Expiration Ends Rough Week

SUMMARY:
- Expiration bounce ends a rough week.
- NY Fed president as Treasury Secretary gives the market a bit of certainty.
- Never have so many SP500 stocks traded for so little.
- LIBOR decline stalled as financials sink lower, banks fail.
- Sentiment indicators are still at extremes.
- Market starts the test of a serious breakdown that will tell the economic future.
- Investors in no-man's land during this test.

After a volatile session, a stressed market rallies late on some decent choices.

The November selloff is as ugly as October. October saw the emergence of some very serious issues confronting the US and world economies. The market was grappling with the developments and the attempts to find a course to correct the problems. There was a rally into the election and then the selling resumed because there was no change in the problems, a lame duck administration and Congress that cannot really initiate any new major policies, and an unknown President-elect. What little we knew about the next President was enough unsettle the markets.

After another wrecking ball hit the stock market this week, however, futures improved at the open. The only early news was a comment by the Fed's Lacker that the US economy could gain momentum in 2009. That was better than what Tuesdays FOMC minutes revealed, i.e. that economic growth may be negative in 2009 with 'normal' economic activity levels not until 2011. After the massive selloff the market was ready for a bit of short covering ahead of the weekend, and this news was enough to push the futures up and hold the market around positive all day. It was a typical expiration, however, in that the market traded up and down all session. All the way into the last hour it was up and down, up and down.

The key for us was there was no initial selloff at the open to really get things oversold and in that rebound mode we have seen on several occasions. Thus the up and down gyrations and that kept us from rushing into a lot of new positions on the indices though we did buy some gold ETF's early. That action continued all session. Almost all session.

Turns out we could have gone ahead and entered some index plays as some news played out well for the market. After wanting to lay low and wait to take any action until later, the President-elect realized he had to step up and get involved now as the lame duck President and Congress just doesn't have enough clout in matters of this magnitude. At the start of the last hour of trade he allowed news as to his pick for Treasury Secretary (New York Fed President Geithner) and Trade Secretary (New Mexico Governor Richardson). Geithner is well respected and has experience from the Clinton administration. Richardson is a free trader, and that really encouraged those with doubts about Obama's trade views. On top of that there is talk of a 'prepackaged bankruptcy' for the automakers versus a plain vanilla bailout (gee, amazing we can bailouts as plain vanilla; how times have changed). That is very appealing to many opposed to the auto execs Gulfstream 4 flights into DC thinking they could get $25B with just some bull talk about how they were really innovating and changing and just got caught short by a weak economy. If you believed them, but for the weak economy they were the movers and shakers in the industry.

This one-two (or is it one-two-three?) punch pleased investors and brought in some buyers. When that happened the shorts, already primed to do cover ahead of the weekend, jumped in. All you could see was the vapor trail. The indices went ballistic, this time to the upside. Have seen it before both to the upside and downside - - this week. When the market reaches a tipping point in the last hour the rush is rather breathtaking. Without any flush out preceding it, however, the Friday rush is likely just another oversold bounce in progress, something we have seen both ways all during this selling with the downside winning out. At this juncture there was nothing to suggest this was nothing more than an end of a bad week, expiration assisted oversold bounce to test a major breakdown. That was a mouthful.

TECHNICAL. Intraday action was up and down in what is considered a typical expiration session but something that seems to rarely occur on expiration anymore. Then an explosion upward on the news and the pre-existing propensity to rally that session given the need to short cover after a brutal week.

INTERNALS. After -11:1 breadth on the NYSE selling, the 1.8:1 advancing breadth Friday on 6+% gains was paltry at best. Paltry is likely too nice. New lows were lower but still strong (-1350 on NYSE) as the indices pushed lower again with all hitting new lows for 2008 before recovering. Volume was mixed but still very strong. Chalking that up to expiration.

CHARTS. DJ30 recovered over the early October low. Just missed an outside session, but it looks ready to continue higher toward near resistance at the 10 day EMA. SP500 and NASDAQ rallied as well, but they are well below their prior lows and didn't do a whole lot in retaking them. SP500 did move back over the 2002 bear market low, however. The other indices are in even worse states of disrepair. It is pretty clear the indices are testing the breakdown and they are doing it, at least on DJ30 and SP500, by retaking the lower levels just given up. They can move past those and still fail when NASDAQ and company get back up to their levels and run out of gas after expending all of their bounce energy just to get back to where they sold off. If there is nothing more to drive them at that point, they fail and sell some more. Nothing yet indicates this scenario is not the one currently in place.

LEADERSHIP. Stocks that were crushed all week bounced back some on Friday, but that is not leadership. Some great leaders that moved lower on the week sold lower Friday and then rebounded sharply to close. They are from a variety of sectors though mostly defensive (QCOR, EMS, ADM, CASY). The ability to hold their patterns in the selling is impressive. If there were more of them that would be even more impressive. This selling is taking out many of those stocks that set up lateral consolidations or short double bottoms after the October selling. The list of potential leaders grows thin, and a market without leadership founders.


THE ECONOMY

SP500 large caps are not so large.

Never have so many of the SP500 stocks traded below $10 per share. 105 is the count as of last week. The focus is on Citi and its woes, but it is not alone. Many say the plethora of large cap stocks less than $10 is the buying opportunity of a lifetime. May very well be. Question is, when does the time period start? If the economy is as bad the market is trying to indicate (the SP500 undercut of the 2002 bear market lows), that opportunity may be here, but opportunities may get even better, some may go out of business, and we all may be some years older before the opportunity's benefits really become realized. The key is all in the timing and there is nothing yet to indicate timing is right.


LIBOR Remains Stalled.

One thing is certain, and that is business for those companies will not improve until the credit crisis is on the way to being resolved. Not resolved, just on its way. The market handicaps ahead of time and it will be moving higher before it is clearly apparent we are out of the woods.

How do we know there is a long way to go? When all of the world central banks put in lending guarantees and about a dozen different lending facilities the LIBOR rates started to fall. The fall started slow but started to grow. The drops started to click off 15 to 20 BP a session. As we wrote last week, when Treasury changed its focus and officially dropped plans to purchase bad mortgages LIBOR stopped falling.

This week LIBOR stopped falling and even started moving higher on some terms. The overnight rate surged Friday to 0.70% from 0.44%. The 1 month and 3 month were lower on the week, but they stopped falling and the 3-month moved higher to end the week (2.16%). At the same time corporate credit yields shot higher. As reported Thursday, Berkshire Hathaway debt prices soared this past week. The credit market is as bad or worse than it was when Bernanke and Paulson ran up the Hill to see Congress.

This credit freeze is getting extremely serious again. Citi is pushed to the edge and is holding an emergency meeting this weekend to try to figure out the best route to take. Its fall this month is extraordinary, from 15 to 3.77 on the Friday close. Word is there will be a brokered deal with the US as the broker where Citi will be spin off assets, merge, or be purchased. Another bank, Community Bank of Georgia, went under Friday after the market close. It is being taken by a Virginia bank. Credit is locked up once again, spreads are wide, and corporate bond prices are surging. The $700B certainly has instilled confidence in the financial markets.



THE MARKET

MARKET SENTIMENT

Sentiment levels are still extreme. They hit extremes in the October selling, plenty enough to put in a bottom given bulls/bears, put/call, VIX. The market did not bottom on this last attempt, however. Sentiment hits highs first then the market bottoms. Sentiment levels are climbing high again, understandable as the indices all hit new lows. The sentiment remains at levels commensurate with a bottom. The size of the problems confronting the economy are so vast that sentiment is remaining high and may remain high for some time before the market is ready to turn back up.

VIX: 72.67; -8.19
VXN: 71.2; -9.44
VXO: 76.17; -11.07

Put/Call Ratio (CBOE): 1.12; -0.21. Five closes over 1.0 on the week. Plenty of negative sentiment remains.


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: 30.9%. Modest decline from 31.9% after bullish sentiment rose steadily off the 5 year low of 21.3% hit to start November. Remains below the 35% considered bullish for the market. It was at this level in early October just as the market started to dive lower. This move down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 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: 43.6%. Bears continue to decline, dipping from 46.1% last week and 48.3% the week before. Still falling form the 5 year high at 54.4% hit the last week of October. 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.


NASDAQ

Stats: +68.23 points (+5.18%) to close at 1384.35
Volume: 3.166B (-0.75%). Volume remained expiration high Friday. Sold on high volume Thursday, rebounded on high volume Friday. Low volume most of the week and then trading distribution and accumulation. Doesn't change the problem.

Up Volume: 2.486B (+2.249B)
Down Volume: 536.764M (-2.392B)

A/D and Hi/Lo: Advancers led 1.37 to 1. Rather pathetic upside breadth though it was a reversal session and breadth tends to lag.
Previous Session: Decliners led 5.86 to 1

New Highs: 3 (+1)
New Lows: 1219 (-51). Ramped up Thursday and Friday. Makes sense as NASDAQ hit new lows well below the early October levels.

