Earnings Ready to Roll Out

SUMMARY:
- Market pensive ahead of the weekend as quarter end buying stalls.
- Prices eat into incomes but disposable income is still rising.
- Nothing showy, but economic data continues its attempt at stopping the bleeding.
- A potential transition week ahead as the quarter winds down and earnings ready to roll out.

Not a great Friday, but a somewhat normal pullback nonetheless.

Friday did not pan out with another good rally to end the week and maybe tap resistance. Didn't even try. Futures were down before the economic data hit, and afterwards they stayed down even though the US side of the equation was not that bad. Spending was up 0.2%, in line with expectations though well off the upwardly revised 1.0% in January. Spending is now up 2 months straight. Incomes, however, fell 0.2%, more than the -0.1% expected and the 0.2% gain in January. Higher prices are eating into incomes. Still, disposable real income was up for its fifth straight month.

On the other side of the ocean's the news did not have the same positive shifting undercurrents the US data is showing (manufacturing, retail sales, same store sales, home sales). Japanese retail sales posted the worst drop in ten years, not exactly what you look for when an economy is expected to emerge from depression. The UK GDP fell 1.6% versus the -1.5% expected. That was not a terribly horrible miss, but the whisper was the number was going to beat expectations. It did, just not the right way. The overall EU reported that industrial orders fell 34%. Ouch.

So, futures found nothing positive heading into the open and they accordingly opened lower. Michigan sentiment proved to be better than anticipated at 57.3 (56.8 expected, 56.6 prior), but that did not liven up the sour mood, at least not right off. Stocks sold lower but then caught a bid and rallied to session highs though the indices never came close to positive on that run. Indeed they never came close to positive. They peaked at lunch and continued the selling, hitting new session lows mid-afternoon. A bounce attempt in the last two hours couldn't hold it together and the indices closed at their previous session lows.

Seems the quarter end buyers were not interested in new positions ahead of the weekend. Perhaps they stopped buying due to the 3-day clear period on stock trades (the end of the quarter is Tuesday), perhaps it was just the weekend. Buyers left and stocks lost their bid. Didn't help matters that the dollar was up and thus some of the recent leaders sensitive to the dollar, e.g. commodities, were substantially lower. That does not excuse losses in the 2+% range, but at least sellers didn't surge into the market as the lower volume shows. They also could not take the leaders down; leaders rather normally tested their good moves. We will see if there is a new spark early in the week, end of quarter or no.

TECHNICAL. Started down, made a weak attempt at rallying that just could not catch hold, and then sold off the last 3.5 hours, finishing at the lows. This time there was no concerted buyer push in the afternoon to take stocks back to positive. Superman didn't show up. The ninth inning rally failed, the 2 minute offense ran out of clock.

INTERNALS. Nothing special. Breadth was negative. What a surprise. 2+% losses will push decliners to the -3:1 level. The most interesting feature was the plummet in volume. NYSE trade hit the lowest level in 1.5 months. Not a lot of sellers, certainly much fewer than the recent buyers. Nonetheless, it was a complete abdication by the buyers that let the few sellers push the market around without any challenge. Jimmy Carter era d j vu.

CHARTS. NASDAQ had the momentum Thursday, but it exited with the closing bell Thursday and that left the techs unable to push further toward 1600 resistance, much more the January peak. Same story across all the market as the indices faded back from just below their next resistance level. Even SOX faded from its November peak it was just getting ready to challenge, but SOX looks great still as it comes back to test the PRIOR post-November high, not just bouncing around inside its big range. Always like dealing from a position of strength. Now the losses were something of a drop in the bucket versus the moves higher in this rally and were in line with the losses on this move (SP500 losses the past two weeks: -2%, -2%, -1.3%). The move was not devastating by any stretch but it was not the lead in to next week that we wanted for a last push ahead of quarter end. We will see if there is a last gasp higher attempt early in the week. As for a test, SP500 can still test back to 800ish and NASDAQ 1500ish and still be in fine shape. You just don't want to see the leaders start to break down.

