The Rally, Part 2

SUMMARY:
- No real change in the news, but 'The Rally, Part 2' continues.
- Still just a relief move for now, but it is likely to carry through to year end.

After a sharp drop, holiday rally resumed with a Santa Clause run this week.

There was more of the same on the news front, i.e. the good, the bad, and the ugly. The good: RIMM seconding ORCL's earnings; strong spending numbers (+1.1%, a 3.5 year high in growth rate); some M&A activity (PHG buying our play RESP; VIP buying GLDN); Michigan sentiment topping expectations (75.5 versus 74.5 expected); the second Fed auction went off with a lot of bids and the promise of bi-weekly auctions as long as needed. The bad: PCE annual core rose to 2.2% versus the 2.0% expected; Oil spiked to 93.50 (+2.44/bbl) on the new trading contract; MU proved that memory chips are a commodity with its abysmal results. The ugly: CC earnings were much worse than the bad earnings expected and JBL (printed circuit boards) guided lower for 2008, and both gapped sharply lower.

The negatives did not matter. Santa's slay is all oiled up and ready to roll, and despite the gloomy prospects the retail sales figures and the reports we are getting from malls and stores shows consumers are spending. More importantly, RIMM gave the market a second B-12 shot after ORCL's earnings, and that was enough to get all stocks off on the right foot.

The morning was a bit choppy, but it was choppy in a narrow range and holding the gains all along. Then the afternoon kicked higher and it was a race to the top. There was a last hour attempt to sell as more positions were shuffled ahead of expiration, but that dip was bought, driving the indices to close at their session highs. The move capped off a recovery from a week of tough selling touched off by the FOMC's rather timid initial response and two-step approach that stomped all over many traders' toes. Leaders were rattled to start the week, but they came on strong to finish. You always have to like a good closer.

Technically the action was excellent, but expiration and year end tape painting had their fingerprints all over the session.

The market showed high to higher action, i.e. gapping higher, holding the gains, then sprinting home. It even fought off some last hour selling to show it was more than just a bounce without a brain.

Internals: The internals were as strong as the day. Nice 3:1 breadth on NYSE and 2.3:1 on NASDAQ, showing it was not just a large cap tech day, though they had their way with the session as well. Volume exploded above average as a lot of positions were rolled out and closed out as December came to an end given the up and down action. It appeared that traders waited to see if the bounce would die of natural causes, but when it showed it was all perky again they had to act. Volume explosion.

Charts: After playing patty cake with the 200 day SMA all week the blue chips ripped through that level. SP500 continues its advance, but it is still playing catch-up as all its work only got it up to its 200 day SMA. NASDAQ already put that level to bed, gapped over its 50 day EMA, and rallied to close at its 50 day SMA. It is once more eying that July high at 2736 that stopped it short on the second leg of the holiday rally. Great moves, but all of this shows there is still a lot of work ahead as the indices collide with old resistance points. Even with the moves this week the indices are still below their peaks from the last rally leg.

Leadership: As discussed earlier in the week, leadership took a blow on Monday, but that turned out to be the end of the selling. Just as it looked as if the leaders were going to get dragged down into the abyss the selling ended. By the end of the week the same old names that led all of the rallies in the last half of 2007 were leading once more: large cap tech, agriculture, energy, metals, machinery - - all stocks with ties to strong global action . . . AND all stocks that will look really great on the year end reports to investors. The big boys were picking up these shares to spruce up the portfolios; of course they won't tell their investors WHEN they shares were purchased.

Still just a relief rally but likely to carry on through close to year end.

As noted in the 'charts' discussion, this still has the attributes of a relief move from the harsh selling. The Fed is in the game, but it has not been a game changer just yet. It is hard to fight the Fed, but as seen in 2000 and beyond, if the Fed waits too long or is not strong enough in its response it can take a long time to come back around, i.e. after the economy, an of course the market, decline. This is particularly true of financial crunches as we have now.

That said the leaders are hitting stride on some strong volume as portfolios are populated with the strongest of 2007. Shorts are getting squeezed, not in a sudden rush that is prone to failure, but a steady rise all week. That gets them very uncomfortable, and they tend to rush in and cover. While the indices are rapidly approaching levels that stalled them out on the last leg higher, this kind of momentum can ride through light volume periods such as that short week sandwiched between Christmas and year end. Thus we are looking for the move to continue next week.

