Monday, February 02, 2009

Financials Hold Up Nicely

- Month ends on a low note, matching the month.
- Inventories help Q4 GDP salvage a 27 year low. Guess it could have been worse.
- Chicago PMI improvement gone with the economy.
- Pet project spending bill goes to Senate in need of its own rescue package.
- Stocks break lower but financials, even with the 'bad bank' snag, hold up nicely.
- Negative sentiment is pumping up again.
- Ready to test the January lows, but can a new 'bad bank'-like proposal rekindle enthusiasm to hold that support?

Rebound attempt can't find anything to bank on.

Stocks tried to rally early and get back that blown follow through thanks to the Thursday selloff. GDP was not as bad as expected thanks to rising unsold inventories (only a government report could score higher on unsold goods), but it was still the worst showing in 27 years. Michigan sentiment was a bit more positive; I guess an auto bailout will do that. Chicago manufacturing was a disappointment as the blip higher the prior month rolled back over.

The higher open held a bit of promise, but it didn't last. The indices turned over and sold off through midmorning, turning negative. A bounce try looked decent; stocks turned at midmorning, often a turning point for the intraday action. A respectable recovery was underway at lunch and was picking up strength. A story about a snag with the 'bad bank' proposal (pricing issues that stymied the Bush administration as well) and the possibility it was indefinitely on hold cut that rebound off at the knees. The indices immediately tanked, failed a relief bounce, and headed to new session lows at the close. A down finish on the last trading day of a down month to start the year.

TECHNICAL. Intraday the market started positive, but the sellers hit and by midmorning stocks were in the red. A bounce attempt through lunch almost got them positive, but an afternoon rollover took them to session lows. After flipping back to bearish action Wednesday, the market remained that way to close the week.

INTERNALS. Modest downside breadth for a change after the Thursday -7:1 or so on NYSE (-2.7:1 NYSE, -2:1 NASDAQ). Not horrific, but the volume rallied, returning to above average on both exchanges. Distribution, i.e. higher volume selling than buying, shows investors were in the stock dumping mode on Friday as stocks turned harder to the downside and broke some potential support. A distribution session shortly after a rally makes a break higher is typically not bullish for that rally.

CHARTS. The key move of the week was the Wednesday follow through on volume but then the Thursday and Friday turn back from resistance. NASDAQ rallied to resistance at the 50 day EMA Wednesday, just below the December peaks and indeed clearing them on a closing basis. Turned back. SP500 showed similar action though not quite making the 50 day. It broke lower and fell through the October closing low. Ditto SP600 and DJ30. SOX started the downturn in better position, so it is a bit better overall after the Thursday and Friday selling. It is nothing to get all excited about, however: chips led the move higher but got roughed up Thursday and Friday on some earnings disappointments. Without their leadership the indices stumbled and broke that potential support at the October closing lows. The head and shoulders tops in the indices look to be heading toward completion if not already there. A test of the January low appears inevitable given the momentum after rolling over. That will be an important test.

LEADERSHIP: As noted the chips fell off leadership pace to end the week. Without them and with the financials and the rest of the market back under some pressure after before and after the bad bank news headline the rally just ran out of steam. Metals fell as they suffered selling pressure as well. With the leadership pretty much all in a general pullback the market was weak. Most leaders managed to hold up well enough, continuing the pullback from Thursday, still holding their general consolidations. You see, many leaders were out in front on the Wednesday rally session, and with this end of week selling are right back where they started from, i.e. back in their patterns or consolidations. They are still livable here, but they are going to have to find some support here as well.

SUMMARY: It was one of those weeks where you have a break higher and things look good, then it gets thrown back at you. We expected some pullback after a 4 day move higher and solid Wednesday surge, but Thursday was more than a pullback from a price standpoint, and Friday the indices broke some potential support on higher, above average volume. That of course is not bullish action; as noted at the time it shows that buyers left and stood by idly on Thursday as the market sold and then on Friday sellers took over as volume jumped back above average. Looks as if a test of the January lows is up next, the point where the indices found some backbone and rallied. That didn't work and how the indices handle those lows will be a fulcrum for the next move.


