Historic Rally Signal

SUMMARY:
- Two unexpected moves yield a positive Friday though down for the week.
- Swap spreads improve ahead of SP500. Historically a rally signal.
- Market holds a new consolidation attempt in the face of more bad economic data, first wave of earnings. All in all, not bad work.
- Holdouts crack as a new crop of stocks stand ready to take their place.

Lots of early depression but market shakes it off.

A day that started somewhat unexpectedly as futures were way down. Overnight they were fine, but a couple of hours before the open they simply lost there nerve. IBM and AAPL goosed earnings but MSFT disappointed, but nonetheless the market recovered Thursday and was in decent shape overnight after GOOG beat as well. In the morning, however, the positives turned over. GE earnings were in line with lowered expectations. It kept its dividend. It didn't have a lot to say about the future. Nothing bad mind you, just couldn't say much of anything, especially nothing positive. They futures seemed to say 'that's it' after that release.

They slid lower and just kept sliding toward the open, indicating 2% losses on the open. No relief from other earnings releases either. COF reported an 11% drop in credit card spending. HOG said worldwide sales fell 13% in Q4 and it couldn't offer guidance. Playboy missed and announced layoffs. Sounds like it is time to go and name your price on a Harley, hire a Playboy bunny to accompany you, and pay for it all on the credit card. Maybe it is time for a bunny bailout. After all, Larry Flynt says the economic downturn is damaging our libido.

Stocks started lower, testing the Tuesday lows right off the bat. That was the start of unexpected move #2. Maybe it was not that unexpected. Yes things were depressingly gloomy at the start but they were so gloomy that when the market opened at the Tuesday lows and held the selling abated. A steady climb from the open to the end of the day took the indices positive sans DJ30. There was no change in character on the session as the indices did not break any significant resistance or change their near term patterns. What the day did was keep them working laterally after the August to November selloff to begin the new year.

This little lateral move is part of the larger 3 month consolidation following that sharp selloff. During this lateral move the market has taken the worst economic news since the Great Depression and has continued to consolidate. As we noted frequently, this is a good indication as the market has reached the point where it has absorbed all the bad news or has anticipated it. There was a hiatus in early January when it sold after the jobs news, but it is trying to catch itself this past week, absorbing more bad news and then getting a bit of decent news in the form of some earnings.

TECHNICAL. Intraday it looked grim at first, but after a much lower open in the midst of a lot of negatives the indices rebounded with all but DJ30 hitting positive. Gloom to positive. Not bad action.

INTERNALS. Given how bad things were and the fight to recover the losses the internals were not bad. Breadth was modestly positive on NYSE, a hair negative on NASDAQ. Volume was down on both, still above average on NASDAQ but lower and just below average on NYSE. Overall, price/volume action has leaned to the positive side the past week. New lows hardly expanded at all on the week. Overall the market internals were pretty solid for the week. Even on the downside days the internals were so extreme they were indicative of reversals in themselves.

CHARTS. Quite an intraday turn, but in the end there were no breakouts or change of character in the indices, but the action was not bad nonetheless. Friday the indices held the lows for the week and bounced, holding their lateral range or shelf that has formed after the selling the second and third week of January. SP500 is holding the early December lows, but it is just a hair away from tripping and falling to test the November and bear market lows. NASDAQ and SP600 are holding the December lows as well. DJ30 is actually holding over the October intraday low. Near term the action this week, coupled with the action in leading stocks, is a near term positive. Looking over the prior 6 weeks you still have those head and shoulders toppy patterns trying to form. This week did nothing to alter that as all the indices did was move laterally. Since October, however, there is that 3 month consolidation that is overall positive. Lots of bad news but managing to hold up.

LEADERHSIP. Friday saw some of those tocks that patiently held support during the market selling jump upside. The chips held their form and then jumped Friday on strong volume. Energy jumped back in the game and on some volume. Metals were up but volume was not. Decent but more trade would be nice. Financials were up as well, but it was a low volume bounce that really has the look of a relief bounce. There are good stocks holding support in their pullbacks even through the bad news and overall market selling. Those will be the emerging leadership if this move and they are stirring. Drugs, health care, tech, chips, small business services, and energy are perking up even before a full test of the November lows by the indices. They can still test those lows, but the action in the leaders is trying to prevent that move.


THE ECONOMY

Nothing but bad reports yet some tidbits of positive news.

Since the September shutdown in the economy the economic reports have been on a one-way express to crap. As of this week the headlines had not improved with housing starts hitting a 50 year low as reported Thursday.

LIBOR had improved quite nicely and indeed it is still is vastly improved from last summer. It is still, however, on a rebound that started when the new administration announced addition regulations for financial institutions receiving TARP funds (a.k.a. federal zombie bank funds) as well as loud democratic grousing about tax cuts contained in the proposed and ever-growing stimulus package. Friday it was up again, hitting 0.24% overnight (0.21% prior, 0.40% 1-month (0.39%), and 1.17% 3-month (1.16%). Modest moves, but the prior gains were more sizeable and pushed the 3-month rate up from 1.09% just a few days back.

Despite this there are modest improvements in a wide array of reports. Most if taken individually would be nothing more than a statistical blip. Putting them all together you get an ever so modest improvement in prospective economic activity.

Swap spreads, a leading indicator, have improved.

The first is a really impressive one though it pertains more to the stock market but it is directly related to the economy. Swap spreads are a measure of the risk involved in financial transactions. Wider spreads mean more uncertainty and risk as more up front profit margin is required by the parties in order to transact the deal. Narrower spreads indicate calmer markets as the parties demand less gain on the exchange. Right now swap spreads have recovered impressively, i.e. narrowing rapidly the past month.

The significance is that spreads reflect improvement or deterioration in areas that facilitate economic activity and are thus precursors to actual movement in the economy. That means they are also precursors to moves in the market. Right now spreads have improved dramatically while the market has note. After a rally off the November low that took the indices up through early January the indices have come back to test. They came back more than you would like, but they are trying to set up the past week. With the 3-month consolidation in place and a cadre of high quality stocks in place as well, the market is trying to set up to follow the spread indicator higher.

Other areas of modest improvement.

Barton Biggs noted today that the PMI reports have shown an uptick the past month. True. Chicago improved to 34.1 from 33.7. Still well below the breakeven at 50, but it is a very bad recession and this is the first tick higher since the plunge. What about the service ISM? It improved to 40.6 from 37.3.

Factory orders showed non-defense capital spending up 3.9% annually, the first gain in 4 months and the best gain in 10. Computers rallied 12.5%. Commercial construction rose 0.7% and is up 12.1% the past three months.

Real disposable income rose 1% and rose 7.1% annually for the past three months. Real spending rose 0.6%. Income is rising as inflation falls, and inflation is falling mainly due to the tumble in oil and gasoline prices. Larry Kudlow estimates that that gasoline price drop is equivalent to a $350B tax cut.

It is not an overwhelming, straight flush of positive data. Then again, it never is in the early stages. We initially scoffed at the modest improvement in the PMI data, noting it would need another couple of months of improvement, but that does not mean it is discounted. Especially so when you factor in the other data that is making its own improvements as well. You can see why the market is firming with leadership that is trying to set up for the next break higher. That keeps us looking for the break higher in the stocks.