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

Gapped higher but it was up and down, up and down all session, turning negative a couple of times before the final surge higher. NASDAQ was slaughtered on the week and it posted a relief bounce on some short covering ahead of the weekend. A firmly established downtrend is in place and this bounce did not change that.

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: +47.59 points (+6.32%) to close at 800.03
NYSE Volume: 2.373B (+10.52%). Strong volume as the NYSE reversed off the new lows for the year. Usually good news but this was expiration.

Up Volume: 1.892B (+1.761B)
Down Volume: 476.494M (+267.172M)

A/D and Hi/Lo: Advancers led 1.77 to 1. Same as NASDAQ: pretty mild breadth for such big price gains.
Previous Session: Decliners led 10.22 to 1

New Highs: 42 (-3)
New Lows: 1349 (-335)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

Managed to recover the 2002 bear market low (768) on the 6% surge. Similar to NASDAQ, SP500 broke to a new 2008 low Wednesday and then took out the prior bear market low Thursday. It is now in the relief bounce mode and how well it does on this move takes its temperature as to what it is going to do when it hits resistance. Also as with NASDAQ SP500 is in an established downtrend and it will take something significant to turn the tide.

SP600 (+5.71%) was not the leader but it was not bad. It plowed under the prior lows first and was just slaughtered. This bounce is a start to getting back to where it can just see resistance. On the other hand, it has plenty of room to bounce higher to get to the 10 day EMA and that can present an upside opportunity for a trade.

SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg


DJ30

Strongest move of the market, recapturing the early October low (7882) in a powerful move as those stocks that led the downside Thursday led the upside Friday (e.g. XOM). Huge volatility both directions. Now DJ30 is going to try the bounce to the 10 day EMA (8289) and even try 8500ish on this bounce. It is in better shape than the other indices but after blowing the bottom out of the 2008 lows it has to prove it can reverse and continue the move. Unlike SP500, DJ30 is still holding above its 2002 bear market lows. Has to start somewhere, and not to beat a dead horse, but DJ30's pattern is one that can produce a nice classic double bottom where the right leg undercuts the left and never comes back.

Stats: +494.13 points (+6.54%) to close at 8046.42
VOLUME: 569M shares Friday versus 528M shares Thursday. Very high expiration related volume to end the week.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


MONDAY

Monday the President-elect officially introduces his cabinet choices. As noted, two of those picks helped the market run higher late Friday. The market won't likely get much more mileage out of these announcements; nice to know some competent, somewhat market friendly people are put in place, but after that something has to be done. It will take unprecedented cooperation between the current administration and the incoming one to get something done before January 20. After this pre-honeymoon the market is going to have to take care of business in dealing with harsh reality of tight credit and dicey financial institutions and lending almost 2 months after the TARP.

Plenty of economic data this week, the kind the financial stations and rags like to debate. Existing and new home sales, another read of preliminary Q3 GDP, Consumer and Michigan confidence, durable goods orders, Chicago PMI, and personal income and spending. Lots of data. Lots.

Of course it is not likely to be positive. There are no indications the data should be turning. We would possibly see some improvement in regional manufacturing before anything else; saw it edging up in late 2002, but the market had put in its bottom and was running higher at that point. Not many thought it was a bottom but it was running higher and the regional manufacturing data started to tick higher. Before we see any economic data improvement we need to see some kind of reversal and move more than what the market has shown the past several weeks.

So with these breaks lower the market has some regrouping to do. Thanksgiving week is often a positive, though it was not in 2007. The market had peaked in October and it sold into the holiday though it did bounce on the half day Friday. The indices are definitely primed to continue the oversold bounce into next week, and a holiday week is a perfect one for it to do so.

The market is now staging for its next move. As noted Thursday it is in no-man's land after breaching serious support and then rebounding to test. The breach of the lows is a game changer, particularly on NASDAQ, SP500 and SP600; DJ30 is still decent as noted and could pull off a surprise. The market is still in the process of rebounding, however, and until it decides its direction it can leave you high and dry. Obviously the market is tending to the weak side as all of November has shown. It can turn right back down Monday as the Friday move was once again something of an aberration: some normal short covering after a harsh selloff and before the weekend turned ridiculous. It can still bottom what with all of the extreme sentiment and internal indicators, but they have not turned the tide yet and thus the burden is squarely on the upside to prove itself. That means another rally, a follow through session about a week later, and some leaders to push higher.

What to do in this environment? Slow it down, look at solid patterns, pick a few really good plays and go with them when they move. There is an upside move in progress, but do we chase it up after that last hour on Friday? If there is a test that holds and turns back up we can do that, but it still has to be treated as a short term move given the downtrends in all the indices outside DJ30. We can use index plays to take advantage of that, but it depends upon your tolerance; things are very volatile right now. We can always pick the good patterns that survived the test and grab them when they move, e.g. HMSY and GLD. There are others such as PETS that used the selling to test and recovered. Even these, however, are not immune. If the market continues to drill lower these stocks are not going to hold up. Thus if we get some decent gain we take at least some of it off the table.

As the market rallies in this bounce we also watch for stocks and indices that rally but show signs of stalling such as lower volume, tapping resistance and fading, intraday reversals near resistance. We are particularly watching SP500, NASDAQ, and SP600 as they recover toward their prior lows broken last week. If they stumble there we can expect another run lower as the downtrend reasserts itself. That is a move we can play with some gusto.


Support and Resistance

NASDAQ: Closed at 1384.35
Resistance:
1387 is the 2001 low
1428 is the November 2008 low
The 10 day EMA is 1471
1493 is the October 2008 low. Key low.
1499.21 is the 2008 closing low
1521 is the late 2002 peak following the bounce off the bear market low
The 18 day EMA at 1539
1542 is the early October 2008 low
1565 is the second low in October 2008
1620 from the early 2001 low
1644 from August 2003
The 50 day EMA at 1751
1752 from 2004
1782 from August 2004
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

Support:
1295 is the November 2008 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 800.03
Resistance:
800 is the March 2003 post bottom low
818 is the November 2008 low
839 is the early October 2008 low
The 10 day EMA at 843
848 is the October 2008 closing low
853 is the July 2002 low
866 is the second October 2008 low
The 18 day EMA at 877
889 is an interim 2002 peak
899 is the early October closing low
965 is the 2003 consolidation low
The 50 day EMA at 983
995 from June 2003 consolidation peak
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
The 90 day SMA at 1119
1133.50 is the mid-September 2008 low
1200 is the July 2008 intraday low
1244 is an August 2005 peak

Support:
768 is the 2002 bear market low
741 is the November 2008 low
650 on the top and 625 on the bottom of a 7 month range in 1996
475 from 1994 where the market moved laterally for the entire year.


Dow: Closed at 8046.42
Resistance:
8175 is the October 2008 closing low. Key level to watch.
8197 was the second October 2008 low
The 10 day EMA at 8289
8451 is the early October closing low. Key level to watch.
8521 is an interim high in March 2003 after the March 2003 low
The 18 day EMA at 8536
8626 from December 2002
8985 is the closing low in the mid-2003 consolidation
9200 is the July peak in the 2003 consolidation
The 50 day EMA at 9319
9323 From June 2003 peak
9575 from September 2003, May 2001
9814 from August 2004
9937 from May 2004 low
10,100 to 10,000
10,127 is an April 2005 low
10,215 from Q4 2005
The 90 day SMA at 10,336
10,365 is the new 2008 low
10,459 is a September 2008 low
10,827 is the July 2008 intraday low

Support:
7965 is the November 2008 intraday low.
7882 is the early October 2008 low. Key level to watch.
7702 is the July 2002 low
7524 is the March 2002 low to test the move off the October 2002 low
7449 is the November 2008 low
7282 is the October 2002 low


Economic Calendar

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

November 24 - Monday
Existing Home Sales, October (10:00): 5.05M expected, 5.18M prior

November 25 - Tuesday
Q3 Chain Deflator-Preliminary (8:30): expected, prior 4.2%
GDP - Preliminary, Q3 (8:30): -0.6% expected, -0.3% prior
Consumer Confidence, November (10:00): 39.5 expected, 38.0 prior

November 26 - Wednesday
Durable Orders, October (8:30): -2.5% expected, 0.8% prior
Initial Jobless Claims, 11/22 (8:30): expected, prior
Person Income, October (8:30): 0.1% expected, 0.2% prior
Personal Spending, October (8:30): -0.6% expected, -0.7% prior
Oil inventories (10:30): +1.6M prior
Chicago PMI, November (9:45): 38.5 expected, 37.8 prior
Michigan Sentiment - Rev., November (10:00): 58.0 expected, 57.9 prior
New Home Sales, October (10:00): 450K expected, 464K prior

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

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

The Overlooked Problem: LIBOR

SUMMARY:
- Massive volatility turns a test of the rally into a rollercoaster.
- The overlooked problem: LIBOR rising following treasury change in game plan.
- No surprise: no rosebuds showing up in the economic data.
- More investors throw up their hands after Friday return of unprecedented volatility.
- Friday frayed many nerves, but market is still set up to move higher this week.

