Sunday, October 19, 2008

Quiet Session Closes Historic Week

- A relatively quiet session to close a historic week.
- LIBOR continues a slow thaw. Here's to a warm fall and winter.
- After summer improvement, economic data tumbles on the credit freeze. Did the economy go into deep freeze or just catch cold?
- Earnings along with LIBOR are the focus this week, and thus far earnings have done no harm.

Things must be interesting when a 563 point swing is anticlimactic.

The economic data was again ugly with new home starts falling 6.3% and Michigan sentiment falling 13 points. On the other hand, LIBOR rates and the TED spread continue to improve bit by bit and Warren Buffet said in the WSJ that we should be buying US stocks.

The news may have tipped toward the negative or not, but the market did open lower. After a big intraday reversal and rally Thursday, however, being a bit off your feed is nothing unusual for stocks. Indeed it did not take long for stocks to bounce from that early weakness and turned positive midmorning, rallying through lunch to early afternoon. That was it for the day, however. Stocks could not hold on and started a slow bleed downside all afternoon. Even with that pullback the indices were bouncing up and down, and until the last 15 minutes it was not a clear cut deal that they would close lower.

It was expiration so you would expect some volatility. Even with that 563 point swing, however, it was the least volatile session of the week. As Ben Stein would say, 'Wow.' Friday trade was lower and as strange as it may seem, 563 points was overall pretty quiet.

The week was amazing in other ways than Friday. The week encompassed the worst single day in the market since 1987. On the other hand, it was the best week in the market since 2003. 966 point swing Monday in a huge upside rush followed a 1019 point reversal the prior Friday. 733 points to the downside on Wednesday, then a 782 point reversal to the upside Thursday. It seems hard to fathom a week that saw a 733 point downside session would close positive. Interesting times indeed.

TECHNICAL. The day itself did not mean a lot. The low to high move was good for the upside, the high to low close was not. All of this was cleanup for the week as the range was less, volume was lower, and the losses were by comparison, very light.

INTERNALS. Friday was a flat day for breadth, volume was lower, new lows were nothing special. A review of the week is more instructive. Breadth was strong on the upside. New lows did not explode higher as the indices reached toward the prior Friday lows on the Thursday intraday low. Price/volume action was good (low on the down days, stronger on the up days): big volume on the Monday gain, lower on the Tuesday stall, lower again on the Wednesday selling, then big again on the Friday reversal and rally to positive. Not only that, but volume was high all week long as the market tested, rebounded, etc. Strong volume tends to go with tops and bottoms. Good internal action after a very weak week the prior week.

CHARTS. The week saw a continuation of the Friday reversal off a new 2008 and bear market low two Fridays back. Monday was a big move but as noted during the week, the Tuesday and Wednesday selling was too early for a really solid, stable base to support a big rise that you stake a new bull run off of. Now the Dow did come within a percentage point of the 25% move it made off the initial low in the 2002 bottom. That means the stage can be set for a sustained move off this test, but everything is bigger and more volatile this time around so we are not banking on that. There was lower volume on the decline off the Monday surge that turned into a higher volume rebound after a test near that prior low. We played both of those bounces for some nice gain on index plays. Now this shorter double bottom may not sustain a big move in most cases, but it can give a nice run higher and accomplish what we wanted the first bounce to do, i.e. set the stage for a test a few weeks down the road and thus form a better overall base. Again, this may be it, it may be the bottom, but history suggests that is unlikely. Overall we liked the action for the week and Friday was not a concern, just cleanup as noted.

LEADERSHIP. There is still not a lot to hang your hat on from the perspective of good traditional bases to lead the market out of a bear market and onto a new rally. At this stage the market is trying to put in an interim bottom and there are stocks in patterns similar to those that surged off the first and second bottoms in the 2002 low, i.e. those lateral consolidations such as MA. They don't need big bases to make that initial move off the first low or off the second low for that matter, just some relative strength and those box consolidations. After the surge we look for more traditional bases to form that lead to breakouts and big runs higher. Right now we are still at the stage where stocks are trying to get off their bottoms so to speak.


The credit thaw continues at a trickle, but it does continue.

Bernanke said last week that the credit thaw would 'take some time.' He was not kidding. The chain was completed over last weekend with the US and Europe agreeing to guarantee interbank loans as well as providing liquidity for the commercial paper markets. Nonetheless, Tuesday (the US bond market opened that day after a Monday holiday) the credit markets didn't show much of a change for the better. After the big upside party Monday in anticipation of this action having a solid impact, Tuesday and Wednesday the market sold.

