Monday, December 08, 2008

Stocks Rally in Face of Bad News

- Stocks stare down terrible jobs data, rally again in the face of bad news.
- After worst week ever for the market in October, indices are hanging in, improving their position.
- Hartford insurance announces everyone is wrong about its future, rallying the insurers singlehandedly.
- Jobs numbers are the worst since 1974. Or are they?
- Budding strength ready to morph into something better.

More new-found strength in the face of bad news.

The big news was the monthly jobs report. It was bad at -533K (-335K expected) and the prior two months were notched lower by 199K total. Total dejection permeated the pre-market financial stations with former Treasury Secretary Snow calling the report 'terrible' and stating the feds had to go all out and do 'whatever it takes' to stimulate the economy. Snow wanted everything from tax incentives to more of the same kind of monetary and socialist interventions. Every guest was similarly downcast. Things were bad and going to get worse was the common theme.

Stock futures were down, but they were not down commensurate with the news. In the pre-market alert we noted once again the market was handling bad news relatively well. Not great, not surging in the face of the news, but hanging in their with a bit of strength. Stocks opened lower but immediately started to bounce. That didn't last long as the sellers came at them again. They pushed the indices lower once more. They pushed them to the Monday low. Do or die, lick log, fish or cut bait. If they failed here it was over. They held. That triggered short covering as well as a session long rise into the close. The market has had spine sightings the past week after the initial rally off the 2008 lows. The action of rallying in the face of bad news, really bad news, shows that the market is sold out for at least the short term if not more.

TECHNICAL. A little spine is a good thing. A few weeks back I was talking about the market needing to start showing some upside bias even when the market overall was not necessarily on the rise. There could be continued up and down action, but you want to start seeing the upside win out at the end of the day. There could be bad news but the market did not waiver and then get the 18 wheeler treatment like an armadillo on the road at night. All week the economic data dumped on the market. ISM terrible. ISM services, terrible. Auto sales horrid. ADP jobs pathetic. Challenger layoffs awful and thousands more were announced later in the week making next week downright painful. Jobless claims were a mere ugly prelude to a 34 year low water mark in non-farm payrolls. Outside of Monday, however, the market fought back from every gut punch. Friday it overcame bad news even before the market opened as futures just were not that bad in the face of really atrocious news. It toyed with the sellers in the morning before rebounding from a second selling attempt. When that attempt to sell failed the washout was complete and stocks rallied to the close.

INTERNALS. Not bad, not great. You can classify Friday as a follow through on the NYSE indices on the heels of NASDAQ doing the same, though as with NASDAQ, it was not that strong thanks to some rising but so-so volume. Trade did reach average on NSYE, so there was a bit more umph to the move. Breadth was decent at 2+:1. A follow through but the lack of real power taints the ultimate upside that can be achieved without something stronger this week. Without that, this move makes it hard to say it is THE bottom, but it is much more than the market has shown since the serious selling started.

CHARTS. The action all week was important, but Friday summed it all up, tying up the loose ends of the week. Specifically, the selling into midmorning took the indices down to the Monday low. When the sellers could not push the indices lower the rebound was on and it took the indices back through the 18 day EMA resistance. That has been violated on both sides of the line this week more than the underage drinking law on Spring Break, but it still means something. NASDAQ moved through some resistance near 1500 on the close as well. SP500 still has 900 to clear, the level that stalled the last move in late November. DJ30 the 18 day EMA as well as some interim resistance at 8500, but it too has some serious issues at 9000, 9600, etc. Digging out of a hole it tough business and there is plenty of work ahead. When you consider that the week of October 6 to October 10 was the worst week EVER for the market and that a month later the indices are basically flat and showing some resurrected strength, you can see the reason for a bit of optimism in the midst of all the gloom.

