Sunday, November 09, 2008

Bottoming Process Continues

- 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.


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.



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.


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.


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.




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.


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:



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.



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
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

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
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

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
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

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

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