As noted Thursday night, however, if this does continue on up to the year end we are going to be banking quite a bit of gain and preparing for a pretty unknown January. There are indications that some areas, e.g. China, are ready to move up after correcting nicely. Overall, however, the charts and their character have not changed yet, and frankly SP500 with its financial weighting still looks technically weak. If the financials are not bottoming then the overall market likely still has more work to do. The world is not going to fall overnight and thus we can stay with the strong global leaders as long as they keep moving higher. In the bigger picture, however, we need to be nimble heading into the new year and see what the big money does after it finishes painting the tape. Those recovering leaders of this week and likely next week may get the ax from some big institutions.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Inflation adds another yoke to the market

SUMMARY:
- Inflation numbers add extra weight on a weary market as stocks slide lower to end a down week.
- CPI adds inflation worries to Fed woes as some energy pass-through shows up.
- Dollar has its best week against the euro in over 3 years.
- Market's near term fortunes dependent upon successful Fed auctions starting Monday as well as continued improvements in Fed targeted areas.

Inflation adds another yoke to the market.

The stock market was moving higher on the second leg of its holiday rally, rallying right up to the Tuesday afternoon FOMC monetary policy announcement. The Fed disappointed with a 25BP Fed Funds rate cut (25 on the discount rate as well) and a muddled, repetitive statement that dropped a reference to 'forestalling' an economic slowdown and still harped about inflation. Then the next morning it confused and indeed infuriated many, particularly the financial market traders, with a second day announcement that looked, based on the timing, as if it was a reaction to the market's sell off in response to the size of the rate cut. It could not have been; you cannot coordinate that many central banks in a few hours. Still, the rambling statement and the clumsy chronology of the 2-step action plan lost the financial markets' confidence.

On top of that, the second action sent the market into a temper tantrum. The Fed's second phase actions had an immediate and positive impact (LIBOR spreads narrowed and rates fell, the dollar surged, and US interest rates reversed their deflationary path). The key for the next market move is whether the Monday auction (the first of four) will show enough success to start convincing the market the Fed, despite its left-handed bungling of the action that hurt a lot of investors, at least knows what is necessary to fix the problem and only has to learn better timing.

Obviously Friday the market was not over its tantrum. Indeed, it was not going to get over it as the CPI was much hotter both in the core and overall and with the unknowns regarding the Fed auction next week. With fears that the Fed was failing to forestall, or as its statement indicated, maybe giving up attempts to forestall a slowing economy, the higher inflation reading raised the unspoken worry over stagflation. That CPI number showed why the Fed kept language about inflation worries in its monetary policy statement, but just because the Fed was right ironically provided no comfort to the market. The market is worried the Fed doesn't have a clue, yet Bernanke's tenure to this point has for the most part shown he understand economic cycles and their history. As with Alan Greenspan in his early tenure (when many called for his ouster as well), implementation of the knowledge is the shortcoming that time will help alleviate. Unfortunately, we have to live through the seasoning of another Fed chairman. You can study history all you want as Bernanke has, but the transition from theory to reality is inherently sticky.

There were positives with respect to the issues that are worries to the economy and thus the market. As noted, LIBOR rates continue lower and spreads are narrowing. The dollar surged. It was not enough to offset CPI, earnings issues (BDK reported a shortfall in its guidance), and Greenspan started talking about recession again after a 3-month hiatus (inflation chances are "clearly rising" and "economic growth is close to the stall speed"). As the market balanced out the pros and cons, the cons won again. Most everything was down: gold, oil (91.33, -0.92), financials, metals, energy - - it was widespread to the downside. But, as noted below, while down, many stocks such as the leaders we have positions again held up quite well. That shows there is an undercurrent of strength after the FOMC decision, and that shows there is some recognition out there of the positives developing despite all of the angst over what the Fed did or failed to do.

Technically the action was mixed again, but of course the overall bias was to the downside. The market started lower as the futures tanked after the CPI data came in hot. The market spent the first hour and one-half recovering, and NASDAQ actually turned positive while DJ30 and SP500 missed the green by a couple of points. Unfortunately the bids died out midmorning and stocks slid to close at the session lows. NASDAQ squandered 37 points from its high, DJ30 dumped 145 points, and SP500 frittered away 18 points off the high. There was no Wednesday or Thursday rebound off the session lows as the more bearish intraday action returned.