LEADERSHIP. Speaking of leadership, not many stocks were up but not many were in trouble either, at least among the leadership. They are testing but not violating near support. Kind of what you would expect after a strong run, and as noted Thursday, without quarter end and earnings it would be just a normal pullback. Indeed a test ahead of earnings, outside of a huge surge into the new month we can use to sell out our positions, is typically a good thing as it takes the froth off the move and allows good results, if there are any, can be rewarded. That remains to be seen. Leaders are holding up very well as the plays on the report show, but we are still more gun shy than not about the market move holding through earnings and thus holding upside positions through earnings.


THE ECONOMY

Data Still Showing Modest Gains.

Hear that? Sounds like whips hitting a dead horse carcass again. Once more last week revealed more economic data that, while hardly indicative of a surging economy, shows a slowing of the rush to the depression. Existing home sales, new home sales, and factory orders all topped expectations and more than that, the revisions were positive as well.

I have said it many times before, but when the revisions start taking back what the prior assumptions offered that is when you start to see the true turns in the economy. As with the stock market, weather forecasting, or any other prognostication endeavor, the humans that man the controls tend to fall into a trend in line with the current trend and they don't change their ways even as the trend starts to change. Thus they continue on in the belief the trend will hold even when the data suggests it is at least pausing. Thus their forecasts and assumptions are based on the current trend, and when there is a true change they have to revise their assumptions as more and more data comes in so they can reconcile with the facts.

The facts right now show slowing in the rate of decline and more than that, showing it for more than just a month. Regional manufacturing is stringing together a series of 'slower declines', meaning contraction continues but the pace is slowing more and more. Durable goods orders and factory orders are bouncing back and forth, showing the volatility that is associated with every change in any trend. I use a weather analogy frequently. When a season is well established the weather patterns are trending in one direction and forecasting the weather is easy. Summertime on the coast means a high around 90, still winds, and a 20% chance of a shower coming in off the Gulf. When the fall starts to roll around, however, the winds shift, fronts race through at differing intervals, violent storms kick off when cold air slams into warm moist Gulf air. Volatility. Then as the fall takes control you get nice days that get shorter and shorter. That holds up until winter hits and things get choppy once more.

The economic data is trying to get choppy, trying to show a bit of volatility. The attempts have not been that forceful yet, kind of like a defector from the Eastern Block learning to speak up with freedom's voice. Pensive at first, then gains confidence as he or she is not hauled off and never heard from again. Maybe these are all head fakes, just blips in an otherwise ongoing death spiral. All we know is that the attempts at improvement cover the waterfront and the market responded ahead of them with this initial bounce that, by the way, has the chips out in front just as it was in late 2002 when the market initially rallied off the bottom before the long, drawn out spring 2003 test that nearly had investors slashing their wrists.


THE MARKET

MARKET SENTIMENT

VIX: 41.04; +0.68
VXN: 41.45; +0.87
VXO: 43.39; +1.96

Put/Call Ratio (CBOE): 0.92; 0

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: 28.9%. A fraction more bulls (28.4% last week) but not really commensurate with the market gains. Not a lot of belief in it just yet. 29.7% three weeks back, down from that 'optimism' Well down 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. 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: 43.3% versus 44.3% the prior week. Slowing the decline from 47.2% as here as well there were not many believers in the run higher. Still showing plenty of worry. 47.2% is the peak for the run this year but is still below the December and October peaks. Hit the 34's on the lows, falling from 38.5% and 46.2% in mid-December. Still 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: -41.8 points (-2.63%) to close at 1545.2
Volume: 2.06B (-18.07%)

Up Volume: 460.521M (-1.991B)
Down Volume: 1.633B (+1.486B)

A/D and Hi/Lo: Decliners led 2.97 to 1
Previous Session: Advancers led 4.23 to 1

New Highs: 18 (-6)
New Lows: 13 (-3)

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

After coming to 13 points from 1600 on Thursday, NASDAQ gapped lower and closed at the session low, never really attempting any upward movement. Disappointing it did not challenge the resistance but it is also in the top of the range, holding well over support near 1500. Low volume. No heavy selling. Just ran out of buyers. Those are positives, but whenever an index makes it back up to key resistance that has pushed it back before it is a gut check moment. We will see how it responds early in the week; some upside and we close out some more positions as we use the upside to bank gain and see if it can make the breakout move.

