Monday, July 28, 2008

Economic Data Turns Up

- Market gets plenty of good news to end the week, but outside of NASDAQ, cannot do much with it.
- Economic data turns up for the weekend as Europe and Asia turn down.
- Housing market sporting down numbers but they continue to strengthen.
- Still room to bounce on the rebound but will the market take the entr e?

Good news on Friday, but only a few take up the torch.

The news saved some of the best for Friday, though it is hard to argue that a 7% drop in oil from the Monday to Friday close is not the best news of the week. In any event, oil continued its decline Friday (123.24, -2.15), the headliner on a day of some solid headlines. June durable goods orders were much better than expected with business spending strengthening. New home sales declined, but not nearly as much as anticipated. Michigan sentiment in July pushed to 61.2 in the final iteration, almost 5 points better than the original read. There was a lot of 'yee hah' on the financial stations in the morning though futures, while up, were hardly roaring higher. Interestingly, it is the height of earnings season, but with oil declining, earnings are getting as little press as I have seen in quite some time.

Stocks started higher, rallying on the early news and then the positive Michigan sentiment along with new home sales. After a morning trend higher, albeit a choppy one, however, the NYSE indices peaked and started a session long decline that took a late bounce to turn DJ30 positive and drag SP500 away from the flat line. Only NASDAQ, led by NASDAQ 100, posted serious gains. JNPR networks really beat earnings and helped drive the entire tech sector. Of course languished at the bottom of a 10 month selloff before the results gapped it higher. A familiar pattern among techs that have some bright spots trying to break higher, but many others in the throes of long declines.

Even with NASDAQ up nicely the overall market was basically mud-bound Friday, unable to really break free even with oil falling over $2. Decent action, but not many wanted to get out and commit a lot of capital ahead of the weekend. Thus some decent gains but also a lot of mediocre, uncommitted moves.

TECHNICAL. Intraday the action was mixed. While NASDAQ rallied nicely through the morning and then carried the upside action into the close, the NYSE indices peaked early trended lower all session, managing a late bounce just to turn positive on the close. A positive finish but a muddling session all the same.

INTERNALS. Matched the NYSE action with modest breadth (1.3:1 NYSE, 1.6:1 NASDAQ) and lower, below average volume on both NYSE and NASDAQ. That lower trade shows the Friday action, despite those calling it a watershed of consolidation given the Thursday selling, are likely just wrong. It was a slow day ahead of a weekend after an ugly return to selling on Thursday. Not quite a placid, orderly consolidation.

CHARTS. No relative change even though the market recaptured some lost ground on the session. The best you can say is that no further damage was done: there was no recovery of resistance but no downside blowout of support, just stemming the downside from Thursday. The charts are not all bleak; NASDAQ 100 is putting in a little rounded bottom the past four weeks and we all know that a little rounded bottom now and then is pretty darn good.

LEADERSHIP. Oil failed to bounce as anticipated but oil stocks managed some upside though it was hardly anything definitive. The leaders were the same groups (and damn few of them) that have led of late. Medical/healthcare put in an excellent session to close the week (e.g. AUXL, ALXN, CELG). You like to see that from your leaders for the health of the overall market. Transports took another day off but remain in excellent shape. The ranks, however, remain too thin for the market's health. Tech remains an important link that shows moments here and there, acting as if it wants to support the market, but overall they are neutral with NASDAQ 100 showing a modest positive bias. As noted, leadership remains thin and if tech would join in that would provide a missing link (not THE missing link) to the market as it tries to hang on just below the early 2008 lows, at least on the large cap NYSE indices. Needs more help to get the job done.


June Durable Goods post an unexpected gain: businesses up, consumers down.

At 0.8% month over month, durables handily beat the expected 0.3% decline. That was not bad at all, but it included a 2.6% decline in transportation. Take that out and the showing was a strong 2.0% topping the -0.5% expected.