THE MARKET

MARKET SENTIMENT

VIX: 47.27; -0.02
VXN: 46.6; +0.77
VXO: 45.63; -1.36

Put/Call Ratio (CBOE): 0.77; -0.11


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: 38.7%. Substantial drop from 43.0%, the current top of the recovery as the market rallied off the November low. A rise from 25.3% in December and quickly starting to fall once the market encountered the January selling. Remains above the 35% threshold for the second week, below which is considered bullish. It does not mean the action is now bearish. That level is up at 55%. Bullishness bottomed on this leg lower at 21.3% in November 2008. This last leg 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: 37.6%. Right back up from 34.4% after a 2-week decline to the 34's from 38.5% before that and off from the 46.2% hit mid-December. Back above the 35% level considered bullish for stocks, but as with bulls, still well below the level considered bearish for stocks. Bearishness hit a 5 year high at 54.4% the last week of October. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment on this move. 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: +11.8 points (+0.81%) to close at 1477.29
Volume: 2.16B (-6.56%). Not a bad week for volume. On the Tuesday selling it was lower. It was preceded by a couple of solid, above average volume sessions though expiration played a role in that. Wednesday it was up on a NASDAQ rise. Up big Thursday on the selling, but as noted at the time, it was all the MSFT selling that pushed it above Wednesday. All in all, a net positive for the techs.

Up Volume: 1.63B (+1.199B)
Down Volume: 517.255M (-1.383B)

A/D and Hi/Lo: Decliners led 1.14 to 1
Previous Session: Decliners led 3.1 to 1

New Highs: 5 (-1)
New Lows: 156 (+33). Never moved up much during the test lower.

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

Down for the week thanks to that ugly Tuesday return from holiday. That closed NASDAQ below the October low but above the early December lows at 1400. It is moving in a lateral shelf for the week as it found some support. Still a very tough near term picture for the techs as they are having a tough time getting back together after a lower low. Indeed, it is the late December consolidation at 1500, the higher low prior to the January selling, that is holding NASDAQ back at this juncture. Improved price/volume action is good along with some building patterns in some big tech stocks. A break over 1500 is a first start.

SOX (+4.15%) jumped back up through the late December pullback consolidation. Tried to move through the 18 day EMA but faded to close at that level. Trying to break up the head and shoulders, but still has to get over 225 to break it up (closed at 208).

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

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


SP500/NYSE

Stats: +4.45 points (+0.54%) to close at 831.95
NYSE Volume: 1.42B (-8.64%). Volume faded below average after a week of above average trade. Not a lot of pop Friday; the financials rallied but they did so on lighter trade. Price/volume action has improved some here as well.

Up Volume: 935.132M (+593.109M)
Down Volume: 476.581M (+45.984M)

A/D and Hi/Lo: Advancers led 1.36 to 1
Previous Session: Decliners led 4.38 to 1

New Highs: 34 (-5)
New Lows: 98 (+5)

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

SP500 struggled back to flat on the session, holding above 800 as it did all week. That didn't change things other than halting the selling for now. There was no break over the October low (849 closing). The pattern still remains quite bearish near term despite this consolidation. A test of the low down at 741 is still not out of the question given the financials and their continued drag on SP500. The past two sessions they moved in a relief bounce, but they were hitting up against resistance to tend the week and volume was much lower. Not a real hopeful sign that the needed change in attitude toward financials is taking place. We will see. Without their help SP500 looks ready to test the November low.

SP600 (+0.29%) was not in leadership mode Friday. It did hold the low for the week and bounced but it was tough sledding for the small caps. They are below the October low and the mid-December low, and that leaves them still in a bearish head and shoulders. Has some serious upside to do to break up this pattern and avoid a selloff to the prior low in November.

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

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


DJ30

Similar story for the Dow as it tested the lows for the consolidation of the week and then rebounded. It made it to positive but needed Viagra as it could not keep it up. Holding over the October intraday low but just below the October closing low. It too has work to do, but its pattern is more of a trading range and it has held the lows in the range and is in position to bounce back up toward 9000. With the improvements in some economic data we may just see that move, and we could still look to play it.

Stats: -45.24 points (-0.56%) to close at 8077.56
VOLUME: 370M Friday versus 420M Thursday. See what a major selloff in MSFT can do? After spiking Thursday volume fell right back.

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


MONDAY

Back to a full week of trade and hundreds of earnings reports. A load of economic data on top of that including an FOMC monetary policy 2-day meeting. Information overload. At least it keeps everyone busy trying to figure it all out.

The past week started bad but it did its best to salvage things. Given the bad news and the first really big week of earnings, holding up after the initial Tuesday selling was not bad action. The market remains in a weakened position with a lot of overhead supply near term, but it is also slugging out a 3 month consolidation in the face of continuing bad news.

Indeed the news is bad enough that it has taken down some of the holdouts that were considered safe havens all along. Last week saw STT, one of the so-called safe bank stocks, get ripped open with a dull deer antler after its earnings unexpectedly imploded. WMT capped lower after the first week of January. WMT's recession rise is over, and the money that was camped in there is getting taken out. Consumer staples are also getting taken down, something you would not expect from a truly weak economy for many more months CLX and PG were heading down Friday yet again. When all of the 'safe' stocks are taken down that is typically the sign of a bottom getting put in place whether short term or longer term.

At the same time, as discussed all week, there remain a cadre of high quality stocks that sold off in the 2008 selling but have now rallied off the lows, and unlike many market stocks, have held up nicely with orderly, shallow pullbacks while most of the market sold hard. There are chips (e.g. BRCM, NVLS), metals (SCHN, STLD, RIO), small business (HMSY, EPIQ), energy (NBL, oil service companies), biotech, healthcare, and drug stocks that are set up well and indeed are starting to move higher. They have done their time so to speak, and as the 'safe havens' fall in a sign the bear market is pulling down the last holdouts, they are ready to move in and fill the void. Think of the dinosaurs dying off and the small mammals coming in and filling the void. From small beginnings . . .

So we start the week of massive earnings looking at the stocks that have done their time and are in position to move higher. You have to really like that they are from diverse sectors, lending some credence to an idea they are pointing to a coming upside economic cycle. Maybe it is just another piss-ant rally in an overall bear market, but there are many stocks that can move well that are in good position to do just that. We have positions in some already and will look to add to those as well as pick up positions in new stocks on the move.

As for the downside, well, there are the financials. A low volume bounce to resistance to end the week has some of those looking right for some downside plays. We will look at them and see if they present anything. After all, SP500 is still poised for a fall to the November low. That sounds somewhat tragic for the market, but that would still be part of the consolidation and while not pleasant, not fatal.


Support and Resistance

NASDAQ: Closed at 1477.29
Resistance:
1493 is the October 2008 low & late December 2008 consolidation low.
1499.21 is the 2008 closing low
The 10 day EMA at 1507
1521 is the late 2002 peak following the bounce off the bear market low
The 50 day SMA at 1521
The 18 day EMA at 1524
1536 is the late November 2008 peak
1542 is the early October 2008 low
1565 is the second low in October 2008
The 50 day EMA at 1576
1603 is the December peak
1620 from the early 2001 low
1644 from August 2003
The 90 day SMA at 1662
1752 from 2004
1782 from August 2004
1786 is the November 2008 high. Key level.
1948 is the early October 2008 gap down level

Support:
1440.86 is the low on this selling
1428 is the November 2008 low
1398 is the early December 2008 low
1387 is the 2001 low
1295 is the November 2008 low


S&P 500: Closed at 831.95
Resistance:
839 is the early October 2008 low
The 10 day EMA at 847
848 is the October 2008 closing low
853 is the July 2002 low
857 is the December consolidation low
The 18 day EMA at 860
866 is the second October 2008 low
889 is an interim 2002 peak
The 50 day EMA at 893
896 is the late November 2008 peak
899 is the early October closing low
919 is the early December peak
The 90 day SMA at 940
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.

