Sunday, March 22, 2009

Market Continues Pullback

- Market continues the pullback, ready to test the SP500 November close.
- CBO says Obama budget projections fall far short of actual costs and forecast deficits of 4% of GDP for the foreseeable future.
- The TALF sounds great, but no one is participating thanks to Congressional disincentives to do so.
- Why the Fed was forced to go where no Fed has gone before.
- Despite the economic peril, the market is setting up for another bounce after this test.

Not bad action in the face of all the political drama.

The good before the bad, the market before the politics. That is how the report goes tonight. The Friday action was not that band and it was, despite the losses, kind of quiet for a quadruple expiration Friday. Commodities were leading higher again in the pre-market and as the session got underway. Financials were struggling again after their surge, likewise the techs and the semiconductors. All was manageable, at least when you put it in the perspective of the past several months. The market rallied for a couple of weeks with SP500 producing a 20% move off the low; a couple of days of pullback is rather normal.

Then the news hit just after lunch in New York. The CBO finished its evaluation of the Obama/Fed stimulus, budget, and bailout facilities and said the cost would be $2.3T more than budgeted because of the additional spending and an economic recovery not as rosy as the White House believes. CBO revised the 2009 deficit up to $1.8T. It further said that the deficit would remain at 4% of GDP (or actually as the CBO put it, NOT LESS THAN 4% of GDP) for the foreseeable future. Less than 2% is typical for our economy and many get antsy when it moves over 2% for even a short period of time. This is absurdly high and not expected to be just temporary, the usually cited exception for running a larger deficit in times of trouble. As a nice bit of icing, another report came out and noted 542 mass layoffs in February. A mass layoff is 50 or more at a time from the same company. Looks as if a million jobs were lost in the last two months. Not good.

The indices were idling sideways and we thought we might get a bounce in to the close that would be good to short heading into the weekend. When the news hit they jerked lower into new selling for the afternoon and taking the selling from basically flat or modestly lower to down 2% and more. Volume ramped up as stocks sold off hard. You can say it was distribution, but it was expiration Friday and a lot of positions had to be adjusted or rolled after the Fed's action Wednesday. It was clear, however, that the market reacted negatively to the latest indication that at least two branches of the government in Washington are insanely out of control with their spending and constitutional trampling.

So . . . the pullback from the rally is on. It was expected, we took a lot of gain on the way up this past week ahead of key resistance, and we closed several positions Friday just to be on the safe side for this pullback. We don't expect it to be a virulent one, more a test of the SP500 November closing low, but with the economy in turmoil and the federal government going Venezuela on us you never quite know for sure. Thus we buttoned up quite a few positions and took entered some more downside plays using SDS, DIA put options and some PG puts to play this downturn. Again, our target is the SP500 November closing low but we just have to see how the move plays out.

TECHNICAL. Intraday the action was not great, but with a pullback that was rather well anticipated, what can you expect? Higher at the open then gave it up to negative, wandered laterally, then dumped into mid-afternoon. The late rebound was not much, but it did cut the losses from pretty ugly to just homely. Always liked that oxymoron. Trying to figure out how to work in one such as 'congressional oversight' though that is more of a double entendre, as in 'was it an oversight that Congress let the AIG bonus payments slide by in the so-called stimulus bill or did Congress oversee the inclusion of the bonus payments in the so-called stimulus bill?' You could answer 'yes' to both: it was an oversight for most of Congress because they did not even read the bill. It was also overseen by the likes of Senator Dodd who knew they were in there. The usually boisterous Dodd was very quiet during all of the red-faced, spittle flying finger pointing done last week. That should have been a tip off that something was afoot.

INTERNALS. Decliners were pretty solid at nearly 3:1 on NYSE, 2:1 on NASDAQ. Not great but not near the extremes before this and not as strong as on the Wednesday follow through. Volume surged on NYSE to the highest level in 6 months, taking it back to the October levels. NASDAQ volume was just slightly . . . here comes another one . . . above average. Distribution? You could call it that, but it was expiration Friday and volume should be up. As noted above, with the Fed changing the game (or at least making a last ditch effort to do so) there had to be some positions closed and rolled given the potential a floor is being built.

CHARTS. After NASDAQ and SP500 hit resistance at 1500 and 800 twice this week they are fading back to test. NASDAQ closed just below the 50 day EMA but is above the January lows and of course the December lows. Still very high in the range and has some cushion to work with. SP500 is on the second day of its pullback as well. It is above the 10 and 18 day EMA, those offering some minor support ahead of the November closing low that is 14 points away at 752. Looking for a test of that level as a key point to find support at or near. DJ30 found resistance at its November low last week and is now testing, coming down to tap at the 10 and 18 day EMA Friday. It has some more downside room toward 7114 to 7000ish, but its moves will be controlled by what SP500 does. SOX hit the February peak and is fading as well, holding the 10 day EMA Friday. Some more downside early in the week gives it a 1-2-3 pullback, perfect positioning to rebound.

