Sunday, March 08, 2009

Is Economy Bottoming?

- NASDAQ hits a new bear market low, market rebounds late.
- Job losses bad enough to mean the economy is bottoming?
- Oversold and searching for a reason to rally.

Market tries the stiff upper lip in the face of jobs losses, survives to fight again thanks to short covering.

Futures were up ahead of the jobs report, aided by Wells Fargo cutting its dividend but saying 'business is good.' MRVL in semiconductors reported solid earnings and was up. Even after the report they managed to hold their own, likely given that the non-farm claims were in line with expectations (-651K). After a bit they started to factor in the large downside revisions to December and January, not to mention that LIBOR moved higher yet again (3-month at 1.29%) and Europe reported that corporate borrowing costs surged to a record. Futures started giving ground ahead of the bell. Still positive, but giving ground.

Didn't take long after the open that the indices turned lower, and before the day was out NASDAQ hit a new bear market low, joined by those already holding that honor, i.e. SP500, DJ30 and SP600. Even the mid-cap SP400 got in on the new bear market low action as it made its first foray below the November low.

TECHNICAL. Intraday the action was weak with a higher open giving way to downside and new bear market lows for all the major indices. After NASDAQ broke to a new bear market low and with the weekend looming, shorts covered in the last half hour and that pushed the large NYSE indices back to flat with some sporting modest gains. The NASDAQ side of the market recovered nicely though NASDAQ could not reach positive as the NASDAQ 100 was an anchor about its neck all day and closed with a 0.91% loss. Nice recovery, but it was all due to short covering ahead of the weekend.

INTERNALS. Breadth was about flat, what you would expect with the late rebound. New lows rallied but not that sharply, still well below November individual daily levels. Volume was mixed with NASDAQ trade hitting the highest in two weeks. NYSE trade was lower but as with the entire week, still strong and well above average. Not much to make out of it other than they recovered off the lows on strong volume. That suggests buyers coming back in to push a rally, but it was a Friday after an ugly week of selling, and drawing that conclusion is a bit of a stretch.

CHARTS. NASDAQ hit that new bear market low and rebounded. Indeed all indices (outside of SOX and NASDAQ 100) rebounded after hitting some new bear market lows, showing doji on the candlestick chart. As noted, that has the look of a rebound, but there we go again, right? So many looking for a bottom under every market selloff. It was Friday and short covering pushed them back up.

Other factors do show a massively oversold market that, with the right trigger, could rebound furiously. When stocks or indices rally too far over their 200 day SMA they have to fall. For the NYSE indices that is usually 15%. NASDAQ 20% to 25%. Same to the downside; when they sell off too hard too fast they cannot stay down forever. The cork has to pop back up. Right now DJ30 is 33% below its 200 day SMA. SP500 36%. NASDAQ 32%. Impressively oversold.

In addition, the indices are testing 12 to 13 year lows. As one commentator noted today, historically if the indices test 12 year lows they tend to bottom and/or rebound furiously. While the reason for each selling bout can be cats and dogs in their differences, it is a statistic worth noting.

The question is when a rally begins. The selling is getting long in the tooth on this run lower and looking for shorts with massive amounts of real estate to fall through is not that easy. That still leaves the old 'watched pot' syndrome with everyone looking for a bottom. Nonetheless, a good selloff to start the week would likely scare more out of the market and go a long way to setting a bottom for a rally. Always like to see early week morning selloffs after plenty of selling already. The rebounds can be furious. We didn't get that early morning selloff last week when the market was primed to bounce. We will watch and see if it comes this week.

LEADERSHIP. Still not the best leadership we have seen since the selling started last fall. January and particularly February were very hard on the leaders that were setting up. Chips are coming back with some really nice patterns, but it is hardly sector wide. Some big techs look decent; a lot were roughed up on Friday. Some metals look solid; others are trying to get that way. Retail shows the same picture, i.e. some real promise and some in need of real work. A rebound rally will help them form up better, but that requires some time after the damage done on this last selling. Back in 2002 the chips led the initial surge off the October low. Even after the selloff in February many are setting up once more and we have no problem with them leading a move that allows the rest of the market to wiggle out from under the selling avalanche and catch their breath. Thus we are looking at chips again to lead and to buy as well as they make that move.


Jobs report bad enough?

The headline data was not that bad with non-farm payrolls right in line (-651K versus -650K expected). Unemployment hit 8.1% versus the 7.9% expected and 7.6% in January, but even the 12.5M out of work seemed somewhat palatable to the market. The January revision was tough (-655K versus -598K originally reported) and December was simply awful (-681K versus -577K). That put job losses for the prior 14 months at 4.4M. The last four months saw 2.6M lost. Manufacturing fell 168K, construction 104K, business and professional -180K. Only health and education (+26K) and government (+9K) showed gains. Education has been up for the prior two months as well as has government. Those are not economic powerhouses with respect to a decently healthy economy.

