Monday, October 29, 2007

Financials come back to life

- Techs pick themselves back up and financials come back to life, delivering a strong 1 - 2 punch.
- The rest of the world views the US economy as a leper. Expecting a market breakout as a result.
- FOMC decision is on tap for Wednesday and a 50BP cut will spring the next leg.

Market finds some additional leadership as indices attempt to end the choppy earnings trade.

You have to love it you diligently take positions in stocks when they show you it's time to buy even though the market action is questionable. After you move in, the reason why stocks were telling you to buy in then appears when the good news hits and other investors rush in to buy and drive your stocks higher. That is what occurred Friday.

Looking at Friday in isolation, the action was no different from the up-and-down movement seen day today over the past two weeks. The forces that cause the movement, however, changed somewhat. With Microsoft's blowout earnings, technology was back in the leadership mode, coming back from some wobbly sessions over the past week, but this time technology was not playing lone Wolf. The financial stocks finally stepped up to the plate and were taking their cuts as well on the heels of Countrywide Financial's prediction that it would return to profitability in Q4. That gave S&P 500 a new shot of energy lacking for the past two weeks. For once, it was not just Goldman Sachs leading the financials while all others sold off.

The earnings and forecasts of profitability were more than enough to take the sting out of a falling Michigan sentiment report (80.9 versus 82.3) and once again surging oil prices ($91.86, +1.40). Futures were sharply higher, and stocks indeed opened the session with gaps to the upside, even S&P 500.

Unfortunately, as is often the case with strong opens, stock started to sell almost immediately. It is always a risk that a strong open is used by sellers to unload positions, particularly when the market is as choppy as it has been over the past two weeks. NASDAQ lost 32 points off of its opening high right before lunch started on the east coast. That was not a good move given that one of the main reasons for the gap higher was the Microsoft earnings. Once more, however, the market found its bottom midmorning (at least by Central Time zone standards) and started to rebound. The market continued to rebound into the close, fighting off a rather eat last our intent to sell the stocks back down, and closing at or near session highs. It was good to see S&P 500 are really pushing hard into the close and moving to a new session high as the closing bell rang.

Technically, the action was solid overall, particularly on NASDAQ and S&P 500. Stocks started higher, but as noted, they immediately started to move lower. As they have done most all week, however, they resumed the move higher into the afternoon. Even though S&P 500 and DJ 30 struggled to move higher on the week, this low to high action intraday shows that there is some underlying strength in the market as buyers moved in on the lows to accumulate shares. You can call it the Fed bid or just plain old buying on the dips, but either way there was steady buying as the indices held key support during the week (e.g. S&P 500 testing 1490).

As for the internals, breadth improved nicely on both NYSE and NASDAQ on Friday, but it was really lopsided to the downsides for most of the week. Volume dropped off on Friday, but it still held the elevated levels that showed up to Fridays back. As discussed Thursday, volume improved as S&P 500 tested key support at 1490. That increased volume showed that big money was stepping in at that support level and buying into stocks. Thus, even though volume was lower on Friday, we do not view that as an overall negative, though we would've preferred volume to surge as stocks broke higher.

The charts showed a pretty good picture for a change after some pretty weak action during the week. NASDAQ broke over 2800 that acted as resistance for the past two weeks. It did not break to a new post-2002 high, but it was a key move as the index installed at that level. S&P 500 broke over the late September highs that represented the left shoulder in a potential head and shoulders topping pattern. The Dow is not quite bear, however, though it did rise nicely on some very solid upside volume thanks to Microsoft. Once more the indices are breaking up a potentially toppy pattern as they've done on many occasions during the runs higher this year. The rather striking feature of the Friday move higher is that with this move you can see an ascending triangle building on DJ 30. It still has a ways to go, but it is making higher lows below a rather constant peak for the past four months.

With respect to leadership, once more technology took the lead gratis Microsoft, but as noted above, financials were there as well, gratis CFC. It was finally not just Goldman Sachs leading higher in the financial sector, and that hold out some hope or S&P 500 as the market moves out of October and into the last two months of the year. China was hotter than a pistol as EJ, CTRP, BIDU, and EDU to name a few posted strong gains. Metals continue to rebound, in agriculture came back to life as well. Energy was not bad either, but given that oil prices were surging higher last week is not all that strong. The drillers, the tar sand plays, independents, and natural gas producers performed well, but service companies and large integrated companies continued to struggle. Leadership is not really spreading out across the market, but instead just returning to the prior leadership after it paused during this last pullback... with the addition of some financials.