LEADERSHIP. Mostly downside Friday, but that is okay as the recent leaders continue their pullbacks. Some of the early leaders are already in their third day, and typically you want to see a stock pop back up after a three day fade to near support. Leaders are called that because that is what they do, and thus we are looking for the likes of AMZN, TSM, QCOM, BIDU, etc. to hold and vault back up. Thus far very few breakdowns and many we closed were just precautionary, protecting the remaining gain and looking to get a new entry point after they finish the test.


With the sanctity of contract abrogated, a decent idea in TALF has few subscribers thanks to Congress.

TALF was the Fed's response to the Paulson bastardization of the TARP when Paulson opted to give banks billions versus buy bad assets, or at least considered bad due to the required mark to market accounting rules. Recall that LIBOR was falling until Paulson's ploy. The Fed had to step in to do something to start the credit thaw again. It worked as the Fed was going directly to mortgages, small business loans, credit debt, etc.

Wednesday the Fed stepped up the game, putting TALF in bold letters with its extra $1.1T for buys of mortgage backed securities and indeed direct purchases of US treasuries, all under TALF.

To this point, however, something in the neighborhood of 3 15 private institutions have signed on with dozens and dozens saying they will absolutely not participate and others under TARP saying they will pay back the TARP money and get out from under the tarp as soon as possible.

Why? Because the sanctity of contract and the basic rule of law the US is known for is broken. With the actions of Congress this past week where it violated multiple sections of the Constitution with its punitive 90% tax on workers that had contracted for these bonuses and would receive them IF they stayed on and helped cut the losses of AIG in half. They did just that but are now getting burned at the stake. The law the House passed is a constitutionally prohibited Bill of Attainder. It is a prohibited ex-post facto law. It abrogates legal contracts that are not against public policy and were in fact approved by Congress. The law also violates equal protection in singling out a specific group and goes a step further with calls by the socialist Barney Frank to publish the names of the recipients. If one of those people is hurt it is on Frank's head.

There is confusion as to whether the 90% limitation would even apply to TALF, so much so that CNBC called the Fed to ask if it did. The senior economic reporter had to be put on hold, and when that happened he realized it didn't matter what the answer was. Why? Because with Congress willing to pass laws that retroactively single out and punish one group it would be nothing for the answer to change from a 'no' to a 'yes' when convenient for Congress.

The perception in the private sector is the government is a loose cannon that will pass whatever 'law' it wants at the moment without any constitutional considerations. With that hanging out there no one is signing up for the TALF if there is any possible way to avoid it. Thus a relatively decent idea (given the position the Fed is placed in) has the look of failure even before it gets off the ground.

Fed really steps up the gambit, but the Administration and the Congress give it no choice.

THE PROBLEM: We all know what the Fed did Wednesday, i.e. making bold never been done before Treasury purchases. Why was it compelled to add another $1.2T into the trillions already in the kitty even before TALF has really kicked off?

First, there is NO plan, YET, from Treasury with respect to the bank bailout. With no appointees to help out Geithner hammer one out, the Fed realizes that no real plan is coming. There is talk of a 'private/public' partnership to get the job done, but as discussed above and more below, the private side has no interest in participating given what the federal government is doing.

Second, Congress is out of control, governing by vendetta or the feud versus truly tackling the problems of overspending, by trillions, in areas far, far removed from its constitutional authority. Ex-post facto laws, bills of attainder, violations of equal protection, all banned by the Constitution, are getting overwhelming support by House reps. Congress is using the Constitution as a liner for the bottom of the bird cage as it abrogates contract law and shreds the Bill of Rights in case anyone wants to call them on it.

So the Fed, realizing Washington is broken and won't be able to fix this problem or any others, is trying to get the public/private melding on its own by expanding TALF over $1T on Wednesday. No big mystery. Congress is off on a $165M witch hunt while it authorizes trillions in spending and the likes of Schumer chide those complaining of a 'measly' $2B in earmarks. The bonuses, while unsavory, are not the problem. As President Reagan noted and as is so painfully clear once more, the problem is out of control government. I never thought I would witness what I saw this past week in Congress, and what I saw was truly disturbing.

THE RUB. The Fed's dilemma is the same as the problem that prompted it to act. Because Congress is constitutionally AWOL from its duty to uphold the Constitution it is not getting the private participation needed to make the plan work, i.e. get the money out in the market and getting it loaned out. After all, how can any elected official tasked under oath with upholding the Constitution pass an $800B spending bill without reading it? Any congressman that voted for the bill without reading it should be recalled or impeached immediately for failing to uphold their primary sworn duty of holding office. Period. The end.

