Monday, August 04, 2008

Job Report Relieves and Worries Market

- 'Benign' jobs report spares market a selloff, finishing off the week basically where it started.
- Jobs report relieves and at the same time worries the market.
- ECRI turning back down after an early summer pop.
- Lack of clear thinking: proposed energy plans play the shell game.
- The slow process of working through a drawn out bottom.

Market struggles Friday, just as it did all week.

Investors worried over the jobs report given the surging weekly jobless claims the past month and the unexpected jump reported Thursday (448K, a five year high). As it turned out, non-farm payrolls fell, but at -51K that was much better than expected (-75K) and the market's need for Prozac diminished. That is no the end of this story, but for a market extremely worried about the report, enough so to sell off ahead of it in the last half hour of Thursday, it was enough for the day.

Earnings were not that great as CVX missed, following in XOM's footprints. The conspiracy theorists would say this is all planned given that Congress is talking windfall profits. They don't realize that these big companies are in both ends of the business (production and refining/marketing), and indeed even more than that with their chemical businesses, and thus while higher product prices may help the production end, they kill the refining/marketing and chemicals end of the business. Thus they operate on thinner margins than real estate, software, tech in general, and most other industries outside of grocery stores. But once more I digress; more on this later. APA (gas production) beat big time. See the difference? Oh, but I digress again. How about this: GM missed big as well. Earnings are better than expected, but they are very hot or very cold. That makes for a difficult mistress.

The national ISM moved up to 50.0, the breakeven point, and while that beat expectations, it was less than June's 50.2. Nonetheless, after a rather dismal Q1, manufacturing is firming, and that is one of the areas that showed early indications the economy was turning back in 2002. Wish the market was in better shape with more leadership ready to step up; it is trying to lay some of the groundwork now, however. Oil was up as well, rising over 128 on the high before setting at 125.10, +1.05. It held 122 support and bounced. The first bounce was expected and the market still rallied on that day. Now it is clearer that oil is going to rebound just as the market did from its selling. There is still enough worry about oil, however, especially with its intraday streak to 128, that even a bounce is wearing on investors as the action last week showed.

This was all enough to stymie the market on Friday and indeed it was the same news that kept the indices flat all week. Yes there were ups and downs, and significant triple digit moves on the Dow just about each session. It was like running with my dog: I run 4 miles while the dog is all over the map, putting in two or more times the mileage. Lots of effort, nothing more to show for it.

TECHNICAL. Another session of significant intraday moves. NASDAQ covered over 40 points high to low and back up. DJ30 150 points. High to low, to back up but not to session highs. Lots of running, going nowhere. Think of the dog, but the market is not nearly as loyal and faithful.

INTERNALS. They matched the market with a dead heat in advancers to decliners on both NYSE and NASDAQ. Volume was lower; typical of a summer Friday. New highs and new lows were not worth measuring. Despite the up and down moves intraday it was just boring. I had to touch off an air horn in the trading room to wake everyone up.

CHARTS. Up and down intraday, up and down all week, ending up going nowhere. In the end the indices managed to hold more or less near near support. That continues the life of this move and that of the relief bounce. That bounce was knocked around early in the week but it hung on by its nails for another try this coming week.

LEADERSHIP. Desperately seeking more leadership. Medical and healthcare were the leaders again last week as the rest of the market wound up and down. Transports sold back to test after some strong upside runs. Industrials tried to run but they faltered; still trying to get some base building going and they are still in the early stages. Some financials are turning the corner, setting up decent bases. After the MER trash found some buyers and the market realized they could start valuing the garbage (at 22 cents on the dollar), financials suddenly felt the earth firm. Techs are trying to form up as well, but it is very scattered and they struggled again on Friday.

SUM. All of the above shows it was a struggle for the indices all week. They looked ready to roll over early on but then hung on at the precipice. Tenacity is noteworthy. Holding off the heavy selling to end the week to, still in position to make another higher low at near support and continue the relief bounce next week. If it does that allows stocks to stretch out laterally and continue working on bases, an essential part to the bottoming process. It is up and down, sweat and toil, feast and famine as the buyers and sellers wear each other out. That is what we are seeing now with these big downside then upside sessions. They are working out their differences, and as they do individual stocks have time to try and establish the foundation for a move higher. At this point success is still up in the air with the indices still simply in a relief bounce from the rough May to July selloff, struggling to get higher. As long as this action continues we look for those stocks that have built good bases, and if they break higher we move their way. Financials are starting to break trendlines as they try to put in their bid for some market leadership.


Jobs report better than expected, but then again, not.