Time to breakout the bubbly? Maybe it was just the stimulus package. Yes, that's the ticket. Problem is, computers were down 0.5% while electronics and appliances fell 5%. If consumers were spending the stimulus checks they were not spending it on durables as just about all consumer sectors were lower. Okay, so it was not the stimulus package. Indeed, it was not consumers at all.

So we turn to business. Machinery rose 2.3%. Business investment rose 1.4%. Now we are seeing what was driving the action: the corporate/business side of the economy. Maybe this is part of the stimulus package as well as businesses spend more due to the increased expensing options under the stimulus package. Maybe. Those, however, tend to produce the most expenditures at year end when the money can be spent at the end of the calendar year to be deducted on that year's taxes. After all, businesses don't get the summertime rebates. They get the increased expensing, meaning if they spend money they have they can expense it immediately versus depreciating it over several years. Thus there is no midyear incentive to spend as there is with the consumer and accordingly we can expect even stronger business spending toward year end when companies look to use the available expensing in the most efficient manner.

This dichotomy in the durable goods, i.e. lower spending on consumer areas and higher in the business areas, is the flip of the 2000 recession that saw businesses go in the tank basically in less then two quarter's time while the consumer remained relatively solid. Businesses were stuck with massive inventory levels as venture capital dried up overnight thanks to Fed and federal policy blunders. Then 9-11 kept the consumer at home, spending on their houses and 'stay-cations'. That kept housing and housing-related industries afloat, but all others went down.

As seen in 2000 and 2001, an economy divided cannot stand. Thus the idea that business spending will keep a sick economy afloat is not true. As in the 2000 recession one half of the economy can keep the recession from being as deep and painful, but it won't prevent a recession. Moreover, if oil does not continue its sharp slide and get closer to 100 than 120, then businesses may feel the sharp bite of recession as well. That makes this drop in oil prices not only needed but quite timely as well. It can reinvigorate the consumer by boosting confidence and actual disposable income. Promising.

Europe Not Playing Along.

A while back I discussed how OPEC didn't seem to learn its lesson in this last oil spike. Initially it talked about keeping prices at a point that would not cause western economies to fold, but as it got used to those high prices OPEC started to believe that it was speculation that drove prices higher and thus it could do nothing about prices and indeed it continually raised its targeted levels as oil moved higher. It got used to those massive profits and took its eye off the ball, listening to those pundits saying that because prices were demand driven there was no issue.

Then the big hiccup. Oil when from under $100/bbl to $145/bbl in a few months, spiking higher. OPEC still blamed speculators, refusing to take any action. Not that it could have prevented price increases; it doesn't have the stroke to absolutely dictate prices anymore. The surprising thing was, however, its complete lack of any attempt to mitigate the price hike, always falling back on the answer that there was plenty of supply and those speculators were driving it higher (remind you of Greenspan in the 1990's talking of the 'runaway consumer' as the reason for inflation?).

The result: prices spiked too high and crushed demand. It also may have crushed European and Asian economies. Many of the Asian countries are or were subsidizing their industries and citizens' use of gasoline and oil. They couldn't keep it up at $130+/bbl oil. When they started removing the subsidies their citizens went into petroleum shock (or as some here in the office put it, they got gassed). Either way the economies couldn't take it: the government could no longer afford it, and the consumer had no idea it was so bad to pay market prices. Bummer.

In Europe the ECB was bound and determined, and indeed by its mandate had to, fight inflation anytime it felt it was near. Thus the rough, tough talk and the rate hikes. It looks to have had little impact on inflation but it has impacted the economies. UK retail sales dove 3.8% in June. German confidence hit lows and not because none of its riders are wearing a leader's Jersey at the Tour de France. EU services are diving. The impact of high oil and tight money has in the near term seriously slowed economic activity. It goes beyond Europe as well. Japanese exports are own for the first time in a year. Same for the EU overall.

Thus just as the US is showing signs of trying to bottom out here and there in its recession, Europe and some Asian countries are heading sharply lower. A bitter pill for the Europeans. I recall in 2000 they were smugly talking about our troubles in the US, but it was not long thereafter they followed us lower. Same thing next version? Could be as that data continues to improve.

