Monday, August 11, 2008

Market Breaks Some Resistance

- Sharp upside response to Thursday selling as a stronger dollar, cheaper oil overrun financial fears, a new Russian war.
- Productivity rising on rising unemployment.
- Dollar puts in a years worth of gains in a couple of weeks.
- Market puts in another higher low, breaks some resistance as the summer rally off the July low rides higher.
- After such major declines, oil and gold will retrench, dollar will do the same.

Market acting as if it doesn't want to stay down thanks to lower oil and higher dollars.

Friday capped an upside week in a big way. The week was not all upside, starting out with a sharp decline but then a sharper surge. Thursday tried to take it all back but Friday stocks surged once more as the indices broke through the next level of resistance.

The Friday surge was a good response to Thursdays selling that threatened to scuttle the higher low and the earlier upside moves. Friday was a classic low to high rally as the market rode lower early, following through on the Thursday afternoon Moody's-induced selloff, but then reversed and surged nicely through the first hour and then flattened the trajectory but continued higher in a steady solid rally into the close.

There was reason enough for some early weakness. There was the hangover from the AIG massive earnings miss and Moody's warning on AXP. Russia and Georgia were at it again, this time in all out earnest with tanks rolling and fighter jets bombing. One thousand were said dead in the initial clashes, and the threat to stability all over the area is very worrisome.

Despite those issues, oil came to the rescue, continuing its slide and now dive lower. Russia and Georgia are big oil areas, yet oil paid no heed, falling $4.82 to 115.20, its lowest level in three months. The dollar surged, capping a huge run the past two weeks. Gold fell another 15 points to 863. The oil trades are unwinding and along with them other commodities, the dollar shorts, and the gold longs. This makes for some powerful undercurrents steering the markets as major amounts of money is shuffled.

The result being the summer rally off the July low continues, making another higher low as the indices rallied up through the next resistance point. Some classic stocks are breaking to new all-time highs (MCD, JNJ) as the market leadership tries to fan out. The question is whether NASDAQ has set a double bottom and is control of the action or the NYSE large cap indices that undercut their early 2008 lows (something NASDAQ did not do) are due for a test of that level when this rally runs out of gas.

For now, you cannot argue with the tape. You can take issue with certain areas such as leadership and overall volume on this last part of the move, but that is always the case. It is a very rare rally that hits on all points. That skepticism helps drive it higher as money is slowly dragged in as manager after manager bites the bullet and puts a bit more money to work. When everyone decides the water is safe there is a big surge and then the money is all used up and the market rally fails. Given the sentiment readings and what you hear on the financial stations we are far from that point.

TECHNICAL. Intraday the action was classic as noted above: lower sluggish start followed by a rally to close at session highs with 2+% gains on all of the indices.

INTERNALS. Solid breadth at 2.8:1 on NYSE and 2.5:1 on NASDAQ, a little worse than the Thursday downside on NYSE but better than the 1.9:1 downside on NASDAQ that day. Volume was lower on both NASDAQ and NYSE though just modestly so, but that kept trade below average though NASDAQ was close to that level. NYSE trade continues to lag. Internally a mixed day given the volume, though lower trade on a Friday in late summer is pretty typical. Still, you like to see better trade when the indices make strong upside moves and break through some key resistance points. The volume gives the move legitimacy and typically a longer life. As it is, a raft of new bad financial news could have the AIG/AXP affect all over when those that were out of the market Friday decide to try and sell it again.

CHARTS. SP500 and DJ30 rallied through their 50 day EMA as well as started again to try a move through the January and March 2008 lows they broke during that July selloff. Higher low once more, taking out some resistance. Not bad, but they are still in the teeth of resistance and have yet to recover to the 50% retracement level. NASDAQ on the other hand, has blown past the 50% retracement level as well as the early April peak and early February peak, starting to break up any potential head and shoulders trying to set up. NASDAQ is a growth index for the most part though many of the NASDAQ 100 are not really growth anymore (MSFT, DELL, INTC). SP600 is also a growth index as the small caps thrive or die on the economic winds. SP600 blasted through its 200 day SMA and the February peak, looking ready to take on the June high. The leadership these two indices are providing is a good sign for economic activity ahead, and given the dump in oil prices, some uptick in the economically sensitive stocks makes some sense.