GDP terrible but not as terrible as thought.

The 3.8% loss was the worst in 27 years, meaning back in the bad recession to start the 1980's that ended the 1970's malaise. A major benefit of that recession was that it broke inflation. With all of the spending, money printing, and more spending right now, I think it is safe to say there won't be any victory over inflation, and indeed the real risk is the worst inflation seen since the 1970's. Not a pleasant thought train as it takes you around in circles and does not get you out of the problem. Lends some credence to those arguing we should just let the downturn run its course and clean out the pipes. But, that is not going to happen, at least not without us first spending several trillion dollars that we don't have.

In any event the -3.8% was better than the -5.5% expected. Of course but for the government's fictional method of gauging economic output GDP would have been -5.1%. When the government figures out put it adds inventories. When the economy is starting to boom and production surges while sales are still strong, then that is a somewhat accurate way of measuring economic activity. When the economy is slowing or as in this case belly flopping, rising inventories are not a good measure of economic activity. Inventories balloon because no one is buying. Manufacturing has curtailed production but inventories are still rising because buyers curtailed consumption faster. Thus the data is doubly inaccurate as it registers more activity when actually manufacturers and consumers are both slowing.

Consumer spending fell 3.5% in Q4 on top of the 3.8% Q3 decline. That is the first back to back 3% declines in spending since 1947.

The PCE inflation measure fell 0.1% for the quarter the largest decline since 1954. The fall in commodities prices led the fall in inflation. Core prices rose 0.6% in the quarter, and that was the slowest pace since 1962. You want stats? You've got stats.

Business investment fell 19%. That pretty much sums it up. No one was spending, manufacturing was falling, and businesses, a big driver in the economy because they not only spend on capital equipment but then use that to make goods and provide services that require jobs, slowed their capital investments even further. Incredibly rapid decline. Incredibly deep decline.

Chicago PMI turns further south.

The last round of regional PMI reports suggested, or more accurately hinted, at a turn in manufacturing. Friday the January Chicago report didn't support any notion of a trend change. It came in at 33.3, less than the 34.9 expected and the 35.1 in December. Of course December was revised higher from 34.1. Positive revision. Worth watching, but at these levels it is not going to turn any heads.

What it did turn was more economists gloomy. There is no doubt the economy is in the crapper. The question is when will it reach the treatment plant and turn into something more appealing. After the pathetic durable goods orders Thursday most economists Friday were in the towel throwing mood as in throwing in the towel on the economy and any recovery in the economy. You would think it will never recover.

Or at least it will take a while. We are hitting really low historical levels in economic activity, and if the spending bill is passed versus a stimulus bill, we could be in a lateral stagnation for years to come. Unlike the early 1980's that some of the current numbers are matching, the proposed stimulus is not the kind that causes immediate investment in the US in new equipment and funding of new ideas and products. It is make work and pork-laden. As noted Thursday, if government spending created a lot of jobs, why do we ever hesitate to just ratchet up government spending any time there is a worry jobs are started to turn scarce. Why not? Because it just doesn't work that way.

Here's to a stimulus bill versus a spending wish list.

$1B for Amtrak. You know Amtrak, right? The subsidized rail boondoggle that has lost money non-stop since inception and bleeds tens of millions a year from our pockets? A bad business in line for $1B of your dollars.

$2B for child care subsidies. Laudable, but stimulus? $50M for the National Endowment of Arts. Sometimes when I am stimulated I paint or draw something. That doesn't mean the economy jumps or 10 jobs are created when I do. $650M for digital television converter box coupons. $400M for global warming research. I thought Obama and Al Gore saw eye to eye that there was global warming and that we are causing it. Why research it further? Both say a consensus of scientists believe that GW exists and that we cause it and thus conclude it is proven.

Of course the consensus of scientists are always right. It was a consensus that said the earth was flat. A fellow named Columbus went out on his own and proved the consensus wrong. A consensus said the sun revolved around the earth. Galileo was almost burned alive for saying otherwise. A consensus said the sound barrier could not be broken. A consensus said we would be out of oil by the 1990's.

