Ready to Test the Bottom

SUMMARY:
- No direction Friday ahead of a long weekend.
- Credit improvement is good but no sufficient.
- Prestige lost or economic clout lost?
- A good plan or just any old plan?
- Ready to test the bottom of the new range to start next week.

Noncommittal: Market shows an inside day ahead of the holiday weekend.

Friday was what is called an inside day. That is where the indices trade between the prior session's high and low. Neither the buyers nor the sellers had enough strength to push the market higher or lower. That is about as noncommittal a day as you can get. Heading into a three-day weekend and with the indices trading in what looks to be a new trading range, that is not surprising.

As for the news on Friday, there were some positives and negatives. The positives: same store sales were better than expected. They are still falling, just not as much as anticipated. That is the same story sales have told the past three months, so whether this is really a positive is problematical. In addition to sales, the Fed announced that, for the first time since September 2008 when the crisis started, banks were borrowing less from the Fed's emergency facilities. Good news as it shows the credit situation is improving.

As for the negatives, British Airways said that it does not see any green shoots in any of its markets. In fact, it says that things are worse in Asia, the region many are looking at to pull the world out of recession, than anywhere else in the world. Asia rose faster than any place in the world when it came to GDP growth, so you would expect the relative crash to be stronger in Asia. That makes sense, but it does not bode well for the world economic recovery.

More negatives. The dollar was crushed once more, going out for the week at 1.40 euros. It is getting hammered on the idea that the U.S. credit rating may be lowered sometime in the near future. Gold was higher again, rising to $958.90 - up $7. It is spiking, albeit it is not running $45-50 a day as it did last year when it exploded to $1,000; nonetheless it is posting strong gains once more on what we are calling the inflation trade.

Of course with all of this news, the ten-year treasury yield continued its surge, reaching 3.45%. Recall that just three weeks back the 10 year treasury yield held 3%, actually breaking into the 2% range. The action shows inflation pressures are building given the rapid climb back up in yield in the all important 10-year bond.

The result for Friday is what is called in street parlance a big goose egg. Stocks were up for most of the session after a sloppy start, then faded late ahead of the close and the long weekend. Typically before a long weekend, stocks move higher because shorts are concerned about holding their positions through a long weekend; they stand to lose a lot more money than the longs if something unexpected happens because their risk is basically infinite. Friday stocks moved down into the close, showing the worry in the bulls and a little more boldness in the sellers given the credit and inflation situation.

What did we do on the session? The market was bifurcated yet again with some sectors moving well, some selling off, most just holding their ranges. Given that action we bought some inflation plays such as SU and UCO (UCO being an ETF that plays off of oil prices). We also bought into a play that was not related to inflation at all: AMX. AMX is a foreign telecom showing great action the past month. We bought some inflation plays to the downside as well, e.g. SKF, a financial 2X short, a.k.a. an ultra short. If inflation kicks in, the financials are going to be hurt and thus our interest in the SKF. We also entered a downside play on a plain old overbought stock, POT. We own POT long, but will take a short play on it as the opportunity presents itself given that POT is very extended.


TECHNICAL

INTRADAY. The futures were modestly higher, but stocks sold right on the open after a slightly higher open. They bounced and then returned the positive, and held positive for most of the day. In fact, it looked as if stocks would go out positive, that the market bias at the end of the day ahead of the three-day weekend would keep things up. As it turned out that did not happen as stocks sold off into the bell, turning the indices negative, but only slightly so; they did not go into the tank by any stretch.

INTERNALS. The internals roughly matched the session. The breadth for the day split the baby at +1.2:1 on NYSE, and -1.2:1 on NASDAQ; that is about as even as you can get. There was holiday light volume at 1B shares on the NYSE, and only 1.5B on NASDAQ. Trade remains well below average, but that is just fine for a consolidation. We'll talk more about trade later because, on the indices, we are seeing differences in high-volume days versus low-volume days. Overall, however, the idea is that this is still lower, consolidation level trade; as the market moves sideways, that is just fine.

CHARTS. Consolidation is what the charts are showing us. This was an inside day; the market did not want to go anywhere ahead of the long weekend. In the bigger picture, that left the indices in the lower half of their May trading range; nonetheless, they are still holding that trading range, hovering over some key support levels. On the negative side they did put in a lower high for the week, but right now that is not definitive, particularly given the low volume. In short, all the indices held above that next support level and that kept them inside this newly forming trading range. The action is, let us say it once more: Consolidation.

As noted earlier in the week, the only conclusion that can be drawn based upon this action is that the market is in a continuing uptrend that is taking a bit of a hiatus with this lateral move. What that means is the original steep uptrend is broken, but it has not broken down. Indeed the indices are moving laterally; they made a high, tested key support, bounced again, and now they are back down to test the lows once more. If they test and hold, that is a solid indication that the consolidation has a firm level of support and will likely hold as it continues laterally. This is an overall bullish scenario because a market that refuses to give up it is gains a market that is stingy with its gains is one that will try to move up again. In sum, the market that is still trending higher because, even though it has broken its short term trend, it is not breaking below key support and is consolidating on nice, low volume.

LEADERSHIP. A somewhat mushy week, but that was in keeping with the market overall. China stocks were a performer, looking very solid Friday they could set up some nice plays in the coming week ahead as they form bullish patterns again after coming back and consolidating earlier than the rest of the market. Leaders tend to lead the overall market. China stocks were out early; they got choppy, but have been holding up and are ready to move again from the looks of it. Makes sense if there is an inflation trade going on, because China is a faster grower and you get more for your money in a faster growing economy than you do in a slower growth economy such as the U.S. right now. China is projecting 8% growth next year; you will stay further ahead of inflation with 8% growth than you will with even trend growth in the United States. Thus China stocks are getting some serious money right now and we need to take a look at those.

Energy and commodity stocks were not up for the day, but were recovering from the prior session. They found support and are making some noise as if they want to move up again; indeed we bought into some of those plays as they held support and bounced. Semiconductors logged a solid session as well. Interestingly, the SOX was the only index to close positive though it was just a fractional gain. After a long consolidation, if the semiconductors start to lead again, that is a pretty bullish economic indication versus just having energy, commodity, and gold stocks moving higher on that inflation-related trade.

Leadership, though mushy, is continuing to hold up. We are still seeing new areas move up as money rotates their way. That is very important for keeping a rally going; you have to have money rotate through leadership groups as well as bring in new leadership groups along the way to keep rallies going. We are seeing some old leaders that peaked out first getting recycled into the leadership position once more; that is what a healthy market does. There is a lot of money in the market from all the liquidity, so you would expect it to rotate through areas, pick up stocks that have consolidated and start carrying them higher again. If the market continues to consolidate, we are going to see more good leaders come back into play in good position and they will give us good entry points.

SUMMARY. The week left the indices slightly higher, even though they sold off Tuesday through Friday. Monday's low volume gain padded the upside enough to tip the indices positive despite the selling. It just goes to show that when you are in a consolidation you are going to have big moves up and big moves down with littler moves in between. We can play a consolidation range again, it looks to be setting up that way and pick great leaders and other stocks that tend to move quickly up and down, taking what the market gives.