One of the reasons the Thursday night report was chock full of typos was that I was traveling and having to use a new voice recognition software program that still has some bugs in it. After having a bout in the hospital couple of weeks back, I was playing catch up on some economic research that I was undertaking when I had to make that unexpected visit to the hospital. I've been traveling around the country to certain real estate locations to ascertain the status of the commercial and housing markets. First, in the formerly hot housing areas such as Phoenix and Sarasota, Florida, the market is as bad as you hear. In Sarasota for instance, but was told by many in the industry, but they're typically 200 300 houses for sale in any given month. That is the land to 800 to 1000 units over the past six months. When you look at several similar markets across the United States, you understand that the housing market is definitely in a deep slump.

In addition to looking at housing markets, we also were talking with many visitors to the United States from foreign countries. Almost unanimously, the people we spoke with, while more than happy to be here to take advantage of shopping opportunities given the weak US dollar, had absolutely no interest in investing in the United States right now. Over and over we were asked when would things improve in the United States. Almost to a person the view was, things were too weak in the US for money to work here.

That kind of negative sentiment would love to hear. Just as with the stock market, sentiment about an economy can get to an extreme level and indicate that a turn is coming. Right now the sentiment in the rest of the world is that the US economy is bad and getting worse with no end in sight. That kind of sentiment starts brewing the recovery as the smart money starts moving in long before sentiment changes. There are indications that the worm may be turning a bit. The Countrywide CEO may conjure up images of a used car salesman, but he is CEO of the largest mortgage lender, and he is no fool. He indicated that there is liquidity returning to the market, and he has changed his forecast to profitability, not sometime in 2008, but in Q4 2007. Moreover, some very savvy people, Florida region were telling us that the market was very near a bottom, and that another quarter of bad results would likely see the money starting to move quietly back into the area. There are some waiting as patiently as possible to move in, but you get its the sense that some very smart people were already a bit itchy to take action.

The stock market typically show the move start before the actual recovery begins. The market is always leading in its view of the economy. Perhaps the moves in the homebuilders, mortgage lenders and the financials on Friday is the start of such a move. It is still much too early to determine that, but with the Fed actively in the game and likely cut another 50 basis points on Wednesday, there is very good reason for the stocks to start moving higher. In the market in general, you can see former leaders took a pause over the past two weeks to a month starting to move once more. There were fears of a global slowdown on top of the US slowdown. Given that the US still plays a dominant role in the world economy even with a slowing economic picture here at home. These indications that the weakest US economic sectors are bottoming might be one of the reasons that we're seeing the materials, metals, agriculture, and other early leaders starting to move once more as the market sniffs out the recovery long before it is evident.

We can prognosticate a bottom if we want to, but that really doesn't do us much good. We can think whatever we want and the market won't give a damn. All we can do is get the best lay of economic landscape and then look to see what the market is doing and whether or not that corroborates what we think we see. In the end, however, the market tells us what to do because as we've said, the market is the best economic prognosticator.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Sunday, October 21, 2007

Stock Market Giving the October Surprise


- CAT gives up on the US economy, raising further mortgage & credit fears and fueling expiration Friday selling.
- Oil runs to $90 but energy balks: too high for its own good?
- Lots of recession talk, and after 5 upside years that is normal. What the market is telling us about it.
- Market giving the October surprise we discussed last weekend.
- Looking for some leaders to hold up and others to recover from some fear-driven expiration selling.

Market gets some CAT-scratch fever on fears of a slowing economy.

GOOG, AMD and indeed most all techs have posted some good numbers thus far, but on Friday that did not really matter as some industrial stocks undermined the good work put in by tech. CAT, MMM, and HON failed to impress though their numbers were not bad. What was bad was the commentary, the words that accompanied the results. CAT said the recovery in the first half of 2007 would fade in the second half of the year. More than that, it could threaten the rest of the world economy, in effect dragging everyone with us. With some anecdotal evidence that Europe was slowing (and it was purely anecdotal; the UK reported a 3.3% GDP growth rate), the impact was devastating on a market that was already in pullback mode, trying to find some footing to continue its breakout move.