LEADERSHIP. As noted above, some large cap, old school stocks made new highs on the Friday surge, but they were not the only ones as medical/health services came back along with technology and pretty much everything not oil or commodities. Leadership is trying to fan out as this recovery is allowing stocks in technology, retail and even financial to base out and lay the foundation for moves higher. There is still a lot more work to be done, and before it is all over the NYSE indices will likely need to test the July low to finish its base and to let the rest of the market do the same. For now, as we have seen over the past several weeks, however, there are leaders that are moving up and making us money even as most stocks work through the struggle of forming a base, the old up a day or two then give it all back and start over. It is a tedious process but necessary in a recovery after this kind of selling.

SUMMARY. The market rode a precipitous drop in oil and gold and an equally precipitous rise in the dollar to a new high on this rally off the July low. There are problems with it and the lack of a plethora of leadership indicates another decline on NYSE is likely, but for now you ride the trend that is working, and this one is working.


Productivity holding its own, but it is not due to implementing new technology.

Back in the last bust in 2000 and the subsequent recovery, a lot of that tech equipment that was made in the 1990's was actually put to use as companies, after Congress passed tax incentives that made it worthwhile to buy new equipment, finally started to spend again. When they did they bought equipment that would help them produce as well as keep overhead low through fewer employees. The tech bust left many with too many employees and they didn't want to get into that position again. So they bought a lot of productivity enhancing equipment and put it to work. That is one reason jobs just did not rise as they did in prior recoveries. Of course the bigger reason is that many started their own businesses in the last bust because there were no jobs coming back, but you get the point with respect to why there was increased productivity.

Right now the situation is falling non-farm payrolls and a rising unemployment rate, i.e. there are less jobs in the economy. If companies keep producing even with fewer workers, productivity has to rise. This recession is thus far pretty shallow, and that is why production is continuing. With fewer employees productivity is indeed rising. There has not been an investment surge by businesses thus far as there was in the 2000 recession, and so productivity is rising mainly because with the declining number of jobs, those left with jobs have to do more.

Friday we found out productivity rose 2.2% in Q2 versus 2.6% in Q1. As noted, many pundits are saying productivity is rising because of fewer jobs this year. Okay, so if productivity rose 2.6% in Q1 due to lower jobs and it rose just 2.2% in Q2, could this mean job losses are slowing, i.e. the job loss is less and thus the productivity gains are not increasing as fast because jobs are no longer falling as fast? It could. Problem is, this is not an exact measure, just an indirect indication. Thus while it could very well be the case, by itself it is inconclusive. As a matter of fact, the losses in jobs are NOT slowing based on what the weekly claims are telling us, so drawing a conclusion that slowing productivity gains indicates slowing job declines is tenuous.

What the productivity gains do mean is that productivity is holding nicely at or above the long term 2% growth trend. Rising productivity helps companies produce more for less and maintain or improve profit margins and thus earnings. Thus even with declines in the economy and increases in input prices, rising productivity levels help allay or offset some of those cost increases. Now that commodities and fuel prices decline, there is a combination punch helping out the bottom line, again good for these companies and as earnings drive stock prices, that is ultimately good for the market.

Dollar has an incredible two weeks.

If a currency gains 2% or 3% against another currency in a year, it has put in a good move. Over the past two weeks the dollar has moved 3% against the euro. It has put in a year's move in two weeks. It has made up since mid-July most of what it lost from early February to March, the largest part of the gain coming the past week.

A lot of short positions in the dollar, long positions in gold, and long positions in oil are being unwound right now. Those trades worked well for a long time. They became very crowded. The dollar short was a steady date for the big currency trading firms what with the US government unwilling to back the greenback. When the Fed came up with the lending facilities and the wide open discount window, however, the dollar bottomed as some currency players realized the Fed no longer had to cut rates to achieve its goals. It took awhile to gin up, but after a 4 month base it took off last week as the trades in the dollar, oil and other commodities finally turned. It was a crowded trade as stated above, and when the run for the exits started, the declines were precipitous.

That is a strong impetus for dollar upside as dollars are bought back. Moreover, as noted earlier in the week, anticipation of rate cuts from Australia to Europe and beyond due to weaker economic activity is spurring further buying of US dollars. It is a potent combination that is having immediate impact on our standard of living. Raise the currency and lower prices of energy, commodities, and other foreign goods and you improve your standing. Even without the Bush administration's help, the dollar is surging, likely to the Baker boys' dismay. Sadly another major factor in the rise of the dollar and fall of commodities is due to lower demand for commodities as economies slow across the globe. In response powerful forces are unleashed as massive trading positions are unwound. The dollar is making the inevitable rebound, but the cause of the rebound is not really one of strength, just the balancing of out-of-balance trading positions ironically fostered by the Bush administration's clear disregard for supporting the currency. Amazing how markets work to correct the errors of human policy makers, errors that we make time and again and in this case passed down from one generation to the next via the presidency.