THE ECONOMY

Which is more important: Credit spreads or Treasury yields?

There is a an argument brewing about what will impact the economy more: improvement in the credit markets or the surge in bond yields. It is very true that the credit market improvement is key to the recovery; credit has to be available in order to move money to where it is needed, and only now is the credit market getting to where it needs to be to do just that.

For example, Friday the 3-month LIBOR fell to 0.66%. The TED spread (dollar LIBOR minus the U.S. 3-month treasury bill) was at 0.49%. For reference, in August of 2006, it averaged 0.36%. It is getting close to being back to a healthy level. That is very important to getting the economy moving, but does it trump the rising indeed spiking bond yields? No, it does not. Credit is a necessary part of getting the system healed, but it is not recovery in and of itself.

The surging bond yields are going to impact many areas. We will see it impact home sales that are just starting to pick up thanks to lower rates and foreclosures creating great buys. Higher yields make it difficult, in a recession, for people to afford housing. Incomes are down, interest rates are up; you qualify for less of a home. With the lending restrictions that are now in the market despite the federal government and the Federal Reserve wanting banks to lend, they simply cannot do so at a level that will allow many to afford new homes, first time buyer credit or no.

There is huge inflation out there that is going to trump the improved credit market at this juncture. The credit market is getting in good shape to move money, but if interest rates are so high that a potential borrower cannot take advantage of it, then it does no good.

Unfortunately, interest rates appear to only be heading higher. As the dollar collapses and the feds take on more debt through all its programs, higher interest rates are necessary to entice foreign banks to buy our debt instruments. Moreover, the weaker dollar drives prices higher across the board. Anything denominated in dollars rises because as the dollar gets weaker it buys less. So, we import inflation because we have to spend more dollars to buy the same barrel of oil, ton of steel, etc. On top of that, vendors raise prices to compensate for the dollar's lost value. It is a vicious cycle and we paid dearly for it, to the tune of about $700B/year in oil payments when oil was at $140/bbl, to OPEC nations. While oil has dropped in price, the dollar has as well. Thus the net outflow of wealth to OPEC is still staggering.

The lower dollar and weakening economic data raise our borrowing costs as the US has to offer higher interest rates in order to attract foreign countries (the lenders) to take our debt that is going to be repaid in dollars. There is an old adage that you repay debts in times of high inflation. Why? Because the dollars you use to pay back that fixed amount of debt are worth less. What banks would like to do in times of inflation is renegotiate and adjust the rates higher in order to offset the loss of the value of the dollar. Since they cannot do that, you as the borrower benefit because you want to pay your debt off now or in the future, as inflation spikes and the dollars that you have to pay off the debt are not as dear to you.


Is the US losing its "prestige?"

There was an argument Friday on the financial stations regarding whether the U.S. had lost its because of the falling dollar. The argument misses the point. The U.S. is not losing any prestige based on that it is just a symptom. Any loss in prestige is due to a loss of economic power. Unlike the 2002-2003 recovery, economic numbers are not turning positive, just avoiding the death spiral they were in. The numbers that are still falling, and on top of that we are piling on debt. In 2010 debt is going to be 70% of our GDP; staggering. We were running debt levels at 2.5% of GDP, and now we have ballooned beyond wartime levels. We are very close to or at the level where foreign countries finally refuse to buy our debt. We may be the United States, but they will not want our debt because we are carrying too much of it; we are becoming a risky investment. The policies the Administration is promulgating are not going to lead to recovery. Foreign bankers are not stupid; they see that we are doing the same things we did in the 1970's and are worried that we are taking on too much debt without having policies that are designed to give us rapid and strong growth, such as we did in the 1980's. That has them worried. Indeed, there is a rumor that foreign central banks are coming to the New York Federal Reserve and wanting to cash out. Whether it is true or not, it is something we have to consider given the huge amount of debt-to-GDP ratio we are carrying right now and into 2010.

We may lose prestige, but we have to fix the economy in order to get better. Prestige goes hand in hand with the economy. If you fix the economy, you have prestige. We must avoid the 1970's-like malaise that the federal government's current policies will likely cause yet again.

In summary, while we could have debt levels up to 20% in a time of crisis and other countries would not feel that was necessarily dangerous, with the runaway debt we have right now, the US is creating a serious problem. No one wants to hold debt when it gets to that level, and we may see that Triple A rating downgraded in the next few weeks.


A Fool's Plan?

There is a commercial were T. Boone Pickens talks about his green initiatives. Again, we have no problem with going green in the right way. One of Picken's sayings is "A fool with a plan is better than a genius with no plan." I am paraphrasing, but that is the gist of what he is saying - and it is totally wrong. Fools tend to have foolish plans because the beliefs they hold that underlie their plans are simply wrong. Thus following a fool's plan often leads to disaster. Look at the Nixon, Ford, and Carter Administrations. Look at the 1929 Fed. Look at Greenspan in 1999. They had plans, but they were fool's plans; when implemented they brought economic disaster to the country.

The 1929 Fed helped throw the US into the Great Depression. Greenspan flooded the financial markets with liquidity ahead of Y2K. Just as now, all of that money that unused money went into the financial markets. NASDAQ rallied 75% from summer 1999 through March of 2000; when the money was called in the economy seized up and we went into recession.

Thus, saying that having a plan is the end in itself is flat out wrong, and yet with respect to the economy, healthcare, and even prisoners of the terror war we are proceeding without good plans. This is not new just to the current Administration; the past few have acted in the same manner. The stakes right now, however, are extremely high. We are as we used to say in my law practice 'betting the farm,' and unfortunately not many realize this. History shows us we need to do more than something we need to do the correct something. What the markets are telling us the bond market, gold market, commodities market is that we are pursuing the wrong fiscal plans in Washington right now, i.e. the fool's plan.


THE MARKET

MARKET SENTIMENT

VIX: 32.63; +1.28
VXN: 31.87; +0.67
VXO: 32.08; +0.35

Put/Call Ratio (CBOE): 0.81; -0.17


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: 40.7% versus 41.0% the prior week. Modest bump higher from 40.4% as bullishness hung around even as the market turned to some chop though still finished that week higher. After this week bullish spirits may be dampened some. Still a strong move, up from 36.0% just three weeks back and moving in on the 43.2% hit mid-April before anticipation of stress tests and SOX' issues. Over the 35% threshold, below which is considered bullish, but this is not a bearish indication yet. Has to get up to the 60% to 65% level to be bearish. Dramatic rise from 21.3% in November 2008, the bottom on this leg. 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: 29.1% versus 33.7%. Interesting rise in bearishness (from 31.5%) even as the bulls rose and the market moved higher though was much choppier. Well off the 37.2% and the 37.1% in mid-April as the rally continued higher. As with bulls, below the 35% threshold considered bullish though not at bearish levels. Now far from off the high on this run at 47.2%. For reference, 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. Prior levels for comparison: 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). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: -3.24 points (-0.19%) to close at 1692.01
Volume: 1.561B (-29.67%)

Up Volume: 673.441M (+181.349M)
Down Volume: 931.307M (-803.572M)

A/D and Hi/Lo: Decliners led 1.21 to 1
Previous Session: Decliners led 2.42 to 1

New Highs: 25 (+6)
New Lows: 5 (-7)

NASDAQ is holding the new range from the May lows. Volume is slightly higher on the downside sessions for most of May. That shows there is some distribution, or churning high volume turnover where the sellers and buyers are basically even and they are dumping and buying rapidly. But the question now is whether or not this volume is enough to defeat the current trading range that seems to be forming. Remember, all the volume has been mostly below average; it is not strong trade. There is some turnover, but on light trade that is more indicative of the trading range we are seeing now. NASDAQ has made a lower high this week and is coming back, but it is also still above a critical level the January peak at 1665.