By Thursday, however, the results started to show up. LIBOR rates started lower with the overnight breaking below 2% to 1.95%. The TED spread (difference between US 3 month treasury and the 3 month LIBOR) fell 27BP to 4.07%. The stock market sold early and then reversed sharply. Friday yields improved a bit more. LIBOR overnight fell to 1.67%. The 3 month fell to 4.18% from 4.28%. The TED spread fell to 3.667%. This is down from 4.34% pre-Paulson.

Picking up a bit of speed, but still a long way to go. Recall from last week when we reported that in 2006 the average TED spread was 0.36%. 0.36% versus 3.667%. Still quite a ways to go, but at this rate it will take about ten more days to get there. Moreover, as it starts to fall more it will likely pick up speed.

That is what we are looking for but there is a scuffle between the US and Europe that broke out Friday over Europe's desire for a quick meeting to set new regulations with respect to oversight of financial activities, something the US, rightly so, views with skepticism. Yes the US dropped the ball across the board with respect to this mortgage mess, but we don't want to exacerbate the problem and risk our future economic strength by letting Europe have a say in how we oversee and regulate our financial institutions. Some coordination is fine but in this day of government intervention around the globe, this is not the time to start hammering out new regulations. We need to work through the crisis, get things settled down, and then approach the situation with calm, cool, clear heads.

A sharp downturn in economic data but will it bury the market further?

Thursday I reviewed the economic data to date and posed the question whether the current downturn was of the 1991 and 2001 type and thus relatively shallow or something worse given the massive implications of the mortgage crisis and credit freeze. Friday some more data came out and it was not good. But is it the death of the economy?

New home starts hit a 17 year low. They should. Recall in the summer of 2005 how the homebuilders paraded across the sets of CNBC, Bloomberg and other news station that would listen and answered questions about the longevity of the housing market. They cited their '10 year demographic' that would keep things rocking right along. Their enthusiasm was justified if the Fed kept rates at 1% and the wheels remained greased. They did not, however, and as noted last week, seeing that we knew it was the top.

Michigan sentiment tanked to 57.5 from 70.3 in September. It was expected to fall, but 65.0 as expected would have been a bit more palatable. The rest of the week was not good. The New York PMI fell to -24.6. Retail sales fall 1.2%, the fifth straight decline. Industrial production fell to 76.4 from 78.7. The Philly Fed PMI fell to -37.5 from positive.

Bad news all around. This was brought about by the credit freeze that worsened in August and September and the panic that was sparked in the mind of the public. That shut down a lot of business activity and then the consumers were shocked to see the Treasury Secretary and Bernanke put forth such a massive plan. We had traders in CDS (credit default swaps) suggesting withdrawing cash and putting it into safety deposit boxes. The news was bad but the people involved thought things were really bad. When Bernanke went up to the Hill along with Paulson, that really put the fear into the public. And the market. It dove lower.

It is, however, a quick fall. The economic reports that are down tend to be the leading ones. They are impacted first. Many deal with the sentiment of the consumer and businesses. The credit freeze has frozen parts of the economy, but the question is how deep? Just some chapped hands and a cold or are we talking cryogenic?

A quick fall is better than a slow bleeding. It was caused by locked up credit. Credit is starting to move. Commercial paper markets are moving after going bone dry. Interbank lending rates are falling. If the recovery in credit, the lifeblood of the economy, quickly returns to more normal levels the patient can recover quickly or at least quicker, and that is always good for the market.

Back in the 1970's oil shocks hit the economy along with incredibly high interest rates, inflation rates, and unemployment rates. The market dove lower starting with a peak in January 1973 and bottoming in, of course, October 1974. That was a steep 53% drop on SP500 taking 22 months. The market bottomed after that and ran higher quickly. It then wandered for 4 years until 1980 and the election that year.

The current drop is 53% and it has taken just 13 months. A quick fall riding down in front of a fast economic decline that is more like a sentiment led panic decline than just your run of the mill fall into an economic slowdown and recession. Restore credit and the panic dies down and the economy can function once more and start healing itself (provided we don't overreact and over-regulate, etc., something that is not a sure thing). The market? It would jump higher well ahead of the economy just as it did in 1974. Thus this bottom attempt here, while not complete, could set the stage for a rapid rise over the next several months. It is, after all, October.