Some say the data is so bad that it has to mean a bottom is at hand or close to being. There are two thought threads on this one. First, when the non-farm jobs report stabilizes for three months that has meant a bottom was set and that the economy was already moving back up. 681K in December, 655K in January, and 651K in February. Could be stabilizing. The unemployment rate is not (8.1% versus 7.6% in January), but non-farms are. One problem is that more than half of the job losses over 14 months (12-2007 when the current downturn started) occurred in the past 4 months. The speed of the decline has increased overall and the downside revisions continue. We assume the 651K is accurate for February, but December and January were not even close.

Second, given this is one of the worst recessions in US history, can you really look back at past events and gauge whether you are at or near a bottom? This one is different in its violence and source, and thus comparisons are tricky at best. As with stocks that are selling, it is a value issue. What 'value' is value for a diving stock? It all depends upon when it stops falling. Similarly, what level of jobs losses indicates a bottom? It is a function of just how bad the economic decline is this time. Each level is different and this one is easily one of the worst on record. In other words, just because the data is as bad as the 1981-82 recession it does not mean this one won't be worse and consequently show worse jobs data.



VIX: 49.33; -0.84
VXN: 47.99; -0.09
VXO: 52.67; -1.35

Put/Call Ratio (CBOE): 0.87; -0.15. After a day over 1.0 on the close it slipped back down even with the selling. The big money guys are not buying much more downside protection right now and the speculators are pulling back some as well. The lack of more put buying after it spiked higher shows they are not speculating to the downside and that is a positive combination.

To recap what we said Thursday with respect to VIX' failure to spike higher on this most recent selling: VIX does not have to spike higher to signal a bottom. It has done its work already and historically it spikes several months before the actual bottom. In 2002 it spiked to 56, the high, over three months before the October bottom. It has been just over four months since the first spike higher in October and just over three months from the November high that was a closing high in the run.

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: 29.7%. Ticked higher last week from 28.6%. Won't likely be there next week after this selling. A lot were looking for a bottom, hence the higher reading. Still a dive, down from 31.1% the prior week and the 35.2% it recovered to on the market rebound. 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: 44.0%, down modestly from 45.1% for the same reason as bulls were up slightly. Up from 41.1% and 36.3% before that. 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.


Stats: -5.74 points (-0.44%) to close at 1293.85
Volume: 2.483B (+7.62%)

Up Volume: 1.028B (+836.348M)
Down Volume: 1.438B (-668.504M)

A/D and Hi/Lo: Decliners led 1.06 to 1
Previous Session: Decliners led 5.39 to 1

New Highs: 1 (-1)
New Lows: 612 (+30)


NASDAQ reached to a new bear market low then rebounded, but it could not recapture even the November intraday low on the close. Good volume on the rebound, suggesting an attempt at a reversal this week, but as noted earlier it is a Friday afternoon short covering rebound giving the index that look. Definitely oversold, and indices typically rebound after breaking key support. Now we see if there is anything in the techs to pull NASDAQ back up. Friday many large cap techs headed lower and did not rebound. Work to be done.

SOX (-1.14%) is trying to hold onto the bottom of the December to February range, rebounding late to close right at that level. Some chips have formed up and others are trying to get there but more work needs to be done to get back to the January numbers in terms of stocks ready to move.




Stats: +0.83 points (+0.12%) to close at 683.38
NYSE Volume: 1.771B (-5.71%)

Up Volume: 810.945M (+690.006M)
Down Volume: 927.05M (-828.577M)

A/D and Hi/Lo: Decliners led 1.62 to 1
Previous Session: Decliners led 8.63 to 1

New Highs: 4 (-1)
New Lows: 523 (-263)


Another new low for the bear but also a nice tight doji on the candlestick chart has us watching for a rebound even though it was Friday after a slaughter and the shorts covered late to make this pattern. Massively oversold as noted above and yet to test the break below the November low back up at 750ish. That is the point you would expect a rebound to make a run at, but thus far no serious attempt at making that bounce. Still looking at some SPY positions, however, if SP500 can get a foot in the door for a rebound.

SP600 (-0.05%) made the late rebound as well, showing its own hammer doji as well. A total blood letting for the small caps and they are even more oversold than the other indices at 40% below its 200 day SMA. Ripe for a bounce as well.


Reversed off the lows in the last hour to put in a doji as well. It has sold off below the 10 day EMA (6949) since early February and has made no serious effort to even challenge that near resistance point. Very strong, entrenched downtrend and on any bounce how DJ30 handles the 10 day EMA as a gauge to the rebound's strength.

