Sunday, April 05, 2009

Market Extended or Starting Next Leg?

- Upside resilience continues.
- ISM services backsliding some after trying to turn the tide.
- LIBOR Resumes its improvement.
- Lagging indicator's leading indicator is not promising for jobs.
- Market extended or just starting its next leg? Earnings season is the next big indicator.

Market holds tough as buyers use dips to do what buyers do.

The big news of the morning, the jobs report, was in line, and with the whisper at -700K and more that was something of a win. Sort of. Modestly higher futures ahead of the number remained modestly higher afterwards as a quick spike fizzled and the status quo resumed. The jobs report was not as bad as expected, and while that can propel the market higher at times, after the kind of run stocks have put in off the March low, it takes more than a not as bad as feared economic report to send stocks rampaging again. Thus there was no new big surge Friday similar to the Thursday upside juggernaut. RIMM's earnings got the large cap tech juices flowing along with once again the semiconductors, and steel stocks as well as retail were up again, and okay, so was GS. Basically the leaders were leading again. But outside of those . . . there was not the same hoopla as on Thursday.

Stocks opened upside and after a short spurt the sellers took a shot. We all knew they would given the run higher and the weak jobs report. Sellers are probing for their opportunity and they sent out a recon team early in the session. The ISM Services was less than expected and below February and stocks slid lower, but then bounced along in a range until lunch. Must have been a 3-martini lunch because stocks were jovial the rest of the day, rallying to the session high as lunch ended, then to new session highs mid-afternoon. With that kind of recovery the sellers took another shot. A few minutes into the last hour we saw the same kind of selling seen in the prior closing hours last week. Stocks sold steadily, but when they high the lunchtime high they reversed and bounced in the last half hour to yet new session highs.

That is a long description of the of the events of the day, but the bottom line: the entire week showed resilience. After Monday butt-kicking gap lower, the indices held support and started a weeklong solid recovery to higher highs on this leg. Each time the market looked about to get its tail caught in the door the upside bias asserted itself. Sure it got some help from the mark to market changes announced on Thursday and the anticipation of that news earlier in the week. But it also overcame a really bad ADP report on Tuesday, reversing a gap lower that session. It rallied in the face of adversity, it held onto gains, and it moved higher even on Friday when there was not a lot of reason to move higher. There is a definite upside bias and continuing resilience, but the sellers are also there, probing for the opportunity to sell into an upside move that may be a bit extended. They are likely to have more success after earnings get underway, but if there are more than a few bad warnings next week they could step in earlier. The key, as always, is whether the sellers can just push a normal pullback after a good run or if they can really get violent and wreck the moves in the leaders. Given the resilience shown of late you would anticipate more of a normal pullback to support but it always helps to stay vigilant.

TECHNICAL. Bounced around from modestly higher to modestly negative and then rallied to 1% to almost 3% gains on the close. Shook off a couple of selling attempts again to close at session highs. Resilience.

INTERNALS. Modest breadth (2:1 NYSE, 1.5:1 NASDAQ) that pretty much matched the action. Volume, however, was much, much lower. Way lower, not even reaching average. There was no real driver, but the market still moved higher into the close. There is that upside bias noted above. But . . . the entire week moved on low volume outside of Thursday, the Mark to Market session. Without additional volume coming in the move has an increasing probability of running out of upside gas and making a test back much more quickly even though it looks as if a second leg to the March rally just started. Now the low volume was good on the downside sessions as there was no distribution, and we did see rising volume on the upside sessions. That is a positive as it shows the buyers are stronger, but again, the volume was not as strong overall. In other words the buyers were stronger but the number of players was smaller, kind of like 7 on 7 football versus 11 on 11. When everyone gets on the playing field things can change in a hurry.

CHARTS. NASDAQ put some more mileage on 1600 and the February high, making that higher high so critical to new rising uptrends. It is moving on up to the January high, the last peak before the serious stuff in early November. SP500 rallied again, but even though it closed higher, it was still below the Tuesday intraday high that tested 850 resistance. Still more work to do there. The lighter trade tells us the Friday moves didn't mean a whole lot other than the continued upside bias currently in the market. Well, not for all indices. SOX broke through its November peak, meaning it has hit a new high for the recovery attempt, a very important move. The indices may be a bit extended as they only took three and one-half days off from the three week run off the March low, but this can also be just the start of a new leg in the rally. See the Leadership section below.