New and existing home sales beat expectations as housing continues to improve, showing it has hit bottom.

Thursday existing home sales were not great, dropping 2.6% month over month. New home sales fared better at -0.6%, but are still lower. That had many pundits again saying housing remains in the tank with little catalyst to bring it out.

No doubt housing is still contracting, but as noted over the past four months from the various reports, the number are improving. You would not know that from the commentary this past week, but simply look at the numbers: existing home sales were down 3% in Q2 2008, matching Q1's 3% decline. So, where is the improvement? Look at the prior three quarters: -30% in Q4 2007; -25% in Q3; -28% in Q2. Minus 3% in the first two quarters of 2008? That is improvement.

Prices are better as well. They fell to $196K in February 2008. Since then they are climbing: 200K, 201K, 208K and then 215K in June. That is up 10% from the February 2008 low. Steady improvement in the largest segment of the market. There may be an 11.1 month inventory overhang, but inventories always get the biggest just at the bottom.

Given the data that has turned up the past three months it is apparent that housing has hit bottom. It is trying to still stem the last bit of bleeding, but after peaking in May 2005 it has bottomed at the similar time three years later. That doesn't mean a surge back up, but steady improvement. As pricing improves along with lower energy prices, consumer confidence eventually follows.



VIX: 22.91; -0.53. Not much of a bump higher last week as the market overall edged higher then dumped lower on Thursday. That Thursday drop pushed VIX higher but it is well, well off any level that would suggest a bottom. Indeed even the spike three weeks back just cracked 30, hardly an indication of a significant bottom. The market bounced off of that spike but by the end of the week it looked pretty tenuous.
VXN: 26.63; -1.2
VXO: 24.1; -0.79

Put/Call Ratio (CBOE): 0.83; -0.22

Bulls versus Bears:

For the second time this year bears are crossing above bulls, doing so basically where they did in March on their way to much more extreme readings just about the time the market made the March low and started the last rally. Positive for the market and if SP500 is going to hold the long term trendline is the place to do it.

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 29.2%. The rally bumped up the bulls from 27.8% as they look for an end to the selling. Still very low and a lot of hope stirred from the bounce. A sharp plunge from 31.9% three weeks back, blowing past the 30.9% low hit in March and well below the 35% level considered bullish for stocks (gets so low there is plenty of money lying around to fund a rally if things turn). Steep drop from a rebound high at close to 50% on the run through May. In March the indicator did its job with the dive below 35% and the crossover with the bears. Now it is going above and beyond. Bulls and bears have crossed over again, doing so even before the prior lows are hit. The bulls and bears were eye to eye in mid-February and have crossed. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 49.4%. Bears, despite what the bulls are doing, continue to increase, up from 48.9% that was up from 47.3%, 44.7% and 39.3% before that. A steady, strong rise. Well above the bullish level and the highest since 1995. Again, that is one of the best indications that sentiment is getting extreme on the negative side. It is again past 35%, the level that historically indicates too much pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March that was up from an already freakishly strong 43.3% the week before. Up sharply from a low of 19.6% on the last rally. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.


Stats: +30.42 points (+1.33%) to close at 2310.53
Volume: 2.017B (-21.55%). Volume fell below average for only the fourth time this month. Not necessarily bad if you want to view Friday as a consolidation session versus an upside move.

Up Volume: 1.357B (+851.651M)
Down Volume: 625.014M (-1.402B)

A/D and Hi/Lo: Advancers led 1.57 to 1
Previous Session: Decliners led 2.18 to 1

New Highs: 69 (+16)
New Lows: 110 (+3)


1+% gain on the session, fighting off an early attempt to sell it and working higher and higher into the close. It was not a straight shot up as it lost its bid midmorning and consolidated for 3.5 hour before a late push took it up to session highs on the close. Hung on at 2300ish where there is some support from prior dips here in 2008, but it remains below an old trendline and the 50 day EMA after almost two weeks of a bounce. Not a straight up bounce, just working its way higher. Thursday it was rejected by the 50 day EMA and sold off. Now it has to prove it still has something in the tank on this upside. If NASDAQ 100 tries to lead off its rounded bottom it will have a shot at doing so, at least up to the 50% retracement at 2358. to go further than that it has to show something more.