Internals: Breadth was pretty rotten at -3.6:1 on NYSE and -2.8:1 on NASDAQ. Of course, that included a lot of stocks that lost fractional amounts on the session as they held their near support and performed just fine despite all of the market gloom. Volume was again lower, coming in well below average ahead of the weekend. Though the market dropped to close at session lows, the volume shows the sellers were not rushing in to push it lower. It was a lack of any buyers willing to step in following the FOMC's decision and the subsequent selling Tuesday and the failed rally attempt Wednesday. If the sellers are not pushing when they have every reason and opportunity to do so, you look around to see what else is going on. The leadership as discussed below becomes very interesting in this scenario.

Charts: The week shows a lot for the indices. They rallied up to resistance into the FOMC decision and failed right there when the Fed disappointed. They tried to hold up to finish the week what with the two rebounds off the lows on Wednesday and Thursday, but after the Friday close they are teetering on the edge of another downside leg after the dump on the FOMC decision. DJ30 will try to make a higher low at the 200 day SMA or 13,250, but the patterns for the US indices are again more bearish than bullish after failing at resistance on the FOMC decision.

Leadership: There were not a lot of surges higher on such a down session, but going down the list of plays and stocks that we are watching for opportunities to buy, there are a lot of stocks that are in surprisingly spry shape after the negative four sessions (both in price and in sentiment) in the US indices. That was a continuing theme this week that we discussed every session. May have seemed as if we were beating a dead horse, but their action in the face of the negative sentiment is very important. The leaders showed rubber band action, i.e. stretching down to near support but not breaking. As noted earlier in the week, if you did not hear all of the negative stories about the market and the Fed or see the action in the major indices, you would be pretty excited about the opportunity to move into some great stocks.

Of course you can never forget about or disregard the overall market if it is struggling. But with the split in the global economies, opportunities remain, and quite a few as we can see from the list of strong leaders in good position to move higher. To us that indicates there is a continuing undercurrent of support for these stocks, and if there is improvement in the areas the Fed's second phase approach targets, an oversold market can make a bounce, and these stocks are primed to jump back up, e.g. AAPL, BIDU, CMED, FCX, SNDA, VIP, etc.


THE ECONOMY

CPI heats up, injects stagflation fears.

Consumer prices popped 0.8% (0.6% expected), and the core topped expectations as well (0.3% versus 0.2%). Year over year prices surged 4.3%, 2.3% on the core. That growth rate doubles that in August (2%) before energy prices spiked. This is the highest annual core rate since the 2.9% reading in September 2006.

Gasoline/energy was the biggest component with a 5.7% gain, up 21% year over year. Ouch. Food rose 0.3%, up 5% over last year. Thank you ethanol for pushing up corn prices, the very basis of our diet here in the US. Drugs rose 0.8% for the month, same with apparel. Airline fares spiked 2.6%, and some are saying that is the long-awaited pass through from energy prices.

That looks to be a real problem ahead. Energy prices are up 21% over last year, and they have remained very high for a very long time. As noted earlier last week, the impact of energy prices is cumulative. If they remain high they keep banging into prices and eventually they break through in areas. Airlines have tried to pass on price hikes for several years but have failed miserably. If this one sticks that marks a turning point for prices.

What can the Fed do about that? Can it lower energy prices? No, at least not directly. It can slow the US economy until we all cut back on fuel so much we are living as we did pre-1940's. That may impact the price of oil, but frankly with China, Brazil, India, etc. growing so ravenously, it would not be enough to push oil back into the 40's or 50's. The Fed definitely doesn't want to lower our standard of living in such a manner, but it is torn by the inflation it was worried about on Tuesday in its statement where it emphasized the slowing economy but could not let go of the inflation worries. Then you throw in food inflation on top of that, something driven by the Executive's side of the government thanks to its energy initiative, and the Fed is sweating it out.

Problem is, the Fed cannot accomplish anything if it tries to play both sides of the fence. It has to either attack inflation or attack the slowdown. As we have written over the past year, and as many economic heavyweights such as Bob McTeer are saying, the slowdown and credit issues are the primary concern. You keep inflation in mind, but you solve the credit problems first to get the economy expanding again as that will help alleviate the inflation issues: growth does act as a cure all in most cases.