The point: scientific advancement is not done by consensus. It occurs when someone that does not buy the conventional wisdom or as in the case of global warming, looks objectively at the data, finds the truth is otherwise. NASA data shows the sun heated up recently, but that data is not taken into account in the global warming theories. Ocean temperature readings show the oceans are cooling in many places. Mount Kilimanjaro glaciers have receded and advanced several times over the past 100 years, yet it is ALWAYS below freezing on the top of the mountain. Could it be the active volcano beneath the glacier on the mountain that is the cause? As my brother always used to say when working on a motor, check the easy stuff first. Change the spark plugs before tearing up the carburetor. Let's look at the facts we already have before spending another $400M.

This is not stimulus. Stimulus that produces jobs is getting individuals and businesses to take risks and invest in the US, i.e. in their businesses, in their lives, etc. Tax incentives do that very nicely because it puts money immediately into the hands that use it. Some say that tax cuts are not good because the recipient may not use it. That is true with the 'rebates.' If you are scared for your job you squirrel it away. No, you have to make it 'use it or lose it' tax breaks. A tax credit for buying new equipment, investing in a start up, putting money into an investment in the financial markets. If you act, you get the tax break. And the best is a tax credit because that comes off the bottom line of taxes. If you don't use it you send the money to the government. If you use it you get the investment as well as don't send the money into the government. Only the truly ignorant don't take advantage of these.

You can also cut the corporate tax rate. That would lower the cost of goods to consumers of all kinds. It would free up capital for investment and expansion. Money would be unlocked as it would flow into corporations for R&D, innovation, production, and oh my goodness, jobs.

What won't work? A tax credit for hiring someone. That has been tried and even the democrats say it doesn't work. Why not? Because hiring someone is a HUGE outlay in time and dollars, and it does not go away. Business has to improve of the job will be lost shortly after creation, i.e. once the tax benefit is used up. The only way it would even come close to working is providing a credit in the amount of the first year's cost. That is way too high for the result. You need to use the multiplier effect of investment credits to generate jobs versus just trying to pull a job out of the air. Let's face it, if there is no need for an employee because business is slow you are not going to hire one unless you get a credit worth every penny you spend on the new employee. That just isn't going to happen.

There is a turning point in the citizenry, however. New poles show that a majority disfavor the proposed stimulus. Why? Because they see it as unnecessary spending on things that will not benefit them one bit. How will contraception help create jobs? Is the National Endowment of the Arts going to spend all that money on employees it doesn't need? If things are as bad as they appear do we really need to get converter boxes for everyone? Just put off the changeover to digital until times are better. I combed the bill and there is not one thing the average small business person would benefit from. It is an amalgamation of wish lists that some congressmen have held for years and years, waiting for the opportunity to scoop the cash out of the public coffers (a.k.a. your wallet or purse). This is it. We are about to shoot another $1T down the hole with no economic benefit. Insane.



The market is wearing on everyone but we are always interested when it becomes obvious it is wearing down the professionals. When the traders on the floor in New York or Chicago or the trading desks become exasperated and dejected, that is worth noting. Friday we heard comments about Wal-Mart not working anymore, and that runs counter intuitively to the recession/discount relationship. WMT is getting torn down as well because it was a refuge for money and was propped up a bit too long. That money is coming out and WMT is down. That is fine because the visible big names have to be taken down before this is over. Look at XOM. It reported big results but it was down on the session. It has held its gains while all other energy stocks fell. It is acting as a refuge for money as well. It might start coming out now as it could not move on rather impressive earnings. This shows that the necessary tearing down of icons is occurring.

VIX: 44.84; +2.21
VXN: 44.93; +2.35
VXO: 45.85; +3.91

Put/Call Ratio (CBOE): 1.03; +0.08. Back over 1.0 after an almost 2 week drought. Will need several more sessions over 1.0 to make a difference.

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: 34.8%. Back below the 35% threshold and that becomes a more bullish indication. Down from 38.7% the prior week and a 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: 38.0%. Rose modestly from 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.