Support:
818 is the November 2008 low
815 is the early December 2008 low
804 is the low on the January 2009 selloff
800 is the March 2003 post bottom low
768 is the 2002 bear market low
741 is the November 2008 low


Dow: Closed at 8077.56
Resistance:
8141 is the early December low
8175 is the October 2008 closing low. Key level to watch.
8197 was the second October 2008 low
The 10 day EMA at 8263
8419 is the late December closing low in that consolidation
8451 is the early October closing low
The 50 day SMA at 8506
8521 is an interim high in March 2003 after the March 2003 low
8626 from December 2002
The 50 day EMA at 8659
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
The 90 day SMA at 9012
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

Support:
7965 is the mid-November 2008 interim 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.

January 26 - Monday
December Existing Home Sales (10:00): 4.40M expected, 4.49M prior
Leading Economic Indicators, December (10:00): -0.3% expected, -0.4% prior

January 27 - Tuesday
January Consumer Confidence (9:00): 38.0 expected, 38.0 prior

January 28 - Wednesday
Crude oil inventories (10:40): 6.1M prior
FOMC policy decision (2:15)

January 29 - Thursday
December Durable Orders (8:30): -1.8% expected, -1.5% prior
Initial Jobless Claims, 01/24 (8:30): 589K prior
New Home Sales, December (10:00): 400K expected, 407K prior

January 30 - Friday
Q4 chain Deflator-Adv. (8:30): 0.5% expected, 3.9% prior
GDP-Adv., Q4 (8:30): -5.2% expected, -0.5% prior
Chicago PMI, January (9:45): 34.2 expected, 35.1 prior
Michigan Sentiment Revised., January (9:55): 61.9 expected, 61.9 prior
Employment Cost index, Q4 (10:00): 0.7% expected, 0.7% 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

Good Stocks Show Good Volume

SUMMARY:
- Stocks blow a lead as financials crater, but manage a recovery to the close.
- Economic data remains as bad as you would imagine
- LIBOR continues to reverse positive trend, rising faster as stimulus types and TARP requirements less than favored by financial markets.
- Tax cut percentage of stimulus package fell as one tax credit was properly abandoned but nothing new was put in its place.
- Bank dive pushes financial sector toward the old low, setting up an important test.
- Good stocks show good volume on the Friday move, and the rebound will need them and more if it is going to move further upside.

Friday manages to hang onto the Thursday reversal as stocks post an afternoon rebound.

Let's see, it was another day in the stock market so there was some really bad news out. Doesn't matter what day of the week. You cannot watch the news, have a work conversation, catch a workout at the gym, or go to your kid's basketball game without hearing about the latest and worst economic news or investment scandal. Indeed Friday after the close another scandal hit with another fund manager disappearing reportedly along with $350M in other people's money.

So it was no surprise there was more bad news in the morning. C and BAC, one cutting itself up and the other forced to drink the blood of the government's TARP (and thus become a government zombie), announced earnings that were, as hard as it is to imagine, worse than expected. The CPI price measure was weak but not as weak as expected (-0.7% versus -0.9% and -1.7% in November). Production and capacity fell even more than expected and were quite weak. Yes, just another day confronting the worst economic times since the 1970's. I didn't like the 1970's at all. The republican Ford couldn't do anything after taking over from Nixon. Democrat Carter was elected as a new start and voice of reason and intellect after the Nixon corruption and the Viet Nam war. He was the worst President, during and after leaving office, we have ever had, making things much worse at a time you though things could not get worse. Kind of makes you wonder about our current situation . . .

Despite the same bad news du jour, futures were up and the market started higher as well. Looked as if the Thursday reversal had a little muscle left over after that higher volume reversal move. Almost immediately, however, stocks started fading. They sold into lunch, giving up the gains and then moving negative. A bearish high to low fade right in the face of the Thursday high volume reversal. On top of that Circuit City announced it was liquidating, unable to come out of Chapter eleven. 35,000 more to be out of work. AMD then announced it was laying off 1,100.

So, as you would expect . . . the market rallied back. It recovered the lost ground and turned positive. It got a goose from Bill Gross when he appeared on CNBC stating the worst was likely over for banks' balance sheets. Stocks continued higher and by the close were just below session highs. Something of a return to the rally that started in the face of a lot of bad news. Something like that, but as noted all week, there are other issues at work that arose after the rally started. Good recovery Friday, but the difficulty in hanging onto a continuation rally from the Thursday reversal was worrisome.

TECHNICAL. As noted the action was looking pretty bearish with the fade from the morning highs, the old high to low bear market selloff. Once more it did manage to turn higher in the face of bad news, however, something to its credit. A solid and steady rally into the close pushed the indices positive. Good recovery.

INTERNALS. The downside internals were impressively weak Wednesday with NYSE breadth at -10:1 levels. That along with 6.5 down days set up the bounce. Thursday breadth was mediocre; okay for a reversal session. Friday it was better with NYSE showing almost 2:1, but these days that is a pretty modest session. NASDAQ was mediocre again at 1.2:1. Volume on the reversal session was very good and it was good again Friday though down a bit. Trade was still above average on both, another positive as the market moves higher yet again though it was expiration week and some of the volume can be attributed to that.

CHARTS. The Thursday reversal started pretty much where it had to as there was no more room to the downside to give and keep things even superficially positive. Friday the move was not as impressive as the indices had to recover from giving away the gains just to hold positive. SP500 is holding right at the October lows. NASDAQ bounced off that level but stalled at the 50 day SMA Friday. DJ30 held the October low as well but it couldn't make much headway. Same with SP500. Very similar. All made the bounce, but of all, the mid-caps look the best in the SP400. We joked a month back about the SP600 small caps leading ('and the children shall lead'). Maybe it is going to be the teenagers instead as they managed to hold the December consolidation levels.

LEADERSHIP. Chips continue looking good with more high volume advances Friday. BRCM moved above the 50 day EMA and the 90 day SMA. NVLS jumped past the 50 day EMA on very strong trade. Chips are universally despised, but they are also moving higher on strong volume and we have picked up positions along the way. Not all small caps struggled mightily last week; HMSY, EPIQ and others performed well and more are in position to move. Engineering pulled back but recovered well to end the week. Metals were down in the selling, but were recovering late in the week. They are a bit iffier with their patterns and have something to prove this coming week. Medical and drugs have improved, but they are a mixed picture. They can be leaders and they can also be defensive. In sum, there are still leaders in good position but the ranks thinned during the pullback. Those in good position started to bounce some Thursday and Friday, but they still have a lot to prove this coming week if they are still going to hold the leadership mantel and help pull the market higher again.


THE ECONOMY

Last batch of economic data stinks.

Yes Michigan sentiment rose to 61.9, topping expectations and December's 60.1. Lower oil prices and the bump higher in the stock market helped that out. The lower oil prices pushed PPI lower and on Friday we learned CPI as well. Consumer prices fell 0.7% but that was not the -1.7% in November. It still marked the fifth straight monthly decline and put 2008 prices at a meager 0.1% rise. That was something in the neighborhood of a 54 year low rate. Core prices remained flat, not rising the 0.1% expected.