Market doesn't want you to get too comfortable.

Thursday's big reversal and gain had many talking market bottom. After Friday many said it was not. As discussed below, Friday did not undo Thursday's significance, but if the US does not take the right steps, the gains made thus far will backslide as seen at the end of this past week.

You would expect the day after a near 900 point swing on the Dow to start a bit softer. Indeed futures were lower, and they turned progressively lower on bad news in the retail sector, earnings, and the Euro-zone. Retail sales fell 2.8% versus the 1.3% expected, the worst decline since 1992 when the data was first compiled. Almost half the loss, however, was from lower costs associated with gasoline purchases. Thus it was not as bad as the headline suggested. Not good, but not a collapse. Earnings were bad with JCP, ANF, JWN, and KSS, all retailers, lowering their guidance. NOK confirmed its musings last month that 2009 handset sales would fall below 2008. The Euro-zone admitted its nations were in an 'official' recession a day after Germany's own 'official' recession declaration. Here in the US we will have to wait for Q4 GDP in January, but it is pretty clear through unofficial channels that we are in an official recession.

The market started lower and made a good effort in the first half hour at rebounding, but things got out of hand. The modest profit taking was not met with any bids and what was modest selling turned into a 4% decline into lunch. At that point the market bottomed and recovered, rallying to positive into the last hour. That was a relief to many seeing Thursday as a bottom in the market. After three hours of recovering to positive, however, the switch was thrown and once again the selling started. Three hours of gains were tossed in a half hour as NASDAQ sold to a new session low and losses ramped up to 3.8% on the low end to 6.5% on the high end.

As is the history of this market selloff, unprecedented volatility can run the indices up or down in a fraction of the time it would take under what were once considered normal conditions. It is both intraday and inter-day. Thursday that volatility surged the market from new 2008 lows in a massive intraday reversal. Friday it pushed the markets lower overall and twice in the same session after a complete recovery to positive. The buyers and the sellers have obviously not worked out all of their differences.


TECHNICAL. As noted, it was just another day at the office Friday with a lower open turning into a 4+% selloff only to recover to positive by the last hour. Of course you can score to take the lead too early, leaving too much time on the clock for the other side. That is what happened, and within a half hour the indices had hit new session lows. Friday it was back to more of the same with respect to the intraday volatility as the market is still not showing it has adopted a changed character with an upside bias when it is not rallying hard.

INTERNALS. A mixed picture internally. Breadth was stronger on the downside Friday (-4:1 NASDAQ, -3.6:1 NASDAQ) than it was on the Thursday upside. Reversal day on Thursday for sure, but Friday showed a lot of up and down action as well. On the other hand, despite new lows on the indices new lows fell sharply. Volume was mercifully lower as well, falling back below average and matching the Wednesday level on that downside session. A positive on balance.

CHARTS. A lower open on all indices and just a weak tap at the 18 day EMA on DJ30 as the all stalled below near resistance at the 10 and 18 day EMA. Even with the Thursday reversal those are still key levels, the next steps after starting the move with the Thursday reversal. Speaking of Thursday, that action was an outside day where the low and the close were outside of the prior session low and high respectively. Technically that is a positive indication that typically leads to more upside given the direction of the action Thursday. Friday was an inside day, and as you can surmise that is where the high and low are inside of the prior session. Those days basically mean nothing. Thus the Friday action while not instilling a lot of confidence, did not undo Thursday.

LEADERSHIP. It was not a great day for leaders but it was not the end of the move either. While most struggled Friday and gave back some Thursday gain there were no major meltdowns in those attempting to set up to break higher and lead the market. Energy led for awhile, smaller financials hung in for the most part, and health related stocks continue to form up. Large cap tech, after a good recovery Thursday that indicated some life, did not fare well. Leadership is still in need of significant improvement to help any rebound turn into something more than just a short term bounce. There are patterns that are similar to the October bottom in 2002 that carried the load early on, but we need to see them set up more as the move continues.


THE ECONOMY


LIBOR rates quietly rise just as other areas show improvement: Treasury coincidence?

For 23 days LIBOR rates declined, falling at a more rapid pace. There were a few days where rates across the spectrum were mixed, but overall rates fell for over three weeks straight.

In the wake of that decline other markets improved. The October data on the commercial paper market issued Thursday and it showed corporate bond sales jumping. Two-year Treasury spreads are narrowing. There is improvement in the financial market at large.

On Wednesday the Treasury announced it would no longer pursue purchasing distressed assets from financial institutions, the heart of the original TARP program for which it was named (Troubled Asset Repurchase Program). Instead it seemed to prefer the direct cash injection option used with the large banks, the one that gave the banks $250B with no strings attached. We are now seeing that cash used for purposes such as paying out bonuses.

Whether the company had the money to pay the bonuses pre-TARP lending or not, the fact that it took public money and then paid bonuses is unseemly to most taxpayers. It is hard to imagine in times of economic hardship such as these that our money is taken, given to another, and then used to pay a bonus to someone at a company that needed our money supposedly to grease the credit wheels so we all benefit. I missed that day in my U.S. History class as to the constitutionality of this. I also must have missed the day in economics class as well that told us how that was economic stimulus or improved credit markets.

Regardless of whether you agree with Treasury's decision or not, the market is responding. That session the LIBOR rates stopped their 23 day decline. It was not much at first, just the overnight rate ticking up 3BP from 0.35% to 0.38%. The 3-month rate held steady at 2.13%. The next session all key levels rose. Overnight moved to 0.40% from 0.38%; 3-month moved to 2.15% from 2.13%. Friday rates rose again with the 3-month jumping to 2.24% from 2.15%.

After the TARP was announced and the authorization bill passed, within a week LIBOR rates and the TED spread started to fall, i.e. improve. That went on for over three weeks. As soon as Treasury abandoned a course of action that everyone signed off on in favor of direct capital injections in businesses, however, LIBOR rates started to rise.

Whether it is simply some short term uncertainty as to just what Treasury is going to do or some deeper seated misgivings about abandoning the troubled asset purchase plan remains to be seen. We do know that it has injected some uncertainty into the market just as it is trying to put in a bottom at the 2008 lows. Thursday the market managed a big reversal despite the change in Treasury's direction. Friday some of the worries came home to roost as the market gyrated in 4% to 6% swings. What we take from this is that the market as always hates uncertainty and it is in need of Treasury once more laying out a clear plan of action with the remaining hundreds of billions in the TARP.


THE MARKET

MARKET SENTIMENT

As discussed Thursday night the bad humor and anticipation of worse times is just about as bad as I have ever seen it. Most people are so beaten down and beaten up they view everything as negative, but as noted the other night, bottoms emerge from the worst of times.

Then along comes Friday and whatever vestige of optimism Thursday brought was spent. We talked with many investors and traders during and after the Friday session and many were throwing up their hands. There are some seasoned ones that viewed Friday as just some lighter volume nervous trade, but many investors are just giving up, throwing up their hands as noted.

This adds to the negative sentiment fires already burning even with the Thursday reversal and the indices still holding over the prior lows. The ongoing nervousness about the market is part of the fuel that ultimately leads to recovery as the sellers finally get done with the selling.

The problem with Friday is the up and down volatility continues even after the Thursday reversal. The buyers and sellers are still fighting. The volume was lower than the Thursday upside reversal volume. With those buyers taking the day off the sellers left could run things up and down. Thus while we don't like the continued and excessive volatility on Friday, we don't think it is going to derail a rally from this point.

Time is an issue here, something I have talked about since this market selling related to the crisis started. As stated months ago, for the magnitude of the problems, this is a pretty short time frame for a selloff, and a pretty modest selloff in percentage terms at that. Financial crises tend to sell quickly and recover quickly. The hope is this one was addressed rapidly enough so the ripples did not spread to the entire economy, causing permanent damage. If the market bottoms here and puts in a good follow through next week starting at the earliest Tuesday, then the meter is still running on the upside.


VIX: 66.31; +6.48
VXN: 66.05; +8.02
VXO: 70.31; +9.71

Put/Call Ratio (CBOE): 1.01; +0.02


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: 31.9%. On the rise again, up from 30.2 and the 5 year low of 21.3% hit to start November. Still below the 35% considered bullish for the market. It was at this level in early October just as the market started to dive lower. This move down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 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: 46.1%. Down from 48.3% last week and well off the 5 year high at 54.4% hit the last week of October. 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.


NASDAQ

Stats: -79.85 points (-5%) to close at 1516.85
Volume: 2.289B (-25.58%). Volume falls significantly below average as NASDAQ sold back. The only above average volume session of the month was Thursday. Looking for more solid volume to come into the index this week as NASDAQ extends its break higher.