LEADERSHIP. Chips came to life Thursday along with the techs, and that really boosted the market. They were joined by commodities as well after the Thursday 'we are back baby' statement about its economy. Very good to see them back in the game. True some leaders are a bit extended, e.g. the China stocks that exploded higher again, but many leaders have made good pullbacks and are embarking on another leg. DRIV, BIDU, CME, WFR, and BRCM are quality stocks that can lead higher and just got started on new moves. There are some key financials that have rallied and are now in a two week lateral move, starting to break higher (e.g. JPM, GS). They too can help lead higher while other leaders take a rest. Many view the market as extended at next resistance, and it is somewhat, but if new and not so new leaders keep pushing to the front as happened when the techs and chips re-engaged late in the week, the market finds new fresh legs. Indeed, we felt the market was done this week but it kept moving higher, making us money. That is why we always think about what COULD happen but watch the market for the 'buy me' and 'sell me' indications as to what will happen. We still like what we see in the leaders but have an eye on the lower volume the past week.


ISM Services improvement attempt takes a month off.

The ISM manufacturing report put in an upside month in March, showing some more slow and not so steady improvement, but improvement nonetheless. The Services ISM Friday could not match that modest improvement, falling to 40.8 from 41.6 in February and 42.9 in January. Still higher than the manufacturing survey, but also below 50, meaning that it is still contracting though at an overall slower pace the past few months.

Does the market lower read mean the improvement attempt is over? Of course not. Turns are never perfectly smooth arcs from higher to lower or lower to higher. Change means volatility. Look at any move in stocks that is reversing. A steady trend higher starts to buck and gyrate before it turns. Same with economic trends and trends in nature. All trends run smoothly until they change, and then it is back and forth jockeying as the true believers try to keep the trend alive while those voting for change try to derail it. Thus a reversion to a lower month doesn't mean a whole lot. It does if it doesn't get back on track.

After holding steady for two weeks, LIBOR makes a serious move.

Three-month LIBOR, the key LIBOR rate to watch along with the US 3-month Treasury, hung around at 1.23% for over a week. Recall that after a very positive decline to close to 1% it rebounded sharply on all of the spending from the 'spendulus' package, the weekly bailout packages, and the 'budget' (a.k.a. spendthrift manifesto), it jumped back up to the 1.25% range. That is still well below the 4+% level in September 2008, but it was a reversal of the progress, a setback, a bitter pill to swallow, and not at all good for the credit market that has to be fixed in order for the economy to recover.

So much riding on it, yet so rarely covered. Well last week it turned over a new leaf, rallying lower as the stock market rallied higher. It appears that both are forecasting some better times at least for the near term. 3-month LIBOR broke the logjam and fell from 1.22% the prior week to 1.16% Friday. Cool. The other levels are lower but basically the same. The three month is the key, and we are happy to see it finally make a serious drop once more. That indicates the road to improvement is moving once more.

Average Workweek indicates jobs will continue to struggle near term.

Thursday I went to some lengths explaining how the jobs report is a lagging indicator and does not tell us anything about the economic status. By the time jobs improve the other evidence of economic recovery is overwhelming. So the jobs report is much discussed but it is all academic.

You can, however, look inside the jobs report to find indications of whether the lagging indicator is trying to change. The best indication is the average workweek. When the economy slows the workweek typically slows as well as companies have less to do but are loathe to layoff trained and productive workers. It costs a lot of money to train a worker, and you want to keep them on if possible to avoid the costs of new training if those laid off find work elsewhere and thus don't come back when business improves. The same number of workers doing less work means the workweek falls.

At some point in a recession layoffs become inevitable no matter how much the business wants to hang onto its trained employees. That is what we have seen with the millions of lost jobs the past year. Fewer workers but still slow business, so the workweek remains low.

Then, when things start to improve the business waits to hire new workers and demand more from those still with jobs. Productivity rises as workers have to handle the increased workload without increased help. What happens? The average workweek starts to rise because more work is required. You start to see overtime and the workweek rises even more. Finally the company has to hire new workers or else risk losing the employees it held through the recession either by direct revolt from having to do too much work or getting cherry-picked by other companies looking for talent.