At least prices are not rising, but that of course stokes deflation fears given the economic cycle is at low tide. Happened in the 2000 to 2003 recession. Happened in 1991 before that. Happens just about every serious economic pullback, and usually near the trough. As with inflation where the economic cycle has peaked as inflation spikes, deflationary trends in prices typically hit their peak (or bottom) when the economic cycle has bottomed. Hey, that is something to look forward to.

Production was really bad, falling 2%, doubling the 1% anticipated decline. November's 0.6% gain was flipped to a 1.3% decline. Production has fallen off the cliff in this downturn and is picking up speed, dropping an annualized 11.5% in Q4. Year over year production fell 7.8%, the largest drop since 1975. Capacity utilization fell to 73.6%, well below expectations and November's downwardly revised 75.2%. That 73.6% rate is 7.4% below its average from 1972 to 2007. Below average? No surprise there.

No question the economic data is bad. It remains bad. There are not a lot of signs it is improving. Regional manufacturing reports for the week were a bit better than expected and improved over the prior month. Maybe something is brewing there; this was one of the first areas to turn up in the last recession and is a bit leading. As jobs losses surge there is a typically a pickup in manufacturing as they become more efficient and the managers feel better having reduced overhead costs. As we know, jobs as with inflation lags the economic cycle and as they hit seemingly unbearable levels the cycle is rounding the bottom. At least unless this is a generational decline, and with all of the bad decisions and evisceration of our banking system (a.k.a. nationalization) it may prove to be generational.

As for jobs, more were pitched under the bus Friday. As noted CC is closing the doors and that means 35K unemployed. AMD cut 1,100. Conoco is cutting 4% of its workers. Hertz is shedding 4K. Honda is cutting 2,100. WLP is cutting 1,500. These were all announced Friday. Earlier in the week MOT announced 4,000, Barclays 2,100, and MWV (packaging) 2,000. All told thus far this year (and the month is only 16 days old) 87,235 job cuts have been thrown on the table. That on top of the 2.6M lost last year. With the workweek falling to 33.3 from 33.5 last month, it is going to get worse because employers are working their employees fewer hours, showing the slack demand has crushed the need for workers.

It is a sad story and we can only hope that this is truly the bottom of the cycle. Companies typically lay off workers en masse as things are actually bottoming. Many are saying that companies acted quickly to axe workers this time around, but that simply isn't reality. It costs too much to layoff workers that have been trained and are productive, so they put it off until it really hurts. As with most things emotional, the action occurs as the bottom is here.


LIBOR and credit markets again reveal poor governmental policy choices.

I want to preface this section by noting that the overall credit condition is vastly improved. If you chart the various credit spreads and rates across a span of 40 years you see that the current crisis at its peaked topped them all. Russian ruble, Asian Flu, Tai baht. They were younger cousins of this credit crisis. That said, after this last sharp decline in dollar LIBOR and the improvement in corporate bonds and commercial paper, the current crisis has come back to levels just under the peaks of those other very serious currency and credit crises.

Problem is, after improving to levels just below those other events, the recent action is reversing ground and ready to break back over the PEAKS in those other crises. The culprit? The market is letting us know when we make bad policy decisions.

We already noted the relationship earlier this week, but the speed of the turn warrants reiterating it in the hope more will take up the cry and thus catch the attention of the policy makers. Ever since the one-two punch of new TARP regulations and the fight over including tax cuts in the stimulus package emerged, the credit markets started to reverse some solid and hard-fought gains.

LIBOR rates were posting very impressive declines, picking up speed along the way. The key 3-month dollar LIBOR hit 1.08% the past week, down from 1.85% just a couple of weeks back. That 1.85% was the lowest level since August 2004 at the time. A very nice drop indeed. When the proposed Obama administration changes in the TARP regulations and the fight over including tax cuts in the stimulus package started, however, the decline abruptly halted. It held steady and then started to bounce back up this week. Friday the 3-month closed at 1.14%. Still well off the highs and holding much of the decline, but LIBOR is up across the spectrum.

This happened before when the Paulson Treasury announced one sunny day several weeks after TARP was passed that it would not be used to buy distressed assets. Of course TARP was sold to us and Congress as a vehicle to buy distressed assets much the same as the RTC bought bad assets in the savings and loan crisis of the late 1980's and early 1990's. LIBOR had been falling until Treasury made this announcement. Then it stalled the decline and started right back up. It was not until the Fed announced its TALF to actually by distressed MBS and SBA loans and securities did LIBOR resume the fall once more.

Take heed please new administration. We know the Fed is watching this rate closely, but the last thing we need is for the Fed to have to come up with another $600B+ program to fix what a bad decision by Treasury damaged.


More word on the tax component of the proposed stimulus plan.

Friday the official version of the stimulus bill left the House. It is still $825B in all with $550B in spending and $275B as tax cuts. Actually it is two bills; one for the spending, one for the tax portion. That is still the 33.3% we reported Thursday. $145B of the tax cuts is a 'tax cut' for low and middle income workers. There is something called the 'Make Work Pay Credit' that pays those making $75K or less ($150K joint) $500 or $1500 in the form of a tax credit. It is paid either through paychecks or their tax return. That tells you what it really is: you may not owe any taxes but you get a 'tax credit.' It is not a tax credit or tax bill at all; it is a new welfare bill and is really nothing more than issuing the bogus 'tax rebates' from the spring of 2008. In short, it isn't going to stimulate anything; it is something to help out and should be called such.

As for real tax cuts, there is not much left out of the $825, just $130B. That is too little, and unfortunately the types of relief offered is not much relief and it is not very stimulating. $17B is for net operating loss carry backs and carry forwards. You can file and get money back. That is not the kind of 'use it to get it' credits that have proved so successful in past recessions. There are renewable energy credits as well. Great. Spend $50K on putting some solar panels on your building to generate one-seventh of your monthly electricity needs and you get a modest tax credit. Watch out for the stampede to the solar and wind stores for that one. There is the increase in expensing, bring it up to $250K from $125K. As we have noted before, however, if you are not going to spend enough to take advantage of the $125K expensing, you won't suddenly spend more because the limit is now $250K. What we need are tax credits: if you buy a computer you get $1000 credit off the bottom line. What do you do? You buy a computer. That goes for phone systems, vehicles, trailers, tools, and on and on. You have to have a 'use it to get it' requirement that forces any thinking business person or individual to make the purchase and have something in hand versus just sending the money in the form of taxes to DC.

And what of Charlie Rangel, the head of the House Ways and Means committee (and the fellow who didn't realize he had a house in the tropics that he rented and received income on and didn't report) who promised to lower the corporate tax on small businesses? That is a move that would really, really help versus this 'file and get money back lost in prior years' nonsense. Who cares? So you can get more of your losses back. You had to have some whopping losses and a lot of businesses, until recently, have been in good shape. The initial stimulus will be so minimal it is a joke. Plus it will cost businesses a lot of money to figure out and determine what is recoverable and then filing the documents. Hire the accountant and the tax lawyer and lose half of what you would get back. Way to go guys. Just cut the percentage people and businesses owe in taxes and you get IMMEDIATE impact. Throw in some tax credits and you accelerate the impact.

Hopefully the Senate will spice it up more as the democrats need the republicans to get anything passed. If not we are getting ready to shoot $825B down the hole with spending that, just like the Great Depression, does nothing to improve our investment in the US and new technologies that will be the real provider of jobs in the future. I had to laugh when I heard the President-elect say that the spending bill would hopefully produce jobs that would not go overseas. He is absolutely right. If you fix a bridge or school roof in the US that job is not going to go overseas. It is, however, going to go away nonetheless because fixing a bridge does not create the demand for another bridge to be built. It only provides a temporary job that anyone can do. That is not the kind of job that will carry us well into the twenty-first century. It may carry us through the end of 2009 and then we will be looking for more money to spend to try and stimulate the economy, but at the rate the Fed and Treasury are spending it, there won't be any.