Instead it was more of a breakdown. Stocks started lower, tried the traditional (of late) midmorning bounce, but failed the attempt. It failed it horribly. There were many negatives on the session, at least there were many that were repeated all day on CNBC and other financial stations. On top of the CAT comments there were calls that the US economy was going into a 'doozy' of a recession. It was the 20th anniversary of Black Friday and the comparisons during the day were ad nauseam. There was the weak dollar with the dollar index hitting a new low and again, comparisons to 1987 when the dollar was weak as well.

All of this led to a snowball selling effect, and in the afternoon when there was no rebound as in the prior sessions there was the definite smell of panic as shares were dumped and the indices went straight down to the close without even trying to bounce or otherwise come up for air. Oh there was a 3 minute or so blip in the last 15 minutes once the sell on close orders cleared out and there were no buy or sell imbalances on the NYSE board, but that was washed over in a last wave of selling.

Technically the action was about as weak as you can get it. A low open that only got worse as the day progressed, knifing lower in the afternoon right into the bell. The indices all lost more than 2.5% with the small caps pushing 3% (-2.98%). Nothing like economic and recession worries to skewer the smaller issues that are so economically, and specifically US economically, dependent. The internals were commensurately weak with surging volume on the selling (3 out of 7 distribution sessions on NYSE, 4 out of 7 on NASDAQ). A sad fact is that the only really strong volume outside the Fed rate cut day has occurred on the downside, just as in the July and August sell off. Breadth was -5:1; weak anyway you cut it.

The charts also told a weak story as SP500 and DJ30 dove through their 50 day EMA and into the May and June trading ranges just before the July and August breakdown. NASDAQ is still hanging in there above its July high and thus holding its breakout, but it is a very tenuous save. Now 200 of the Dows downside was due to just 7 stocks, and more than half of that was attributed to just three. That, however, does not change the outcome and it certainly doesn't explain the massive weakness in SP500 and the small caps.

Leadership was mixed. Energy was just coming to life the past week once more and then Friday it suffered a blowout. SLB reported great earnings but it was torched. There were calls oil would reverse sharply, and along with the recession talk (recession means less demand for oil) the energy stocks got hit as well. Industrials were slaughtered after CAT spoke its mind about the economy. Financials were of course lower with the renewed worries regarding the economy and CAT's comments about the housing industry.

On the other hand techs were remarkably solid. Of course, tech earnings have been solid, indeed strong (e.g. GOOG, NOK, INTC, YHOO). Amazing what some solid earnings can do for a stock and a sector. Interestingly, techs led the move higher and looking over many of those same stocks on Friday, they held up very well, holding their uptrends and just making normal tests. Metals were also quite strong. Yes they were lower, but they were just testing, setting up nicely for a new break higher. It remains to be seen whether they continue their normal tests or succumb to the selling in the other sectors, but on Friday when investors were throwing everything out the window, these stocks were holding the line. That is a nice plus, and we are looking at these areas for when the selling winds down.

Friday was a classic example of why we take gains on the way up, i.e. after the strong runs in stocks when they start the moves we anticipated. Even though the move looks strong, when a stock makes a strong surge over a few sessions it is prudent to lock in some gain, particularly with options. In a market where the economics still look good and the Fed is on investors' side, the market can still react adversely. After all, the Fed tends to lead the economy, selling off before there are many hints of an economic decline. That is why you have to look at what the market does as opposed to relying on your own conclusions and emotions. Friday smelled of panic, especially in the afternoon when no rebound transpired. With the very heavy negative technical indications, however, you cannot just write it off to panic and assume things will be back up next week. The market was consolidating nicely until Friday when it was clocked and the breakouts in the NYSE were given up. This may just be a new buying opportunity in the making, but we have to see how this coming week pans out, particularly watching how the remaining leaders hold up.


Oil blitzkrieg balks at $90/bbl.

Energy broke higher in September after a good base, and after a three week test of that initial run, it started to break higher again this past week. As oil moved toward $90/bbl that started to pull some of the major integrated companies along with the service and independents that had already broken higher. The high prices also got the tar sands and other alternative energy plays moving again.

As oil hit 90, however, if immediately came back. That did not kill the energy stock advance, not until SLB announced some solid results and got slammed. The results were better than expected but nonetheless SLB blew up. It took the other service stocks with it, the particular sector that really led energy higher. Now on the positive it did not take down the rest of the energy sectors. There was some selling in the independents as they are considered a bit riskier, but they did not fold up their patterns. The majors sold some as well, but they also held up. The tar sands and other alternative energy stocks held up just fine. It was not a washout, but the leading sector took a hammering.