VIX: 70.33; +2.72. Big week for VIX hitting a new post-1987 high at 81.17 Thursday during the early selling. Now remember, VIX is not THE turning point for any bottom. Volatility spikes once, and it can spike again on a second low or test of an initial dive lower. The turn comes several weeks AFTER volatility hits its peak. Now in 2001 it spiked, but that was when the market re-opened after 9-11. In the bottom it surged on the July low to the high in the process and then spiked again as the second bottom was hit. The big spike on the first leg, the next spike on the second leg and it can be and often is lower. So, we need the indices to build a base. The bounce in 2002 was 10 weeks, bottom to bottom. Again, more needs to be done here.
VXN: 71.26; -1.13
VXO: 71.06; +0.72

Put/Call Ratio (CBOE): 0.97; -0.18

Bulls versus Bears:

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: 22.4%. Down from an already very low 25.3%. That prior week was the largest single week drop we have ever seen, down from 33.7% and 37.5% the week before. Well below the 35% threshold considered bullish. Down from 40.7% on the high during the rally off the July 208 lows. Surpassing the 27.8% on the low this round. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. 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: 52.9%. Modest decline from an already high 53.0%. Surging from 47.2% and 40.9% the week before. Surpassing 50.0%, the high on this move. Well above the 35% threshold so still a bullish indication. This move over 50 takes it to the highest since 1995. Extreme negative sentiment. 35% is the level that historically indicates excessive pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March. 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: -6.42 points (-0.37%) to close at 1711.29
Volume: 2.765B (-18.89%)

Up Volume: 1.323B (-1.586B)
Down Volume: 1.417B (+959.974M)

A/D and Hi/Lo: Decliners led 1.29 to 1
Previous Session: Advancers led 1.21 to 1

New Highs: 2 (0)
New Lows: 127 (-274)


Good recovery off the early weakness but then could not close the deal for the day, but that did not ruin the week. Rallied up to the 10 day EMA and then faded back to basically flat. Reminiscent of Tuesday, but like the Thursday reach lower to test toward the prior low and a big reversal on strong volume. A short term double bottom that can send NASDAQ up closer to 2000, maybe even 2100 on this move.

NASDAQ 100 (-0.10%) was trying to lead Friday with the earnings from GOOG, AMD, and IBM sparking some excitement in technology. It was the relative strength leader on the session, and as with NASDAQ you have to like the short double bottom. Still looking at the AAPL, RIMM and similarly situated techs as potential upside plays on a continued NASDAQ rebound.




Stats: -5.88 points (-0.62%) to close at 940.55
NYSE Volume: 1.74B (-12.88%)

Up Volume: 818.794M (-738.405M)
Down Volume: 913.803M (+502.715M)

A/D and Hi/Lo: Advancers led 1.23 to 1
Previous Session: Decliners led 4.54 to 1

New Highs: 47 (-2)
New Lows: 211 (-340)


Rallied to the 10 day EMA (980.50) on the Friday high and faded to flat on lower though still above average volume. Similar to the other indices the large caps are trying to advance off of a short double bottom, but they have to get through the 10 day EMA first and then 1000 to 1050, the range it stalled out early last week.

SP600 (-1.57%) was the market laggard Friday. Led the Thursday romp, lagged Friday. Go figure. It rallied up to the 10 day EMA as well then reversed to negative. Still the same action as the other indices: they all seem to want to do this together. What a co-dependent market.

SP600 Chart:



Basically a carbon of the other indices with the action on the week and on Friday. It more matched the small caps as DJ30 was a laggard. Still, the same pattern and if the others go the Dow will more than likely follow.

Stats: -127.04 points (-1.41%) to close at 8852.22
VOLUME: 360M shares Friday versus 422M shares Thursday.



Earnings and LIBOR, earnings and LIBOR. Last week the earnings started to come in, and while they were not blowing the market away, they were not sending it down the drain either. It is expected earnings will turn in their fifth straight quarter of declines, and they likely will. The initial big names last week (JNJ, GOOG, IBM), however, did no harm. Right now that may be the best that we can look for. If credit continues to improve and earnings continue this kind of showing, the market may be quite encouraged. The action last week in the midst of all of the turmoil has put in place the foundation for at least a tradable run to set up a better bottoming attempt.

The sentiment and internal indicators, as reported the past week, are at levels that support a bottom in the market or at least the bottoming process. The loss is equivalent to prior bear markets; it has just piled up very quickly this time, understandable given the nature of the beast causing the decline.