Techs are somewhat sloppy as well. Their patterns are sloppy; they have broken their trends, but they are trying to hold support just as NASDAQ is trying to hold. We anticipate NASDAQ will come back and test that May low again which is the January low as well next week. That will tell more of the tale. If it holds, that becomes much more solid support and it will likely bounce back up in its trading range. If it breaks down, we play the downside, letting our current downside plays continue to run; the QID and the QQQQ's. If it holds, then it will bounce; we will need to close them out and play the range. That will show that we are going into a trading range and need to play that.


NASDAQ CHART: http://www.themarketbeat.com/NewsLetterMgr/chartsPart1/NASDAQ.jpeg

NASDAQ 100: http://www.themarketbeat.com/NewsLetterMgr/chartsPart1/NASDAQ100.jpeg

SOX CHART: http://www.themarketbeat.com/NewsLetterMgr/chartsPart1/SOX.jpeg


SP500/NYSE

Stats: -1.33 points (-0.15%) to close at 887
NYSE Volume: 1.058B (-26.41%)

Up Volume: 415.406M (+97.139M)
Down Volume: 626.086M (-484.246M)

A/D and Hi/Lo: Advancers led 1.17 to 1
Previous Session: Decliners led 2.78 to 1

New Highs: 17 (+3)
New Lows: 42 (+1)

SP500 is showing the same action as NASDAQ. Indeed, it is even closer to the May low at 882 than NASDAQ is to it is May low. There is also a key support level at the February peak at 875 you have heard us talk of that level quite a bit. The large caps are trying to establish, 875 and indeed even the higher level at 882 as the bottom of this new trading range. We are going to do the same think that we will watch with NASDAQ. The volume on the NYSE has been even less churn, less distribution, than on NASDAQ. It is much more in favor even of a consolidation move.

As with NASDAQ we are likely to get a test of the May lows early this week-again, that is where the important hold or failure will occur, and we will be watching that. If it holds, it will likely give us a bounce back up to the top of the range and we need to close out downside plays that are at risk of bouncing such as any of the index plays and then look to play the bounce to the upside. If SP500 heads into a range, we need to adjust our thinking along those lines and start thinking trading range once more as opposed to straight up, or breaking down and tumbling lower.

SP500 CHART: http://www.themarketbeat.com/NewsLetterMgr/chartsPart1/SP500.jpeg

SP600 CHART: http://themarketbeat.com/NewsletterMgr/chartsPart1/SP600.jpeg


DJ30

Stats: -14.81 points (-0.18%) to close at 8277.32
Volume: 244M shares Friday versus 302M shares Thursday. Low volume all week.

DJ30 CHART: http://www.themarketbeat.com/NewsLetterMgr/chartsPart1/DJ30.jpeg


TUESDAY

Despite the four-day slide Tuesday through Friday the indices closed higher thanks to that low-volume surge on Monday. That gave the indices enough buffer to hold in what looks to be this newly formed trading range. They refuse to give up their gains a market or a stock that is stingy with it is gains, that holds up near the top of it is rally then moves laterally, is a stock or index that is still getting money put into it. There may be some sellers and some profit-takers, but every time they come along, there are buyers to keep a little bid under those stocks to keep the money in there, which keeps it from breaking down. Two weeks back it looked as if the market was primed to fall, but money came in and propped it upright at that May low and the prior peaks. There is still that bid that is holding the indices above a very critical point heading into next week. Moreover, the internals do not suggest heavy selling, or that the sellers are otherwise undermining the entire market. Overall money continues moving in, propping up stocks and the indices at key levels.

What do we do? We have to assume and proceed with the idea that the rally is still in place as there has been no breakdown. The sharp upside trendline broke, but now the market is showing a lateral consolidation versus selling off. That is still bullish action and we must proceed with that mindset. We do have some downside plays and will have more to consider in the event the indices cannot hold this second test of the prior peaks on NASDAQ and SP500. At the same time we have more upside plays because they continue to perform and the market has not rolled over.

This weekend we have some new upside plays ready to go in case the range that looks like it will be tested early in the week holds and they start to bounce; we want to play the move up in the range. We also have some downside plays at the ready. In the event the range does not hold, the market will finally get the test that the market really needs. These gains have been huge to this point 30-35% runs in the indices is a very strong snapback. Typically there is more of a retracement after such a move, but the market is not selling because of all the liquidity in the world. That money is working into the financial markets because the world economies are not good enough to absorb it yet. In other words, there is not enough activity and not enough fiscal programs coming out of the major economic countries that stimulate the kind of activity the market needs.

What the US and indeed the world needs is the kind of policies that gives businesses and entrepreneurs a reason to spend money a reason to invest in America even when there is no economic activity to induce them to do that. The current stimulus simply does not provide that incentive and thus there is all this money pushing the market higher, as would a good economic recovery. The difference is, at some point that money is going to run out. Eventually that money won't matter because the economic data fails to show the kind of improvement needed.

For now the money is leading the move because there is still good enough improvement in the numbers to keep the promise of recovery alive. Eventually it will fail, but until it does, we are going to play whatever the market gives us right now it looks to be a trading range. Maybe this trading range is the last one before a big crash; we do not know that, and indeed no one does. We will watch the critical levels where the buyers and sellers engage one another; right now that is the support level in this new consolidation range that is forming whichever side wins out, we are ready to take the plays that way. So we watch the test to see if the market bounces and tries to break out at the top of the range or if it turns back down and makes a test again. That is the way the market is working right now; that is the market we have, and you know we always take what the market gives. Have a great three-day weekend. I will see you on Tuesday, and we will make some more money again in the coming week.