SOX (-2.08%) lost some ground after the Thursday breakout, but it is holding over the prior highs after coming close but not quite taking out the November peak. Big and important moves by the chips, clear market leaders. How they respond early this week is key. Recall back in December we were talking about the chips and their relative strength and building patterns. They were showing strength then and while they had a couple more tests to make, they finally broke to a new post-November high and are leading the market higher.

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

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


SP500/NYSE

Stats: -16.92 points (-2.03%) to close at 815.94
NYSE Volume: 1.443B (-20.26%)

Up Volume: 192.082M (-1.127B)
Down Volume: 1.246B (+765.008M)

A/D and Hi/Lo: Decliners led 3.07 to 1
Previous Session: Advancers led 3.86 to 1

New Highs: 12 (-6)
New Lows: 87 (-4)

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

The large caps turned back before hitting 850, 875, or 900 to 910. It also turned back below the 90 day SMA (828). As noted earlier, the loss was in line with other losses on the upside run. Just the location where this one occurred as well as the time on the calendar make it more interesting as they say. Very low volume here as well and that leaves SP500 in technically good position to test the 800 level and try to find a higher low. Again, the concern is approaching earnings season and whether SP500 will make a normal test of support or the sellers use this run to jump all over the downside.

SP600 (-3.34%) move dup to test the bottom of its January range and there it stalled, at least on Friday. It is holding at the December low but it has not shown any leadership quality thus far, just tagging along with the other indices as they recovered.


DJ30

Similar action after DJ30 rallied toward resistance at 8000, bumping into the bottom of the January/early February consolidation range and fading modestly on very low volume. As noted earlier in the week a test back to 7552 (the November closing low) is a logical point for it to fade to, but sure would like to see a sprint up toward 8175 to 8250 first. We will see how it responds to start the new week, but we keeping our expectations low.

Stats: -148.38 points (-1.87%) to close at 7776.18
Volume: 323M shares Friday versus 397M shares Thursday. No sellers at least.

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


MONDAY

Lots of economic data. Lots. The market is also preparing for earnings season. It has a 20% run under its belt. The quarter is ending. Just your usual start to a week.

Friday was a disappointment as the market did not make another push higher and give us an easy opportunity to take a lot more gain off the table. As noted above, a bit of profit taking and nervousness ahead of the weekend, something similar to the prior two Fridays. They were followed by two good upside Mondays.

If we get another good Monday we will book quite a bit of gain. If the market continues to test then we have the decision of whether to see if we get a bounce after a test of 7500 on the Dow and 800ish on SP500. Oh yes, and 1500 or so on NASDAQ and 235ish on SOX. While the market is showing good upside strength and volume, and while we have banked a lot of gain on the recent upside moves, we are inclined to stick with some tight stops and take the rest of the gain on plays that have it and avoid any serious losses on more recent entries and then see how any test holds up.

We have enjoyed many good moves by many stocks as the indices move into resistance, and with earnings coming on top of everything else we would prefer to bank more gain. We can always get back in if the market rebounds after holding support. Might be the wrong call if earnings turn out better than expected, but with a good run in the bank we would rather not take the gamble, at least not on all positions.

So we enter the week playing it a bit cautious, happy to see another upside Monday again if it will show itself, but either way ready to protect gains and our positions. As for new positions, for the upside we will have to see what kind of test comes off of this most recent tap at resistance or whether it blows on through, making it harder to get in as that involves more chasing the bus toward earnings. We will see what kind of opportunities provide some fast upside in that situation to augment our current positions, i.e. current leaders coming off tests of their moves.

In sum the market is at a potential transition moment thanks to its move thus far, key resistance at hand, quarter end, and earnings season. We have taken gain on the way up and will continue to do so given the opportunity. We will also protect positions from any further downside given you just don't know what the market is going to do after this run to resistance. If things get really dicey, we have some downside positions that we can turn to for some downside gain as well.