Stats: -31.42 points (-2.08%) to close at 1476.42
Volume: 2.126B (+7.57%). Volume was back up as NASDAQ sold again. This time there was distribution and on the heels of the follow through that is not a good indication for the rally attempt.

Up Volume: 404.246M (+151.726M)
Down Volume: 1.681B (+18.604M)

A/D and Hi/Lo: Decliners led 2.05 to 1
Previous Session: Decliners led 3.55 to 1

New Highs: 6 (-3)
New Lows: 113 (+27)


Broke below the October closing low on rising volume. A test of the January low (1434) looks on as it does with SP500 after Thursdays session. The test of the 50 day EMA on Wednesday and the turn back down has formed a lower high and that right shoulder to a 7 week head and shoulders. That more bearish near term pattern held sway, knocking back a NASDAQ attempt to break it up with the follow through session. Thus it looks downside near term but it is also still in the 3.5 month lateral consolidation since the selling started to slow in October.

SOX (-1.92%) sold as well. It tried to move higher but hit the 50 day EMA and stalled. It too is in a head and shoulders. SOX tried to break up the pattern with the Wednesday close above the December peak, but it could not hold as some key chips fell hard. Still in better position than the other indices as it was up faster, but it still has its work cut out for it as the indices have all set up the same patterns nearer term.




Stats: -19.26 points (-2.28%) to close at 825.88
NYSE Volume: 1.51B (+5.18%). As with NASDAQ, rising and above average volume on the selling as SP500 made a clear break lower. Distribution.

Up Volume: 208.214M (+85.7M)
Down Volume: 1.29B (-19.038M)

A/D and Hi/Lo: Decliners led 2.71 to 1
Previous Session: Decliners led 6.7 to 1

New Highs: 28 (-1)
New Lows: 125 (+33)


Tried to hold the October low Thursday but gave it up big on Friday. Heading to the January low (804.30) as SP500 breaks lower from its own head and shoulders. Now it is a question of where it holds in the 3.5 month consolidation range. Can it again hold at the 800 level and set up an intra-pattern double bottom or will it need to go on down and test the low in November. We are playing the move down to the 800 level with some SPY puts and then we see how it reacts at that level. Interestingly, the financials were in quite decent shape Friday. They were down but they were not rolling over hard along with the indices. That was one of the most interesting features of the session. Even with the news on the 'bad bank' hang up the financials did not lead the dive lower. Some of the big names held some support and were actually positive on the session. If they show some strength here that changes the dynamic of the Thursday and Friday selling in terms that they were not as potent as they appeared.

SP600 (-2.12%) gapped lower and closed near the low. Same pattern as other indices, i.e. the 7 week head and shoulders as part of the larger 3.5 month consolidation. Heading toward the January low quickly. Some good support at 225, a key support point.

SP600 Chart:



DJ30 sold off again on rising average volume and is already back at the January lows. Likely to break this level and the Dow could be the first to hit the November lows. It has been a laggard on this entire move, never really getting a good push off the January consolidation. It can sell to the November low and not really hurt much else. If the financials hold, however, it will have something to lean on given its financial contingency.

Stats: -148.15 points (-1.82%) to close at 8000.86
Volume: 303M shares Friday versus 247M shares Thursday.



The market heads into the new week on a bearish note with the reversal of the Wednesday follow through session and the crack below the October closing lows on all the indices. The nearer term patterns for the indices are head and shoulders tops and that indicates more downside momentum. Indeed we expect SP500 to test the January low, and indeed most indices should do that.

That level, however, is the fulcrum for the next move. As one of the traders here says, it will make it or break it, meaning it will determine the next several weeks for the market. If it holds that is the surprise and sends the indices up to the January highs. If it fails they run down to test the November low. That still leaves them in their consolidation ranges, but it puts a new aspect in the mix, i.e. the jump off point between a nearer term recovery or a much longer bear market.