Support and Resistance

NASDAQ: Closed at 1692.01
Resistance:
The 18 day EMA at 1702
The 200 day SMA at 1712
1770 is the mid-October interim peak
1773 is the May peak
1780 is the November 2008 peak
1947 is the October gap down point

Support:
1673 is the prior April peak
1666 is the intraday January 2009 peak
1664 is the May 2008 low
1661 is the April 2009 prior peak
The January closing peak at 1653 (intraday)
The 50 day EMA at 1642
1623 is the early April peak
1620 from the early 2001 low
1603 is the December peak
1598 is the February 2009 peak, the last peak NASDAQ made
1587 is the March 2009 high is getting put to bed again
1569 is the late January 2009 peak
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


S&P 500: Closed at 887.00
Resistance:
888.70 is the April intraday high.
The 18 day EMA at 891
896 is the late November 2008 peak
899 is the early October closing low
919 is the early December peak
930 is the May peak
935 is the January closing high
944 is the January 2009 high
The 200 day SMA at 936

Support:
882 is the early May low
878 is the late January 2009 peak
The prior April peak at 876
866 is the second October 2008 low
The 50 day EMA at 862
857 is the December consolidation low; cracking but not broken
853 is the July 2002 low
848 is the October 2008 closing low
846 is the April peak
842 is the early April peak
839 is the early October 2008 low
833 is the March 2009 peak
The 90 day SMA at 825
818 is the early November 2008 low
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
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


Dow: Closed at 8277.32
Resistance:
8307 is the April 2009 intraday high
The 18 day EMA at 8313
8315 is the February 2009 peak
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
8588 is the May high
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:
8221 is the May 2008 low
8197 was the second October 2008 low
8191 is the prior April peak
8175 is the October 2008 closing low. Key level to watch.
8141 is the early December low
The early April intraday peak at 8113
The 50 day EMA at 8103
The early April peak at 8076
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
7702 is the July 2002 low
7694 is the February intraday low
7552 is the November closing low. KEY Level.


Economic Calendar

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

May 26 - Tuesday
March S&P/CaseShiller Home Price Index (9:00): -18.4% expected, -18.63% prior
Consumer Confidence, May (10:00): 42.0 expected, 39.2 prior

May 27 - Wednesday
May Existing Homes Sales (10:00): 4.65M expected, 4.57M prior

May 28 - Thursday
April Durable Goods Orders (8:30): 0.5% expected, -0.8% prior
Durable, Ex-Transport, April (8:30): -0.3% expected, -0.6% prior
Initial Jobless Claims, 5/23 (8:30): 631K prior
New Home Sales, April (10:00): 363K expected, 356K prior
Crude Oil Inventories, 5/22 (11:00): -2.10M prior

May 29 - Friday
Q1 GDP - Prelim. (8:30): -5.5% expected, -6.1% prior
GDP Deflator, Q1 (8:30): 2.9% expected, 2.9% prior
Chicago PMI, May (9:45): 42.0 expected, 40.1 prior
Michigan Sentiment-Rev (9:55): 68.0 expected, 67.9 prior

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

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Stocks Cannot Hold Modest Gains

SUMMARY:
- Stocks put on a game face early, but cannot hold modest gains.
- NY PMI puts on the brakes, but capacity, production, and EU economic data are not as pleasant.
- Michigan sentiment better but still at recession levels.
- Economic data not showing the same improvement in prior recoveries, but that doesn't mean we don't make money.
- Bankers forced to accept TARP or else.
- Expecting more pullback this coming week and watching solid leaders as it does.

Midmorning lets the upside down.

After a string of upside weeks, we finally had a down week. There's nothing wrong with that. After 30% gains and more, getting a little downside is no problem at all. In fact, it's healthy. We're going to make some money from the downside, and thus the downside becomes a positive. We always take whatever the market gives, whether it's upside or downside, we're going to take it. And with the market is primed to give us downside, that is exactly what we want to look for. We like to look for those easy setups where we can just walk up and pick the money up off the ground. If we can do that, that's great. We did that with the Potash, the POT play this week; the money was there on the ground, we stepped up and picked it up. Got to love that.

As for Friday, it was really what we expected and what we wanted. We had that big down day on Wednesday -- it's expiration week -- and sometimes you get the big moves mid-week, and that's what we had. Friday was rather calm. It was up, at first, as we thought it would be, and then it came back. We didn't really know if it was going to come back Friday or not. As stocks went ahead and declined that gave us a chance to move in and get into some downside positions, to position ourselves for next week. We got a little Amazon, we got a little Apple, we got some of the Q's (QQQQ) to the downside to get ready for more of the downside move. We were getting in position for what we think will be a down Monday as the downside resumes. We also have some continuing upside plays with some pulling back, some continuing higher. CME was down Friday, but it was a great mover for us this week. As a matter of fact, this week we had a bunch of good moves that went to the upside, even when the market was going down. We had Potash. We had CME. We had Amazon to the downside; nothing wrong with going with the market direction. That was nice. We doubled up on some more of Amazon puts Friday. We took some Priceline gain off the table as retail was having some issues. Digital River gave us some more gains. That's the way we do it. We let them go up, we take some gains as they go up, taking money off the table as key moves are made. But we still get bigger gains, because we're leaving some on the table as we go. As long as the stock remains in its trend, whether it's up or down or sideways, we can make money by just letting some of the position run for free after we bank some nice gain on strong surges. That's what we've been doing, and it pays off; we had a good week that way.

As for Friday in specific, we had a lot of economic data. We had the CPI. It was basically in line, but the core was hotter (no food and energy), and it was hotter at 0.3% versus the 0.2% expected. We had the New York PMI. It was much better at -4.55. Still contracting, as is all the economic data, but it was a lot better than the -14 prior, and the -12 expected and showing that little bit of improvement. Again, slowing on the way down, slowing the fall into the abyss. Indeed, it no longer looks like we're going the fall in the abyss. Just the ditch. That can hurt too, but not as bad as never finding the bottom.

Industrial production fell -0.5 versus -0.6, better than the -1.7 before. That's improvement a little bit. Capacity was down though above expectations at 69.1, but that is still very low.

That is what we're finding with all the economic data. It may be slowing, but it's still really low. It still, pardon the expression, sucks. It's trying to slow down and make the turn, but we're not there yet. Michigan Sentiment is another example. It was better, it tried to give the market a boost even, and it did. It came in at 67.9, topping 67 expected, and the 65.1 prior.

60s are still recession levels. When we see 60s and 50s, you're thinking recession. That's all there is to it. People are feeling a little bit better because they see some better economic activity. They see the stock market going up. Maybe they don't feel like their job is in as much jeopardy. Although, with 5.6 million continuing claims, there's not many jobs out there as companies are not hiring, and indeed they're still losing jobs. No job creation, and as we talked about Thursday, we're not going the get it for awhile. But, first things first: the economy has to turn the corner in other indicators before jobs improve. My concern is, and we'll talk about it later, we are not getting there yet.

Finally, we had some news out of Europe and Asia, and it's not good. The first quarter European Union (EU) GDP fell -2.5%. Not great. Not horrible, but not great. In Germany, the largest economy in the European Union, was down 3.8%. Ouch! The largest economy is down 3.8%. Of course some countries fared better because, over all, it was just down 2.5% even with Germany dragging it lower. Nonetheless, Germany has a lot of output, and when its down, the rest of the continent feels it. Very similar to when California has a problem. The rest of the US feels it.

