upside on small cap and growth plays, and it will give downside on the plays that have run hard and are rolling over near term. It is going to give us plays like on PCU or FCX that have made their runs and are ready to make a fall. That is how we take what the market gives and make some more Christmas money ahead. Have an excellent weekend, and we will try to do the same.

Support and Resistance

NASDAQ: Closed at 2190.31
2191 is the October 2009 peak
2205 is the November 2009 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
2275 - 2278 from the February 2008 and April 2008 lows

2177 is a low from March 2008
2169 is the March 2008 closing low (double bottom)
2168 is the September 2009, intraday peak
2167 from the July 2008 intraday low
2155 is the March 2008 intraday low
2143 is the October 2009 range low
The 50 day EMA at 2139
2099 is the mid-September 2008 closing low
2070 is the September 2008 intraday low
2060 is the August peak
2048 is the early October 2009 closing low
2016 is the early August peak
1984 from late September
1962 is the bottom of the August 2009 range.
1947 is the October gap down point
1897 is the October post gap intraday high.
The 200 day SM A at 1884
1880 is the June peak
1862 is the July peak

S&P 500: Closed at 1106.41
1106 is the September 2008 low
1114 is the November 2009 peak
The March/July up trendline at 1128
1133 from a September 2008 intraday low
1185 from late September 2008
1200 from the July 2008 low

1101 is the October high
The 18 day EMA at 1098
1085 is the 2007 down trendline
1080 is the September 2009 peak
The 50 day EMA at 1081
1078 is the October range low
1070 is the late September 2009 peak
1044 is the October 2008 intraday high
The August peak at 1040
The early October 2009 closing low at 1025
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low
The 200 day SMA at 959
956 is the June intraday peak

Dow: Closed at 10,471.50
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

10,365 is the late September 2008 low
The 50 day EMA at 10,122
10,120 is the October 2009 peak
9918 is the September 2008 peak
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
9430 is the early October low
9387 is the mid-October peak
9116 is the August low
9088 is the January 2009 peak
8985 is the closing low in the mid-2003 consolidation
The 200 day SMA at 8946
8934 is the December closing high
8878 is the June peak
8829 is the late November 2008 peak

Economic Calendar

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

December 15 - Tuesday
Core PPI, November (08:30): 0.2% expected, -0.6% prior
PPI, November (08:30): 0.8% expected, 0.3% prior
Empire Manufacturing, December (08:30): 24.00 expected, 23.51 prior
Net Long-term TIC Fl, October (09:00): $42.3B expected, $40.7B prior
Capacity Utilization, November (09:15): 71.1% expected, 70.7% prior
Industrial Production, November (09:15): 0.5% expected, 0.1% prior

December 16 - Wednesday
Building Permits, November (08:30): 570K expected, 552K prior
Housing Starts, November (08:30): 578K expected, 529K prior
CPI, November (08:30): 0.4% expected, 0.2% prior
Core CPI, November (08:30): 0.1% expected, 0.3% prior
Crude Inventories, 12/11 (10:30): -3.82M prior
FOMC Rate Decision, December 16 (14:15): 0.25% expected, 0.25% prior

December 17 - Thursday
Initial Claims, 12/12 (08:30): 465K expected, 474K prior
Continuing Claims, 12/5 (08:30): 5170K expected, 5157K prior
Leading Indicators, November (10:00): 0.7% expected, 0.3% prior
Philadelphia Fed, December (10:00): 16.0 expected, 16.7 prior

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

Jon Johnson is the Editor of The Daily at

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