Saturday, January 26, 2008

Big data week ahead as investors look to Fed to see if it is going to continue to 'do what is necessary.'

- Stocks continue the upside reversal on the open, the reverse for a significant loss.
- Investors likely getting too hopeful this bounce is something more than a bounce.
- Big data week ahead as investors look to Fed to see if it is going to continue to 'do what is necessary.'

Stocks get a bit anxious to end the week after the big reversal.

The news was good on the earnings front and foreign markets were surging on the heels of the US gains. MSFT's results and guidance were pleasing; CAT talked of a 'very strong' back order situation, though that was outside of the US that was expected to have 'anemic' growth; HON, JNPR, JAVA, and BRCM all posted results that put investors in a positive mindset. Oil was higher ($90.80, +1.39) and gold was close to $1000 again, but that seemed okay too.

Stocks opened higher, but as anticipated Thursday night, after the big reversal and charge higher, the market hesitated ahead of the weekend, and indeed started to sell back almost immediately after the open. The indices had charged above the 10 day EMA on the open with DJ30 coming within 15 points of 12,500. Then they started to stall. As planned, we used that bounce to take some gain off the table and we also started working into some downside positions. As the session wore on the indices gave up the break above near resistance at the 10 day EMA and closed reversing from that move above that level. The market could still move higher after this pause; it sold hard and had a lot of downside pressure to let off. The action was still worth starting some downside positions, however, particularly with the week ahead chocked full of earnings, economic data, and the FOMC meeting on monetary policy which could likely disappoint the market with a 25BP rate cut given the talk of the Fed panicking over last weekend.

TECHNICALLY the action looked heavy on Friday. After the reversal the indices tested the 10 day EMA on Thursday and struggled. Friday they looked to be making the break on through that initial resistance, but after clearing it, they turned and closed lower. Many stocks showed the same heavy action at resistance after bouncing, i.e. rolling over after a gap higher or showing a doji on the candlestick chart.

INTERNALS: Breadth was negative but not as bad as the 1+% losses on the indices would suggest (-1.3:1 NYSE, -1.1:1 NASDAQ). Volume was lighter; after all of the massive trade on the week it was backing off Thursday on the upside move and Friday on the reversal. That indicates no major selling or dumping, just a loss of interest or buying strength after a wild week that used up a lot of adrenalin and ammunition.

CHARTS: As discussed above, the indices moved through near resistance at the 10 day EMA on the open but could not hold the move and reversed to close negative and below that near resistance. Bearish given the overall market downtrend, but not fatal for this rebound; after such a wild and sharp reversal the market could very well take a pause before continuing higher. It does look heavy, however, and not just the indices.

LEADERSHIP: It was a week that saw a lot of banged up stocks recover some from the blood-letting in the second leg lower in this selloff. While many were calling this a great time to buy some of these stocks, the patterns show a lot of technical damage, and after such huge runs in 2007 leading into the selling, a sharp plunge as we have seen likely won't be all the consolidating they need. Techs tried to make a comeback Friday, but again, they mostly look like oversold bounces. They gave up the gains despite MSFT's earnings. Healthcare stocks took a back seat on the week, struggling as the other sectors rebounded, but their patterns are still solid, and after this rebound they should resume their moves as money moves back their way. Outside of them, the leadership is very scattered, with most former leaders still in downtrends, just bouncing back up after harsh selling.

Quite a bit of positive talk to conclude the week that saw the market bounce.

On Friday we listened to a number of shows recapping the market week. We were frankly surprised by the amount of talk about the 'buying opportunity of a lifetime' or 'the opportunity of the century.' Why? Because if this market is truly factoring in a recession as it tends to do ahead of the actual fact, then we have likely still in the first phase of the market correction.

No doubt there was a sharp and steep decline in the market, and with earnings outlooks we are hearing thus far still positive, P/E ratios are much, much better than they were in 2000 when that market crash started. As we noted three weeks back, this markedly better posture will likely keep this bear market from getting too entrenched. In other words, there is not as much froth this time around to wring out of the market before it can advance again. Have to like that.

Still, the likelihood the Fed with its late stage aggressive rate action and the economic 'stimulus' package that has yet to be even submitted to Congress has already stemmed the tide of the economic slowdown is low. Proposed remedies and fixes are popping up faster this time around versus in 2000 when the Fed hiked right into the recession, and the faster the better as far as length of the economic slowdown. Nonetheless, what we saw last week was not the end of the selling that set up with those massive topping patterns on the indices, particularly the Dow. Three and one-half months of selling are not likely the full consolidation stocks require. For example, many agriculture stocks doubled or tripled on their runs. Two weeks of downside is hardly enough to set up a run to another double.

Even if for argument's sake Tuesday was the low (though as noted earlier in the week, the indicators, e.g. VIX, suggest it was just an interim bottom), the market is still going to have to at least consolidate some more and ultimately make a successful test of the Tuesday and Wednesday intraday lows.

Perhaps foreign economies will still move higher despite the fears that gripped the market early in the week that the US' troubles were the rest of the world's as well. Gold and oil recovered late in the week and as the earnings results and guidance are showing, companies with foreign markets to sell to are still churning and burning.

Back to reality, DJ30 did get close to consummating the selling portion of its big 7 month head and shoulders top. A month ago we discussed the Dow selling down to 11,250 or so in response to the size of the top. DJ30 hit 11,634 on the Tuesday intraday low; that is getting close and could have been enough to do the trick. More likely, however, it will test down to 11,300ish on the third leg lower after this bounce, and that finally may be the start of the bottom to the selling. It will still take time to rebuild a strong foundation after such a beating, but that does not mean that cannot be the bottom, particularly given the positives of good P/E ratios heading into this selling. Of course, that still means there will be more selling, and thus we will likely get the 'opportunity of a lifetime' or of the century once again before this is over and a bottom is set.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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