The result is that no private entity is willingly participating in TALF. All companies in TARP want out as soon as they can get out. Why? They don't want the government on their necks or attacking them after the fact with more bills of attainder or ex post facto laws. Businesses need to conduct business in these very difficult times with the best employees they can attract and not have government calling them to hearings if they pay bonuses to good honest works for doing the job the bonus was contracted for. What has happened is a travesty on all sides, but mountains of government oversight (there I go again) is not the answer. Many congressional leaders cannot even pay their taxes correctly (no surprise given the tax law) or keep budgets in line so what do they know about operating businesses?

So, those not in are not getting in and those that are in are getting out. That means they are not going to take part in the facilities and thus the government money will not get disseminated through the through the country and credit markets. That means failure, despite all of the insanely spendthrift (another oxymoron?) ways of Congress and the Administration. Congress has driven away the private sector with its witch hunts designed to distract us all from its poor performance. No one can blame the private sector for hunkering down and just trying to survive until different winds start blowing.

Unless there is some different route taken it is hard to see the economy getting much better and indeed it without credit getting fixed it will not get better. Sweeping tax incentives for investing in the US are needed. Not just money giveaways that are squirreled away, but incentives that say 'use it or don't get it.' Then it will be used and the money will get into the economy. Instead we are taxing money from businesses and individuals, sending it to Washington, and Washington is sending it back to the states (after taking its hefty 50% cut for overhead and favorite federal spending programs) to spend on museums and Frisbee parks. Sure there are some roads and bridges, but that is a small part of the bill. Most of this is a preparation for federalization of many extra-constitutional matters and not stimulus.

We need to reward risk taking to start businesses and to invest in America. Instead Congress and the Administration are working to punish those trying to put risk capital into play and create profitable businesses. Thus the money won't be spent and there is no help to the economy. It is a bleak picture unless things change significantly, but alas, because the powers that be are motivated by social restructuring it is not going to change course. The economy may improve some, but it will not surge and grow as it did in the early 1960's, the 1980's and 1990's, and again after the 2003 investment tax cuts. Of course, if no one participates we suppose Congress could pass a law forcing them to do so or get fined or taxed even more . . .



VIX: 45.89; +2.21
VXN: 44.66; +2.2
VXO: 46.41; +1.12

Put/Call Ratio (CBOE): 0.89; +0.12

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: 28.4%. Nothing like a rally to bring around the bulls, but not a very big run from 26.4% last week and not even hitting the 29.7% from the week prior. Not a lot of confidence just yet and that is fine. Still 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: 44.3%. Bigger drop for the bears, falling from 47.2%. Very solid 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.


Stats: -26.21 points (-1.77%) to close at 1457.27
Volume: 2.512B (+6.69%)

Up Volume: 362.524M (-522.869M)
Down Volume: 2.048B (+598.535M)

A/D and Hi/Lo: Decliners led 2.12 to 1
Previous Session: Decliners led 1.21 to 1

New Highs: 9 (-3)
New Lows: 37 (+6)


Second day of a pullback that started after the tech index hit 1509 a couple of times and could not push further despite the goose from the Fed. Sliding back to test and looking for it to hold around the December low at 1398. That is the working hypothesis and we will have to watch how strong volume is and what the tech leaders do with respect to holding their own near support to gauge the strength of the pullback. For now things look good and indeed many have a 2 to 3 days of pullback and thus are very close to position to rebound. That makes a test of the December low and a hold important.

NASDAQ 100 (-1.41%) is showing an excellent pullback, holding over the 50 day EMA with thus far a very modest pullback. If the large caps continue to show this relative strength that bodes will for a nice, orderly, rather short-lived test before another try higher.

SOX (-3.46%) took a hickey Friday, but it held the 10 day EMA on the low and remains well in within the top half of its 4 month trading range. Looking for a hold around 212 on the low and then a higher low and run toward a breakout.




Stats: -15.5 points (-1.98%) to close at 768.54
NYSE Volume: 2.107B (+7.93%)

Up Volume: 512.778M (-253.751M)
Down Volume: 1.947B (+774.982M)

A/D and Hi/Lo: Decliners led 2.86 to 1
Previous Session: Advancers led 1.04 to 1

New Highs: 4 (-1)
New Lows: 46 (+16)


Second day of the test after hitting resistance at 805ish and stalling. Volume is strong on the dive but it is expiration week so it tends to be elevated. Looking for another day of pullback to the November closing low (752) to give another bounce attempt, but then again, if the index is going to try and form a double bottom it will need to come back toward the March low at 675ish. Either way the ultimate outcome looks pretty decent thus far for more upside unless the selling runs out of control. If it moves to the march low we make a lot of money on our SDS play and likely the DIA on the DJ30 as well.