Stats: +5.22 points (+0.42%) to close at 1257.76
NYSE Volume: 1.288B (-21.85%). Only the second below average volume of the month and it was of course on an upside session. Maybe a consolidation volume session as SP500 held 1250 support.

Up Volume: 668.222M (+447.018M)
Down Volume: 592.971M (-829.546M)

A/D and Hi/Lo: Advancers led 1.31 to 1
Previous Session: Decliners led 4.26 to 1

New Highs: 28 (-8)
New Lows: 123 (-15)


Up on the day but on below average volume. Basically it held the line after the Thursday selling, managing to hold some support at 1250ish from the March low. Trying to stem the Thursday selling and make a higher low here; as with NASDAQ it has a lot of work to make that low hold, but it has even more upside before it makes a 50% retracement (1320). Indeed it has a lot of upside room after that Thursday dump lower.

SP600 (+0.95%) held near support Friday, managing to turn back the Thursday sellers. It was the best runner in the rally, and if it does hold here, put in that higher low, and then break higher once more that is a good sign for the market as the small caps are economic leaders, i.e. they rally before the economy does. A significant bottom here is very important, but it has yet to put that in. If it does, great; we will be all over it.

SP600 Chart:



The blue chips bounced but of all the indices it was the most anemic, tapping the 18 day EMA on the high and then falling back to close below the 10 day EMA. Of all the indices this was clearly the weakest of the day and its pattern is clearly the weakest, failing to take out the January or March lows on the bounce. It is not going to lead upside; question is, will other indices take up those reins or will DJ30 lead to the downside.

Stats: +21.41 points (+0.19%) to close at 11370.69
VOLUME: 190M shares Friday versus 241M shares Thursday. Bounced but no volume so there was nothing there. Illusory. Vaporous. Fugacious.



More earnings, a lot more economic data (GDP, manufacturing, unemployment report), and of course, more oil. Friday oil plunked lower again, unable to bounce off the Thursday doji, and if it continues its decline with no bounce, the market may find the legs to make a higher low and make that run to the 50% retracement level. Note I don't say make a bottom and run higher in a new roaring bull market, just a continuation of the retracement. Not all of the factors are in place for a real bottom yet. If oil really plummets, however, that could be the confidence injection that combines with the improving economic data to put in that bottom. Recall what we said: too high oil destroys the economy, but if the plummet is rapid and far, given the resilient US economic data, it could be enough to deliver the B12 shot that turns the corner.

Wow. A lot of 'ifs' and 'buts' there. Suffice it to say oil got too high, started to stall the economy and looks to have indeed stalled out Europe and parts of Asia. Now it and the other commodities are plunging back down to lower demand levels. The question is whether too much damage was done to the economies for a dive in oil to assuage. If it was superficial, i.e. tied mostly to confidence, oil's decline will reinvigorate things quickly.

Still a lot of 'ifs' and 'buts.' For now the question is whether the market can stem the Thursday resumption of the selling and rebound up toward the 50% retracement level or if Friday was just a pre-weekend respite from the return of the selling. Either way, overall the market still has to prove if there is any economic turn coming. SP500 with its financial contingency still has failed to even take out the January and March lows after a week of rallying. With that there are still many stocks that bounced but have reached resistance and are still in position to turn back over for downside runs.

In sum, the market can still bounce in this rebound after the Thursday selling and still continue the downtrend once the indices cut their losses a bit more. Wednesday and Thursday showed that, despite oil's decline, there is still resistance from sellers as NASDAQ tapped near its retracement level and the entire market reversed. Thus even if SP500 rebounds next week and continues its move higher, after it puts in another 50 points or so it has to deal with some serious resistance.