The headline everyone hangs on, non-farm payrolls, slid in a bit better than feared (-51K versus -75K expected, -51K prior). Despite the relief that jobs didn't fall 100K or more per the whisper, unemployment rose to 5.7% from 5.5% (5.6% expected). Even though the economy lost 'only' 51K jobs in July, more people entered the workforce looking for jobs, but they didn't find them. Thus they were counted in the survey as looking for work but not finding it.

Rising unemployment is not great, but this is all a lagging indicator. What do the leading indicators of this lagging indicator suggest about the future? The average hours worked is telling. It has held steady at 33.7 in May and June, and that was down from 33.8 for several preceding months. That is not the level nor the trend that indicates jobs growth is about to ramp and is indeed a reversal of the prior modest strengthening. Historically hours worked needs to rise closer to 35+ to build the pressure to create more jobs. Why? When employees average this number that means they are working overtime at higher cost to the employer and start getting overloaded. Employers have to hire in order to avoid losing the efficiency they have gained with fewer employees by working them too hard for too long.

In July the workweek fell to 33.6. While one month is not definitive, it is clear that the pressure to push hours higher is not building. Moreover, part-time workers jumped again, pushing the gain this year to 1.4M. Nothing wrong with that except this statistic tracks people wanting to work full time but having to settle for part time work. More evidence there is simply not any real upside pressure on jobs production.

What does this mean for the economy? Not much about its future because jobs lag what the economy does. Jobless claims tend to spike at the end of a cycle, but they can stay up for awhile so as a timing mechanism it is more like a calendar than a stopwatch. On the other hand, the jobs losses are nowhere near as weak as in past recessions. Thus while the lack of improvement is frustrating to many, the decline has been shallow, and if the economic numbers continue their plod toward better times, jobs should not decline too much more.

ECRI heading back down.

While ECRI's inflation gauge continues to decline, moving to a six year low in July and consistent with a shallower recession as we are seeing, its leading US annualized index slid lower again, down to -7.6%) last week, continuing a slide that started in late May. ECRI had bounced in April into May, but it is now backsliding.

At this level ECRI is not predicting any recovery near term. Indeed it needs to get much better to indicate any recovery at any point down the road. The overall levels are not saying deep, nasty recession, but they are also not saying this one is about to end.

This conflicts somewhat with the improving economic data in certain areas. The thing about ECRI is, however, is it is pretty darn accurate in gauging slowdowns and recoveries. Thus the sag in the Leading index suggests nothing is over near term.

Energy 'plans' just ain't making it. Why doesn't anyone call BS?

The presidential candidates are defining their energy plans more with one adding some parts and the other simply clarifying the same position. Listening to some pundits argue over what candidate had the better plan I simply had to call BS. Why their opponents or the moderators didn't point out the glaring problems is anyone's guess.

McCain first proposed a federal tax holiday on gas. It won't produce anymore gasoline, but after hearing the other side, it has its benefits if you have to choose between the two. More recently McCain has pushed for drilling offshore and in other areas, citing changed conditions ($4/gallon gas) as a good reason for change. Of course why he insists on preserving the ANWR wasteland (where maybe 16 people visit annually) from a few small drilling pads and production sites but instead pushes for offshore drilling in environmentally fragile Florida or California coastlines that we all see and enjoy every day is beyond most practical mindsets. It does have the effect of ultimately increasing reserves, and despite shrill claims otherwise, it will immediately impact price if we make this kind of commitment, expedite the process, etc.

Obama is for conservation as is McCain. We all are. He is also for a windfall profits tax on oil companies on the theory that high product prices simply fell into their laps. That sure sounds similar to the tech companies in the 1980's, real estate in the mid-1980s and again in the 1990's. Indeed any industry goes through periods where it prints money. Let's not forget the agriculture, steel, coal, copper and other industries that are reaping a great reward from rising prices. Hell, tax them all too. They just happen to be in the right place in the right time and it has nothing to do with their business model and the like, right? Of course he is not going that far. Why bother when the oil companies are so easily hated by many? If he went further everyone would call it socialism, planned economics, etc., and that is not good for winning elections, at least in the US.