Up Volume: 239.577M (-2.451B)
Down Volume: 2.028B (+1.691B)

A/D and Hi/Lo: Decliners led 3.98 to 1. Much higher than the upside Thursday volume.
Previous Session: Advancers led 2.39 to 1

New Highs: 4 (-3)
New Lows: 222 (-498). Nice and low on this test.

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

Started weak, gapping almost 40 points lower on the open and sold from there. It held above 1500 (1499 is the 2008 closing low) on the early low and on the close. On the high it reached toward the 10 day EMA (1599) and came up short. Still in the pattern, still in the hunt for a move higher after that Thursday high volume reversal.

SOX (-6.40%) fell right back down to the Wednesday close, holding just over that level as the bell rang. SOX and NASDAQ are both trying to hang on and continue the move higher, showing a follow through this coming week after pausing following the initial reversal session.

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: -38 points (-4.17%) to close at 873.29
NYSE Volume: 1.449B (-27.21%). Volume dropped off to below average levels, matching the Wednesday selling volume. That leaves the Thursday reversal trade the highest in over a month.

Up Volume: 158.616M (-1.681B)
Down Volume: 1.283B (+1.139B)

A/D and Hi/Lo: Decliners led 3.6 to 1
Previous Session: Advancers led 2.88 to 1

New Highs: 5 (-4)
New Lows: 214 (-471). Well off the prior spike in new lows both Thursday and Friday as those old lows were tested and indeed breached on Thursday. That shows many stocks are acting sold out for now.

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

Opened lower, sold off, but then came right back to cross the 10 day EMA (908) and move positive. Of course it did not last and SP500 hit the session low on the close. Still well above the prior lows, and despite this setback Friday, in position to make its next upside move. The 10 day EMA and the 18 day (928) are the first levels of resistance to cross this coming week. Looking for a follow through starting Tuesday through Friday

The small cap SP600 (-6.46%) failed at the 10 day EMA as well and turned lower for a market leading loss. The small caps continue to struggle with larger gains and larger losses than the other indices, but they are also well above the lows and are maintaining their double bottom pattern. Of course, a breakout would help.

SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg


DJ30

DJ30 actually made it up to the 18 day EMA (8912) on its high hit at the start of the last hour. Then it made the plunge and closed just off the session lows, right at the interim support range near 8500. Still easily above its prior lows. Positive reversal and as with the other indices needs to show a follow through next week to the Thursday move. In short, the index, all indices for that matter, need to do something with the Thursday move other than fritter it away.

Stats: -337.94 points (-3.82%) to close at 8497.31
VOLUME: 304M shares Friday versus 476M shares Thursday. Nice drop-off in volume to back below average.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


MONDAY

Lots of economic data next week for what it is worth. Some regional manufacturing reports, production and capacity stats, housing starts, inflation statistics, FOMC statistics. All they will really do is confirm what the data in October and thus far confirmed: a rapid slowdown in the economy. Right now the data is not going to show the kernels of growth so desperately sought. The slowdown was so rapid and no one has a handle on even that at this point.

That does not mean there is no action. After dumping stocks a year ago followed by a long dry spell, corporate CEO's are starting to buy again. It is reported that C, GE, DOW, GLW CEO's to name a few are buying their stock again. Buying is a better indicator than selling; they can sell for any number of reasons such as taxes, diversification, divorce. They buy for one reason: to make money. The fact that these guys and girls are buying is a kernel of positive news. Further, the redemption period for November is over this week, and the market escaped in relatively decent fashion. Yes all but the Dow hit new lows on the year, but they also reversed to close the week above the prior lows. Without the redemption, some CEO's buying, and that Thursday reversal, the prospects for a further upside move starting this week are good.

As noted above, that leaves us looking for a follow through to the Thursday reversal that is trying to ignite a new rally off a second low and successful, for now, test of the early October selling. A follow through is a strong percentage gain on strong volume with strong breadth occurring a week to 10 days after the initial reversal. The market often stalls some after the initial surge as some profits are taken by those who think the rally is bunk and simply setting up more selling. If the move is for real the market makes a subsequent upside move with those strong indicators as the backbone. The follow through shows the buyers are picking up the baton from the initial short covering surge.

Friday was not a good day. Never like to answer upside with such negative moves. There was no distribution, however, and the lower volume and wild volatility shows relatively few were pushing it around. As noted above, it did not undo the Thursday move, and indeed we are looking for Thursday to carry the market higher. As for how long remains to be seen. The sentiment and internal indicators are strong enough to suggest a sustained move.

In any event we are looking to play the move higher with more upside despite Friday. That means picking up positions as they present themselves after the Friday pullback and riding them for a nice gain. There are more and more patterns that are establishing themselves and thus more potential leaders to take the ball and run on a continued market rally. We will let the market worry about how far it wants to go.

As for the downside, with the indices bouncing up off the lows last week and the big Thursday reversal, we are going to let this bounce play out and see how strong it is. Again, we will let the market tell the story after it delivers this bounce.


Support and Resistance

NASDAQ: Closed at 1516.85
Resistance:
1521 is the late 2002 peak following the bounce off the bear market low
1542 is the early October 2008 low
1565 is the second low in October 2008
The 10 day EMA is 1596
1620 from the early 2001 low
The 18 day EMA at 1641
1644 from August 2003
1752 from 2004
1782 from August 2004
The 50 day EMA at 1827
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
2099 is the mid-September closing low
2155 is the March 2008 low
2167 is the July 2008 low

Support:
1499.21 is the 2008 closing low
1493 is the October 2008 low
1428 is the November 2008 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 873.29
Resistance:
889 is an interim 2002 peak
899 is the early October closing low
The 10 day EMA at 908
The 18 day EMA at 928
965 is the 2003 consolidation low
995 from June 2003 consolidation peak
The 50 day EMA at 1021
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 90 day SMA at 1142
1200 is the July 2008 intraday low
1244 is an August 2005 peak
1250 is the 2002/2003 up trendline
1257 is the March low
The 200 day SMA at 1257
1270 is the January low
1285 is the recent July peak

Support:
866 is the second October 2008 low
853 is the July 2002 low
848 is the October 2008 closing low
839 is the early October 2008 low
818 is the November 2008 low
800 is the March 2003 post bottom low
768 is the 2002 bear market low

Dow: Closed at 8,497.31
Resistance:
8521 is an interim high in March 2003 after the March 2003 low
8626 from December 2002
The 10 day EMA at 8772
The 18 day EMA at 8913
8985 is the closing low in the mid-2003 consolidation
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
9575 from September 2003, May 2001
The 50 day EMA at 9600
9814 from August 2004
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 90 day SMA at 10,508
10,827 is the July 2008 intraday low
10,962 is the July closing low
11,061 from February 2006
11,317 from March 2006
11,388 is the prior August low

Support:
8451 is the early October closing low. Key level to watch.
8197 was the second October 2008 low
8175 is the October 2008 closing low. Key level to watch.
7882 is the early October 2008 low. Key level to watch.
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.

November 17 - Monday
November NY Empire State Index (8:30): -26.0 expected, -24.6 prior
Capacity Utilization, October (9:15): 76.6% expected, 76.4 prior
Industrial Production, October (9:15): -0.1% expected, -2.8% prior

November 18 - Tuesday
October Core PPI (8:30): 0.2% expected, 0.4 % prior
PPI, October (8:30): -1.5% expected, -0.4 prior %
Net Foreign Purchases, September (9:00): $14.0B prior

November 19 - Wednesday
October Building Permits (8:30): 770K expected, prior 805K
Core CPI, October (8:30): 0.2% expected, prior 0.1%
Housing Starts, October (8:30): 780K expected, prior 817K
Oil Inventories (10:30): 220K prior
FOMC Minutes, October 29 (2:00)

November 20 - Thursday
11/15 Initial Claims (8:30): 516K prior
Leading Indicators, October (10:00): -0.6% expected, prior 0.3%
Philadelphia Fed, November (10:00): -30.0 expected, prior -37.5

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

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Bottoming Process Continues

SUMMARY:
- Stocks rebound even after weak jobs data in a pre-weekend relief bounce.
- Jobs report confirms the weakness the prior reports indicated.
- Valuations are getting low, dividend yields are climbing, but value takes a back seat to liquidity issues for now.
- Friday bounce sets up market for a further test of the prior lows as bottoming process continues.

Market bounces on bad news but the surge is not convincing.

The futures were up even before the jobs data. LIBOR was down again (3-month at 2.29% versus 2.39% Thursday; down 76BP for the week) as the bank loan guarantees continue to loosen credit. Problem is, we are still hearing from the trenches that banks are not lending even with the guarantees, the TARP, rate cuts, and the other few dozen facilities the world central banks have in place. Trust in the financial world is hard to come by these days even with central bank guarantees. That shows how ad the credit issues are and how bad banks view the world economies.