LEADERSHIP. Still a long way from a plethora of solid bases ready to ride the swell of the indices higher, but that is not really necessary at this point. As seen in prior recoveries, there simply needs to be some good stocks in position to make rallies and lift the market higher, allowing other stocks to fill in behind with base formation. This past week there were good stocks making the move, some of them from good patterns, some from simply solid consolidation patterns. Some solid, familiar names: AMZN, LOW, DLTR, COH, VX, FLR, MCD, AAPL. Some broad shoulders to lift the market. In addition a lot of smaller stocks were doing some great work: QCOR, CBST, EPIQ, HMSY. Sectors are also starting to work other than just individual stocks. Retail is attempting to come around, rallying on bad same store sales results. Airlines are shaping up and some are moving. Financials are moving higher and setting up. Some techs are doing the same. Insurance is suddenly performing: Hartford said Friday that its business and balance sheet was nowhere near as bad as many outsiders say it is. Some good work is being done, and they are in and are getting in position to move upside.


Predictions of $25/bbl oil.

Remember $200/bbl oil as a lock last summer? Remember AMZN was to go to $500? Well, AMZN did, but that was the mark of the top. When those kind of predictions start coming in after what is already a massive move, there is more froth than on a cappuccino. As the $200/bbl predictions hit, oil rolled over. It is down 70% from its peak.

Now the pendulum has swung full to the downside. Friday a MER analyst said that if China goes into recession among other things that oil would hit $25/bbl. Not that $25 seems that much more, but it is another 38% move lower and overall an 83% decline from peak. A massive move and now predictions of a lot more. Oil is getting sold out.

Not that no one would mind seeing oil head lower, but after a 25% drop this week to a close at 41.64 (-2.13), expecting a lot more downside near term is a stretch. Moreover, $40ish oil is really good if it stays. Once there is sign or even anticipation of economic recovery, however, oil will start back up. Not as much as before; that was mania driven by the belief China, India, Brazil, etc. would never see recessions. Yes and the US market rally in the late 1990's was driven by fundamentals. Everyone believing that stand on his or her head.

Thus oil is going to bounce near term, but the downtrend is not going to end anytime soon. It will likely hang around for quite some time in this range, and again, that is acceptable for the economy and thus consumers.

Terrible jobs numbers, but let me tell you, back in my day . . .

Unemployment hit 6.7%, a 15 year high. Not as bad as the 10% unemployment of the 1970's thus far. On the other hand, the monthly jobs loss (-533K) was the worst since December 1974, and we all know that the 1973-74 recession and the 1970's malaise was the worst since the Great Depression. September was revised to -403K from -284K. October was a write down as well, falling to -320K from -240K. Another 199K more lost, bringing the 3-month total to -1.256M. Impressively weak and worthy of the 1970's comparisons.

Or is it? Yes and no. The numbers of jobs lost measures up, but you also have to figure the size of the overall jobs pool. As the economy has grown impressively since 1974, the job pool is much larger. That makes the same real number of jobs losses proportionately less: bigger pool, same number of jobs lost, less of an impact. To even things up, the monthly jobs loss would need to DOUBLE to have the same impact as in 1974. Thus while the numbers are by no means pleasant and we pray for every person and family suffering a job lost, the impact on the economy is not the same.

That line of reasoning dovetails with the unemployment rate. It is a percentage of the workers in the jobs pool, and that makes it apples to apples. The 6.7% is the highest since the 1991-92 recession (it topped out in October 1993; it is a lagging indicator that follows the economic cycle), but it is well off the 10% rate in the early 1970's. It basically confirms that the non-farm payrolls decline does not represent the same impact as the 500+K in 1974.

So we have delved into the vagaries of 1974 versus the present. What does it mean? Signs of a bottom given things are so bad on a jobs lost basis? Does it mean things have to get worse to be the equivalent of 1974, i.e. -1M jobs per month? Or does it mean this economic slump is not as bad as the 1970's?

What the jobs report tells us.

It doesn't tell us a damn thing other than the jobs market is bad. Now there is some in-depth, rocket science-like analysis. But that is exactly what it tells us because jobs are lagging and they don't tell us anything about the future. They are not, as some suggested Friday, able to tell the future by how bad the past is (that is, how many jobs are lost or how high the unemployment rate gets). The horrible litany of economic data the past two weeks coupled with the fact that jobs lag the economy simply means that the economic bottom is not here yet. It may be ready to turn given the new actions by the Fed and Treasury that finally brought mortgage rates lower this past week, but it has not shown up in the market.