VIX: 20.66; -0.49. As noted Thursday, volatility is back down to mid-June levels and is a range considered low if you consider 20 to 30 a normal range. It ran to 31 in the mid-July selling, and while likely not enough to cement any kind of permanent bottom for NYSE on this bear market, it was enough to kick off this rally.
VXN: 24.24; -0.51
VXO: 21.88; -0.75

Put/Call Ratio (CBOE): 0.92; -0.13. Closed over 1.0 one session last week, the Thursday selloff. Other than that it has hugged 1.0 but closed below. As noted before, it did all of its work in July when it put in three weeks straight of closes above 1.0, indicating that fear and speculation to the downside was overdone.

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: 34.0%. Jumped up from 30.0% closing in on that 35% level, below which is bullish. Still bullish though a long way up from the 27.8% on the low this round. Hit 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: 43.6%. Steep drop from the 50.0% peak on this move hit last week. Still well above the 35% threshold so still a LOT of bearishness out there. This bounce off the July lows is instilling some confidence, however. A steady rise to 50% on this move: 48.9%, 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: +58.37 points (+2.48%) to close at 2414.1
Volume: 2.245B (-1.51%)

Up Volume: 1.719B (+954.463M)
Down Volume: 498.36M (-956.894M)

A/D and Hi/Lo: Advancers led 2.47 to 1
Previous Session: Decliners led 1.91 to 1

New Highs: 83 (+28)
New Lows: 111 (+8)


NASDAQ broke through the 90 day SMA and some resistance at 2400. In addition it took out the early February closing high and went a good ways toward breaking up a potential 6+ month head and shoulders pattern. It has easily recovered more than 50% of the June to July loss and now is making a run at the 200 day SMA (2439) as its next test. NASDAQ is providing some leadership in this late summer rally. Techs tend to bottom in July and August, and they are certainly giving the look as if they have tried to do the same once more.

NASDAQ 100 (+2.45%) was not the leader but it was the second index of the session and of this rally off the July lows to clear its 200 day SMA. That rounded bottom it was sporting all through July as the market dove lower is paying off with some early leadership. Those RIMM positions picked up Thursday and the others in late July are quite nice right now.




Stats: +30.25 points (+2.39%) to close at 1296.32
NYSE Volume: 1.246B (-2.93%)

Up Volume: 969.344M (+735.169M)
Down Volume: 270.289M (-773.465M)

A/D and Hi/Lo: Advancers led 2.85 to 1
Previous Session: Decliners led 3.2 to 1

New Highs: 48 (+28)
New Lows: 115 (+2)


Not a powerhouse what with its lower volume and squeaking past the 50 day EMA (1294) and closing at the 50 day SMA, but it made a new high on this rebound and delved deeper past the January and March 2008 lows. There is still a mountain of resistance overhead starting rather close at 1315 and running up to 1375 or so. The financials dug a deep hole for the large caps and they fell into it. Getting out is proving to be difficult as SP500 lags on the rebound. It is making headway, but it is letting the techs and smaller caps doe the work.

Speaking of small caps, SP600 (+2.93%) shot past its February peak and the interim resistance, as well as its 200 day SMA. Impressive strength as they take out resistance levels and move toward the early June peak about 14 points away. If measured by the Friday gain, that would be just a day and one-half away. As noted above, small caps are joined at the hip with the economy, and if they put in a serious rally with serious breakouts that bodes well for the economy.

SP600 Chart:



Nice higher low and then a push through the old trendline from late 2004 as well as the 50 day EMA (11,686). It tapped the important 11,750 resistance on the high and faded back to close modestly off that level. That represents the March bottom and is significant resistance. After that 12K bears watching as there is minor price resistance, psychological resistance, and that is roughly 50% up off the July low. Climbing out of a pit is never easy as it is a constant test of buyers' will to crawl on out.

Stats: +302.89 points (+2.65%) to close at 11734.32
VOLUME: 212M shares Friday versus 229M shares Thursday. No surge in volume to match the impressive price gains.



Boatloads of economic data next week, but does any of it matter what with the dollar soaring and oil plunging? June trade and inventories, July retail sales, CPI, industrial production. Most of this data was compiled before the really big decline in oil and rise in the dollar. Some of the July data reflects falling oil, but the big impacts of these big declines will come later.