Russia was down 23% in its first quarter. Lower demand for oil and gas (Russia's only real production item) even though product prize prices are higher -- approaching $60 last week - yet Russia's GDP tanked. The commodities are improving in prices, but demand for energy is still low. It's at 2001 levels but prices are rising on speculation it will go up. In theory versus reality. I have a great joke about that and someday I will tell you; just send an email. Anyway I digress. Demand is at 2001 levels and what was happening in 2001? We had 9/11 and we were in recession. That kind of puts things in perspective and underscores how things are not good for the world economies. Indeed, they're bad all over the world, not just "not good."

The dollar was up on all of this, because it had been hammered pretty hard over the last few weeks and it's trying to bounce back some. So it came back a little bit on the economic news and really jumped on the terrible European news. The Euro got slammed, so the dollar naturally rose against it due to all the bad data out of the EU.

Oil was down, closing at 56.34, -$2.28 after it approached $60 this last week. Gasoline prices are well over $2.00 now. Demand for gasoline is still pretty low, yet prices are rising and we aren't in the summer yet. Memorial Day is coming soon, however, and we could easily see $3.00 again. Of course, last year it got to $4.00. It doesn't look too promising right now and we could have some of the same problems with the consumer having its wallet pinched once again.


TECHNICAL

INTRADAY. Stocks rallied into mid-morning. Despite the lackluster economic news, they opted to look for the good, but it was more of a relief bounce similar to Thursday, as we anticipated. By mid-morning, stocks had peaked after moving through near-term resistance. Mid-morning is often a fulcrum for the session, and Friday stocks turned back down and skidded all afternoon into the last hour. A late bounce failed and they slid again into the close. That late bounce allowed us to get into our downside positions. We saw it bounce up, we saw they were going to close lower, and we moved in, getting ready for some more downside next week.

INTERNALS. The internals were really mediocre on Expiration Friday. No volume as trade skidded. It was below average on both the NYSE and NASDAQ. Expiration Friday, yet below average volume. All of the position shuffling occurred midweek. Now the one thing is, there was no vicious selling all week. There was selling, yes, but it was not vicious. The market is just top-heavy.

CHARTS. We describe the patterns as top heavy quite a bit lately. What happens is you get these nice moves, they bounce off near support, they bounce off they're trendlines, and the 10- and 18-day EMA, and then they flatten out and roll over. Kind of umbrella shaped. Sometimes it's a big umbrella, sometimes it's a little umbrella. Sometimes they bounce, them make a bigger bounce, then a smaller bounce, forming that little head and shoulders peak. Look at the charts for NASDAQ, NASDAQ 100, SP600 and even SP500 and you see they are starting to show the same thing. That little head and shoulders, then the roll over and downside selling that should about equal the size of the formation from the neckline up to the top of the head. That's how far a stock or index should fall from this pattern, all things equal.

What we're looking at is more of a relief bounce from Thursday. A sell-off on some higher volume Wednesday, and expiration had something to do with that. Then we had a little bounce back up on Thursday, your basic relief bounce. Tried a little more upside on Friday - then failed. Look at NASDAQ, NASDAQ 100, SP600. They moved up through that near resistance, whether it was the 18-day moving average or the 200-day moving average on NASDAQ 100. They moved above it, and then they just couldn't hold it. The buyers continued push them back up, but the sellers jumped on top of them with more strength, and they pushed it to close lower. Even SP500 showed this action though to a lesser extent. It is right below its 18-day moving average, but not in any real trouble. It's still above 875, after bumping up at 900, again still in really good shape. It is, however, getting that little top-heavy look itself. Makes sense. The financials have run and then early in the week many announced new issues of common stock coming, and they started to turn down.

So we're getting a little bit of a pull-back. The market is ripe for it. As I said earlier, it's not a bad thing, it's a normal thing. It's even healthy for the market to do this. We're just going to use it to make a little bit of money. Make money as it goes down. Nothing wrong with that at all.

LEADERSHIP. Leadership showed some problems, but not a breakdown. Energy was down with some pretty big drops in energy stocks. Some techs had problems. Chips have already had issues as we've seen. They tried to bounce, tried to break out again, but then tumbled back down. They were THE early leader and they are still struggling. There's a lot of that earlier leadership that is in a little bit of trouble right now, such as the chips and large cap technology. Not major trouble, but definitely selling back with the kind of retracement you would expect. Commodities were down again. Oil was down, metals were down - again, not terribly. We see some good steel stocks for instance, trying to set up for a new bounce. They are down, they were a little soft, but they're still in good shape. Industrials struggled as well all week, but again, they are not imploding. There are stocks such as CAT and Joy Global (JOYG) that are in good shape. They're holding up well in the pullback, trying to set up for a new run. If they can ride through this selling, we're going to have some great buys from those stocks as well as many other quality stocks.

SUMMARY. I want to state again just as I've said all week and the week before: this is not a really a major sell-off. This is a normal sell-off. The market is going to have good leadership stocks pull back and get in great buying position. We just want to take advantage of the downside while that happens. We aren't sitting here saying the world's going to come to an end. As a matter of fact, we have avoided The Great Depression II. Nonetheless, we are going to have pull-backs. We want to take advantage of that. And while we do that, we want to watch for good stocks, i.e. the leaders setting up, and when they complete their tests and start to move we're going to get those. Visa, Caterpillar, BTU, XTO are examples, and there are many more. For now we watch them as this market pulls back. We make money on the downside, but we also watch these good stocks -- we own some already -- and others that we're looking at buying. And if they hold up, hold at support, and don't sell off vigorously, they're going to be ready to lead and bounce right back up. Then they make us money as the market swings back to the upside. So for now we have positioned ourselves for the downside and will continue to do it some more as opportunities arise, then be ready to pick up shares to the upside, along with the once we already have, when things turn back up.


THE ECONOMY

Indicators say recession may end this summer, but what about the upside?

One of the things subscribers and others tell us is, "You're so negative on the economy." Well, not really. We were championing the turn in the data, or more accurately the slowing dive in the data before it was mainstream. And we are getting better data.

ECRI says things look better and we are going to be at the end of the recession by the end of the summer." Well, that's true. The economy could very well do that. Problem is, bottoming is not recovering. Bottoming is stopping the bleeding, and that's what the Fed has tried to do with all of these facilities that the Fed and that the Treasury have put in place -- to stop the bleeding. The bleeding is slowing.

But one of the problems that we have, and one thing that's telling to us, is that right now people are so ebullient about the economy with such crappy numbers. Back in 2002 and early 2003, the economic numbers were much better, and people were in terrible moods. They were so depressed about the economy. And the economy took off. Now, we've avoided Great Depression II, and thank goodness we're not going into depression, but pundits are having a party over that.