Obama plans to tax oil companies' 'excess' profits due to the rise in prices (can you imagine the nightmare of accounting for what is excess versus your prior profit levels? More lawyer and accountant retirement programs as gifts from Congress) and give some of the money to the 'hard workers' in our society (he cannot pass it all along; the feds have to take their cut in the form of paying for the bureaucracy). 'Hard workers' apparently doesn't include those who do in fact work very hard but in doing so make more money. I know of no one who is part of the so-called rich who doesn't work hard 12 to 16 hours a day. That one always puzzles me. In any event the beneficiaries of this tax and rebate are to use that money to go out and buy gasoline so they can supposedly buy more goods that they would not buy if they instead stay at home. An Obama energy advisor said that was the goal: get them money to get them out and drive more (he bemoaned the low number of miles driven this year due to high gasoline prices) and go about the business of the economy.

Stop. I call BS. You tax oil companies because they make too much, give the money to 'hard workers' so they can go out and buy more gasoline, putting the money right back into the oil companies' hands? And let's face it: Congress hates XOM, CVX, all the big integrated companies that produce, refine and market oil and oil products. They are the target of this idea. In short, the money goes back into their hands where it came from in the first place.

First, this doesn't incent production of another drop of oil or gas. It is just a shell game, a movement of money from one source to a beneficiary, then back to that source, at least according to the Obama energy analyst lobbying for the measure. Second, the real impact is tax revenue for the federal government by creating three new taxation points. The first is the initial windfall tax. The second is when the recipient buys the gas and the feds take their cut through the federal excise gasoline tax. The third is when the oil companies are taxed, again on the profits from selling the gasoline. The incredible federal shell game. No new supply, no economic stimulus, just more federal revenues taken from the economy at a time it needs them.

While McCain's tax holiday does not create any more gas or oil, it does help accomplish one of McCain's goals, i.e. slowing the revenues of the federal government and thus help curtail spending by virtue of the theory if you don't get it you cannot spend it. Well, that doesn't work with our Congress, but at least it keeps more money in the pockets of those that earn it, and that helps the economy.

As you can see, neither plan really attacks the problem or at least the whole problem. I keep waiting for McCain to make the next logical step and that is saying that the extra drilling is just a stopgap to buy time while we incent our great ingenuity and entrepreneurship to devise a means to remove our vehicle fleet from the need for fossil fuels. That would be a Reagan-esque moment and potentially quite inspiring. Instead we have a couple of plans that don't get us where we need to be and are as inspiring as any new tax would be. It won't create incentives to find solutions, it will just create incentives to avoid the tax.



VIX: 22.57; -0.37
VXN: 25.97; -0.27
VXO: 24.26; -0.41

Put/Call Ratio (CBOE): 0.99; +0.04. Spent all but one day below 1.0 on the close. That 1.0 is the point where there is enough anxiety about the downside to suggest a bounce or something more. Plenty of backlog during the May to June selling helped the market bounce higher.

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: 30.0%. Up modestly from 29.2%. On a rise, but still below the 35% level, below which is considered bullish. Up from 27.8% on the low this round, moving back up toward the 31.9% a month back and the 30.9% low hit in March. 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: 50.0%. Still rising as bears remain worried, up from 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 and still going. 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: -14.59 points (-0.63%) to close at 2310.96
Volume: 2.176B (-9.32%). Volume falls below average to end the week after three sessions above average midweek as NASDAQ moved higher though Thursday it reversed off its high ahead of the jobs report. Overall decent price/volume action for the week.

Up Volume: 750.389M (-241.726M)
Down Volume: 1.371B (+18.145M)

A/D and Hi/Lo: Decliners led 1 to 1
Previous Session: Decliners led 1.15 to 1

New Highs: 36 (-26)
New Lows: 93 (-19)


Sold off below 2300 as well as the 10 and 18 day EMA at roughly coincident prices, then rebounded to close over those levels. Down for the session of course but also 24 points off its low. Still trending higher though slowly, and still finding it very difficult to get over the 50 day EMA (2339) and the old 2004/2006 trendline. Techs definitely struggled Friday. They are starting to set up more bases, but they also have a ways to go.

NASDAQ 100 (-1.22%) was the worst offender Friday. Sold off sharply and did rebound to recover half the losses. Still in its 4 week rounded bottom but had a tougher time of it Friday as the new month started; no new money coming into the large cap techs the first day of August.




Stats: -7.07 points (-0.56%) to close at 1260.31
NYSE Volume: 1.226B (-15.78%). Volume fell off the table to end the week after at least one decent session midweek on an upside day.

Up Volume: 537.614M (+76.701M)
Down Volume: 676.247M (-311.41M)

A/D and Hi/Lo: Advancers led 1 to 1
Previous Session: Decliners led 1.58 to 1

New Highs: 35 (-6)
New Lows: 141 (+28)


Sold through the 10 day EMA on the close but still in position to make a higher low as it did in late July. Stalled out at the mid-July peak on the week, having a hard time getting past the March and January 2008 lows. It is trying to continue the rebound toward 1300 and even 1320ish. It is a struggle but the financials are working on bases and thus it is a back and forth, slow effort, and at this juncture it is not a pretty pattern, just a rebound.