Support and Resistance

NASDAQ: Closed at 1545.20
Resistance:
1569 is the late January 2009 peak
1598 is the February 2009 peak, the last peak NASDAQ made
1603 is the December peak
1620 from the early 2001 low
1644 from August 2003
The January closing low at 1653
1666 is the intraday January 2009 peak
1780 is the November 2008 peak

Support:
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
1505 is the late October 2008 closing low.
1493 is the October 2008 low & late December 2008 consolidation low
The 50 day EMA at 1476
The 18 day EMA at 1475
The 50 day SMA at 1463
1440 is the January 2009 closing low
1434 is the January intraday low
1428 is the mid-November 2008 low
1398 is the early December 2008 low
1387 is the 2001 low
1316 is the November 2008 closing low
1295 is the November 2008 low
1271 from is the March 2003 low, 1253 intraday
1262 from July 2002
1192 is the July 2002 intraday low
1114 is the October 2002 low, the bear market low


S&P 500: Closed at 815.94
Resistance:
818 is the early November 2008 low
The 90 day SMA at 828
839 is the early October 2008 low
848 is the October 2008 closing low
853 is the July 2002 low
857 is the December consolidation low
866 is the second October 2008 low
878 is the late January 2009 peak
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
944 is the January 2009 high

Support:
815 is the early December 2008 low
805 is the low on the January 2009 selloff. KEY Level
800 is the March 2003 post bottom low
The 50 day EMA at 798 held on the Wednesday low
The 50 day SMA at 792
The 18 day EMA at 783
768 is the 2002 bear market low
752 is the November 2008 closing low but it is not broken and done away with
741 is the November 2008 intraday low
722 is a December 1996 low
681 is the June 1996 intraday peak, 673-71 closing
665 from August 1996
656-654 from January, April 1996
607-05 from November 1995


Dow: Closed at 7776.18
Resistance:
7867 is the early February low
7882 is the early October 2008 intraday low. Key level to watch.
7909 is the early January low
7965 is the mid-November 2008 interim intraday low.
The 90 day SMA at 8022
8141 is the early December low
8175 is the October 2008 closing low. Key level to watch.
8197 was the second October 2008 low
8419 is the late December closing low in that consolidation
8451 is the early October closing low
8521 is an interim high in March 2003 after the March 2003 low
8626 from December 2002
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
9088 is the January 2009 peak

Support:
7702 is the July 2002 low
7694 is the February intraday low
The 50 day EMA at 7639
7552 is the November closing low. KEY Level.
7524 is the March 2002 low to test the move off the October 2002 low
The 18 day EMA at 7460
7449 is the November 2008 intraday low
7282 is the October 2002 closing low in the prior bear market.
7197 is the intraday low from October 2002 bear market
7115 is the February 2009 closing low
7008 from February 1997 closing peak
6528 is the November 1996 peak
6489 from December 1996 closing peak
6356 is the April 1997 intraday low


Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

March 31 - Tuesday
March Consumer Confidence (9:00): 27.0 expected, 25.0 prior
S&P/Case-Schiller Home Price Index, January (9:00): - 18.5% expected, 18.55% prior
Chicago PMI, March (9:45): 34.7 expected, 34.2 prior

April 01 - Wednesday
March ADP Employment Change (8:15): -648K expected, -697K prior
ISM Index, March (10:00): 36.0 expected, 35.8 prior
Construction Spending, February (10:00): -1.6% expected, -3.3% prior
Pending Home Sales, February (10:00): -2.0% expected, -7.7% prior
Crude Oil Inventories, 3/27 (10:00): +3.3M prior
Auto Sales, March (14:00): NA expected, 2.9M prior
Truck Sales, March (14:00): NA expected, 3.5M prior

April 02 - Thursday
3/28 Initial Jobless Claims (8:30): 653K expected, NA prior
Factor Orders, February (10:00): -0.3% expected, -1.9% prior

April 03 - Friday
Nonfarm Payrolls, March (8:30): -656K expected, -651K prior
Unemployment Rate, March (8:30): 8.5% expected, 8.1% prior
March Average Workweek (8:30): 33.3 expected, 33.3 prior
Hourly Earnings, March (8:30): 0.2% expected, 0.2% prior
ISM Services, March (10:00): 42.0 expected, 41.6 prior

By: Jon Johnson, Editor
Copyright 2009 | All Rights Reserved

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

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