Well, the data is still going down. It hasn't turned and some cheerleaders and as a whole we are way too enthusiastic and optimistic given the data. It's great that we feel good that the economy is not going into the toilet totally, and flushing into the septic tank - but, I digress. It's not the same as making a turn up. ECRI could be right. A recession could end but we then could have no growth. This would be very much like the 1970's, like the early 1980s. We've done it before. We've made the same policy mistakes that we're making now. And thus we likely get the same outcome as before. Does that make sense? It sure does to me, and anyone who reads some history books could figure it out. But, apparently, a lot of people in D.C. haven't read much history. Or they've selectively forgotten what they read, or maybe they never learned it in class.

In any event, does that mean that we're done with the stock market? Do we stick a fork in it? Not at all. Even in the 1970s, and even in the 1980s, there was bursts higher and bursts lower. And, just like right now, when we're going to make money on the downside after we've been making money on the upside, we're going to make money during those bursts to the upside and then sell-offs that follow. To us, we take what the market gives day in and day out and we're going to keep doing just that. This kind of action can be depressing, it can be boring. You worry about your kids' and grandkids' futures. But, the best thing to do for them is to take what the market gives and make money off of it and hope we don't go into that 18% inflation that eats away your wealth similar to the past when I wondered as a kid of the 1970's if I'd ever be able to afford a house. Well we've been there, and I don't want my kids to go there. But, if they do, I want to teach them how to make it through those times ahead of the curve, just like you're going the make it through.


FOIA request turns up a document from the original TARP meeting, alters the Administration's plans with the nation's banks.

Well, as I was saying all along, it turns out that last fall at the start of the crisis the nation's banks were actually forced to take the TARP money whether they needed or wanted it. Surprise, surprise. We find out that there were memos, handwritten, and afterwards transcribed, where Paulson came in and basically said, you're going to take this money. If you don't, you're regulators are going to find that you need to take the money - wink, wink. In other words, no matter what the books were like, the Treasury was going to find, or the FDIC was going to find that the banks were undercapitalized and needed to take the funds. FDIC's Baird was there. Bernanke was there. Or course Paulson was there. And now we know that current Treasury Secretary Giethner was there as well. The big guns were going to let the banks CEO's know that, hey, you're going to go with the plan, or you're going to get the shaft. So everyone signed up. It took quite a while to do so. State Street had to get board approval, and it took three hours. Some things went on during those three hours with STT and other banks in the same position that we'll never know about. Political intrigue at its best. That's a nice way of putting it.

Anyway, they all signed up under coercion, and late Friday we learned Goldman Sachs will probably be the first one to get out from under the TARP. It didn't want to be there in the first place, it was just basically told by Paulson, "I used to work here. You're going to do it; take the lead on this." So it did. And now they're going to get out of it. We hope that all the others can get out of it and pay the money back. Maybe we can all then feel better about what we have going forward. We'll see.

The most interesting thing is, that this document, when it came out through a Freedom of Information Act request, is probably what changed what the Treasury and the Administration was going to do with the banks. When hard evidence surfaced that the banks were forced to take this whether they needed it or not, that took away the hand of the administration to say, "We stepped in to save you when you needed it, therefore we can take stock and take shares and tell you what to do." Just the past two weeks there was a big uproar as to whether the BAC CEO was telling the truth about being forced to take TARP funds 'or else.' This document puts that 'controversy' to rest.

The Administration and Treasury were very tight lipped about banks getting out of the TARP. Then this document was apparently made known to them before it was released via the FOIA request. Recall how just before the stress test results came (and recall that they were DELAYED almost a week without any explanation) the tone changed. Geithner was out saying he foresaw most banks passing and able to get out from under TARP. No problem mate. To us it is pretty clear that when it was known there was a smoking gun out there the Administration's plans had to change course to all our benefit. Thank goodness someone filed the Freedom of Information Act request.


THE MARKET

MARKET SENTIMENT

VIX: 33.12; +1.75
VXN: 33.14; +0.5
VXO: 33.77; +2.13

Put/Call Ratio (CBOE): 0.8; -0.08


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: 41.0%. Modest bump higher from 40.4% as bullishness hung around even as the market turned to some chop though still finished that week higher. After this week bullish spirits may be dampened some. Still a strong move, up from 36.0% just three weeks back and moving in on the 43.2% hit mid-April before anticipation of stress tests and SOX' issues. Over the 35% threshold, below which is considered bullish, but this is not a bearish indication yet. Has to get up to the 60% to 65% level to be bearish. Dramatic rise from 21.3% in November 2008, the bottom on this leg. 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: 33.7%. Interesting rise in bearishness (from 31.5%) even as the bulls rose and the market moved higher though was much choppier. Well off the 37.2% and the 37.1% in mid-April as the rally continued higher. As with bulls, below the 35% threshold considered bullish though not at bearish levels. Now far from off the high on this run at 47.2%. For reference, 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. Prior levels for comparison: 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). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: -9.07 points (-0.54%) to close at 1680.14
Volume: 2.03B (-3.95%). Low volume again as NASDAQ tried to reach higher but could not hold it with the weak trade.

Up Volume: 932.465M (-699.919M)
Down Volume: 1.237B (+700.31M)

A/D and Hi/Lo: Decliners led 1.53 to 1
Previous Session: Advancers led 2.14 to 1

New Highs: 11 (-2)
New Lows: 12 (-1)

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

Rallied to the 10 day EMA on the high but then slid back to close below the 18 day EMA (1693) yet again. Nothing seriously dangerous, just a near term toppy pattern that is the set up for NASDAQ to consolidate the big run off the March low. NASDAQ is holding off the January peak (1665 intraday) but that is likely to give in to a test of the February peak at 1600. That is roughly at a 38% retracement (1592) and matches the 50 day SMA. The 50 day EMA is at 1626 so that is a good logical range to shoot for on this test.


NASDAQ 100 (-0.34%) rallied intraday as well but after clearing the 200 day SMA (1365) it reversed and gave up the gains. It is showing the same kind of short head and shoulders top and is showing a tombstone doji on the candlestick chart. Great set up to head lower near term.

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

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


SP500/NYSE

Stats: -10.19 points (-1.14%) to close at 882.88
NYSE Volume: 1.481B (-2.93%). Well below average on the decline so no distribution, just top heavy.

Up Volume: 292.615M (-905.46M)
Down Volume: 1.18B (+861.639M)

A/D and Hi/Lo: Decliners led 1.8 to 1
Previous Session: Advancers led 2.53 to 1

New Highs: 6 (0)
New Lows: 47 (+4). Note the new lows rising faster than the new highs the past couple of weeks.

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

SP500 is holding tough above 875 and the late January/early February highs (878 and 875 respectively), refusing to give up that level thus far. The key points: it rallied up close to the January high (NASDAQ and NASDAQ 100 topped the January high on their runs) so it is still lagging, but it also made something of a double top there. A first failure at resistance is not the end of the run as we saw in Aril as SP500 tested the late January/February peaks. It failed but then recovered. This time, however, it has broken its March up trendline and has another 50+ points under its belt. It has also set up that same near term toppish head and shoulders pattern. Not consummated, and the H&S can fool you because it really has to make the break lower, but with all the indices showing this a test to the 50 day EMA (854) makes a lot of sense. There is a range of support there and it will try to hold there. Then we see if it fails, i.e. the economic data takes a turn for the worse, and that makes the 825 range to watch as that is the 38% retracement.