Nonetheless, stock futures ignored the credit markets and indeed even the weak jobs data that saw a 240K loss and unemployment rise to 6.5%, topping the peak in the 2000-20002 recession. They held gains into the open and stocks rallied early. This was scenario number 1 from Thursday: the market ignores bad news and rallies, a potentially good sign. There was some selling mid-afternoon as the market hiccupped during President-elect Obama's press conference following a meeting with his team of economic advisors. Obama indicated he still wanted a 'net tax cut' where taxes are reduced at the lower end and even those not paying get money back while the new tax 'middle class', i.e. the small businesses, bear the bulk of the new taxes. When he finished talking the market rebounded toward the close.

That was a positive but it was not a strong move. There was no powerful scream higher indicating a massive reversal. Instead the internals showed a rather weak relief bounce. Everything was flat. Market internals, the dollar (1.2721 versus 1.2688 Thursday), oil (61.04, +0.27), gold (736.10, +3.90), and bonds (1.33% 2 year, 3.78% 10 year). That meant no serious reversal and thus no Scenario 1 after all. The indices, even with the gains, were still well below the 10 day EMA. Given the action we took some downside positions in the last hour, anticipating some more downside to test the prior lows to try and set up a stronger market bottom.

TECHNICAL. Intraday action was good, starting higher, fighting off an afternoon selloff, then recovering to session highs on the close. As we have noted many times over the past month, the intraday action bends with the market winds of the day. That tells us there is no prevalent trend in place, that the market is trying to make a change. Typically the intraday action trends positive or negative on a consistent basis regardless of the overall action on the day. In other words, if the market trends higher, the intraday action finds a way to put a positive twist on the session and vice versa. Right now the action is either really good on the upside days or really bad on the downside, feast or famine. That shows the ongoing battle between buyers and sellers.

INTERNALS. As noted, they were basically flat, at least flat for this market. Breadth was 2.3:1 on NYSE, and that is rather tame all things considered. NASDAQ was flat at roughly 3:2. Volume fell back off the cliff, closing well below average in a week where most trade was weak. That means even though the selling Wednesday and Thursday was intense, the volume indicated it was not a total downside blowout with sellers running the table. Overall light trade on a test of prior lows indicates the market is sold out on the second test. Thus far not bad.

CHARTS. All of the indices bounced off the Wednesday and Thursday selling that pushed them back below the 10 day EMA. They bounced toward that initial resistance level on Friday but did not come close to taking it out. As noted last week, the 10 and 18 day EMA play important roles in continuing downtrends. They tend to act as resistance as a downtrend makes its periodic bounces. Two Fridays back the indices cleared the 18 day EMA, but they gave it back in the selling last week. The Friday action did not disrupt the current patterns, however, the reverse head and shoulders bases set up by the up and down action the past month. Those patterns suggest the market does not have to fully test the prior lows, but the weak relief bounce Friday indicates there is more testing needed to finish up the bottoming process. Thus we anticipate some more volatility this week before another bounce attempt above the prior lows tries to set the market bottom.

LEADERSHIP. The relief bounce helped stocks recover but it didn't change leadership very much. Stocks overall are still working on bases in this up and down action while a few sectors are producing some good patterns ahead of the rest of the market. This includes the smaller financials, some energy, airlines, smaller biotech; a rather motley crew. Has to start somewhere, however, and then other sectors follow. Market is trying to consolidate and that keeps stocks working on bases, and a market needs a lot of stocks breaking out to form a successful bottom.


THE ECONOMY

Unemployment rate tops last recession levels.

At 6.5% unemployment topped the prior recession's peak and hit levels not seen since March 1994 following the 1991-92 recession. Many are predicting unemployment hits 8% in 2009, the highest since the early 1980's and that recession that ended the 1970's malaise.

As for jobs themselves, October lost 240K, more than the 200K officially expected, but less than the high end of the street expectations at 300K. The surprise is that August and September were written down another 179K, indicating the economy was sliding fast even before the LEH bankruptcy. We are down 1.2M jobs in 2008 with half that amount coming in the last three months. With the earnings season a slew of layoff announcements came as well, indicating the numbers are not going to improve, and that 8% handle on unemployment is not out of the question.

The jobs losses are already worse than the last recession and are ready to jump past the 1991 recession as well, on toward the 1980's and the worst economic period since the Great Depression (the 1970's). The damage done in housing and the credit markets is too great to be a simple hiccup, and the downturn is going to stretch well into 2009.


More stimulus to come but likely not the right kind.

ECRI, the best man-made economic cycle predictor, is still showing no upturn in its leading indicators. Worse, they are still heading lower. Its leading index for the period ending Halloween fell to a 12+ year low. The annualized growth rate hit -24.6%, the lowest in ECRI's 60 year history. Right now there are no prospects for economic recovery looking out on the horizon.

Washington does not look at ECRI as far as we know, but there is of course more talk of stimulus to get the economy rolling again. The last round passed in early 2008 involved a round of 'rebate' checks similar to the initial stimulus in 2001. Those 2001 checks did not work, and as we said at the time, the 2008 checks did not work. Now some say they did because consumer spending went up after the checks. That was not our point. Sure spending went up, but the rebate 'stimulus' rarely works because it cannot sustain any buying once they checks are spent. Moreover, it is never enough to jumpstart supply and industry, the real focus of stimulus, because the latter knows it is just temporary and it is used to sell off inventories versus making capital investments to improve technology, increase production, and increase jobs. If the recession is close to its end then checks might just work because businesses see improvement anyway and start to invest in the future recovery.

President elect Obama Friday said he wants stimulus immediately, but if the lame-duck government does not take action he would as a first order of business. The Bush administration is skeptical of more stimulus; understandable if it is just more checks. Obama said he wants to extend unemployment and provide cash to the middle class. That sounds like more checks. With the recession still deepening all checks do is ease some pain for a month or two and then it is more of the same.

There has to be something to get businesses to invest as well, and our past experience with stimulus shows that includes tax incentives such as tax credits for buying capital equipment. You have to give businesses and individuals a reason to buy when there is fear and worry and no reason to buy. Otherwise businesses lay off workers and delay expenditures indefinitely while consumers go 'turtle' and quit all spending, even hoarding any meager stimulus 'rebate' sent their way. As economic times are much worse than in the first half of 2008 when the stimulus checks were issued and spent, we can expect with almost 100% certainty that any rebate checks will not be spent at all but instead saved for a rainy day.

There is also proposed 'stimulus' with respect to the auto industry, and Obama says he is going to address that as well, apparently under the belief that the less than 300K jobs in that woefully obsolete industry have to be saved versus putting the money elsewhere to incent new technologies, indeed even new vehicle propulsion technologies with new companies better able to compete internationally given the stifling fixed costs such as healthcare tied to the Big 3 ($1800 of each GM vehicle goes toward paying healthcare costs). It is hard to see how propping up companies with obsolete business models and declining overall job levels is 'stimulus' for the economy. We need companies that can compete, develop new technologies, and thus create new jobs in order to pull out of this economic crisis. GM and Ford are not going to lead us to prosperity. At best they sap away billions of taxpayer dollars to maintain the status quo, but likely that would only be a stopgap measure before they toppled or demanded more money to prop them up yet again.


THE MARKET

MARKET SENTIMENT

VIX: 56.1; -7.58. Volatility jumped on the week once more, hitting the mid-sixties before easing Friday. It already did its work with that spike into the nineties in late October.
VXN: 55.14; -7.56
VXO: 58.38; -7.62

Put/Call Ratio (CBOE): 0.97; -0.36

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: 30.2. Up from the 5 year low of 21.3% hit last week. Nothing like a rally off the prior lows to build up the confidence. Still below the 35% considered bullish for the market. It was at this level in early October just as the market started to dive lower. This move down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 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: 48.3%. Down significantly from the 52.7% last week that was off the prior week's 5 year high at 54.4%. 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.


NASDAQ

Stats: +38.7 points (+2.41%) to close at 1647.4
Volume: 1.925B (-20.25%). No volume on the move upside so no accumulation to respond to the Thursday distribution when stocks were sold more aggressively than bought earlier in the week. Overall volume is lower, and as noted above that is more bullish as it shows no high volume selling as NASDAQ comes back to test the prior lows. The sellers are getting finished with their selling.

Up Volume: 1.387B (+1.157B)
Down Volume: 472.993M (-1.698B)

A/D and Hi/Lo: Advancers led 1.65 to 1
Previous Session: Decliners led 3.56 to 1

New Highs: 3 (-2)
New Lows: 177 (-5). Watching these as well as NASDAQ heads toward the prior lows. Don't want to see them jump to those old levels near 1000. If they stay low that is another indication the index is getting sold out.

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

Gapped higher and closed near the session high, getting back up toward the early October closing lows. Still well below the 10 day EMA (1674) and moving up on low volume. Not a lot of strength compared to the prior selling that almost pushed volume up to average. NASDAQ is still working on a 4 week reverse head and shoulders pattern, but this action Friday was weak enough for us to anticipate more downside to test toward the prior lows before any significant upside.