Hate to sound so pessimistic, but we have tried this before and it failed miserably. If you give money to people with no strings attached such as these 'credits,' they won't spend it given times are bad or they won't spend it on capital investment in the US. It simply takes money that was taxed away from someone who earned it, gives it to someone who did not, and then creates another taxable event (with the money going to the Feds) when it is spent (sales tax and income tax). The winner? The federal government as it gets more tax revenue out of the same dollar that is passed around without being invested in any jobs producing activity.


THE MARKET

MARKET SENTIMENT

VIX: 46.11; -4.89
VXN: 44.19; -4.14
VXO: 45.85; -2.61

Put/Call Ratio (CBOE): 0.97; -0.2


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: 43.0%. Up from 41.8% last week and continuing the rise though the market drop might bring it down a bit next week. Up from 38.5% the prior week and up from 25.3% hit in mid-December. This puts bullishness above the 35% threshold below which is considered bullish. It does not mean the action is now bearish. That level is up at 55%. Bullishness bottomed on this leg lower at 21.3% in November 2008. This last leg 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: 34.4%. Basically flat from 34.1% the prior week, slowing the rapid decline from 38.5% the prior week and off from the 46.2% hit mid-December. That puts it below the 35% level considered bullish for stocks, but as with bulls, still well below the level considered bearish for stocks. Bearishness hit a 5 year high at 54.4% the last week of October. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment on this move. 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: +17.49 points (+1.16%) to close at 1529.33
Volume: 2.284B (-8.76%)

Up Volume: 1.531B (-150.935M)
Down Volume: 664.693M (-141.676M)

A/D and Hi/Lo: Advancers led 1.24 to 1
Previous Session: Advancers led 1.2 to 1

New Highs: 8 (+4)
New Lows: 62 (-46)

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

Gapped higher, sold to fill the gap and test the October low again and then rebounded close to session highs. It could not break the 50 day SMA (1594), however, though it did move up through the late December consolidation lows. Still rather precarious; the gains the past two sessions were just 40 points and NASDAQ was losing more than that on the downside sessions in the selling. NASDAQ has quite a bit of work to do this coming week if it is going to make this rebound stick. More volume on the upside moves and that is a positive, but the pattern took a real bearish turn this past week and NASDAQ dug a hole that will need some better than expected earnings and guidance for the second half of 2009 to get it out of.

SOX (+3.47%) gapped higher and rallied to the November/December up trendline and the 50 day EMA. It filled the gap and recovered, but it is showing a doji on the candlestick chart near the mid-December high. As with the other indices, there is the risk of a head and shoulders top here that needs to be broken up with the action over the next week or so. Always tough climbing out, but as noted above, many chip stocks are in good shape and showing good action.

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

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


SP500/NYSE

Stats: +6.38 points (+0.76%) to close at 850.12
NYSE Volume: 1.617B (-1.61%). Volume was lower but still nicely above average as the NYSE indices scratched out a modest gain. It was expiration, however, and thus there was volume tied to it.

Up Volume: 1.023B (+134.707M)
Down Volume: 573.875M (-155.064M)

A/D and Hi/Lo: Advancers led 1.96 to 1. Not bad, but as noted above, nothing special with the breadth shown of late.
Previous Session: Advancers led 1.2 to 1

New Highs: 50 (-5)
New Lows: 84 (-22)

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

SP500 was up, but it was also all over the map before it closed right at the October low. Good reversal Thursday but not much of a follow through Friday. Given that some major components (or at least they used to be) such as JPM, BAC, C and WFC sold hard those same days, it is amazing SP500 finished upside at all. It has a lot to do next week to turn a rather lackluster follow up to the reversal off a week of selling into a continuation of the rally. The trend is broken, it closed the week below the late December consolidation lows, and the financials continue to bleed and sap SP500's strength. The XLF (financial spyder) is approaching the prior lows for a test. That makes this week's action in SP500 very critical to the market and whether it can hang on and convert this to something more of fails and starts lower again.

SP600 (+2.70) bounced up and down and up as well, posting a very modest gain for all the running around it did. Held the October low on the closes, a positive, and bounced form there. It is also below the late December consolidation range, however, and has some ice breaking to do if it is going to recover and get the bounce back on track. That will take more than next week to determine even if SP600 finishes next week higher. It has to take out the mid-December peak to break up its own potential head and shoulders top.

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

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


DJ30

Similar to SP600 the blue chips held the October closing low on last week's closes, reversing off some support at 8000 Thursday. It added just a modest gain Friday similar to the other indices; not much of a follow through to the reversal. It does have a rather well established trading range from 8000 to 9000. If it can make that move that will be a great start. It has resistance at 8420, 8500, and 8750 along the way. AS with the other indices, lots of work to do.

Stats: +68.73 points (+0.84%) to close at 8281.22
VOLUME: 439M shares Friday versus 436M shares Thursday. Lots of volume on the financial components as they mined lower once more.

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


TUESDAY

Inauguration day Tuesday. Should we believe the commercials about new beginnings, etc.? Was there some geological event we were not informed of such as hell freezing over? This is Washington, DC we are talking about. Even before the inauguration we are witness to politics as usual as long-time senators and House members try to show the incoming President where he stands in the pecking order and these are people in his own party.

More important is the action on the stimulus plan and what if any meaningful changes are made over the next two weeks in committee. Rangel said an AMT patch and some corporate tax reduction should be included as the bill is taken up by the House Ways and Means committee. We will see. If discussions turn that way that will be a market positive.

Economically it is a slow week but earnings will dominate. The spigot opens up and they will be coming in fast. The market needs some good names reporting some relatively positive outlooks for the back half of the year, some movement on the tax cut stimulus, the solid stocks in good position to move upside, and financials to hold the line and start back up.

Speaking of financials, this was a very, very bad week for that group on some very, very bad news in the sector. Bad earnings, the need for more money from the government, the fear that total nationalization of all major banks will occur before this is over. It was a feeding frenzy of bad news and that drove them lower. As noted, the XLF financial spyder is nearing the prior lows set in November 2008. If they can hold and double bottom at that point (just a point away though that is a 10% move) that gives the market a real opportunity to attack the recent selling with some vigor.

That is a lot of ifs and maybes, but these are uncharted waters for the economy and the financials, so investors are feeling their way along. There is a dichotomy right now with some great stocks in great position on one end and the financials on the other end. Everything else is somewhere in between, but after the past week and one-half most are leaning to the financials' side of the median line. Not in nearly as dire shape, but not ready to break higher either. Again, the financials are near the prior lows (as a whole), and if they muster a bounce at that point then the market stands a good chance of bouncing further up on this rebound.

That takes the indices up to the December peaks, maybe a bit farther. The chance of success from there depends upon stimulus negotiations and how the financials fare. At this juncture there remains good leadership, but it is half of what it was two weeks back. Still, as you can see on the report and the continuing plays table, there are many, many high quality stocks in very good position to move higher. Still, all aspects considered, the index patterns and the action in the financials tip the scale more toward an eventual failure of this rally versus hitting new highs on the move. That can all change with a new surge of buying off of this pullback, but for now our game plan as set out on Thursday remains the same: riding a bounce as far as it will take us, playing stocks that can make us nice, crisp moves higher, and if it stalls at the December peaks or in that general vicinity we take them off the table along with current upside plays and have some downside plays at the ready when the bounce plays out. After all, SP500 has bounced a couple of sessions, but still does not look too healthy. Again, it is amazing it finished upside at all given how some major financials sold hard to end the week. That suggests there is strength elsewhere in the market, and if the financials overall hold at the prior lows then there is a jump higher coming.