But that still doesn't obviate the import of this data. If it is stronger than expected then that means that it will likely get stronger given lower prices for energy and more purchasing power thanks to a stronger dollar. The economy, while in a recession from the standpoint of the size of the decline from the highs, is not a textbook recession, meaning it is rather shallow. If the economic data is improving as it has been in fits and starts, that indicates the recession may run its course without ever entering official bear market territory given the lower costs even if the stimulus checks have, as Wal-Mart noted last week, run their course.

The market will lead before the economic data turns, and the indices are up off the July lows. Not a powerful move but a string of higher lows and a move through some initial key resistance points is a good start. Still a lot of technical resistance to get through and more leadership is needed, and that leaves doubts about the move ultimately being the ONE. As noted early on in the summary, however, it is more than enough to play to the upside and make us some solid scratch. You have to like the small caps making moves again; out of the 2000-2001 recession they took the lead (as they should coming out of recession) and made us a lot of money. It is a nice bonus they are moving along with the large cap techs as that gives the market a bit more backbone, something it finally started to show over the past two weeks. Still developing, but building some character here.

Now oil and gold dropped like rocks the past week and gold gapped lower Friday down to the May low where it found support and rebounded on into July. It will likely attempt some kind of last stand at that point, and it would be normal for the dollar to retrench a bit and oil to bounce a little as well. That means the market retrenches a bit as well as oil's loss and the dollar's gain has been the market's gain. Pretty normal. The important thing for the market, of course, is how it handles the rebound attempts by the commodities. Thus far it has overcome each round of bad news and made higher lows. When the dollar, gold and oil backtrack a bit it will have its chance to do it again.

The market has run nicely the past two weeks and we picked up some nice upside. As noted Thursday, at this stage of the rally the prudent investor scales back a bit, not chasing stocks that have made good moves as they are prone to come back after just a bit more upside, particularly when gold and oil retrench some. Thus we need to be patient with new upside but that does not mean there are not stocks ready to break higher. More and more stocks are trying to join in the upside after building some good bases and they breakout in waves as the market advances, indeed, helping drive the advance. Accordingly we will, as always, have new plays ready at the offing, and if they make their breakouts we can start building some positions.

Support and Resistance

NASDAQ: Closed at 2414.10
2419 is the January 2008 peak and the early February peak
The 200 day SMA at 2439
2451 is the August closing low
2500 from interim August lows.

2392 is the April 2008 peak
2388 is the June 2008 low
2386 is the August 2007 intraday low
The 90 day SMA at 2386
2378 is the mid-February peak; 2379 from the October 2006 peak
2370 from the April 2006 peak
2343 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
The 50 day EMA at 2342
2340 from the March 2007 low
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 1296.31
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
1348 is an ancient trendline
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
The 200 day SMA at 1375
1387 is the April 2008 intraday high
1396 is the February 2008 peak
1406 is the August and November 2007 closing low

The 50 day EMA at 1293
1285 is the recent July peak
1270 is the January low
1257 is the March low
1244 is an August 2005 peak
1240 to 1221 are September 2005 peaks1234 is the July 2006 low
1234 is the late July 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 11,734.32
11,731 is the March 2008 low is bending
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 12,150
12,250 from late March 2007 lows
The 200 day SMA at 12,512
12,518 is the August intraday low
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

The 50 day EMA at 11,686
11,670 is the May 2006 intraday high; 11,642 closing
11,639 is the 2004/2005 up trendline
11,634 is the January intraday low
11,317 from March 2006
11,131 is the late July 2008 low
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 12 - Tuesday
Trade Balance, June (8:30): -$61.9B expected, -$59.8B prior
Treasury budget, July (2:00): -$69.0B expected

August 13 - Wednesday
Import prices ex-oil, July (8:30): 0.9% prior. Will they fall given the oil decline?
Retail sales, July (8:30): 0.5% expected, 0.1% prior
Retail sales ex-auto (8:30): 0.6% expected, 0.8% prior
Business inventories, June (10:00): 0.5% expected, 0.3% prior
Crude oil inventories (10:35): +1.6M prior

August 14 - Thursday
CPI, July (8:30): 0.4% expected, 1.1% prior
Core CPI (8:30): 0.2% expected, 0.3% prior
Initial jobless claims (8:30): 455K prior

August 15 - Friday
New York Empire State PMI, August (8:30): -5.0 expected, -4.9 prior
Net foreign purchases, June (9:00): $67.0B prior
Capacity utilization, July (9:15): 79.8% expected, 79.9% prior
Industrial Production, July (9:15): 0.0% expected, 0.5% prior
Michigan sentiment, August preliminary (10:00): 62.0 expected, 61.2 prior

By: Jon Johnson, Editor
Copyright 2008 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

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