Sunday, December 14, 2008

Wall Street Fraud Reaches Far

- Senate votes down auto bailout, massive Wall Street fraud, but economic data not as terrible as expected, and the market bounces back.
- Who is in charge? Federal government in disarray as different branches acting independently and all without constitutional authority.
- Wall Street fraud going to reach far even as irony is thick.
- November retail sales not as bad as feared and core sales rise.
- Market has tested and now needs to resume the upside move.


Jon Johnson has been under the weather much of the week and this afternoon he threw in the towel for the weekend. We suspect the final straw was the handling of the auto bailout and the Executive branch indicating it would use TARP funds. Mr. Johnson was pretty amped up about this and we are pretty sure that pushed him over the edge so to speak. He did give us his important takes from the session and the week and we put them together for him tonight.


Three important points Friday, two bad, one good, but the market acts just fine.

Futures were falling like stones on the failure to reach any accord for the uncompetitive US auto industry. It galls most to give arrogant, bad business structures tax dollars that will likely be squandered, but at the same time we like having the tanks and military equipment for national defense reasons. It is not very perplexing but when you fold politics into the mix it becomes a black hole.

That was point number one: the continuing automaker saga, and the market allowing itself to be led by the nose as the prospects for a bailout ebbed and flowed. It was leading the market sharply lower but then the White House and Treasury said 'all options were on the table' to rescue the automakers, and that brought the market up off the lows. If you cannot get what you want from Congress, go to another branch of government. Right now any semblance of constitutional protocol has been tossed in the toilet, evident by the end run around Congress to the President's doorstep. Bush was only too happy to suggest that TARP funds, created to help financial institutions through buying distressed assets, were also available for uncompetitive automakers. Great negotiating tactic. Makes you wonder what it was like in the Bush home raising the two daughters. Did they run from one parent to the next trying to get their way? In fairness we haven't heard what conditions the White House will put on TARP funds (why put any? It didn't put any on the financial institutions), but even senators are hoping some will be put in place. Never a good sign when some leading senators on both sides of the aisle have no idea what the President is contemplating. The carnival in DC is now a three-tent affair and the Constitution is being used as a trash liner. We may never recover from this. Yes we may get out of it without a major financial collapse, but our form of government and the respect it used to have around the world for the rule of law is over. We will all suffer as a result forever.

Point 2. An estimated $50B fraud took place in the money management business, a giant Ponzi scheme perpetrated by the former NASDAQ boss Madoff. Madoff returned 2% to 3% per month for years on end. Some savvy investors with Madoff said they could not tell what he was doing even though they had the trade confirmations. They were just happy to get their monthly positive returns. As it turns out, Madoff was taking the money coming in from the new investors and paying out to the existing investors. At some point it all had to seize up, and the dive in the market was the catalyst as a lot of overseas investors just decided to get out, worried about US hedge funds. The irony of this is that in 3 to 6 months the market will probably be much better off and Madoff would have escaped as new money would have come in. The market impact: not likely much. There are no positions to liquidate because the money never hit the market. Thus no mass selling to raise cash. The cash is gone. It will hurt the investors, but this time it won't hit the market really hard.

Point 3. The economic data was not as bad as feared. PPI fell 2.2% overall and rose 0.1% on the core. That makes 4 months of declining producer prices, a positive for business profits. Retail sales fell 1.8%, and while that makes five months of consecutive declines, they were not as bad as expected (-2%) nor as bad as October (-2.9%). It did not hurt that gasoline sales fell 14.7%, the largest decline on record. THE KEY: Core retail sales ROSE 0.5%, the first rise since July, right before all of this brown stuff hit the fan. Many, many sectors rose: Electronics 2.8%; health/personal care stores 1%; clothing sellers 0.8%; sporting goods 2.8%; department stores 2.1%; general merchandise 1.2%.

Point 4. The market took the bad news and instead of the Dow being down 400 points as it looked like in the wee hours of the morning, it and the other indices opened much tamer and rallied back to the upside in a steady albeit jagged move and closed positive. Yes there was an assist from the free wheeling President that never met a spending bill he did not like (or veto that he liked, for that matter), but the result was as we have seen before in this rally: some bad news tries to knock the market back but then the market swallows it and rebounds. The shorts simply could not take advantage of this amazing stroke of good luck that hit just as the indices were testing and were in a vulnerable position. The sellers would have feasted just 5 weeks back but on Friday this early Christmas gift was returned unopened. It was no big reversal session on the indices, but it was a big day in that once more the sellers could not grab onto a perfect selling opportunity. Winds of change are blowing stronger and stronger.

TECHNICAL. Once more some good intraday action with the lower open and then a steady, session long rebound to positive. Volatile but a steady, unbroken climb in the face of bad news. The new backbone is growing a bit stronger.