It usually just gives us hints and whispers it is turning, such as modest improvements in manufacturing that may just show up in the sub-indices within the overall regional measurements. We will notice those but no one will give them much credence at the time because things look so bleak no one can possibly believe it will make a difference. Diving prices paid are giving short shrift right now even with the ISM prices paid falling to the twenties; major re-pricing of costs is ongoing, and that means more profitability.

As often noted here, the market will make the turn first. Yes the market overshoots on the upside and the downside, and that is the argument many use to say the market is not really the best leading indicator. Does it really matter if it overshoots, however? That is not what is being measured, i.e. how high or low it goes. It is whether it is turning and showing real underpinnings of strength versus just a bounce. That is what tells the real story. In early 2003 almost 100% of the pundits said the market was rolling over into another bear decline after that late 2002 double bottom and rally. We saw many fine patterns developing during that consolidation of the 2002 run. Price/volume action was great. Patterns were forming up well. It took a lot of courage to step in when they broke higher, but NASDAQ was up 70% in short order and we made a lot of money on that move because we were ready to jump when the stocks moved, no matter how bad the economic data was and how pessimistic the investment climate was.

Thus we are watching this current showing of new strength with keen interest. Not a lot of great patterns yet though there are some good ones showing up. This looks more like the October part of the bottom that set up for a nice run higher that was the lead in to a real character building shakeout while the other patterns formed and the bear market was finally wrung out after the initial double bottom jump. Plenty of work to do, plenty to prove, but we see patterns building, and with some better leadership we are very interested in playing this move and seeing how it develops subsequent to this run.

LIBOR drops a bit more, mortgage rates adding a missing ingredient.

The overnight LIBOR rate tumbled once more, falling to 0.28% Friday, down from 0.52% Thursday and 1.09% Monday. The key 3-month held steady at 2.19% Friday, down from 2.22% Monday. Not a huge move; needs more of course.

Mortgage rates are a key group coming into play now that the Treasury said it is going to buy consumer, SBA, and mortgage assets and the Fed set up a swap facility for the same. On top of that there is the Treasury plan to offer 4.5% mortgages to new home buyers. If it had said ALL citizens for refinancing and new purchases then the results would have been much bigger. It is not finalized; after letting my House reps and senators know my unvarnished thoughts (as have millions across the country), maybe that will change. Some say it costs too much to do that. Versus what? Giving banks $300B to hand out bonuses? Give me a break.

Treasury yields show strength as well.

After an historic drop in Treasury bond yields that saw the 2 year fall to 0.81%, suddenly they bounce in the face of terrible jobs news. Friday the 2 year rose to 0.94% after showing 0.82% Thursday and o.85% after the jobs data. Despite the bad news, no rush to the safety of treasuries Friday. Instead investors bought stocks.

The 10 year bounced back as well. It fell into the 2.54% yield range Thursday, the lowest yield in decades for the 10 year. Friday it bounced and closed at 2.72%. Not the high for the week but it looked into the abyss and climbed back up.



VIX: 59.93; -3.71
VXN: 58.96; -3.63
VXO: 62.94; -7.24

Put/Call Ratio (CBOE): 0.92; -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.

This is a historical milestone in the making. Bulls are impressively low considering we are in general a very optimistic country. The few bulls is a positive indication because it means most everyone that is getting out is out and there is money on the sidelines. In other words the ammunition boxes are full and as the market recovers investors will start opening up the boxes and firing. Little by little they will be forced to put more money into the market and there will be some rushes higher in fear they are missing the train. You relish times when sentiment is so negative because it means some tremendous buys are setting up. This could indeed be the opportunity of a lifetime, and you take advantage of it by buying quality stocks and letting them work for you as long as they will. If we can hold them for years, great.

Bulls: 23.1%. Diving to almost record lows again, falling from 29.0% last week after bouncing up into mid-November. Hit 31.9% after bullish sentiment rose steadily off the 5 year low of 21.3% hit to start November. Rapidly approaching that level again. Remains below the 35% threshold considered bullish for the market. At this level it is very bullish. This past 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: 49.5%. Surging as bulls tumble, rising from an already high 44.1%. RiNot many believers, a positive indication. Blasting higher after dipping from the 5 year high at 54.4% hit the last week of October. It is on its way there again. 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: +63.75 points (+4.41%) to close at 1509.31
Volume: 2.222B (+7.98%). Volume was up as NASDAQ tested and moved higher. Unfortunately it was still well below average, unable to crack that barrier or even give it a scare all week. Improving price/volume action (up on upside sessions, down on downside sessions), but not blowout buying strength.