So on Friday when the average workweek FELL to 33.2 from 33.3 where it has held for months on end, that indicates the employment picture is not improving at all. There is not even the little uptick in the workweek to pique interest. It is instead heading lower, still on the downside slope. Hardly encouraging given all of the supposed 'jobs saved' by the stimulus package. I guess if you have not lost your job you would be considered as a job saved. How else are you going to measure it? Got to Caterpillar where a speech was made about how a few hundred jobs would be saved immediately if the stimulus was passed only to see CAT announce layoffs of several thousand workers just weeks after passage. Guess that is not the example the Administration wants to tout. Better go back to Ohio and find those 12 police officers who were kept on the payroll and milk that one more.



VIX: 39.7; -2.34
VXN: 40.6; -1.69
VXO: 41.63; -2.84

Put/Call Ratio (CBOE): 0.83; +0.14. The ratio means most when it closes over 1.0 or is down at the 0.4 range. Those are the extremes, the former indicating high anxiety about the market while the latter indicates apathy and thus a potential fall in the works. It is interesting how the ratio jumped Friday even as the market posted gains. This shows that the funds are nervous at this level and are buying protection (not condoms but puts) in the event the market falls. That is actually a good contrary indicator, i.e. the big funds getting nervous about the upside prospects.

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: 31.0%. A little rally and a climb in the bulls, up from 28.9% and jumping over the highs a month back at 29.7%. Still well below the 43.0%, the prior 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: 38.0%. Quite the drop from 43.3% and 44.3% the prior week. The decline was slowing its fall from 47.2%, the peak for the run this year but no more. 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. Bearishness hit a 5 year high at 54.4% the last week of October 2008. 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: +19.24 points (+1.2%) to close at 1621.87
Volume: 2.086B (-23.03%)

Up Volume: 1.512B (-914.846M)
Down Volume: 594.908M (+215.85M)

A/D and Hi/Lo: Advancers led 1.53 to 1
Previous Session: Advancers led 3.68 to 1

New Highs: 15 (-14)
New Lows: 15 (+5)


NASDAQ kept on pushing upside, finding renewed strength as the techs and chips rejoined the fray Wednesday and particularly Thursday. That ignited the upside move. Cleared the February and December peaks near 1600 and closing in on the January peak at 1666. Strong move off the early march low, the bear market low, a short rest to end March, then a renewed upside move to start the new quarter. New money definitely made its way in, but the leaders were moving on good volume so it was not a fluke. Still, when the new money is spent NASDAQ will have to find still more buyers. Good start to a new leg, we will see how many more buyers come back to the buy side this week.

NASDAQ 100 (+1.69%) gapped higher again and definitively cleared the January and February peaks and is looking at the November peak though that is still a good throw upside. Nice move and another upside push sets up a test of the prior peaks it just broke through. Nice action.

SOX (+2.94%) continues its surge as it moved PAST its November peak, making a new high for the recovery. Seriously solid movement and of course we have banked a lot of gain from the chips on this run. A further push toward the 200 day SMA at 265 gives it a good point to shoot for and then test the breakout. Letting our SMH positions run higher for now but ready to take some gain after another move higher early in the week.




Stats: +8.12 points (+0.97%) to close at 842.5
NYSE Volume: 1.484B (-20.82%)

Up Volume: 1.159B (-550.923M)
Down Volume: 300.19M (+139.809M)

A/D and Hi/Lo: Advancers led 2.08 to 1
Previous Session: Advancers led 5.95 to 1

New Highs: 5 (-10)
New Lows: 54 (-14)


A further push higher but on below average volume and unable to take out the next resistance at 850ish. Similar to NASDAQ, SP500 tested its March move late that month and has resumed the move, aided by that big Thursday surge on big volume. This week we see if that was a Lone Ranger move or the start of a new leg higher. Still resistance at 875 from the February peak and then up at 920. Now this 850 level is also the series of October lows where the index tried to hold after the straight dive to the bottom. That means some extra resistance at this point and SP500 might have some trouble moving through. So, watching SP500 closely and its financials as a barometer of the strength of this new attempted move.

SP600 (+1.62%) moved through the Thursday peak and right up to the October low. Basically in the same position as SP500, but showing a nice reverse head and shoulders formation setting up. Would be sweet if SP600 could go ahead and breakout and become a leader once more. That would be huge and sweet.