That takes us back to the disappointment with the Fed action this past week. It has something of this two-faced approach and its statement on Tuesday only underscored the appearance of indecision as to what to attack. That more than anything in our opinion is what really rattled the market. The Fed holds much too much power over our economy and our lives, and thus any appearance of confusion or uncertainty is devastating to investors.

Dollar enjoys a big week.

The dollar advanced the most against the euro since August 2004 on Friday. Indeed, it gained against 14 of the 16 most actively traded currencies. That is on top of a strong week overall that saw the dollar gain 1.6% versus the euro, the largest weekly increase since June 2006. The move got underway in earnest as the dollar broke the $1.4650 resistance level against the euro. The dollar is now down 8.5% versus the euro for the year.

The drivers are two-fold. First, the dollar was down too far, too fast as it moved to the $1.50 level versus the euro. It had to snap back. Moreover, the dollar has been trending lower for an extended period, and we all know that leads to relief moves or even a key reversal that changes the game.

That leads to the second driver: the Fed action. The Fed's rate cut didn't hurt the dollar as many currency traders feared a 50BP move and thus the dollar actually started strengthening on the Fed action. Then the announcement of the swaps and auctions jumped the currency higher as it enjoyed its strongest session in weeks. Then the CPI reduced, at least in currency traders' minds, the likelihood of further Fed rate cuts. That combination of events started by the Fed directly targeting the credit logjam really turned the currency. Add to that the long downtrend and you see a spring that was wound pretty tight.

As a result we could see the dollar at sub-$1.40 by year end. The rally could be just getting started there, however, as the dollar has been underwater a long time and when these moves start to reverse the recovery can be lengthy. If the Fed auction on Monday is a success, then we will see the dollar continue higher and even increase the speed of its gains. Already we are hearing stories of European visitors wondering if they need to think about cutting their stays here in the US shorter. That is how dramatic a move this was in the currency this week. Cannot complain about that, and frankly, despite the market angst over the Fed's actions, this is some pretty excellent news.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

Technorati tags: stock trading stock market investing Jon Johnson Eric Aafedt InvestmentHouse.com

New Month Means New Money

SUMMARY:
- Bernanke gaps stocks higher but end of month shuffle closes them off the highs.
- The importance of the 50 day EMA shows itself this week.
- New month means new money and we will see if the leaders can move through the prior highs with that boost.

Stocks have all the good news they can handle. More than they can handle.

Big Ben, Uncle Ben, Ben There Done That. Whatever your favorite description of the Fed chairman, the market liked what Bernanke had to say Thursday night when he talked about weakness in the economy and cramping in the credit markets. It seems the economy is something you can talk smack to and no one gets upset. Try doing that around my family at Christmas; you see holiday cheer fly right out the window.

In any event, Bernanke's comments echoing Vice Chairman Kohn's jazzed investors enough to overcome the Dell margin issues and a Goldman Sachs downgrade of key technology stocks. At least at the open. There was other news as well, good and bad, but leaning to the positive. Personal income and spending was half that expected with a 0.2% gain (0.4% forecast), core PCE was in line at 0.2%, and Chicago PMI was quite refreshing with a 52.9 read, bouncing it back above the 49.7 in September and the 50.5 expected. Oil was ripped again, falling to 88.71 on the close, down $2.30/bbl. Not bad, and with the Fed 'troubled' about the return to a credit freeze already, the better manufacturing data was definitely a relief. Not a turn in the economy, but nice to see no back to back sub-50 readings in Chicago.

Again, stocks gained, at the open. They gapped higher on Bernanke bliss, but that was the zenith for the session. After the strong open they struggled all session, sinking through the morning, through lunch, and really dropping mid-afternoon. NASDAQ was the downside leader as the large cap tech leaders went from a strong gap higher to negative. It took a bounce in the last hour to push the NYSE indices firmly positive and drag NASDAQ up off its lows for a more modest 7 point loss and not the 25 point spanking it was rubbing as the last hour started.