NASDAQ 100 (+2.39%) shows the same pattern and Friday showed the same action as NASDAQ. Thus it can break higher from here with this pattern, but it is likely going to test a bit more before any real rally.

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: +26.11 points (+2.89%) to close at 930.99
NYSE Volume: 1.227B (-19.61%). Same weak volume as on NASDAQ, not what you want to see on a rebound. That leaves this move in the relief bounce category.

Up Volume: 995.451M (+922.644M)
Down Volume: 225.809M (-1.227B)

A/D and Hi/Lo: Advancers led 2.28 to 1
Previous Session: Decliners led 4.84 to 1

New Highs: 5 (-3)
New Lows: 152 (-23). Shot over 1000 on the early October lows. Didn't get to that level on the last test and want to see them stay low on this leg to show no increase in selling pressure.

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

Bounced off some support at 900, the closing low from early October. It is trying to make the right shoulder of that 4 week attempt at a reverse head and shoulders pattern. Closed well below the 10 day EMA (943). It could bounce up a bit more and test that level, but we anticipate SP500 will test lower toward the prior lows before making the next run. It can bounce around a lot in this range as it tries to form this bottom.

SP600 (+1.51%) brought up the rear Friday as it too bounced and could not, and indeed did not even try, to challenge the 10 day EMA. It is in a reverse head and shoulders pattern as well, working on the right handle. Watching to see if SP600 can start showing that greater relative strength it pulled out in late October as that suggests the market is anticipating some economic improvement. Needs more than just a one week stretch to show that, however.

SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg


DJ30

Same story as the Dow bounced off the sharp Wednesday and Thursday selling that took it below the 10 and 18 day EMA as well. Very low trade as the blue chips bounced; here as with the other indices there was no serious buying. Trying to make a higher low and recover, but the low volume on Friday says it still has to attract more buyers to rally here. 8500 to 8450 is a key level to watch this week on any further testing.

Stats: +248.02 points (+2.85%) to close at 8943.81
VOLUME: 246M shares Friday versus 344M shares Thursday.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


MONDAY

There is a lot of talk about how stocks are a value right now and that it is prudent to start buying into this selloff. That may be the case but if the economic climate is similar to the 1970's it could be a long time before these value buys start to pay off. There will be surges in the market even in a continuing malaise, however, just as there were in the 1970's. That still didn't make the seventies a good time to invest. It was a good time to take a shorter term view and work the shorter trends inside the overall malaise. The long term buys just eroded and eroded.

Right now values do look good if nothing more than on simply dollar basis. The problem is, earnings estimates are heading lower and that makes values decline as prices have to catch up with earnings outlooks. The problem is, value is not as valuable right. With the credit and liquidity crisis and the unknown liabilities thanks to factors such as the credit default swaps market, an accurate value for most stocks is elusive at best. Guessing at value is truly a long term strategy.

That said, the market is trying to put in a bottom. As discussed Thursday the gloom level is extremely high, and while it can get worse and drag out for a long time, the indicators that you look at to determine market turns have hit extremes in that October plunge. Since that dive the market indices are still holding above those prior lows, trying to put in a bottom. High gloom, sentiment and internal extremes, trying to put in a bottoming pattern, some leadership bases forming. That tells you more than guessing at valuation as to what the market is going to attempt.

Thus this week we watch for more indications the indices are putting in a bottom over the early October low. The Friday bounce was nothing exciting and we think it set up a bit more short term downside. Stocks rebounded from the 10% two day decline, but the internals were weak, volume was low, and they remain well below near resistance. It was not the surge back up after bad news that shows the market has factored all of the worst and the sellers are gone and buyers are committed.

That left the market in something of a no man's land, i.e. in the range above the prior lows, but suffering from a massive 2-day selloff. Friday it was up but had the look of a dazed car driver wandering the road after a massive collision.

Thus we anticipate more testing this week though it may not be in a straight line to the prior lows. That is fine as the volatility is another indication that the buyers and sellers are getting things worked out between them. It also allows individual stocks to work on their bases. Indeed, that is what a bottoming attempt is all about, i.e. stocks weeding out the sellers and undergoing accumulation to set the foundation for a new rally higher. All of the action the past month has occurred in an existing range, and that favors formation of good bases.

Not there yet. There is still a dearth of stocks in great position to rally, but that is changing with each day. The volatility pushes them up and down in the patterns, and we patiently wait for them to set up and if the break higher we can move in. That is the best way we know of to determine if stocks are at a value: if big money funds are accumulating stocks to the extent that they form bases and breakout, they think they are at value levels, and as the big funds move the market, that means we need to be ready as well.

Things certainly seem far from the point where funds would buy stocks in anticipation of better economic times. Economic issues appear as bad as they have been in 30+ years and visibility is a question mark. How could the market anticipate a bottom? That leads many to conclude the market is wrong if it tries a bottom and it will only fail. False bottoms are common in bear markets, i.e. where they fire up a rally only to eventually collapse. The key in each bottom attempt is leadership. Right now they are working on bases and there are some stocks out in front as seen on the report. How they play out in their bases and as other stocks set up new bases will ultimately tell the story of this bottoming attempt at a time when there appears to be no economic hope. As noted Thursday, when all hope is lost that is when the market typically makes a move. At this point hope seems to have forsaken this market (getting back into the movie quotes again).


Support and Resistance

NASDAQ: Closed at 1647.40
Resistance:
The 10 day EMA is 1674
The 18 day EMA at 1703
1752 from 2004
1782 from August 2004
1882 from October 2003
The 50 day EMA at 1887
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
2099 is the mid-September closing low
2155 is the March 2008 low
2167 is the July 2008 low

Support:
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
1493 is the October 2008 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 930.99
Resistance:
The 10 day EMA at 943
The 18 day EMA at 956
965 is the 2003 consolidation low
995 from June 2003 consolidation peak
The 50 day EMA at 1049
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 90 day SMA at 1163
1200 is the July 2008 intraday low
1244 is an August 2005 peak
1248 is the 2002/2003 up trendline
1257 is the March low
1270 is the January low
The 200 day SMA at 1269
1285 is the recent July peak

Support:
899 is the early October closing low that held Thursday.
889 is an interim 2002 peak
866 is the second October 2008 low
853 is the July 2002 low
848 is the October 2008 closing 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 8943.81
Resistance:
8985 is the closing low in the mid-2003 consolidation
The 10 day EMA at 9043
The 18 day EMA at 9127
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
9575 from September 2003, May 2001
9814 from August 2004
The 50 day EMA at 9815
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 90 day SMA at 10,654
10,827 is the July 2008 intraday low
10,962 is the July closing low
11,061 from February 2006
11,317 from March 2006
11,388 is the prior August low

Support:
8626 from December 2002
8521 is an interim high in March 2003 after the March 2003 low
8451 is the early October closing low. Key level to watch.
8197 was the second October 2008 low
8175 is the October 2008 closing low. Key level to watch.
7882 is the early October 2008 low. Key level to watch.
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.

November 12 - Wednesday
Oil inventories (10:30): 54K actual versus 1M prior

November 13 - Thursday
Initial jobless claims (8:30): 479K expected, 481K prior
Trade balance, September (8:30): -$55.8B expected, -$59.1B prior

November 14 - Friday
Export prices, October (8:30)
Import prices, October (8:30)
Retail sales, October (8:30): -1.2% expected, -1.2% prior
Retail ex-auto (8:30): -0.9% expected, -0.6% prior
Business inventories, September (10:00): 0.2% expected, 0.3% prior
Michigan sentiment, November preliminary (10:00): 57.0 expected, 57.6 prior

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

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Small Caps Surge, Lead Market Higher

SUMMARY:
- Market heads home positive, holding gains that changed the outlook, not for October, but for November.
- Incomes rise but spending declines for the first time in 5 years.
- Regional manufacturing continues its skid as Chicago turns in a failing report card.
- Worst economic news of the cycle, but the small caps surge, lead the market higher.
- Looking for continued upside as the market bounce stretches out, but still has to break free from current resistance.

Market closes out a bad month with some positives.

No doubt October was a bad month for the market as it inflicted the lion's share of the damage to this point in the bear market (going with an animal theme this weekend). There were a couple of positives to the month, however. First, the indices hit a new low for the year, a low deep enough to be considered the extent of a bear market selloff, and the indices reversed immediately off of that level. On that dive lower they held in the middle to top of the 2002 bear market bottoming patterns, a logical place for a subsequent bear market to find its bottom. Second, after bouncing up off of those levels the indices fell back again, but SP500 and DJ30 did not undercut that low, instead all indices reversed sharply this past Tuesday on strong volume. New lows held below the prior levels even as NASDAQ, SP600 and SP400 hit new lows for the year.

That shows the indices were pretty much sold out on this leg, not surprising given the 20+% declines in October, and the reversal on volume shows buyers stepping back in. The market is game for a move higher to work on a larger bottom and let stocks build some bases. It may or may not ultimately work, but this confluence of indications tell us there is a tradable rally that we have a good stake in already as we bought into the upside ahead of that big Tuesday surge and have already banked some nice gain on several positions. We even picked up some more positions Friday as DJ30 sets up for the next break higher.