Up Volume: 1.89B (+1.543B)
Down Volume: 315.96M (-1.381B)

A/D and Hi/Lo: Advancers led 2.21 to 1
Previous Session: Decliners led 1.92 to 1

New Highs: 1 (-3)
New Lows: 173 (+45)


Gapped lower, sold down close to the Monday low, but it held and reversed. Took out some price resistance at 1505 and the 18 day EMA (1500) for the second time since the rebound starting, making a higher low along the way. It is firming, setting up for a solid move higher. This week it needs to deliver that move and it has set itself up nicely to do that.

SOX (+3.17%) is still below the 18 day EMA, having yet to enjoy even the modest success of the other indices. It is, however, moving laterally in a nice range and is poised to make the break higher. Good move Wednesday, and it is or should be an early upside sector in a recovery cycle.




Stats: +30.85 points (+3.65%) to close at 876.07
NYSE Volume: 1.62B (+10.27%). Volume moved up to average. It was basically average Monday on the selling and Tuesday on the rebound. Not much difference here, but volume was up on a good upside session, and that put this move in something of a follow through category though a rather modest one in need of some positive reinforcement this coming week.

Up Volume: 1.379B (+1.058B)
Down Volume: 231.975M (-910.319M)

A/D and Hi/Lo: Advancers led 2.51 to 1. Good but not great, not a Dylan Rattigan 'holy crap' type improvement.
Previous Session: Decliners led 3.03 to 1

New Highs: 31 (-5)
New Lows: 128 (-5)


The large caps sold hard Monday then clawed back into Thursday where they gave some ground. Friday they gave more ground, all the way down to the Monday low (well, almost). When they held the financials bounced and the index jumped. Closed at session highs on rising, average trade. Down for the week but in position to take on the late November high and early October closing low at 900. A move over that level gives SP500 an important higher high that will take more shorts out of the index. It is still in the process, but it has some snap in its jab this time around.

SP600 (4.32%). Small caps were not the market leaders Friday but they were right up there with the growth indices, what you want to see if the market is starting to factor in economic expansion. Been here before have we not? Looks good, moves well, gets hammered. As with the rest of the market the small caps are showing a bit different look this time around, coming back above the 18 day EMA quickly after an initial run through that level and fade. In position to make the move as well.

SP600 Chart:



The Dow reached all the way down just past the Monday low and then reversed back through the 18 day EMA and 8500. Volume moved to just over average. Still below 9000 and the 50 day EMA (9075), but DJ30 put together the best pattern over the past few weeks (or more accurately, held together better) and is in good position to lead. Good meaning it still has a lot of work ahead of it, but it is in position to make the upside move. Money flow has turned upside. Needs some help from the financials that have rallied up to resistance, a critical test ahead for them and the rest of the market this coming week.

Stats: +259.18 points (+3.09%) to close at 8635.42
VOLUME: 346M shares Friday versus 280M shares Thursday. Solid volume, the best in 8 sessions, is helping the index push higher.



Some more important economic data this coming week, but no one is holding their breath for a sudden turn in the economy. Inventories, trade balance, PPI and importantly, retail sales and Michigan sentiment. Again, no one is expecting a big turn in the data and we will see if the market can move higher once more in the face of weak data.

Why would the market move with such bad economic data? The expectation of better future data. We discussed it last week, but it is worth repeating: the Treasury and Fed appear to have hit on the right areas to get key rates moving lower, i.e. focusing on the consumer, small business, and mortgage markets. That brought mortgage rates down and it started moving LIBOR lower as well.