SP600 (+0.53%) was a leader on the rally and it too is now attempting to make a higher low, tapping the 18 day EMA on the low and rebounding to post the only gain of the indices. Nice doji with tail, setting up a break higher for further upside leadership.

SP600 Chart:



The blue chips sagged a bit more to end the week, holding at some interim support at 11,250 on the low. Made a lower high this past week. A very indecisive pattern right now, very much a rebound move looking for a reason to try and hang on but not finding it just yet.

Stats: -51.7 points (-0.45%) to close at 11326.32
VOLUME: 189M shares Friday versus 220M shares Thursday. Below average volume all week as the Dow thrashed around with big point swings. Like a prize fight with pillows tied to the fighters' hands. No distribution, and at this stage of the game that is not bad.



Big week of data. More earnings. Personal income and spending, ISM services, pending home sales, production, and the granddaddy of them all, a one-day FOMC policy meeting. My bellybutton has been puckering and un-puckering in anticipation (email me if you know what show that is from).

Oil remains a dominant player after it held support at 122 and did not just go ahead and collapse. It is no mystery it has bounced here; the selling was sharp. Friday it closed well off its intraday high in a showing of some weakness. It will likely try higher again for another two to three sessions up toward 130ish, then it should keel over once more, and the test of 122 will tell the conscience of the king of industry. Of course Friday it closed below the 90 day SMA after punching through and testing close to the 50 day SMA so it may just collapse. The point: we still see oil falling again and falling significantly.

That will continue to be market friendly action and help it attempt to base out and find some new leadership. We are watching the financials try to develop; picked up some WFC last week and are looking at some others for this week if they can continue to reverse the nasty downtrend. That is the way it is going to have to be for the upside: locating those stocks that are setting up new bases and getting some on the move out and then on the test. The more that do this the better the prognosis for the market. It needs more leadership; a lot more. If the financials continue their improvement, that is very good for the market as they were the bad boys that kicked out the legs from under the market attempts to move higher.

There are still sentiment indicators that are not there such as the VIX. The index patterns are still weak. Leadership is the main factor and it is still thin. If the market continues to work on its base and more stocks set up in good accumulation patterns that how bottoms, and more importantly, new strong runs are born. This move here looks more like just part of the process with likely more downside in the future before it is done. The lack of aggression in the selling last week (in terms of volume) indicates the sides are fairly even in strength for now, and if this continues the market can put in a quiet bottom, but that doesn't mean that there won't be price swings along the way. That is par for, dare we say it, August and a bear market.

Support and Resistance

NASDAQ: Closed at 2310.96
The 50 day EMA at 2339
2340 from the March 2007 low
2340 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
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 2383
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
The 200 day SMA at 2450
2451 is the August closing low
2500 from interim August lows.

The 18 day EMA at 2304
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 1260.31
1270 is the January low
1285 is the recent July peak
The 50 day EMA at 1297
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
The 200 day SMA at 1381
1387 is the April 2008 intraday high
1396 is the February 2008 peak
1406 is the August and November 2007 closing low

1257 is the March 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 11,326.32
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
The 50 day EMA at 11,716
11,731 is the March 2008 low
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
The 90 day SMA at 12,199
12,250 from late March 2007 lows
12,518 is the August intraday low
The 200 day SMA at 12,566
12,573 is the mid-February high
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.

August 4 - Monday

Personal income, June (8:30): -0.1% expected, 1.9% prior
Personal spending, June (8:30): 0.5% expected, 0.8% prior
Factory orders, June (10:00): 0.7% expected, 0.6% prior

August 5 - Tuesday
ISM Services, July, (10:00): 48.0 expected, 48.2 prior
FOMC policy statement (2:15)

August 6 - Wednesday
Crude oil inventories (10:35): -81K prior
Consumer credit, June (3:00): $6.0B expected, $7.8B prior

August 7 - Thursday
Initial jobless claims (8:30): 448K prior
Pending home sales, June (10:00): -1.3% expected, -4.7% prior

August 8 - Friday
Q2 Productivity, preliminary (8:30): 2.6% expected
Wholesale inventories, June (10:00): 0.6% expected, 0.8% prior

By: Jon Johnson, Editor
Copyright 2008
All Rights Reserved

Jon Johnson is the Editor of The Daily at

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