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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