What is the deeper story here? Is there a deeper story? The first thing that you think of is oil approaching $100/bbl. Boone Pickens said that might be the choke point but he quickly followed with a general denial of just at what point the economy would seize up. Good reason too as he believed it was a lower point last year. Not criticizing him; he has made billions for himself and his investors. Just pointing out that the economy has changed such that quantifying oil's impact on its output is very difficult.

Thus you look at how everything reacts when it reaches certain points. It hit 90 the past week and it immediately pulled back. The service stocks, despite strong earnings, gapped lower. The stock market struggled all week and then went into a tailspin Friday. There is a point where oil becomes too expensive and the economy stalls as a result. Call it the 1970's syndrome when it surged due to the embargo and western economies seized up into recession. Again in the early 1980's when price hit its all-time high (and that is still the champ in inflation adjusted dollars even with this spike higher) the economy recessed. Price just got too high and the economy couldn't handle it.

When you have $90/bbl oil and then add a housing bust, a credit crunch, a tanking dollar, protectionism, and talk of ending the economic policies that brought about the prosperity, it is tough to keep things going. When you think about it, that is a harsh laundry list of negatives for any economy to withstand. It is easy to fall into the trance many are in that recession is inevitable. It doesn't look great, but it hasn't for a couple of years. The acid test is what the stock market does. This last week was a nice pullback until Friday. Now it is a question mark as to whether the market will recover or will roll over and end the expansion. The latter seems improbable, but lets look at the issues at hand.

What is the market saying about the economy.

Lots of talk Friday about a market crash and a doozy of a recession. As noted, that helped fan the selling frenzy. Up until Friday the market was running higher and making rather orderly pullbacks with strong leaders plowing the road ahead. Definitely positive action. Even with Friday and the sharp sell off there is no reason to panic based on that event alone. Sharp sell offs are rather normal in continuing runs higher, though Friday, for just one session, was a bit extreme with all indices down more than 2.5%. That was a spanking. Nonetheless, even after Friday with SP500 and DJ30 plunging, it was not a breakdown. NASDAQ still holds its breakout, and as noted, some good solid leadership basically ignored the selling.

But market, and thus the economy, has some issues. In July and early August we discussed how the VIX was rising even as the indices made new highs. The last time that happened was in late 1999 and early 2000 and the market topped in March. Volatility did fall as the market rallied out of the August selling, but it held above the average level for the past 3.5 years and has rebounded close to 23 with the Friday selling. That is a sign to be watching for events such as Friday to develop into something worse.

There was heavy distribution in the summer selloff. Massive volume at record levels never seen on NASDAQ or NYSE. The recovery lacked any volume and indeed volume remained below average on over 90% of the recovery. To be fair average volume surged thanks to that record volume, but the point is the selling volume far surpassed the trade as the market recovered. That has been the major weakness of this recovery. Without a doubt much of the July and August volume was panic selling over the credit crisis, but it shows investors are ready to sell en masse if the conditions are right. After 5 years of economic expansion, investors are a bit more skittish.

There is also a big divergence among sectors in the market. Retail, housing, and other consumption related stocks are in the tank, declining even as the overall market rises. Energy, materials, metals, technology, agriculture, etc. are hitting highs. Divergences never go on forever. Remember in the 1990's the large cap techs were leading and no small caps were following? It took a nasty yet quick bear market in 1998 to get everything working together in harmony.

These current divergences have a huge difference, however, to those in the 1990's. Back then the US was THE game in town. The world was producing goods and selling them to us. Japan was in its depression after the 1980's when we were phobic about Japan buying up all of the US. It did, then those assets went down the tubes and we had the money and the property. Sweet deal. Makes you kind of wonder why we are all bent out of shape now about foreign purchases. It always tends to work out when the economy turns over and the house keeps everything. In the current situation the foreign countries are expanding sucking up all of the materials, thus driving prices, and those of the stocks dealing with these materials, higher. The consumer and retail sectors are languishing because of a slower US economy vis- -vis the rest of the world. After a 5 year run that is hardly unexpected. Thus the divergence is not the big issue that some make it out to be.

Okay, so the divergence is not anything to fret, but the rising VIX on the new highs and the heavy selling volume versus the rebound volume are significant market issues. Still, even with those the market is not breaking down. This pullback is thus far similar to others. It is the fact that it comes after a long expansion that makes each pullback worrisome to many pundits. How it responds to this selling given that there are some important issues is the key to how it moves going forward. Thus we want to see how this expiration sell off pans out in the week ahead. The market dug itself into a hole with that move and now we see how it responds.