At this juncture, however, the market is still in the process of putting in that initial low in a bottom, and that makes the plays we are looking, whether upside or downside, more short term in horizon, capturing a surge, taking some gain, seeing how the move holds, then looking for more. Thus the index plays that capture the runs off the reversals. Other plays are a bit different as they form up nicely for a solid surge (those lateral consolidations) if this market gets serious about the upside off of this short double bottom, and that is why we are hanging around in those positions. There are some others, mostly financials but some others as well, that are actually in good current bases. Again, once this market gets serious about this move higher off the short double bottom we expect those to start breaking higher.

Thus it is still early in the process as this is the first leg of a potential bottom and there are not a lot of stocks with long term leadership patterns. We will continue to look for those patterns to develop, and if we see them with good stocks we will put them on when they look ready. For now we are still expecting more from the likes of MA, AAPL, RIMM, CME and some new stocks setting up in energy and metals. It is the combination of extreme sentiment, solid market internals, good action in the indices, and the improvement in the credit markets that makes this current action more positive than just another bounce in a downtrend.

Support and Resistance

NASDAQ: Closed at 1711.29
1752 from 2004
The 10 day EMA is 1768
1782 from August 2004
The 18 day EMA at 1859
1882 from October 2003
1900 is the gap down point in October; from August 2004
1912 from April 2005
1947 is the point where the market gapped down from in October 2008
1984 is the lat September low
2070 from September 2008
The 50 day EMA at 2070
2099 is the mid-September closing low
2155 is the March 2008 low
2167 is the July 2008 low
2202 is the January 2008 low
2261 is a March 2008 interim low
2286 is the first April 2008 gap up point.
2300 is some resistance
The 200 day SMA at 2312
2340 from the March 2007 low

1644 from August 2003
1620 from the early 2001 low
1565 is the second low in October 2008
1542 is the early October 2008 low
1521 is the late 2002 peak following the bounce off the bear market low
1387 is the 2001 low
1253 is the March 2003 low on the test of the rally off the 2002 bear market low
1108 is the 2002 low

S&P 500: Closed at 940.55
965 is the 2003 consolidation low
The 10 day EMA at 981
995 from June 2003 consolidation peak
The 18 day EMA at 1031
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
1075 from August 2004.
1106 is the late September low
1133.50 is the mid-September 2008 low
The 50 day EMA at 1142
1200 is the July 2008 intraday low
The 90 day SMA at 1226
1243 is the 2002/2003 up trendline
1244 is an August 2005 peak
1257 is the March low
1270 is the January low
1285 is the recent July peak
The 200 day SMA at 1302
1313.15 is the August 2008 peak
1317 from the February low
1324 is the April low
1348 is an ancient trendline

889 is an interim 2002 peak
866 is the second October 2008 low
853 is the July 2002 low
839 is the early October 2008 low
800 is the March 2003 post bottom low
768 is the 2002 bear market low

Dow: Closed at 8852.22
8985 is the closing low in the mid-2003 consolidation
9200 is the July peak in the 2003 consolidation
The 10 day EMA at 9211
9323 From June 2003 peak
9575 from September 2003, May 2001
The 18 day EMA at 9631
9814 from August 2004
9852 is 25% off of the October 2008 intraday low
9937 from May 2004 low
10,100 to 10,000
10,127 is an April 2005 low
10,215 from Q4 2005
10,365 is the new 2008 low
10,459 is a September 2008 low
The 50 day EMA at 10,503
10,827 is the July 2008 intraday low
10,962 is the July closing low
11,061 from February 2006
The 90 day SMA at 11,127
11,317 from March 2006
11,388 is the prior August low

8626 from December 2002
8521 is an interim high in March 2003 after the March 2003 low
8197 is the second October 2008 low
7882 is the early October 2008 low
7702 is the July 2002 low
7524 is the March 2002 low to test the move off the October 2002 low
7282 is the October 2002 low

Economic Calendar

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

October 20 - Monday
Leading Economic Indicators, September (10:00): -0.3% expected, prior -0.5%

October 22 - Wednesday
10/18 Crude oil inventories (10:35): 5.61M prior

October 23 - Thursday
Initial Jobless Claims (8:30): 461K prior

October 24 - Friday
Existing Home Sales, September (10:00): 4.93M expected, prior 4.91M

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

Jon Johnson is the Editor of The Daily at

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