SP600 (-3.16%) as the small caps were hammered. SP600 fell to the November closing low after stalling at the 50 day EMA. This is also the bottom of the late February consolidation. The small caps are already at the November low and if they break down the move to the March low could be rather abrupt.


A second session of pullback for the blue chips as well after bumping into the November low at the peak of the rally and starting to fade. Ended the week in good position over the 10 and 18 day EMA, but looking for a move down to the bottom of the late February consolidation at 7115ish and then we see how much strength is in the Dow.

Stats: -122.42 points (-1.65%) to close at 7278.38
Volume: 672M shares Friday versus 559M shares Thursday. Big volume all week, but again it was expiration.



Heavy week of economic data ahead along with the earnings warning season. Already saw warnings popping up last week and more will show up this week as companies need to set the expectations now that the later numbers in the quarter are coming in and quiet periods are approaching. Then there is the Vaudeville act of Congress to keep things interesting and somewhat frightening.

Even with all of this intrigue and the rather bad prognostications about the ability of all the trillions to fix the problem as the federal branches are working at odds with each other the market thus far still looks good with an orderly pullback after the rally and follow through. Of course these pullbacks can always become less orderly and less good looking as they get their heart into it. We will just have to see how rambunctious the sellers get and whether they are back to all in or just testing the waters along with the profit takers after a 2-week run.

We are going to look at positions to ride back up after a test of the SP500 November low or thereabouts. As noted above, there are many solid leaders in very nice tests that we want some more of as they start back up. We have also protected positions on the way down and will continue to do so though most should hold near support if they are going to resume the rally.

If the indices do not hold and sell on sharp volume we will simply let the downside positions run as we close the rest of the upside. The market is acting as if it wants to put in a bottom, but the credit picture, despite improvements in LIBOR all week (the 3-month closed at 1.22% Friday after starting the week at 1.32%) remains bleak given Congress' new politburo style of governing. The trillions put into the Fed and Treasury facilities cannot work without participation, and Congress is going to have to repent or no company is going to willingly participate. Again, we suppose Congress could just pass a law requiring participation. That would right in line with its new direction.

Once more government action has worked to add uncertainty to the financial markets as well as all other markets such as housing, healthcare, etc. Thus there is an additional layer of risk to the market, but so far the market is acting as if the feds didn't do anything unusual with this rally up to resistance and rather normal pullback to test. As always we will take what the market gives us and for now that means picking up some bucks on the current test, and if it holds at logical support, move in to the upside again as the leaders rebound.

Support and Resistance

NASDAQ: Closed at 1457.27
The 50 day SMA at 1464
1493 is the October 2008 low & late December 2008 consolidation low. Cracking but not broken
The 90 day SMA at 1491
1505 is the late October 2008 closing low.
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
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
1666 is the January 2009 peak

The 50 day EMA at 1461 is trying to hold.
1440 is the January 2009 closing low
1434 is the January intraday low
1428 is the mid-November 2008 low
The 18 day EMA at 1421
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 768.54
800 is the March 2003 post bottom low
The 50 day SMA is at 798 tapped on the Wednesday high and again Thursday.
805 is the low on the January 2009 selloff. KEY Level
815 is the early December 2008 low
818 is the early November 2008 low
The 90 day SMA at 832
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

768 is the 2002 bear market low
The 18 day EMA at 750
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 7278.38
7282 is the October 2002 closing low in the prior bear market.
7449 is the November 2008 intraday low
7524 is the March 2002 low to test the move off the October 2002 low
7552 is the November closing low. KEY Level.
The 50 day EMA at 7607
7694 is the February intraday low
7702 is the July 2002 low
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 8070
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

7197 is the intraday low from October 2002 bear market
7115 is the February 2009 closing low
The 18 day EMA at 7220
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 23 - Monday
February Existing Home Sales (10:00): 4.45M expected, 4.49M prior

March 25 - Wednesday
February Durable Goods Orders (8:30): -2.0% expected, -5.2% prior
Durables, Ex-Transportation, February (8:30): -2.0% expected, -2.5% prior
New Home Sales, February (10:00): 300K expected, 309K prior
Crude Oil Inventories, 3/20 (10:30): +1.942M prior

March 26 - Thursday
03/21 Initial Jobless Claims (8:30): 650K expected, 647K prior
Q4 GDP - Final, Q4 (8:30): -6.6% expected, -6.2% prior
GDP Price Index, Q4 (8:30): 0.5% expected, 0.5% prior

March 27 - Friday
February Personal Income (8:30): -0.1% expected, 0.4% prior
Personal Spending, February (8:30): 0.3% expected, 0.6% prior
Michigan Sentiment - Rev, March (9:55): 56.0 expected

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

Jon Johnson is the Editor of The Daily at

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