Mercifully next week the economic data dies down somewhat, leaving earnings as the main focus. They would be the focus in any event given this is the heaviest week of the season for S&P results, but there won't be the distraction of a lot of economic data.

Thus far S&P earnings are running at a -1% clip versus last quarter. Outside of technology the picture is just not looking that promising. Indeed even with all of the positives from tech the industrial earnings are overrunning the good news. The fear has to be that the foreign economies will start to slow either due to getting just too hot, because oil has moved too high, or some combination of both. Coupled with the grim expectations recently expressed about the US and its economic future, there was some selling that, combined with expiration Friday, became some panic selling.

Looks as if this is the October surprise we talked about in last weekend's report. No weakness in September and a run right up into earnings. Earnings at first did not live up to the run, but then they almost pulled it off when tech started coming in and giving credence to the run higher. When industrials, the shoe-ins for strong results given the world economic expansion, did not serve up results topping expectations, the pullback started, and Friday it started to have the look of a correction.

This is, however, somewhat typical action for an October. There can be selling in September that continues in October until it bottoms, or there can be a run to October that then turns into selling as we have here. We are looking for some more selling after this recent turn to the downside, but when DJ30 gets to its trendline (which won't take long at this rate) and SP500 tests the 1490ish range we will look for some kind of upside answer. That is not much further at all and we could see some undercutting of those levels, but a hold generally near those would be the start of a recovery to take the markets higher to the end of the year.

The question is what will leadership look like when this is over. Will the same guard take up the point or will a new crop rotate in? Tech held up well Friday as did metals and ag, and both of those led the move higher thus far. We keep looking for the move to spread out and it tried to do so, but it never really caught on. Now with the small caps getting clubbed the logical choice is tech along with those other leading sectors that are holding up (and that does not rule out energy despite SLB's collapse Friday).

Of course we have to see how this week pans out. Given expiration Friday and the more emotional reaction to the CAT comments you would surmise that the Friday selling was overdone. Indeed the market tends to always overshoot in the short run. Thus we could see stocks try to start back up early in the week given expiration is over. Whether they try to bounce or fade a bit further, the key is to be patient. When casting a fly you have to be patient and let the line move through its pattern after your arm movement lest you rush it and pop your flow off your tippet. Same with pullbacks; you have to let them run their course as a harsh sell off is often met with a relief bounce that does not last. You can get caught moving in too early, and then when it fades back again you are susceptible to second guessing and doubt that pushes you into bad decisions even as you look at the charts and see things are going as you would expect. It is one thing to look at a chart without money at risk versus looking at one when you are significantly invested. The goal is to always look at a chart with the mindset of the former, but it is a constant battle to do so.

That is one good reason why it is a good practice during these times to move in piecemeal, i.e. if you see a move you like, don't go all in on the first bounce. Put some money to work, and see how it pans out. If it moves on up then add when there is a test. If it moves lower you are not killed, and when the bottom does come again you can add to your position and get a better overall price. If it does not bottom you can sell and not be hit as bad.

In short, adjust to the times. Back in September when the energy and metal stocks set up beautiful bases and tests we were going all in on the plays and we made a ton of money. That was a situation where everything was perfect. Now things are jumbled at best, and it is prudent to move slowly and cautiously, taking advantage of moves when they show up, but realizing the set ups are not as sure. Remember, these are the times that are not going to make you rich but they can hurt you. In other words, during this kind of action the risk/reward ratio is not as good. It behooves us to recognize that and to be patient and let the plays come to us whether upside or downside. Everyone was running to go short Friday and more will be doing so to start the week. It is best not to rush after it but let it test; if it fails the test then you move in. Otherwise you are chasing the bus and just after you catch it, it slams on the brakes.

We still see some great stocks in good position, and if they continue to show nice, easy pullbacks to test their last moves we are going to be ready to move in. Indeed we have some for this week that we are looking to do just that. If they show the moves, great. If they are not ready we will wait on them and adjust the buy points based upon their moves. There are a lot of earnings coming this week, and right now the market is going through the initial phase of the season where it makes its first strong move based on the results. This one is down. It will have to run that course, and if say tech earnings continue to come in strong the selling will wind down and then the second phase will take control. If tech remains solid then those earnings will propel that sector and start the move toward year end. What we will do is be ready to move into the leaders that are holding the line and setting up new bases for the upside, and if there is a weak bounce in the market overall or in certain sectors, we can use the bounce to bird dog some downside plays. Again, it is a time to be patient and let the move mature, then be ready to move as it concludes and the next phase begins.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Sunday, October 14, 2007

Economic data helps stocks stage a rebound

- Economic data helps stocks stage a decent, albeit low volume rebound.
- The moves early this week will be the market's direction for the next leg.
- October surprise, albeit short term, may be in store.