Is that all driving things? No. At the end of the week we heard a lot more talk about the need for a stimulus package now, not later. The Bush administration is reportedly meeting with congressional democrats and republicans on what type of stimulus is needed. Bush will want supply side (the rebates on the demand side early in the year did nothing but temporarily bolster buying), the democrats will want to focus on the demand side. What we hear is that a stimulus package will include both and it will be massive. Hearing talk of $1T in stimulus, that in addition to the over $7T in bailout/TARP/TALF money already out there.

Hey, if you are putting that kind of scratch in play, what is another little trillion? It is clear that stimulus is needed as we said back in October: it is not enough to just free up credit given that it took so long to start to work and that some severe economic damage is done. Once the credit flows there needs to be a reason for businesses and consumers to seek it. Thus tax incentives to buy capital equipment, durables, etc. as well as a reduction in marginal rates. It was the catalyst during the Reagan years, the combination of stimulus that resulted in investment in the future of the US and we reaped the rewards of those seeds planted for 20 years.

We feel that is another reason the market is stirring. As noted last week, almost to the day the second Bush stimulus package passed the market took off to the upside in anticipation of what the incentives would do to economic growth. The market is trying to bounce in a manner similar to October 2002 before it went into an almost 3 month consolidation of that move that led many to believe there was another bear market rollover in progress. That set up the great patterns, and when the stimulus was passed and the Iraq war was under way the market took off in anticipation of growth. The set up is there, but of course as with the indices there is still a lot of work to be done to get us there. It does appear, however, that both sides agree something major is needed and the die is being cast right now.

With that we are continuing looking at solid plays ready to move upside. As noted above, many solid names moved well last week, a very good indication for the market overall. More will unfold as the market moves and we will continue to focus on those to get us into position to ride the move higher. We already have some great positions working for us and as the rally unfolds more will come to the fore. We will watch for them and be ready to pick them off as they do.

Support and Resistance

NASDAQ: Closed at 1509.31
1521 is the late 2002 peak following the bounce off the bear market low
1536 is the late November 2008 peak
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 1659
1752 from 2004
1782 from August 2004

The 18 day EMA at 1500
1499.21 is the 2008 closing low
1493 is the October 2008 low. Key low.
The 10 day EMA is 1476
1428 is the November 2008 low
1398 is the early December 2008 low
1387 is the 2001 low
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 876.06
889 is an interim 2002 peak
896 is the late November 2008 peak
899 is the early October closing low
The 50 day EMA at 946
965 is the 2003 consolidation low
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 18 day EMA at 867
866 is the second October 2008 low
The 10 day EMA at 858
853 is the July 2002 low
848 is the October 2008 closing low
839 is the early October 2008 low
815 is the early December 2008 low
818 is the November 2008 low
800 is the March 2003 post bottom low
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 8635.42
8829 is the late November 2008 peak
8985 is the closing low in the mid-2003 consolidation
The 50 day EMA at 9076
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
9575 from September 2003, May 2001
9656 is the November 2008 peak

8626 from December 2002
The 18 day EMA at 8522
8521 is an interim high in March 2003 after the March 2003 low
The 10 day EMA at 8477
8451 is the early October closing low. Key level to watch.
8141 is the early December low
8197 was the second October 2008 low
8175 is the October 2008 closing low. Key level to watch.
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.

December 9 - Tuesday
October Pending Home Sales (10:00): -2.3% expected, -4.6% prior

December 10 - Wednesday
October Wholesale Inventories (10:00): 0.2% expected, -0.1% prior
Treasury Budget, November (2:00): -$193.0B expected

December 11 - Thursday
Initial Jobless claims (8:30): 530K prior
November Export Prices ex-ag. (8:30): -1.2% prior
Export Prices ex-oil, November (8:30): -0.9% prior
Trade Balance, October (8:30): -$54.0B expected, -$56.5B prior

December 12 - Friday
November Core PPI (8:30): 0.2% expected, 0.4% prior
PPI, November (8:30): -1.8% expected, -2.8% prior
Retail Sales, November (8:30): -1.4% expected, -2.8% prior
Retail Sales ex-auto, November (8:30): -1.7% expected, -2.2% prior
Business Inventories, October (10:00): -0.1% expected, -0.2% prior
Michigan Sentiment-Preliminary , December (10:00): 58.0 expected, 55.3 prior

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

Jon Johnson is the Editor of The Daily at

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