INTERNALS. Mediocre at best, but it was a reversal session from a very weak start so breadth was so-so (1.9:1 NYSE, 2:1 NASDAQ). Volume was lower and still well below average where it resided all week but for Monday (on the NYSE) when the indices jumped higher. The rest of the week was a lateral consolidation and Friday was a weak start but solid recovery. Positive for th upside.

CHARTS. The test continued as the indices started lower, moving well below the 10 and 18 day EMA, but then reversed to close over those near support levels. On the lows all of the indices easily held above the prior lows. That means they are looking to make another higher low here, building more of a positive picture. In addition, leadership came from the growth indices with NASDAQ scoring a 2.2% gain, SOX A 4.71% gain, and the small cap SP600 a 2.62% gain. Want to see the growth indices leading as that would signal the economy is going to be turning up in the future, that the trough is here. Not tat that point just yet; they still have to prove they are ready to lead and actually start leading.

LEADERSHIP. Growth areas were perky. Chips were up. Techs were solid. Some industrials put in some good work. After a pullback this week to test prior moves, they were moving back up and we saw some of the small business services rebounding as well (e.g. EPIQ, ACM). As discussed earlier in the week these are early cycle stocks. If they start moving again that is a positive for the economy and thus the market.



VIX: 54.28; -1.5
VXN: 51.91; -0.15
VXO: 57.78; +0.67

Put/Call Ratio (CBOE): 1.04; +0.06. Moved back over 1.0, a bullish indication, even as the market reversed and moved higher. That is a positive indication as the put/call ratio is a contrary indicator: as it goes higher and closes over 1.0 that suggests anxiety or worry is hitting extremes.

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: 25.3%. Bouncing up with the modest rise in the market, up from 23.1%. Turning back up above the 5 year low at 21.3% hit in November 2008. 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: 46.2%. Down from 49.5% the prior week that saw bear surge from 44.1%. Making a lower high below that 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.


Stats: +32.84 points (+2.18%) to close at 1540.72
Volume: 1.903B (-7.18%). A week of below average volume. It was higher on the upside sessions and lower on the consolidation and downside sessions so the price/volume action was a positive. Just needs some serious volume, however, i.e. above average volume.

Up Volume: 1.366B (+1.13B)
Down Volume: 519.724M (-1.277B)

A/D and Hi/Lo: Advancers led 2.03 to 1
Previous Session: Decliners led 2.86 to 1

New Highs: 3 (0)
New Lows: 110 (+27)


Gapped lower and then rebounded through the 10 and 18 day EMA near support. That kept the index above the late October low at 1500ish and if it holds, puts in another higher low in the move off the November low (the second higher low; racking them up here). That is how it starts but again, NASDAQ needs to show stronger trade on the upside as NASDAQ moves up and tries to take out the 50 day EMA (1646).

SOX (+4.58%) held key support at the 10 and 18 day EMA that is coincident with the late November peak and the late October low. It bounced off of that Friday after a nice orderly test to that level. From the doghouse to attempting to lead the recovery higher. A late start but making up ground.




Stats: +6.14 points (+0.7%) to close at 879.73
NYSE Volume: 1.434B (-2.42%). Low volume reach lower and recovery. Strong above average volume the first session of the week on the strong move higher, then lower, below average volume the rest of the week as the NYSE indices tested.

Up Volume: 1.019B (+795.662M)
Down Volume: 407.912M (-824.309M)

A/D and Hi/Lo: Advancers led 1.88 to 1
Previous Session: Decliners led 3.56 to 1

New Highs: 29 (+1)
New Lows: 81 (-6)


After closing near the 10 and 18 day EMA Thursday, SP500 reached lower in the early session, undercutting those levels. It came close to the late October low but held above that level and reversed to recover the 10 and 18 day EMA, closing with a modest gain. Nice test and is now in position to continue the rebound, making a higher low in the process.

SP600 (+3.62%) small caps gapped lower, tested lower, but held the October low and reversed. They closed over near support at the 10 and 18 day EMA that they gave up on the Thursday close. SOX edged the small caps for the upside lead Friday. SP600 is still questionable here; needs to put in a strong week ahead to show it is back in the game and getting money put its way once more. The 50 day EMA is a key level it needs to take out, about 20 points north. It will take quite a move to get there so once it does it will likely need to take a pause that refreshes before continuing on. Has to get there first and on Friday there were some small caps bouncing back nicely from selling that week.

SP600 Chart:



As with SP500, the blue chips reached lower from the 8500 support level, held above the late October low, then recovered positive and just over the 10 and 18 day EMA on the close. Nice doji reversal though volume was still low overall. Still in position to make the move higher after this week of testing. Indeed, it is time to make the move higher.