DJ30

Very similar to SP500 though in a bit better pattern. It is holding the 18 day EMA just above the October closing low at 8175. This is a very mild test that does not look nearly as top heavy as the other indices. DJ30 will tend to follow SP500 right now, but it could very easily hold up above 8000 (just 268 points away) as SP500 tests lower.

Stats: -62.68 points (-0.75%) to close at 8268.64
Volume: 308M shares Friday versus 323M shares Thursday. Anemic volume all week even with expiration.

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


THE WEEK AHEAD

Housing starts, building permits, crude inventories (taking on new significance with the crude price rise), Fed Minutes, leading indicators (though they are not really leading), and the Philly Fed. The Fed minutes are always interesting given the quantitative easing mode the Fed is in, and any indications of its thought process regarding how long this lasts is useful. Outside of that, the Philly Fed will be the interesting one as manufacturing tends to lead us out of economic troubles. Everyone will look at the jobless claims, but they're going to stink, so that's not going to change. We've got to get improving economic data for those to turn up.

There will still be some more earnings, but we're basically over that. Right now the market is in a technically-driven move. We've had a huge run. They cheered through earnings. They had a stress test, they cheered through the stress test. Then the financial companies make it out to the other side of the test and start offering common stock. Finally investors stopped cheering: "No, we don't want you to do that." So some selling started. That was the reason to sell. Now the market is in a technical downside move, a correction, after a big run. Look at the pattern. Look at the ones that you have in your report. You'll see that little head and shoulders forming up and a little rollover. That's okay; we're expecting more downside this week and have positioned for it.

Now the question is, and what everyone always wants to know is: How long is this selling going to last? Well, the market is a living, breathing entity. We always say this: it acts like we do. If it runs real fast, it gets tired and has to take a rest. If it runs real fast for too far - or, I like to use bicycling analogies used in the Grand Tours-- if it goes so hard, so fast in the red line that it pops, then it collapses; it's over, it's done. It's going to go way back down.

Well, we've gone a long way off the bottom, but we haven't gone that far. The way things look now, we've got a rather normal pullback underway. One indicator we look at are Fibonacci levels. They are one indicator we use, though we look at a lot of other things as well. But Fibonacci's are nice. They give you round figures to look at. NASDAQ could come back to 1600-ish. 1600 looks good at the February high, but just below that at 1565ish that is the 38% Fibonacci level. That's a normal continuation retracement. In other words: you go up, you sell back that 38% level, boom, you can take off right from there again. You can go back to 50%, boom, take off from there again, as well.

Now on SP500, we're looking at 875 right now. But a trip to 850 looks totally normal, and a Fibonacci 38% retracement is all the way down to 824. Wow, 825. That's a nice even, round number. It may not make it down to 806 like we wanted it to originally, but 825 would be just a normal retracement. And what would 50% be, by the way? Fifty percent would be right at 794.

Fibonacci's are basically natural rhythms in nature, and we're big into the market being rhythms. We always talk about weather analogies, and volatility being the weather change, and that sort of thing. So we really like the Fibonacci's, trendlines, and moving averages, because they're that same ebb and flow. Traders and big money technicians look at these. That's why they work. They're emotionally driven. The markets are emotionally driven. We're humans; we're live by emotions. And we tend to cling to our guns, religion, . . . just kidding. We cling to to trends and patterns that have held in the past. Therefore, when a market hits these certain levels, people tend to react the same way. Whether it was a thousand years ago, or five thousand years ago, or five minutes ago, they tend to react the same way.

So, what we're looking for now is this market to keep coming back in a normal retracement. It will find it's level, whether it's 20%, whether it's 10%, whether it's 38%. It will find it's level. It will give us the sign posts along the way, telling us it's getting ready. How will we know? If it's getting ready to turn, we'll see leaders start to hold again. And leaders, by definition, are leaders. They start up before everyone else. As I mentioned earlier, we've got Visa, there's CAT, there's Joy G, there's others out there - XTO - that are holding up very well. And if they hold up well during the selloff, they'll be out leading again. And we'll be seeing them turn up, and we'll be buying them. A lot of times, we're not smart enough to figure out exactly what the market is going to do. All we can say is the big money is buying these stocks; they're going back up. So we join in and buy them, too.

We saw things getting ready to turn over so we joined in and started downside positions. We're letting some of our upside positions ride because they're still in good shape. Some are giving us a little heartburn at times, but they're still in good shape. We're aren't expecting massive sell-offs from these stocks that look really good still. We'll have to play it and see how they work and how they hold up, but, overall, we really like what we see from the market still.

Again, we're not saying that the rally is over, that it's going to end in a massive selloff. That is a worry if the economic data cannot make a real turn and the economy double dips. Right now the market is not saying that, and the market has the last word. Some are really negative with prognostications of the Dow at 4000, 5000; SP at 600 by Memorial Day - I'm just throwing those out, that's nonsense, but that's the kind of fear you still hear. You always hear that. Every time there is a top, or turn in the market; every time there's a bottom, you hear "huge upside" or "huge downside," and it's always worst case. But, are things ever that bad? Sometimes they are, as we found out last fall, but usually not. This is an unusual time, of course, but we're starting to see the biorhythms get back in the way they usually work. We're starting to see patterns work the way they should work. And money is coming into the market again. Which, of course, is another reason why it probably topped right now. With everyone feeling good about the market rally, several billion dollars flowed into the market over the past week or two. And of course, as usual, the money flowed in just as the market topped. So that's another indication that we're in for some more selling right now. The money's just coming in. That usually means the market has stopped near term. That money will be put to work at some point, just not right now.

For now we are going to make some money on the downside and we are going to look at some more downside positions this coming week. Then when we start to see good stocks bottom, we're going to have them on the report (we are already doing that of course), and you're going to be ready to buy them just as in "Trading Places", "Buy 'em!" We'll be doing that. And we'll be riding the next CME up, we'll be riding the next POT up, and those kind of stocks that have soared and made money for us to the upside when the market was moving down on the week.

I hope you had a great week, and I hope you have a great weekend. Because what we need to do is hammer the market, take everything that it gives us, but also take everything that life gives us as well. And that's why we do this. We do this so you can do what you want to do. That's our definition of retirement: Being able to do what you want to do, when you want to do it. We love providing information to people who are where we were years ago. Hope you have a great weekend, take care of yourself, and very good investing to you.


