- 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