Support and Resistance

NASDAQ: Closed at 1529.33
Resistance:
1534 is the 50 day SMA
1536 is the late November 2008 peak
1542 is the early October 2008 low
The 18 day EMA at 1552
The 50 day EMA at 1594
1597 is the November/December up trendline
1565 is the second low in October 2008
1603 is the December peak
1620 from the early 2001 low
1644 from August 2003
The 90 day SMA at 1696
1752 from 2004
1782 from August 2004
1786 is the November 2008 high. Key level.
1948 is the early October 2008 gap down level

Support:
1521 is the late 2002 peak following the bounce off the bear market low
1499.21 is the 2008 closing low
1493 is the October 2008 low & late December 2008 consolidation 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


S&P 500: Closed at 850.12
Resistance:
853 is the July 2002 low
857 is the December consolidation low
866 is the second October 2008 low
The 10 day EMA at 872
The 18 day EMA at 879
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 905
916 is the November/December up trendline
919 is the early December peak
The 90 day SMA at 958
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.

Support:
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


Dow: Closed at 8281.22
Resistance:
8419 is the late December closing low in that consolidation
8451 is the early October closing low
The 10 day EMA at 8463
8521 is an interim high in March 2003 after the March 2003 low
The 50 day SMA at 8572
8626 from December 2002
The 50 day EMA at 8757
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
The 90 day SMA at 9153
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

Support:
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.

January 22 - Thursday
December Building Permits (8:30): 615K expected, 616K prior
Housing Starts, December (8:30): 610K expected, 625K prior
Initial Jobless Claims, 1/17 (8:30): 548K expected, 524K prior
Crude inventories, 1/16 (11:00) NA expected, 1.14M 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

Leadership Holds Support

SUMMARY:
- Jobs roughly within expectations, but stocks cannot hold an early bump higher, test back further.
- Weekly jobless claim data once again understates layoffs.
- LIBOR improves nicely, corporate bonds finding buyers. Some hope for a nasty recession.
- A few more stocks break lower Friday, overall leadership holds support as indices near the lick log point.

Market tries, but Friday it could not swallow the jobs report.

The jobs number was almost dead on expectations. At 524K it was high, but lower than the 600K to 700K whisper number fears that the ADP report stoked with its 600+K survey earlier in the week. Seems after underreporting jobs the new changes have overshot the mark.

There were other stories out Friday as well. Earnings continue to trickle out, ready to turn into a torrent. Chevron said Q4 would miss expectations thanks to lower product prices. Guess it didn't see the jump in gas prices this week of 20 to 30 cents after that quick spike in oil prices two weeks back. Of course, oil fell sharply again, ending the week at 40.45 (-1.25/bbl) as the dollar surged to close the week at 1.3470. Just two weeks back it traded at 1.4370. Huge dollar swing, but all it did was get the dollar back to its July/September up trendline, a key test areas this week. APOL, the online educator, drilled earnings by 14 cents and exploded higher. Coach lowered its estimates for the quarter and it gapped lower. Glad we dumped the rest of our positions on Thursday. There is certainly more to come on the earnings.

Fund flows into mutual funds actually bounced higher last week as $6.4B moved in after fading 1.9B the week before. The drain on funds has been steady and, until the past couple of weeks, unrelenting. The withdrawals were slowing, and then a bit of a bump in the market brought in some new cash. Corporate bond sales jumped on the week as well, another indication of money ready to buy as investors snapped up bond offerings at the best rate in 8 months.

The Fed was also out with the Boston bank president saying the recession could extend into the second half of 2009. Is that a shock or a surprise? We just finished the first week of the first quarter of the year. If the stock market has bottomed, a question that is hardly answered by the current small albeit solid and steady rally, you would not expect the economy to bottom until at the earliest mid-second half of the year. The financial stations tend to confuse economic recovery with market recovery. You want to look at signs of the former as confirmation of the latter, but we often get to looking at the economic data as the end and conclude subconsciously that the market cannot recover until the economic data recovers.

That takes us back to the jobs report. It was bad and everyone was downbeat to downright glum. Understandable. The economy is in very bad shape. This is an ugly recession, the worst since the bad one in the early 1980's that capped the decade of 'malaise.' The drop has taken us to those early 1980's levels and it has done so at light speed. It has investors and consumers wondering how long it can stretch out given the drop was so fast. How much time is enough to heal the wounds?

The market tried to rally when the jobs news was not as horrid as the ADP report suggested. It could not hold the move and indeed sold pretty sharply after that early bump. That was without a doubt discouraging as the market could not shrug off bad data even if it was expected to be bad. The action led some to conclude the rally is over as the market was no longer chugging all the bad news and not even belching.

When you look at the technical action, however, that is not the case, at least at Fridays close. Sure there were stocks that broke down Friday, some of which were leaders. That happens in pullbacks. Banks weakened again. Overall, however, the crop of leaders continued to hold support levels even if they did test lower on the session. The indices sold but trade was lower once more and they can still make nice higher lows. They may crack and sell deeper in a continuation of the bear, but the action thus far, while getting you a bit uneasy, has not turned back to the weaker bearish character. The market typically does make you a bit worried, a bit ready to throw in the towel even on pullbacks that hold. That keeps the crowd guessing and keeps stocks climbing the wall of worry. That is pretty damn tall and steep wall right now for sure.

TECHNICAL. Intraday the action was negative. No hidden strength as far as how the indices performed. They gave up an early recovery attempt, sold hard, tried a steady though unspectacular 5 hour recovery, but then gave up that as well in the last hour, closing at session lows.

INTERNALS. Not spectacularly bad, but no rose petals either. NASDAQ breadth doubled the Thursday gains but to the downside (-2.95:1). NYSE was not that bad, but the -2.4:1 was not a confidence builder. Volume was mercifully lower on both exchanges, continuing the slide in trade as the indices make this test. That furthers the positive price/volume action during the pullback, and that, along with the continuing solid action in the leadership, keeps this pullback in an overall positive technical light. This despite the disquiet and uneasiness everyone is feeling on this fade given the weaker response to bad news.

CHARTS. Thursday left the indices in good position to bounce with dojis on the candlestick chart at near support. Didn't happen. The market had issues with the jobs data even though it was more or less in line with expectations (though the revisions discussed later were a problem). NASDAQ and SP600 gave up the 50 day EMA, and SP600 sold pretty sharply, but both held the next support level. SP500 performed similarly, managing to hold the 50 day SMA on the close. SOX sold but it held near support at the 18 day EMA. In short, all were lower, but held support and remain in position to make a higher low. SP600 is the most worrisome. It is the main growth area and most sensitive to the economy, and it had jumped into a leadership role. It now has wobbly knees. It can still make a higher low, but it needs to hold here. A key indicator in the week ahead.