If the financials show the same kind of moxy in the face of selling pressure as they did Friday they may be turning a corner. They had every reason to sell given the news about the 'bad bank' but many closed the session positive, rising off session lows to do so. They acted as if there will be some kind of plan. The talk is an insurance or guaranty plan. Heard that before? That is what the House republicans wanted in the original TARP. Seems as if they were more prescient than the Wall Street professionals in charge of the back room deals that gave away hundreds of billions of our tax dollars. Something will have to be announced whether a blend of 'bad bank' and guarantees or something else. If they assume a real leadership role that changes the market dynamic as they have held the throttle for SP500 for many months.

Thus you bet we are watching the likes of JPM, GS, WFC, MS. What about C and BAC? Don't think they really matter now. They are kept banks now and they are on the liquidation trade because their stock will be worthless due to the federal ownership. It is a long shot but the action Friday was interesting.

As the indices test the January low we will watch the leadership that is currently testing back with the market and see how it holds support. Best case is if it holds the same pattern, waits out the test of the January lows and can break back to the upside. Many are making good tests putting them in buying position if the indices can find support and once gain move higher. A bounce off January support is a solid indication, but after this reversal off of a solid follow through the character is more bearish. As long as our positions hold support that is fine.

Support and Resistance

NASDAQ: Closed at 1476.42
1493 is the October 2008 low & late December 2008 consolidation low.
1499.21 is the 2008 closing low
The 50 day SMA at 1518
1521 is the late 2002 peak following the bounce off the bear market low
1536 is the late November 2008 peak
1542 is the early October 2008 low
The 50 day EMA at 1564
1565 is the second low in October 2008
1603 is the December peak
1620 from the early 2001 low
The 90 day SMA at 1624
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

1434 is the January low (1440.86 closing)
1428 is the November 2008 low, the bear market low
1398 is the early December 2008 low
1387 is the 2001 low
1295 is the November 2008 low

S&P 500: Closed at 825.88
The 10 day EMA at 845
848 is the October 2008 closing low
853 is the July 2002 low
The 18 day EMA at 854
857 is the December consolidation low
866 is the second October 2008 low
The 50 day EMA at 885
889 is an interim 2002 peak
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 920
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.

839 is the early October 2008 low
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 8000.86
8141 is the early December low
8175 is the October 2008 closing low. Key level to watch.
The 10 day EMA at 8191
8197 was the second October 2008 low
8419 is the late December closing low in that consolidation
8451 is the early October closing low
The 50 day SMA at 8471
8521 is an interim high in March 2003 after the March 2003 low
The 50 day EMA at 8569
8626 from December 2002
8829 is the late November 2008 peak
The 90 day SMA 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
9575 from September 2003, May 2001
9654 is the November 2008 peak

7965 is the mid-November 2008 interim intraday low.
7909 is the January low
7882 is the early October 2008 intraday 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.

February 2 - Monday
December Personal Income (8:30): -0.4% expected -0.2% prior
Personal Spending, December (8:30): -0.9% expected, -0.6% prior
Construction Spending, December (10:00): -0.9% expected, -0.6% prior
ISM Index, January (10:00): 32.0 expected, 32.4 prior

February 3 - Tuesday
December Pending Home Sales (10:00): 0.0% expected, -4.0% prior

February 4 - Wednesday
January ADP Employment Change (8:15): -515K expected, -693K prior
ISM Services, January (10:00): 39.0 expected, 40.1 prior
Crude Oil Inventories, 1/30 (10:30): 6.2 min prior

February 5 - Thursday
1/31 Initial Jobless Claims (8:30): 592K expected, 588K
Productivity-Prel, Q4 (8:30): 1.0% expected, 1.3% prior
Unit Labor Costs, Q4 (8:30): 3.0% expected, 2.8% prior
Factory Orders, December (10:00): -3.0% expected, -4.6% prior

February 6 - Friday
January Average Workweek (8:30): 33.3 expected, 33.3 prior
Hourly Earnings, January (8:30): 0.3% expected, 0.3% prior
Nonfarm Payrolls, January (8:30): -500K expected, -524K prior
Unemployment Rate, January (8:30): 7.5% expected, 7.2% prior
Consumer Credit, December (14:00): -$2.3B, -$7.9B

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

Jon Johnson is the Editor of The Daily at

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