Friday there was mixed news early yet again (seems we say that every day of late). Personal spending fell negative for the first time in almost 5 years (-0.3%) and a bit more than expected. The Bank of Japan lowered interest rates but less than hoped. Chicago manufacturing was terrible (37.8) and Michigan sentiment was weak (poor football performance perhaps). On the other hand, incomes gained again (+0.2%). Importantly, LIBOR once more continued its more rapid thaw: overnight 0.41% (0.73% prior); 1 month 2.58% (2.85% prior); 3 month 3.03% (3.19% prior).

Despite the preponderance of negatives, the credit improvement is helping more than it is currently being discussed. Futures were negative but bouncing toward the open. Stocks started negative but turned positive in a steady climb from losses to gains in the last hour. The sellers took their shot ahead of the weekend and the indices peeled back significantly from their highs. A last minute bounce made it look a bit better but they held their gains nicely. This action continues the consolidation after that big Tuesday surge, and we are looking for that move to continue once this pause or rest period is over and the market moves into the new month.

TECHNICAL. Intraday there were steady gains from negative to positive by more than 2% on most indices. The last hour drop pared those back but the action was good enough: the indices held the 18 day EMA, continued to consolidate the Tuesday surge, and kept themselves in position to continue the move.

INTRADAY. Once more solid breadth as the small and mid-caps surged 4.4% and 2.8% respectively. Volume was down on NASDAQ, not bad given techs lagged the market, particularly large cap techs. NYSE trade improved by 13%; given that the small and mid-caps surged, that rise in volume shows some buying in these beaten up but surging economically sensitive stocks.

CHARTS. The indices moved through the 18 day EMA, but the last hour selling and the somewhat light-ish overall volume said the move was nothing definitive. With respect to the large cap indices the action shows more of a continued consolidation despite the gains. There is some accumulation on NYSE in the small and mid-caps as they posted gains on that rising trade. The smaller caps didn't even slow down from Tuesday, the start of the current leg, rallying 4+% Thursday and Friday. They may need a rest soon but the large caps will be ready to pick up the torch when the small caps do rest as the large caps have put in something of a pause after their big surge. Indeed, DJ30 is working on the handle to its short three week double bottom.

LEADERSHIP. As noted this week there are more stocks and sectors forming good bases. Airlines have decent patterns and were up Friday. Retail is forming bases right now in an environment where personal spending just fell for the first time in 5 years. Energy was strong again as those sectors bounce off of good short term bottoms even with fears of a worldwide economic slowdown. Steel is still improving. Stocks are in the process of building their patterns and that is what the overall market needs to put in a real bottom. The upside move that started last week is buying the time for the needed accumulation that builds a foundation for significant and more sustained upside moves. Still a lot of work to do before that is set up because there are simply not that many of those great bases out there that were relatively plentiful at the October 2002 low and market bottom.


THE ECONOMY

A week of poor economic data capped by personal spending turning negative and Chicago producing not a heck of a lot.

September spending fell 0.3% and that was just shy of the June 2004 0.4% decline. In the Thursday GDP report Q3 consumer spending fell 3.1% annually, the first drop in spending since 1991 and the largest since 1980. Many predict a 2% personal spending decline in October, but there is that sharp decline in oil and thus gasoline thanks to a falling world economy and a surging dollar (closed at 1.2730 Friday, not the low of the week, that was 1.2448). Saw gasoline at $2.09 Friday. That is giving consumers a much needed shot in the arm. Problem is, thus far consumers are not spending the extra coin just in case . . . credit doesn't loosen, the policies the next administration puts in place don't work, jobs become a bit more threatened, etc.

Manufacturing sentiment continues to swirl in the toilet as Chicago, usually the more staid of the regional reports, fell to 37.8 from 56.7. Not only did it fall below 50, the threshold that defines expansion and contraction, it collapsed. After several months skirting around 50 and then moving sharply over that level in August and September, sentiment for manufacturers fell as hard as that for consumers. The credit freeze, the inability to conduct business as usual, and the worries about the ramifications down the road has purchasing managers quite gloomy. This, after all, a sentiment reading not a report based on hard data as some seem to imply. Thus it is subject to the most fallible of all factors going into economic reports, i.e. human emotion.

So while the decline is important, what is more important is whether it stays down or rebounds. Solid reading up to this point, then a plunge as the credit market locked up money. If it continues to thaw quickly, sentiment can change quickly. Thus we are not, as you can tell, overly sweating this report that matched Philly's weakness but which can turn quickly.


Michigan sentiment holds up.

Speaking of sentiment, Michigan was not hideous, coming in at 57.6 versus the 57.5 expected and posted before. It is still at recession levels, good thing given Q3 GDP was negative - hate to get the economic indicators all mixed up and at odds with one another. Overall the consumer is depressed given the intrigue the past month with the market crash, the government takeover, the election, etc. Again, gasoline was $2.09 on Friday, and that means it is not long until we could see, believe it or not, sub-$2 gasoline. That alone and the countdown to $1.9-something gasoline could keep consumers feeling better. Seems bizarre, but that amber fluid plays a huge role in US citizen outlook.


Okay so the economic data stinks so why are small caps rallying?

SP600 rose 17.4% last week. SP500 gained 13.9%, DJ30 13.7%, NASDAQ 10.8%. Small caps were all the rage last week even as economic data hit the worst levels in one and even two recessions. Economically sensitive stocks surging as economic data dives. As is often the case, the market moves contra to what the current data show because the market discounts the future not the past or present.

The stock market dove lower in October on credit issues and uncertainty as to the future economic and tax policies coming out of the November election. It hates the uncertainty of how damaging the credit crunch might be as well as what uncertain policies will actually be. Some of the proposals match what was done in the past that pushed a recession into a depression both here in the 1920's and 1930's and more recently in Japan.

There is this belief that we have to prop everything up in order to save the economy. Sometimes it is best to let things just fail because keeping them propped up only builds additional problems or just puts off the ultimate day of reckoning. Friday we heard talk about bailing out the US automakers. The idea is they employ a small nation of workers and make up a large part of the economy. True, but they also have become health care companies that make vehicles on the side. They cannot compete with international makers. So do we take more taxpayer money and prop up fundamentally flawed (to use some buzzwords in the news of late) business models, basically subsidizing poor business decisions for the foreseeable future or is it better in the long run to let them fail and then let others fill the void with new business models that stress building better vehicles than operating as health care companies? If you were deciding what to invest in would it be the former or the latter? You know the market's answer.

Getting back to the small caps, however, they exploded higher and led the rebound after a hard and sharp plunge. They held out the longest, but when they gave in they gave in big time as the credit issues directly impacted their greatest influence, i.e. the economy. Now that they are rebounding they suggest the economic prognosis midway into 2009 may not be that bad. This is the initial run so it is not definitive, but it is something that we have to watch as the overall market bottoming process continues. If the small caps test and set up good bases, things from the economic perspective look a bit more promising.


THE MARKET

MARKET SENTIMENT

VIX: 59.89; -3.01. Hit a new closing high at 80.06 though that was not the high. That was hit the previous Friday and was the highest level since 1987. Definitely strong enough to set a market turn. Remember, the highs on VIX are typically hit several weeks before the bottom and in this case that means a bounce here and then a subsequent test of the early October lows still to come.
VXN: 60.3; -2.89
VXO: 61.38; -3.93

Put/Call Ratio (CBOE): 0.96; +0.16. Third day below 1.0 on the close after three weeks closing above that level. As stated before, this did its job, showing high anxiety about the downside prospects as the market sold off.


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: 21.3%. Fading from 22.2% as the market could not move up last week. Still decline but now in dribs and drabs (22.4% the week before). Down from an already very low 25.3% that 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: 52.7%. Slipped from a high of 54.4% on this move, up from 52.9% before that after pausing at that 53%ish level for a couple of weeks. 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.


NASDAQ

Stats: +22.43 points (+1.32%) to close at 1720.95
Volume: 2.488B (-1.95%). Solid volume on the Tuesday surge, then declining trade the rest of the week as NASDAQ continued to rally. Good turn, weaker as it coasted higher. May need to test back just a bit, but view this as a good turn and still in position to move higher.

Up Volume: 1.451B (-466.722M)
Down Volume: 1.011B (+356.449M)

A/D and Hi/Lo: Advancers led 2.99 to 1
Previous Session: Advancers led 2.67 to 1

New Highs: 7 (+2)
New Lows: 99 (-54)

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

Undercut the prior 2008 low the previous Friday and made a new closing low for the year Monday. Then the surge higher Tuesday that started the move and the coast on up to the 18 day EMA where NASDAQ closed Friday. This is the second level of near resistance for the index as it tries to break higher once more. NASDAQ is in a downtrend. The action the past three weeks is trying to set up a break higher, but it has to make the break. NASDAQ is lagging this move but it too is in position to make the break higher still, though it could use some consolidation before it continues.