For now we are looking for overall continued weakness in some sectors while others continue their attempts at improvement. Energy and commodities have been slaughtered. They, along with oil, are likely to put in a relief bounce at some point this week. As they do we still anticipate the rest of the market to start giving up their relief bounce gains. If they don't come back even as oil rebounds, that will tell us the market is strengthening much more than it currently suggests. Leadership remains thin at this juncture, and as such we are still going to look for that mix of upside and downside plays, looking to leaders for the upside while we tap into the downside with stocks that rallied in the recent move but have reached resistance and roll back over. With stocks in medical and transportation running and making us upside money last week and stocks in energy diving and making us money to the downside we can effectively play both sides of the fence while the market works through the current down leg. The improving economic data and diving oil prices have at the very least made things much more interesting in that regard as well as making us some nice money the past couple of weeks.

Support and Resistance

NASDAQ: Closed at 2310.53
2340 from the March 2007 low
2342 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
The 50 day EMA at 2346
2358 is a 50% retracement of the June to July selloff.
2370 from the April 2006 peak
2378 is the mid-February peak; 2379 from the October 2006 peak
The 90 day SMA at 2382
2386 is the August 2007 intraday low
2388 is the June 2008 low
2392 is the April 2008 peak
2419 is the January 2008 peak and the early February peak
2451 is the August closing low
The 200 day SMA at 2461
2500 from interim August lows.

The 18 day EMA at 2297
2286 is the first April 2008 gap up point.
2261 is a March 2008 interim low
2202 is the January 2008 low
2155 is the March 2008 low

S&P 500: Closed at 1257.76
1257 is the March low
1270 is the January low
The 50 day EMA at 1305
1317 from the February low
1320 is a 50% retracement of the May to July selloff
1324 is the April low
1331 is the June low
1345 is an ancient trendline
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1387 is the April 2008 intraday high
The 200 day SMA at 1388
1396 is the February 2008 peak
1406 is the August and November 2007 closing low

1244 is an August 2005 peak
1240 to 1221 are September 2005 peaks1234 is the July 2006 low
1224 is the June 2006 low
1176 from the Q4 2005 lows
1167 is the January 2005 low
1154 from the May 2005 lows
1142 is the 2005 closing low

Dow: Closed at 11,370.69
11,634 is the 2004/2005 up trendline
11,634 is the January intraday low
11,670 is the May 2006 intraday high; 11,642 closing
11,731 is the March 2008 low
The 50 day EMA at 11,794
11,982 is a 50% retracement of the May to July selloff
12,050 from the March 2007
12,070 from the early February 2008 lows
12,250 from late March 2007 lows
The 90 day SMA at 12,256
12,518 is the August intraday low
12,573 is the mid-February high
The 200 day SMA at 12,633
12,743 is the November low
12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 2007
12,786 is the February 2007 peak
12,845 is the August closing low
13,092 is the December 2007 intraday low
13,133 is the May 2008 high

11,317 from March 2006
11,061 from February 2006
10,912 peak from March 2005
10,854 from December 2004
10,701-10,705 from July 2006, July 2005

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

July 29 - Tuesday
Consumer confidence, July (10:00): 50.0 expected, 50.4 prior

July 30 - Wednesday
ADP employment, July (8:15): -48K expected, -79K prior
Crude oil inventories (10:30): -1.5M prior

July 31 - Thursday
GDP, Q2 advanced (8:30): 1.8% expected, 1.0% prior
Deflator, Q2 (8:30): 2.8% expected, 2.7% prior
Employment cost index, Q2 (8:30): 0.7% expected, 0.7% prior
Initial jobless claims (8:30): 406K prior
Chicago PMI, July (9:45): 49.0 expected, 49.6 prior

August 1 - Friday
Non-farm payrolls, July (8:30): -68K expected, -62K prior
Unemployment rate, July (8:30): 5.6% expected, 5.5% prior
Average workweek, July: 33.7 expected, 33.7 prior
Hourly Earnings, July: 0.3% expected, 0.3% prior
Construction spending, June (10:00): -0.3% expected, -0.4% prior
ISM Index, July (10:00): 50.2 prior

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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