Stocks rebound, but in line with the presidential candidates out there we have to ask where's the beef.

Futures were decent on some deal news (ORCL wants to buy BEAS) and a general rebound in the market following the whiplash session Thursday that saw strong early gains turn into strong late losses. The idea of some deals acted as something of a salve, but alone that would not do the trick. Now when retail sales came out and beat expectations and some rather draconian predictions from some of the more negative pundits (0.6% actual versus 0.2% expected; 0.4% ex-autos versus -0.4% expected) and core PPI rose 0.1% versus the 0.2% expected. Golly Wally, the economy is just not rolling over as so many expect.

The market started higher on that news and a half hour later was goosed a bit higher by the Michigan sentiment report that was a bit lower than expected (82.0 versus 84.0), but after the stronger early data it seemed to play a good foil, i.e. diluting the prior data for the Fed's use and enjoyment.

Stocks opened higher and surged into lunch. Then they moved laterally from lunch to close, gyrating in a rolling range. It took a last half hour surge higher to push them back up to the session highs, but they made it. They recovered some of the Thursday losses, and it was the usual group of leaders doing the leading. It was a good response, but it was not all that powerful.

Technically it was a decent answer to the Thursday reversal, showing a solid price rebound, especially on NASDAQ and even more so on NASDAQ 100 (1.73% gain). The indices gapped higher, moved further upside, fought off some modest selling attempts, and closed right at the session highs. The internals were mediocre. Volume was lower after that strong Thursday reversal surge. Breadth lacked any enthusiasm or punch. Good price moves but not a lot of beef so to speak.

As for the charts, the indices showed inside days or what is known as a Hirami in Japanese candlestick charting. Hirami means 'body with a body', i.e. where the current session high and low traded within the prior session's high and low. That is an indication of indecision, particularly after a well established trend. The way a stock or index moves after such an inside day or hirami historically tells the direction of the next move. It doesn't say that a trend is broken or otherwise, just that the near term direction is moving that way. People get into trouble trying to stretch such indicators further than they can be used.

Combined with that wild, out of left field spike in selling volume Friday, that makes the direction to start the coming week important. Friday the leadership was bouncing back, but as noted, the moves were not all that powerful in many cases. Thursday showed there are sellers out there, ready to strike when they see an opportunity. Thus far they have not been willing to step in front of the upside train. They had some success Thursday, and the Friday buying response was rather tepid. That will embolden them to take some more shots.

NASDAQ remains in need of a breather after it led higher, and the Thursday reversal was likely not enough. Indeed, the Friday action was as we expected, i.e. higher as a response to the selling, but not really showing us one way or the other if the uptrend was back on after Thursday tried to buck it off. With earnings opening up the spigot wide open this week we can expect some more attempts at bucking the uptrend, particularly given the run from upside through September and into mid-October.

Indeed, with the lack of selling pressure and the run into the earnings we could very well see a version of the October surprise, i.e. some selling in the midst of the run higher as investors digest the early rounds of earnings results. The indices broke higher, clearing to new all-time highs on SP500 and DJ30, and new post-2002 highs on NASDAQ. The small & mid-caps have yet to make that move. A sharp, relatively fast October pullback would set them up for a run into the end of the year, and with the action seen Thursday as well as the run from the August low, such a move would actually be healthy for a nice sprint to year end.

Thus it is best to be cautious here with the runners that have come a long way on this move. Thursday the leaders that had run the hardest the past three weeks were the stocks taking the hardest hits. That is normal, but the strength of the selling shows there is something behind the scenes that needs venting before too much more upside. Again, we have to be a bit cautious with those positions; if they start showing more higher volume weakness it is best to take some more gain off the table and then let them test and see how they shake out and if they set up for new buys.