LEADERSHIP. As noted, most of the leadership groups held up quite decently, e.g. metals, energy, chips, and tech. Financials, particularly the big banks, stunk again. As noted Thursday, they are not leaders right now, but any market rally ultimately has to have them moving upside. Some of the financials that did manage to set up well rolled over as well. Small caps were hit. Despite the weakness in those areas, many stocks remain in good position to continue the move higher. They are reaching the point they need to hold, however, that point where it starts to get uncomfortable. We exited many positions early on in this pullback just in case this bounce ahead of earnings ran into trouble. We kept those in the strongest areas that are holding support and in position to rebound and maintain their uptrends off the November lows. It is time for them to hold the line.


THE ECONOMY

Jobs report headlines in line, but there are always the details, details, details.

-524K was in line with the upwardly revised (at the last minute) -525K expected. Not great, but right on the nose versus the upwards of 700K in whisper losses. The unemployment rate spiked to 7.2% from 6.8%, and that topped the 7% expected. That is the highest rate since January 1983 following that bad recession. Note, however, that the job losses were peaking AFTER the stock market bottomed. We lose sight that job losses peak well after the economic cycle. Problem is, there is nothing in the other data to suggest any kind of turn. Confidence was a bit better thanks to gasoline prices falling and the service ISM was a bit better than expected, but that is it. Signs of economic recovery are very lean for now.

Job losses were everywhere except education and health and a very modest 7K gain in government. The details, however, tell most of the story. October and November losses were revised, flushing an additional 154K jobs for those months. That put the losses over the last four months at 1.9M jobs. Staggering when you consider 2.6M jobs were lost in 2008. That is the most for a year since 1945 (end of WWII) and three-quarters of them came late in the year after the LEH collapse.

The downward revisions show the picture is still deteriorating. Downside revisions mean that things are worse than the experts think they are. When you start seeing upside revisions things are of course much better and improving faster. The experts tend to continue to forecast the trend until they are proved wrong . . . several times. At this juncture they are behind the curve in the respect they underestimated the rapidity of the decline and its momentum. Another aspect to the revisions: when you add them in with the December 524K losses you get the whisper number. Thus even though the headline nicely avoided the whisper, the backdoor from October and November pushed them on up to that level. Hence the investor gloom and poor market action Friday even with a headline number that looked in line.

Hours worked also tell us there is no turn yet and that indeed the picture will get worse. Hours worked fell to 33.3 from 33.5. Just a couple of tenths, but the story told is important. Employers cut hours worked before they cut an employee because an employer does not want to lose a well-trained employee if he or she can help it. The costs on the other side, i.e. rehiring, retraining and lost productivity, are too great. Thus an employer will cut hours worked in an effort to bridge the downturn and hang onto employees. After reducing hours the next step is laying off. If employers are still cutting hours then they are still hanging onto some employees despite all of the announced layoffs. That means job losses will churn even higher over the next couple of months at least unless there is a rapid recovery. As noted above, however, the economic data has yet to show any sign of a turn.


Improving jobless claims last week prove illusory.

Thursday we wondered if the second week of fewer new jobless claims meant anything substantive. It did, but not in the sense that things were improving. We are hearing that the reason jobless claims fell last week after falling the week before on misfiring seasonal adjustments is that the state systems were so overwhelmed with filings that they could not supply the feds with all of the data. Oh boy. That means the next couple of reports are likely to be real donnybrooks. Hey, we are down in the gutter. Might as well set some records and benchmarks here for compare future recessions to.


Credit has to recover before any stimulus can work, and by golly it is doing that.

Mortgage rates, LIBOR, corporate bonds.

Weeks and indeed months back we wrote, and likely too frequently as we obsessed over the unprecedented credit problems, that the credit markets had to recover and get back to some sort of normal flow before any economic recovery could take place. Makes sense. You can have all of the tax and other incentives you want, but unless the government is putting money in your bank account like, say, some big bank or automaker, you are not going to take advantage of incentives if you cannot get the credit.

There is improvement, yea verily solid improvement, in the credit markets. Ever since the Fed announced its TALF plan to purchase mortgage backed securities and small business credit instruments mortgage rates have softened. When the Fed announced the New York Fed was buying MBS a week ago mortgage rates cracked. Thursday you could get a 30 year fixed mortgage for 5.01%, a record low. That decline has fueled a rise in mortgage activity although things did slow last week in anticipation of more federal action to lower them further. That shows one of the downsides to a lot of intervention: you create an expectation of intervention and that keeps consumers from getting on with buying and selling as they would normally do.

LIBOR rates slid all week and really fell on Friday. The overnight rate is at 0.10%. The 1-month fell to 0.37% Friday from 0.39%. It was close to 2% in early December. The key 3-month rate (used to calculate the TED spread, the difference between the US 3 month and the LIBOR 3 month) tumbled to 1.26% from 1.35% Thursday, and that was down from 1.41% from Wednesday. That is down 100 basis points since early December. As noted a week back, that puts the 3-month below the mid-2004 levels.

Corporate bonds were relatively hot commodities last week as some big names such as GE floated issues to gauge the market's appetite. Sales totaled $41B, the best week in 8 months. That even topped the $32B for the same week in 2008, long before the credit freeze struck full force. Spreads narrowed nicely as well thanks to the improved demand. Narrower spreads indicate more confidence in the economic future as less risk protection is demanded. This week underscores the improvement in the corporate bond market the past 6 weeks, a very important money source for large corporations.

The bottom line is that the credit market is improving, and it is doing so on several fronts from interbank to corporate to consumer. This free flow of credit is necessary before any stimulus can work to repair the economic damage the credit freeze caused. It is not a cure for the damage from the freeze (physician heal thyself). The extra liquidity pumped into the system can be a form of stimulus, but as we saw in 2000 to 2003, Fed liquidity is not a catalyst in bad times (the old 'pushing on a string' argument). It takes fiscal stimulus in the form of capital investment incentives to stimulate the economy out of recession. That is why I scratch my head a bit when I hear calls from some conservatives that there is enough stimulus already. I also scratch my head when I hear democrats complaining about Obama's proposed tax incentives in his package, the only part of the package that will potentially have any real lasting impact. Once more it is going to be an ugly battle in DC, and hopes of a stimulus bill agreement by mid-February appear rather optimistic.


THE MARKET

MARKET SENTIMENT

VIX: 42.82; +0.26
VXN: 43.84; +0.61
VXO: 42.6; +0.64

Put/Call Ratio (CBOE): 1.03; -0.04. Third session above 1.0 on the close. As soon as there was some selling, the put buying for speculation and downside protection jumped higher.


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: 41.8%. Continuing the rise, up from 38.5% the prior week and up from 25.3% hit in mid-December. This puts bullishness above the 35% threshold below which is considered bullish. It does not mean the action is now bearish. That level is up at 55%. Bullishness bottomed on this leg lower at 21.3% in November 2008. This last leg 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: 34.1%. Declining rapidly, down from 38.5% the prior week and off from the 46.2% hit mid-December. That puts it below the 35% level considered bullish for stocks, but as with bulls, still well below the level considered bearish for stocks. Bearishness hit a 5 year high at 54.4% the last week of October. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment on this move. 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: -45.42 points (-2.81%) to close at 1571.59
Volume: 1.95B (-2.35%). Volume remained below average as on Thursday, declining again as the index sold. Price/volume action is still positive for now, what you want to see on a pullback.

Up Volume: 470.431M (-922.858M)
Down Volume: 1.461B (+854.702M)

A/D and Hi/Lo: Decliners led 2.95 to 1
Previous Session: Advancers led 1.49 to 1

New Highs: 15 (-1)
New Lows: 17 (+4)

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

Unable to hold a modest bounce at the open and giving up the 50 day EMA (1609) right off the bat and settling much lower at the 18 day EMA. That puts it just below the December peaks. This keeps NASDAQ in the range of support for it to make another higher low and resume the move higher. These support levels are not hard steel, meaning that the move is not over if there are modest breaks or the index trades in the general range.