Stats: +64.59 points (+0.75%) to close at 8629.68
VOLUME: 271M shares Friday versus 290M shares Thursday. Above average volume Monday then well below average the rest of the week. Good quiet consolidation action. Now it needs to show something in the last full week of the year this coming week.



Big week of economic data, but the market faced a big week of data two weeks back and rallied into the teeth of ugly results. It will have the chance to do the same again, but . . . there could be some improving numbers. There is not a lot to base that upon, but November retail sales were better than expected in the face of terrible sentiment and jobs data. Many dismissed the retail results as a one-time rebound after two bad months, but pundits ALWAYS DISMISS any changes in the data when they are convinced things are very bad or very good. Viewed as aberrations, they are explained away as relief moves or something similar, then summarily dispatched. We will see if improvement comes in on the regional manufacturing reports as they were the first responders out of the last recession. Not looking for major sea changes, just nibbling at the edges that suggest something could be up.

Are we just whistling past the graveyard in so doing? Not really. There is some market improvement in terms of gains and in terms of keeping a stiff upper lip in the face of really bad news. There is leadership in some very interesting areas such as retail, business services, chips, technology, and commodities. The dollar is a worry (closed at 1.3372 Euros, still falling) and its decline is driving oil higher (though it closed lower Friday at 46.60, -1.38). On the other hand, LIBOR rates continue falling with the overnight at 0.12% Friday (flat from Thursday), the 1-month rate at 1.04 (down from 1.20% Thursday and 1.83% just Monday), and the 3-month at 1.92% (2.00% Thursday, 2.19% Monday). Good movement that is picking up speed finally at the 3-month level. With mortgage rates holding lower after last week's sharp decline and with gasoline prices down 60%, there is a serious undercurrent building.

With that setting it is no surprise the market is growing more backbone, bit by bit. We bought into new positions even if it was Friday, and we are going to continue looking at positions this coming week. Not all stocks move at once. As we have written many times, they break higher in waves with early leaders, more staid leaders, and the tag alongs. Different sectors and groups within sectors move at different times. Thus it is hogwash when you hear you have to be in the market at the initial rush higher or you miss out. With stocks leaving the station at different times during a solid upside run you have many opportunities to step in and make money to the upside.

PCLN is a stock we bought into originally (on the current rally) back in mid-November. It moved from the low fifties to 70 for us then tested for a couple of weeks. Friday we bought some more as it broke higher off a test of the 18 day EMA as it looks ready for another leg higher following that first solid run. Same stock, different leg, different wave. In a healthy market it is joined by more and more stocks that rally for the first time as PCLN, an early leader in this move off the bottom, makes its second run. It should give us another couple of runs higher similar to the first one if this rally has legs. For now it is getting the leadership stepping up in such a way that is does look as if it has some desire and ability to continue to move upside. We are going to look at more of these for next week and a bounce up off of this test.

Support and Resistance

NASDAQ: Closed at 1540.72
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 1646
1752 from 2004
1782 from August 2004
1786 is the November 2008 high

1536 is the late November 2008 peak
1521 is the late 2002 peak following the bounce off the bear market low
The 18 day EMA at 1519
The 10 day EMA is 1518
1499.21 is the 2008 closing low
1493 is the October 2008 low. Key low.
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 879.73
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 935.61
965 is the 2003 consolidation low
995 from June 2003 consolidation peak
1008 is the November 2008 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 876
The 10 day EMA at 876
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
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 8629.68
The 50 day SMA at 8794 stopped the Dow all last week
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
The 50 day EMA at 9010
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
9575 from September 2003, May 2001
9654 is the November 2008 peak

8626 from December 2002
The 10 day EMA at 8611
The 18 day EMA at 8598
8521 is an interim high in March 2003 after the March 2003 low
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 15 - Monday
December NY Empire State Index (8:30): -27.0 expected, -25.4 prior
Net Foreign Purchases, October (9:00): $66.2B prior
Capacity Utilization, November (9:15): 75.9% expected, 76.4% prior
Industrial Production, November (9:15): -0.5% expected, 1.3% prior

December 16 - Tuesday
November Building Permits (8:30): 700K expected, 708K prior
Core CPI, November (8:30): 0.1% expected, -0.1% prior
CPI, November (8:30): -1.3% expected, -1.0% prior
Housing Starts, November (8:30): 730K expected, 791K prior

December 17 - Wednesday
Crude oil inventories (10:30): 400K prior

December 18 - Thursday
November Leading Economic Indicators (10:00): -0.5% expected, -0.8% prior
Philadelphia Fed, December (10:00): -40.0 expected, -39.3 prior

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

Jon Johnson is the Editor of The Daily at

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