NASDAQ 100 (+0.06%) was flat Friday, and that was not really bad action given the lighter overall trade. NASDAQ 100 is similar to SP500 and DJ30, i.e. working laterally a bit after the initial surge higher, and that is setting up a consolidation handle to lay the ground work for the next break higher.

SOX (+1.88%), despite the improving look of the large cap indices, has the look of an index in a continuing downtrend. It has rebounded past the near resistance at the 10 day EMA on up to the next level in a downtrend, the 18 day EMA. It tried that level Friday and then faded back. It looks like a classic downtrend bounce that is ready to turn back and resume the move lower. That shows tension in the market between some tentative upside moves in the other indices. As seen last week when the market reversed from positive to sharply negative in the last few minutes on reports regarding GE's 2009 outlook, the market is still fragile.

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: +14.66 points (+1.54%) to close at 968.75
NYSE Volume: 1.563B (+13.68%). Volume moved up close to average Friday after falling below average on the Thursday gain. Volume fell Monday as the NYSE indices faded. It jumped to the highest level of the week on the Tuesday surge. Then it faded the rest of the week though it showed good price/volume action nonetheless, i.e. stronger volume on upside price days and lower volume on downside days. The upside volume Friday was not bad given the small and mid-cap stocks surged.

Up Volume: 1.16B (+17.856M)
Down Volume: 399.02M (+174.456M)

A/D and Hi/Lo: Advancers led 2.68 to 1
Previous Session: Advancers led 4.11 to 1

New Highs: 11 (+4)
New Lows: 99 (-4). New lows did not surge on the Monday new closing low for the year. As noted at the time, that suggests the market is sold out for now.

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

SP500 coasted into the weekend as well, angling up toward and just through the 18 day EMA (962) on Friday. Not a lateral move for sure as you would see in a typical handle, but moving up the 10 day EMA (938), using that as support. This is something of a handle for the three week double bottom though it could test back a session or two and set up better. Overall it still looks ready to move higher; the question is simply when it makes the move.

SP600 (+4.46%) ripped higher once more posting its second back to back 4+% gain. The move represents a knifepoint turn off a new low for October, and SP600 bolted through the 18 day EMA on the Friday close. Knifepoint turns rarely work to the extent they never come back to test again, but the small caps strapped on the rocket last week just as the economic news turned in its worst performance of they year. If they can continue to set up and move higher, that bodes well for the market and the economy. Still early in the move but it is making the moves it needs to make.

SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg


DJ30

The Dow was the main indicator on this test of the early October low. It easily held above that early low on the test and then reversed sharply on Tuesday with the best volume of any index. As with the other indices it started to test Wednesday, but then drifted higher again Thursday and Friday. Volume returned Friday, however, moving up to average as on NSYE. That shows some real buying interest continued. This resumed rally on higher volume on the forth session after the rally started is a follow through to that Tuesday rally. Positives are piling up on the Dow and thus we anticipate more upside on this move with the 50 day EMA (9966) on up to 10K looking reachable.

Stats: +144.32 points (+1.57%) to close at 9325.01
VOLUME: 311M shares Friday versus 267M shares Thursday.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


MONDAY

Earnings continue to play out with the likes of DELL and CSCO along with a boat full of economic data: ISM, auto sales, Factory orders, and the jobs report. No more Fed meetings until December, and with rates at 1% we likely won't hear much from them outside of more assistance clarifications, tweaks, etc. to their facilities. In other words, we will hear from them all the time, just not about rates. There is also this election thing on Tuesday. A surprise result could lead to a vigorous rally. A senate with less than 60 democrats will be a positive as well to the market because a split in power is viewed as good. That will have to play out on its own. A bigger immediate concern is that there is no answer on Tuesday if things do continue to tighten and/or there are voting irregularities or something of that nature. That means uncertainty again, and we all know the market hates uncertainty.

SOX is an indication that the market is still nowhere near out of the woods. It has all the look of a typical bear market bounce in a continuing downtrend. The other indices are improved but are not clearly on the mend. As seen on the GE news just before the close midweek, the market is fragile and subject to upset even with the improvement in the action. It is due a bounce after the massive October liquidation, and it started that bounce this past week. It is set up to do so given the LIBOR improvement even with the weakening economic data: if credit loosens quickly then the economy will have the ability to function and start to recover. That does not mean it won't get challenged.

Nonetheless the market is in position to continue higher. Might take two or three days off as it continued to climb into Friday, forming a better consolidation to break higher from, but what we saw last week says to us the upside will continue from here. The indices are still not definitively above the 18 day EMA, but the resurgence of the small caps is a potentially important new element looking ahead for the economy and thus the market. The market looks ahead, not back at the last GDP report.

Those are positives but for now we are looking for a move higher that is more of a rebound to set up a bigger, scarier test of the prior October lows, but that rebound is definitely one we can buy and make money off of. As noted earlier, we are already doing that and will continue to buy positions that give us good opportunity to capture the moves higher.

Again we are looking in the neighborhood of Dow 10,000. At that point many will feel good about the rally and posit that the bottom is in, load up, etc. That will be the tipping point for an October 2002-like dive lower and test of the prior lows. That will likely be what sets the bottom on this market move and leads to the more sustained run higher. As always there is the caveat that the market may not look back at all. If it doesn't then we have some positions in great stocks and stand to make even more on such a move. We could definitely admit we were wrong and live with that.

Either way we want to be ready with some plays in hand to take advantage of the direction the market takes, realizing that it could stumble given the look of some sectors and indices such as SOX. It is not easy right now to find stocks that are still ready to move yet are not too extended, yet the large cap indices are setting up for a new break higher and some sectors such as parts of retail are setting up in very interesting patterns. As noted above, if this market action continues to set up or work on a larger bottom, there should be more and more stocks setting up in bases. If not, this bounce attempt will ultimately be just that, a bounce attempt in a continuing bear market. Thus for now, given the action in the indices, we look to play the current action, taking what the market gives.


Support and Resistance

NASDAQ: Closed at 1720.95
Resistance:
The 18 day EMA at 1718 is bending
1752 from 2004
1782 from August 2004
1882 from October 2003
1900 is the gap down point in October; from August 2004
1912 from April 2005
The 50 day EMA at 1931
1947 is the point where the market gapped down from in October 2008
1984 is the lat September low
2070 from September 2008
2099 is the mid-September closing low
2155 is the March 2008 low
2167 is the July 2008 low

Support:
The 10 day EMA is 1669
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 968.75
Resistance:
The 18 day EMA at 962
995 from June 2003 consolidation peak
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
The 50 day EMA at 1071
1075 from August 2004.
1106 is the late September low
1133.50 is the mid-September 2008 low
The 90 day SMA at 1181
1200 is the July 2008 intraday low
1244 is an August 2005 peak
1245 is the 2002/2003 up trendline
1257 is the March low
1270 is the January low
The 200 day SMA at 1279
1285 is the recent July peak

Support:
965 is the 2003 consolidation low
The 10 day EMA at 938
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 9325.01
Resistance:
9323 From June 2003 peak
9575 from September 2003, May 2001
9814 from August 2004
9852 is 25% off of the October 2008 intraday low
9937 from May 2004 low
The 50 day EMA at 9966
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 90 day SMA at 10,776
10,827 is the July 2008 intraday low
10,962 is the July closing low
11,061 from February 2006
11,317 from March 2006
11,388 is the prior August low

Support:
9200 is the July peak in the 2003 consolidation
The 18 day EMA at 9141
The 10 day EMA at 8982
8985 is the closing low in the mid-2003 consolidation
8626 from December 2002
8521 is an interim high in March 2003 after the March 2003 low
8197 was 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.

November 3 - Monday
September Construction Spending (10:00): expected -0.8%, prior 0.0%
ISM Index, October (10:00): expected 42.0, prior 43.5

November 4 - Tuesday
October Auto Sales: 4.3M prior
Truck Sales, October: 5.3M prior
Factory Orders, September (10:00): expected -1.5%, prior -4.0%

November 5 - Wednesday
October ADP Employment (8:15): expected -80K, prior -8K
ISM Services, October (10:00): expected 48.5, prior 50.2
Oil inventories (10:30): 493K prior

November 6 - Thursday
11/01 Initial Claims (8:30):
Productivity Q3 Preliminary (8:30): expected 1.0%, prior 4.3%

November 7 - Friday
October Average Workweek (8:30): prior 33.6
Hourly Earnings, October (8:30): prior 0.2%
Nonfarm Payrolls, October (8:30): prior -159K
Unemployment Rate, October (8:30): prior 6.1%
Pending Home Sales, September (10:00): prior 7.4%
Wholesale Inventories, September (10:00): prior 0.8%
Consumer Credit, September (3:00): prior -$7.9B

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

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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