That doesn't mean there are not opportunities out there even as these runners take a deserved break. We have seen money rotating around the market; it did that Thursday when a lot of big names were getting sold back. That will likely continue to happen and we are looking for new buys on stocks emerging from bases, pullbacks or consolidations that get some of the money thrown their way when the leaders test.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Monday, October 08, 2007

Will Fed cut another one after stronger jobs report?

- SP500, NASDAQ ride in-line jobs report, August revisions to new post-2002 highs.
- Jobs report: Okay, so what if the government was off by 93,000?
- Will Fed cut another one after stronger jobs report?
- Still a lot of negativity regarding the market even as indices break higher.
- With the continuing economic re-recovery, time for industrials to resume their move, and small caps are trying to help as well.

Just right jobs report pushes SP500 to a new high.

The market was set up to move higher and looking for a trigger. The in-line jobs report (110K versus 100K expected) and a rather massive revision to August (+89K from -4K) provided the spark to break the indices higher. Well, it provided the spark, but it was not an explosion higher. Part of the powder didn't ignite. SP500 broke to a new all-time high and NASDAQ added a lot to its earlier move to a new post-2002 high. DJ30 was up, but its move was nowhere near its large cap brethren, and after pushing to a new high intraday it faded. Held a gain, but a mere shell of the other indices.

The jobs report was the keynote address, but there was other news pre-market, some good, some not so good. RIMM was up on its results; once again after hours action does not necessarily represent what happens during the full session. RIMM dragged AAPL along with it along with some other big techs. On the flipside, NBR (drilling) guided lower due to a falling North American rig count. MER warned re its Q3 due to heavy write-downs in assets related to the sub-prime issues. Outside the jobs report, life goes on as usual.

Stocks started higher out of the gate. The dollar started higher as well, pushing oil a bit lower and keeping a lid on the energy stocks again. After that higher open the action was up and down through midmorning. Then the market broke from that range and headed nicely higher. Some word that the commercial paper market was improving as a few companies were placing their paper, and the Fed's Kohn had some decent things to say about the prospects of more Fed action.

The upside move paused over lunch, but stocks were back up into the afternoon session. Techs were the dominant leaders but the small caps were up nicely as well. Metals started to move in the afternoon, one of the leadership groups on the last leg that backed off and was lagging on the current attempt. They were still not blowing things away as some late profit taking took back some of their nice gains. As noted, energy was lagging; still set up well, but thus far unable to take up the leadership mantle it had on the market's last leg higher. That left it to the techs, and they did an all around decent job at holding the gains together.

Technically the action was solid . . . for the most part. SP500 broke to a new all-time high, testing the move intraday and then closing with room to spare over the July high, completing the move out of the cup with handle base. NASDAQ did the same, i.e. breaking out from its cup with handle base as well. It already broke to a new high to start the month and quarter, and the Friday break higher was an exclamation point on that move.

Volume was up and actually not bad on NASDAQ. It topped 2 billion share, approaching the levels hit as NASDAQ started its stronger move higher in mid-September. Still below average, however, given the huge volume during the July and August selling that jacked up the average level of trade. NYSE volume was up as well, but it was rather puny, coming in less than the Monday new money for the month trade. Breadth was great at 3:1 NYSE, but that doesn't really make up for the chronic lack of volume on NYSE.

Notably lacking was DJ30 with respect to a move to a new high. As noted above, it put in a decent move but it could not hold above Monday's peak that took it to a new high. SP600 didn't make a new high either, but unlike DJ30, it was running hard toward the old high, posting the best move in the market outside of NASDAQ 100.

Leadership was clearly in the hands of a few tech stocks such as RIMM and AAPL. Techs continue to perform well in general, though the large cap techs are dominating. Once more, however, the small caps were there as well, posting strong moves as the economy continues to look as if it is going to once more resume its growth plane. As we have discussed, the economy was emerging from a mid-cycle slowdown in Q2 and into Q3 when the credit freeze hit. That really hammered the small caps as the fear was the credit issues would stall the economy, and small caps have to have growth, solid growth, to prosper. They are surging back up, leading the market in percentage moves all week, and that is an indication that the economy is emerging, once again, from a pause and has good growth potential ahead of it.