SOX (-3.26%) was a relative loser, slipping back through its 50 day EMA, but it held the 18 day EMA support level on the close. Holding at the 50 day EMA would have been great, but the 18 day EMA is not bad at all as SOX tests right at the trendline off the November/December lows.

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

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


SP500/NYSE

Stats: -19.38 points (-2.13%) to close at 890.35
NYSE Volume: 1.159B (-3.17%). Volume was below average all week. It rose as the NYSE indices rose, however, and backed off as they sold back. That continues some positive price/volume action though overall volume remains lower then you want to see when the indices moved higher.

Up Volume: 169.239M (-580.148M)
Down Volume: 983.436M (+553.779M)

A/D and Hi/Lo: Decliners led 2.38 to 1
Previous Session: Advancers led 1.67 to 1

New Highs: 29 (-1)
New Lows: 59 (+4)

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

The large cap SP500 struggled under the selling of the financial stocks. SP500 fell to close at the 50 day SMA, basically the level it needs to hold and make a higher low to continue the move off the November low. SP500 did crack the November/December up trendline on the Friday close, but it also held a key level in the 50 day. Early next week will tell the story on how SP500 holds. The drag from the financials is undermining it.

SP600 (-3.88%) did not perform well Friday. It had shown solid relative strength with a hold at the 50 day EMA on Thursday. Then it dumped down Friday, falling below the December peak and to the 50 day SMA. It is 5 points or so above the late December lows. As with SP500, it is at a point where it needs to find some support, hold its ground, and continue the rally.

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

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


DJ30

The blue chips continued to lag, weighed down by their financial components. The Dow broke to new low ground on this decline, but it is well above the late December low (8364 intraday). Want to see DJ30 hold at 8500ish and make the turn there, but it is not leading by any stretch other than showing more downside weakness.

Stats: -143.28 points (-1.64%) to close at 8599.18
VOLUME: 204M shares Friday versus 226M shares Thursday. Volume fell, about the only silver lining.

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


MONDAY

Friday did not lead to the renewed bounce as the jobs report rattled investors. Some early rally leaders struggled and broke lower though most managed to hold up quite decently despite the market selling. It was somewhat frustrating, and it ratcheted up the worry about the rally's longevity. Skepticism is a positive . . . as long as the technical aspects remain healthy.

No doubt the rally is getting fully tested. There were some breakdowns and financials are again weak. The fight this week will be between the financials with the renewed downside from the big banks (e.g. JPM, WFC) and the rebound strength in commodities and the other infrastructure stocks, as well as chips, tech, and energy. There is also a key battle with the small cap index and whether it can recover from the Friday decline and make a higher low here.

The market is making it uncomfortable, raising that wall of worry once more as investors deal with the latest batch in a continuing bout of weak economic data. On top of that Q4 earnings are just cranking up, and investors are pensive. They know this will be the sixth consecutive month of declining earnings as S&P forecasts a 14% drop. What else is worrying investors? Dissention among the democratic party about the proposed stimulus package and its use of tax cuts, the one element that made it palatable to republicans and gave it a chance of actually working. Thus the market was a bit more pensive to end the week.

We took gain early in the week as the market ran higher, and we protected gain on positions that struggled, closing those failing to hold support. We still have significant positions in the leader groups and note this weekend there are many still in excellent position to rebound. There is a loggerhead this week with earnings and some breakdowns to end the week versus the continued strength in the commodities/infrastructure sectors along with the techs. If the rally is going to maintain its steady build in strength, that fight will be resolved this week.

We continue to look for good upside opportunity if the technical underpinnings hold up next week and the leading sectors rebound with force off their test lower. The indices are somewhat split at this point with respect to their indications. NASDAQ, SP500, SP400 (mid-caps) and SOX remain solid in their pullbacks while SP600 went from solid to problematical on Friday. DJ30 has the same look as SP600, but it has just followed along the past several weeks after leading the initial move off the lows. If the week starts rocky it is better to close out plays that struggle to hold support and see how the pullback plays out. If the indices break their trends off the November low the character changes. The rally off the lows would no longer be in place. That means we then have to watch for a test of the broken trendlines, and if the indices roll back over at that point then we move back into the downside. Not too wild about that idea. Would much rather see the market continue higher as an indication this recession is winding down and that people will be getting back to working and feeling better about life. If, however, the downside is what the market is going to give, then that is what we are going to have to take.


Support and Resistance

NASDAQ: Closed at 1571.59
Resistance:
The 18 day EMA at 1574
1603 is the December peak
The 50 day EMA at 1609
1620 from the early 2001 low
The 90 day SMA at 1737
1644 from August 2003
1752 from 2004
1782 from August 2004
1786 is the November 2008 high. Key level.
1948 is the early October 2008 gap down level

Support:
1565 is the second low in October 2008
1554 is the 50 day SMA
1542 is the early October 2008 low
1536 is the late November 2008 peak
1521 is the late 2002 peak following the bounce off the bear market low
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


S&P 500: Closed at 890.35
Resistance:
896 is the late November 2008 peak
The 18 day EMA at 897
899 is the early October closing low
The 10 day EMA at 903
The 50 day EMA at 916
919 is the early December peak
965 is the 2003 consolidation low
The 90 day SMA at 979
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.

Support:
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
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


Dow: Closed at 8599.18
Resistance:
8626 from December 2002
The 50 day SMA at 8667
The 10 day EMA at 8743
8829 is the late November 2008 peak
The 50 day EMA at 8854
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
The 90 day SMA at 9353
9575 from September 2003, May 2001
9654 is the November 2008 peak

Support:
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.

January 9 - Friday
December Average Workweek (8:30): 33.2 actual versus 33.5 expected, 33.5 prior
Hourly Earnings, December (8:30): 0.3% actual versus 0.2% expected, 0.4% prior
Nonfarm Payrolls, December (8:30): -524K actual versus -525K expected, -584K prior (revised from -533K)
Unemployment Rate, December (8:30): 7.2% actual versus 7.0% expected, 6.7% prior
Wholesale Inventories, November (10:00): -0.6% actual versus -0.7% expected, -1.2% prior (revised from -1.1%)

January 13 - Tuesday
December Treasury Budget (2:00): -$33.0B expected, -$48.3B prior

January 14 - Wednesday
December Retail Sales (8:30): -1.1% expected, -1.8% prior
Retail Sales ex-auto, December (8:30): -1.2% expected, -1.6% prior
Business Inventories, November (10:00): -0.5% expected, -0.6% prior
Oil inventories (10:30): 6.68M prior

January 15 - Thursday
Initial jobless claims (8:30): 467K prior
December Core PPI (8:30): 0.1% expected, 0.1% prior
PPI, December (8:30): -1.9% expected, -2.2% prior
Philadelphia Fed, January (10:00): -35.0 expected, -32.9 prior

January 16 - Friday
December Core CPI (8:30): 0.1% expected, 0.0% prior
CPI, December (8:30): -1.0% expected, -1.7% prior
Capacity Utilization, December (9:15): 74.7% expected, 75.4% prior
Industrial Production, December (9:15): -0.8% expected, -0.6% prior
Michigan Sentiment-Prel, January (9:55): 60.0 expected, 60.1 prior

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

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

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