Volume was strong on both NYSE and NASDAQ. Distribution on NASDAQ? Accumulation on NYSE? Likely it was just end of the month shuffling. The moves for the week caught many with the pants around the ankles and there were some adjustments to be made to end the month and prepare for the new money to be put to work to start next week. The early move higher was used by some to take some positions off the table. We did some of that as well. There were sellers in there taking their shot as well; by sellers we mean short sellers versus just profit takers. The sharp move left many scrambling, however, and thus the higher volume as the indices closed mixed.

Technically the action left a bit to be desired though it was not a necessarily nefarious session. The intraday action was high to low. Yes the NYSE indices finished positive, but the action was down from the open with sellers using the action to sell and long players using it to take some gains on the week. Weekend, great news from the Fed leading to a big surge; yes, taking a bit of gain was quite normal, particularly given the harsh selling leading into this past week and its rally.

Internals: Decent breadth on NYSE with a 2.4:1 advancing edge. NASDAQ was rather anemic at 1.2:1. Volume jumped sharply. It was the strongest on NYSE outside of one session in the selling in early November. NASDAQ was no slouch either. Mixed signals if you look at whether the indices gained or lost ground, but when you factor in the unexpected surge for most involved in the market along with the month end, the reason for the volume becomes clearer. Thus it was not likely a session where the sellers showed they are going to overrun the market again just yet, but it is also something to watch into next week as the leaders and the indices need to hold their ground if the holiday rally is to continue.

Charts: Advances on SP500, DJ30 and SP500, though the indices could not punch through key levels. SP500 failed to hold a move over the 200 day SMA and DJ30 could not hold the move through the 50 day EMA. Sounds pretty worrisome, but considering that the indices jumped sharply for four straight sessions, the inability to push through that resistance is not shocking, surprising, or otherwise too worrisome.

Leadership: Some more leaders emerged Friday even as some of the early leaders from NASDAQ struggled. Good sign as that shows some money actually spreading out and not just a narrowly concentrated short covering rally. Sure there is some short covering driving this; after that kind of selling that is a given. The fact that new leadership caliber stocks popped higher on strong trade once more even after a few days of solid rallying shows continued new buying as it did not occur in a narrow, initial short covering orgy. Some early leaders, e.g. AAPL, GOOG, RIMM came under pressure after good runs, but they were the early leaders and were fighting off a GS downgrade of leading techs. It will still be important to see how they hold up this week as they test this move. Want to see them hold their gains then rebound to take on and preferably take out the October or November highs, whichever the case may be.


The 50 day EMA proves key once more.

Even as the indices sold on heavy volume we noted over the past week how some of the leaders in the prior rally had sold as well, but they were not breaking down in the same manner as the indices. They had faded but they were holding around their 50 day EMA, not rallying, but refusing to give up this level. That had our attention, and indeed on Tuesday we stocked the report with several prior rally leaders that looked ready to move higher. Indeed they did. We did the same on Wednesday and Thursday.

So what is the deal with this level? There are certain support points that the big money in the market, the mutual funds, insurance companies, pension funds and the like use to either buy more of their stocks, sit on the sidelines, or sell. The 50 day EMA is one of those points. In strong uptrends following breakouts the 18 day EMA is an important point early on as it shows whether or not a stock's breakout is still strongly supported. The 200 day SMA is a make or break point where a stock either holds and tries to repair the damage or breaks and heads lower and lower in a major correction.

The 50 day EMA is more of an intermediate level. Stocks have definitely come under pressure but are not being totally dumped. There is something there, some big money refusing to sell, holding them up. We noted during the week the former leaders were milling about the 50 day EMA: GOOG, MON, ISRG, SOHU, AMT, AAPL, VIP, etc. The fact that former leaders held this key level was a positive as it showed the big money not totally bailing out on them. That suggested a rally coming as we noted. We put them on the report and then they started to break higher. Ah the power of the 50 day EMA.

Now after that break higher off of a key support level we have to look ahead and see what is next. That would be the October and/or November highs these stocks hit before they were knocked back to the 50 day EMA. That is natural resistance for these stocks as it stalled them out on the prior move. As some approached that level Friday they stalled; after 3 to 4 upside sessions, however, that is normal. The litmus test is this week as they rest and then turn back up to take on those levels. If they can punch through that tells us the Ho-Ho rally has more legs. If not, it may have made its run and is going to fall short of the actual holiday and forecasts some more, as the Fed would say, 'turbulence' ahead.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com