You won't hear much of that kind of talk on the financial stations. For one thing, there is still a lot of pessimism about the US economy in general. The litany of terrors is cited every day: sub-prime, credit, weak dollar, inflation, declining consumer. You even hear how the market is a poor indicator of future economic performance. Don't tell that to the market back in 2000 when it pitched over and the economy collapsed after it. And of course the rally that started off the October 2002 low and the surge that preceded the huge gains in GDP in Q3 2003 was not forecasting the return to prosperity. Throughout US economic history you have market rallies followed months later by surging economic growth. Yet some still pick at the time or two that growth lagged longer than usual, claiming that is the rule rather than the exception. That is fine. As long as there are those out there refusing to acknowledge fact and remain negative, that is good for the market rally as the market moves its best when there is a lot of doubt and worry. This has been a strong move higher, befitting the amount of issues and worries covered each hour of each trading session on the financial stations.


Jobs report shows August report was wrong. That is what is so right about it.

You have to wonder. The government reports a loss of 4K jobs in August when expectations were for a gain in the 140K range. A month later it issues an 'oops' report, noting that jobs were actually up 89K; nothing like a 93K miss. We figured the August number was an outride, i.e. just plain did not reflect reality, and that was the case. It certainly doesn't add to the already crumbling confidence in the government's ability to collect and compile data about the economy or anything else for that matter.

As for the September report, it was basically in line at 110K versus 100K. With the revisions to the prior two months 118K non-farm jobs were added back in. Average hourly earnings rose 0.4% versus the 0.3% gain they have held for months. That put the year over year level at 4.1%, a very solid expansion considering all of the talk we are hearing about how US wages are terrible. Of course that raised comments about 'wage-led' inflation. For once we would like to have an expansion with some wage increases without having to hear about this bogus, unsubstantiated theory.

Even with the upside revision that brought cheers from many commentators, the market did not run higher because the results were strong. No, the numbers were still quite weak, just not the gut-punch level the initial August report of negative growth suggested. The revision suggested no collapse, but the overall numbers were weak. 89K? Even if that was reported in August it still would have been a big letdown versus the 140K expected. No, all the revision did was put the numbers in the 'just right' category for the market given its desire for continued Fed rate cuts.

Will the Fed still be ready to keep cutting them?

Indeed, despite the 'whew' many were letting out Friday and the talk of a strong economy as evidenced by the jobs report, quite frankly it showed nothing of the sort. To backtrack some, recall how some said the August jobs report and the initially reported 4K jobs loss was why the Fed cut rates. If you believe that, then the revision to +89K would prompt you to conclude that the Fed would not cut again and probably be looking for the opportunity to 'take back' that cut. We heard that on Friday from the uninformed or the shallow thinkers.

The Fed did not cut because of the jobs report. Bernanke's writings show he knows jobs are a lagging indicator, and the other more leading indicators simply did not jibe with that jobs report. As we said at the time, the Fed cut rates because it feared that the credit freeze on top of the sub-prime concerns would stall the economy and lead to recession as such contagions had done in the past. Friday FOMC member Kohn confirmed this with his candid comments as to why the Fed cut by 50 BP: the Fed cut in order to offset tight credit and promote growth, noting it was better to respond too rapidly versus too slowly. He noted that with core inflation trending lower (core annual PCE growth at 1.8% last month) the Fed had room to work with.

As we noted at the time, the weak August jobs number was additional cover the Fed could use to cut rates if it wanted to. Kohn's comments confirm this. Given the Fed cut to prevent a further contagion from leading to recession, the fact that jobs 'recovered' is not going to change anything with respect to whether the Fed cuts rates again or not.

Remember, the Fed was saying before the credit freeze hit that the economy would grow below its potential. Bernanke said this to Congress in his son of Humphrey-Hawkins testimony, and several other Fed presidents and governors echoed this position. After the credit crunch hit the Fed had even less reason to believe the economy would improve its growth, i.e. it likely expected growth to slow even more as a result. Thus with the Fed viewing the economy with even less momentum than before, the jobs revisions won't impact its view regarding rate cuts.

Given the Fed's moves ahead of and during the credit crunch and the Kohn comments, it is pretty clear that the Fed, through Kohn (and likely others to come this week) is outlining why the Fed will likely cut at the next meeting here in October. In short, the Fed was worried about sub-trend growth before all of these issues hit, and now that they have hit and the Fed has cut in response, a few more jobs added due to a revision are not going to change its course of action. The only real question is whether the Fed cuts another 50BP or just 25BP. If the leading economic data continues to improve and show a second re-acceleration out of the mid-cycle slowdown, 25BP is likely the number. Much depends upon how the credit issues improve before that meeting, however. If they are not better, the Fed will do what it has to in order to get that market opened up to avoid any chance of a slowdown leading to a recession.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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