Leader on the week but not Friday, meekly rising to close at the 90 day SMA on light trade. New high on the move off the March low but still stacks of resistance ahead and DJ30 is moving right into the teeth of it at the January and February consolidation lows.

Stats: +39.51 points (+0.5%) to close at 8017.59
Volume: 308M shares Friday versus 442M shares Thursday.



Friday did not give us the test of the Thursday gap move and with the market gains on the day many stocks we were looking at just before the Thursday gap remain out of reach. Why out of reach? Because chasing the bus at this level is a lower probability play. It is a play without a really good edge. It is trying to beat the train across the tracks.

Now that does not mean there are not very good stocks still in position to move higher. That is why we were looking at DRIV for example on Friday. While many stocks have rallied other good stocks have been consolidating previous upside moves and are ready to run higher. As noted earlier, they can keep the market moving if enough of them advance. There are still quite a few of those but there are also quite a few that are a bit too extended to chase right now. Not necessarily so extended the entire market has to correct back; there can always be rotation by stocks and sectors, and indeed that is the healthiest of all market action. When groups of leaders take turns taking the point similar to a breakaway working together in a bike race good moves can be made.

So we are going to keep looking for prime upside plays ready to move. We are also going to look for tests of breakouts. Some of the stocks that broke higher Wednesday shot to the upside and Friday were testing back some. A quick test by these stocks often sets up another surge so we will be looking at those in the light of getting a pullback early in the week and moving in on the bounce.

As seen Friday, there are also downside opportunities even as the market rallied. If the market runs out of gas prematurely on this attempt at a second upside leg off the March low that is a signal of weakness. That means the financials and some other stocks are going to head lower and we have to see what kind of test they make. We are trolling for stocks ripe to turn lower such as GENZ and MCK in the event this upside move just doesn't quite cut it.

It was a good week and we banked a lot of gain, still letting good positions run higher, and picking up other good positions as the opportunity arose. We had to avoid taking everything off the table because even as we bank gain on the way up we also let at least a part of our winners run higher to keep logging gains as long as the move holds its ground. That way we have some solid gain in the bank and can get in on the really bigger runs without feeling the need to sell out altogether and miss out on the really strong moves.

The key now, as always, is to be patient and let the plays set up and try to avoid chasing that bus. Better to jump out and ambush the position as it initiates its move. So, we keep our eyes on leaders and look for opportunities to get in as they test or set up new solid bases and buy points.

Support and Resistance

NASDAQ: Closed at 1621.87
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

1603 is the December peak
1598 is the February 2009 peak, the last peak NASDAQ made
1587 is the March 2009 high
1569 is the late January 2009 peak
The 10 day EMA at 1549
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 1492
The 50 day SMA at 1471
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 842.50
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

839 is the early October 2008 low
833 is the March 2009 peak
The 90 day SMA at 828
818 is the early November 2008 low
815 is the early December 2008 low
The 10 day EMA at 811
805 is the low on the January 2009 selloff. KEY Level
800 is the March 2003 post bottom low
The 50 day EMA at 800
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 8017.59
8141 is the early December low
8175 is the October 2008 closing low. Key level to watch.
8197 was the second October 2008 low
8375 is the late January 2009 interim peak
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

The 90 day SMA at 8006
7965 is the mid-November 2008 interim intraday low.
7932 is the March 2009 peak
7909 is the early January low
7882 is the early October 2008 intraday low. Key level to watch.
7867 is the early February low
The 10 day EMA at 7739
7702 is the July 2002 low
7694 is the February intraday low
The 50 day EMA at 7666
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 7511
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.

April 7 - Tuesday
February Consumer Credit (14:00): -$1.5B expected, $1.8B prior

April 8 - Wednesday
February Wholesale Inventories (10:00): -0.6% expected, -0.7% prior
Crude Oil Inventories, 04/03 (10:30): +2.84M prior

April 9 - Thursday
March Export Prices ex-aq. (8:30): 0.1% prior
Import Prices ex-oil, March (8:30): -0.6% prior
Initial Jobless Claims, 04/04 (8:30): 699K prior
Trade Balance, February (8:30): -$36.5B expected, -$36.0B prior

April 10 - Friday
March Treasury Budget (14:00): -$157.0B expected, -$48.2B prior

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

Jon Johnson is the Editor of The Daily at

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