Stats: +32.5 points (+0.49%) to close at 6626.94
Volume: 425M shares Friday versus 509M shares Thursday. Lower volume but still well, well above average.



Retail sales and Michigan sentiment are two key reports next week, but Congress is meeting to discuss mitigating mark to market accounting at least temporarily, and that could provide some upside incentive for stocks, particularly in their oversold condition. The financials need a kernel or two of positive news to hang onto. The WFC "business is good" statement Friday was not quite enough to get the job done. Something has to be done to unfreeze credit after its return to sub-zero temperatures ever since the stimulus bill looked as if it would pass and Geithner's non-announcement announcement about the bank bailout. Mark to market suspension, even if temporary, is a step in that direction. It is not the solution in itself, but it is an important step in the process of prying open the bank vaults and getting money circulating so that the stimulus, what there is of it, can have some hope of getting money into the hands of those needing it.

With the extreme oversold conditions we are not looking to open new downside positions without first a bounce higher to test the 10 day EMA resistance and see what kind of pushback that near resistance gives. As the market bounces we will anticipate potential rollovers and have plays designed to take advantage of them if the market hits resistance and starts back down.

As for the start of the week we will continue to look at some of the solid upside plays on the report as well as some new ones to ride any oversold bounce as far as it will run. We want stocks in good patterns as those tend to run well in recoveries. We also will look at fast runners that may not have great accumulation patterns but are in position at support to makes a sharp jump higher. Still treating any upside move as a temporary relief bounce that can make us money but will have to prove itself to be anything more. That means more leadership, and it will take time to develop that. So if we are looking at a more sustained move it will take more time to get the bases built to help sustain a further run. Kind of has to feed off itself and be as serious move to be a serious move if you get my drift. For now we look for a bounce and play it for what it will bring, and then evaluate it after a good bounce to see if there is any staying power.

Support and Resistance

NASDAQ: Closed at 1293.85
1295 is the November 2008 low
1316 is the November 2008 closing low
The 10 day EMA at 1359
1387 is the 2001 low
1398 is the early December 2008 low
1428 is the mid-November 2008 low
1434 is the January low (1440.86 closing)
1460 is the February low
The 50 day EMA at 1480
1493 is the October 2008 low & late December 2008 consolidation low.
The 50 day SMA at 1496
The 90 day SMA at 1519
1521 is the late 2002 peak following the bounce off the bear market low
1536 is the late November 2008 peak
1542 is the early October 2008 low
1565 is the second low in October 2008
1569 is the late January 2009 peak
1603 is the December peak
1620 from the early 2001 low
1644 from August 2003
1666 is the January 2009 peak

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 683.38
722 is a December 1996 low
The 10 day EMA at 722
741 is the November 2008 intraday low
The 18 day EMA at 750
752 is the November 2008 closing low
768 is the 2002 bear market low
800 is the March 2003 post bottom low
804 is the low on the January 2009 selloff
812 is the February low
The 50 day EMA at 812
815 is the early December 2008 low
818 is the early November 2008 low
839 is the early October 2008 low
848 is the October 2008 closing low
853 is the July 2002 low
The 90 day SMA at 854
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

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 6626.94
The 10 day EMA at 6948
7008 from February 1997 closing peak
7197 is the intraday low from October 2002 bear market
The 18 day EMA at 7209
7282 is the October 2002 closing low in the prior bear market.
7449 is the November 2008 low
7524 is the March 2002 low to test the move off the October 2002 low
7694 is the February intraday low
7702 is the July 2002 low
The 50 day EMA at 7816
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.
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 90 day SMA at 8280
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

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 10 - Tuesday
January Wholesale Inventories (10:00): -1.0% expected, -1.4% prior

March 11- Wednesday
03/06 Crude Oil Inventories (10:30): -757K prior
Treasury Budget, February (14:00): -$200B expected

March 12 - Thursday
Initial Jobless Claims (8:30): 640K expected, 639 prior
Retail Sales, February (8:30): -0.4% expected, 1.0% prior
Retail Sales ex-auto, February (8:30): -0.2% expected, 0.9% prior
Business Inventories, January (10:00): -1.1% expected, -1.3% prior

March 13 - Friday
February Export Prices ex-ag. (8:30): -0.0% prior
Import Prices ex-oil, February (8:30): -0.8% prior
Trade Balance, January (8:30): -$38.2B expected, -$39.9B prior
Michigan Sentiment-Preliminary, March (10:00): 56.3 expected, 56.3 prior

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

Jon Johnson is the Editor of The Daily at

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