Support and Resistance

NASDAQ: Closed at 1680.14
Resistance:
The 18 day EMA at 1693
The 10 day EMA at 1702
The 200 day SMA at 1727
1770 is the mid-October interim peak
1773 is the May peak
1780 is the November 2008 peak
1947 is the October gap down point

Support:
1673 is the prior April peak
1666 is the intraday January 2009 peak
1661 is the April 2009 prior peak
The January closing peak at 1653 (intraday)
The 50 day EMA at 1626
1623 is the early April peak
1620 from the early 2001 low
1603 is the December peak
1598 is the February 2009 peak, the last peak NASDAQ made
1587 is the March 2009 high is getting put to bed again
1569 is the late January 2009 peak
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


S&P 500: Closed at 882.88
Resistance:
The 10 day EMA at 894
896 is the late November 2008 peak
899 is the early October closing low
919 is the early December peak
930 is the May peak
935 is the January closing high
944 is the January 2009 high
The 200 day SMA at 946

Support:
888.70 is the April intraday high.
The 18 day EMA at 885
878 is the late January 2009 peak
The prior April peak at 876
866 is the second October 2008 low
857 is the December consolidation low; cracking but not broken
The 50 day EMA at 854
853 is the July 2002 low
848 is the October 2008 closing low
846 is the April peak
842 is the early April peak
839 is the early October 2008 low
833 is the March 2009 peak
The 90 day SMA at 825
818 is the early November 2008 low
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
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


Dow: Closed at 8268.64
Resistance:
The 10 day EMA at 8336
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
8588 is the May high
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:
The 18 day EMA at 8264
8315 is the February 2009 peak
8307 is the April 2009 intraday high
8197 was the second October 2008 low
8191 is the prior April peak
8175 is the October 2008 closing low. Key level to watch.
8141 is the early December low
The early April intraday peak at 8113
The early April peak at 8076
The 50 day EMA at 8039
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
7702 is the July 2002 low
7694 is the February intraday low
7552 is the November closing low. KEY Level.


Economic Calendar

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

May 19 - Tuesday
April Building Permits (8:30): 530K expected, 516K prior
Housing Starts, April (8:30): 527K expected, 510K prior

May 20 - Wednesday
5/15 Crude Oil Inventories (10:30): -4.63M prior

May 21 - Thursday
5/16 Initial Jobless Claims (8:30): 610K prior
Leading Economic Indicators, April (10:00): 0.6% expected, -0.3% prior
Philadelphia Fed, May (10:00): -18.0 expected

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

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Stocks Rally Again

SUMMARY:
- Stress test medicine is painless, jobs report within tolerance, stocks rally again.
- NASDAQ gains ground but techs are struggling. After the stress test and jobs report the financials need to find more near term buyers.
- Massive liquidity, 'chase money' fueling the stock market rally, but a poor bond auction and bond rates forecast the problems ahead.
- A lot of enthusiasm over poor economic data versus a lot of pessimism over truly improving economic data.
- Liquidity means more stock market gains but near term techs have to prove themselves again and financials have to continue to lead.

Stress test, jobs report no obstacle to a further rally.

Financial institutions that did not 'pass' the stress test, 9 of the 19, are engaged in the next rush, the rush to raise their own capital, non-government assisted, so they can cast off the TARP. The Treasury surprised us all this week when it announced that any institution could repay the TARP and throw down the government yoke when it can raise needed capital without the government backing. Thus a lot of bond issuances were announced Friday. Banks that were basically forced at gunpoint to take the funds are showing how much they detest the governmental interference.

The jobs report was also quite palatable at -539K versus the 610K officially expected, though the whisper was in the -550K range. March was revised to -699K, however, so the April number was really at expectations. That was not worse than expected, however, so that was enough to keep things going. Of course the unemployment rate hit 8.9%, already topping the Administration's estimates on the peak for this downturn. Moreover, the improvement in the overall number was due to growth in the federal government with the hiring of census workers. Now THAT is real improvement in the jobs picture. The real story is in the temp workers. Temp workers are the first to get hired in a recovery as companies gingerly get back into hiring. If things work out they make those temps permanent offers. At +68K temp hiring is still very anemic, indicating no improvement in hiring. That is nothing unusual. The economic numbers, as discussed below, are still pathetic and you would expect hiring, a lagging indicator, to remain muted at this point. It is.

Nothing was stopping the move higher, however. There are reasons for that as discussed the past week and later in this report, but it was not all upside. Stocks again gapped higher but that move did not hold and NASDAQ was negative by midmorning. At that point, however, the buyers moved back in and it was upside for the rest of the session with stocks rising back to the morning highs and beyond, at least on SP500 (+2.41%). SOX closed down almost 2%. NASDAQ 100 scratched out a 0.3% gain. Gains again but there are some cracks. Of course thus far cracks have been filled by liquidity.

TECHNICAL. Intraday a gap higher, a test midmorning, and then a move higher into the close that once again ended with gains. Eight straight weeks higher for NASDAQ, 7 of 8 for SP500. Same old story.

INTERNALS. Solid to the upside once more with 3:1 advancers on NASDAQ and 5.5:1 on NYSE. Volume was lower but still huge on NASDAQ (3B) and it was no slouch on NYSE. Volume is pouring in since Wednesday. Is it good volume? NASDAQ showed churn on Tuesday and really on Wednesday, and Thursday NASDAQ was down on the strongest volume since November. Strong volume is the most telling volume. On NASDAQ it is showing distributive action, and with SOX failing its breakout this volume is setting up an important inflection point for this rally this coming week. NYSE is running higher on the strength of financials and also the liquidity run in commodities and industrials.

CHARTS. SP500 broke to a new post-March closing high, clearing the December twin peaks at 319. Still below the January peak at 944 and the closing January high at 935, but showing no signs of wear and tear as the financials continue to move higher as money chases them. Of course when they are getting money for free and can invest it in the market, money should chase them as it is free money. We are not only giving financials money to shore up their balance sheets, we are subsidizing them with all the free money the Fed has injected into the system that no one wants to borrow and the banks are putting it in the market, driving up prices and making them money. How easy is that?

NASDAQ posted a gain but it was after the Thursday hit down to 1700. Pretty modest rebound though volume remained strong. As noted, volume is an issue for the techs as there is churn and some distribution. NASDAQ looks toppy near term and a test to the mid-April high at 1675 looks easy and 1600ish is more reasonable for this test. SOX was down on an up day and this former leading group and has broken its trendline from March. It held over the November high with a late recovery, but we are looking for a deeper test down toward the 232 level. SP600 (+3.59%) HIT A NEW POST March high as well and is a gnat's butt from the January peak. Strong day for small caps but they are also at two layers of resistance at that January high and the descending 200 day SMA.

LEADERSHIP. Financials. Energy. Industrials. Commodities. Financials are rallying as they can basically print their own money. The other three are rallying on the liquidity explosion via world monetary policy that makes these sectors attractive from both a recovery perspective and an inflation perspective. Techs are struggling with many toppy patterns near term. Chips were hammered. Retail doesn't look very good at all even with the supposedly 'stronger' April same store sales. Overall leadership remains strong, but after such a rush higher there is some typical retrenching by the early leaders. Okay, some are more than retrenching; some are digging trenches. Overall leadership remains in good shape, however.


THE ECONOMY

Fed liquidity is having its impact, but it is not healthy for the longer term.

After making trillions of dollars available in direct loans, guarantees, etc. we are seeing the effect. Money is everywhere but there is a problem. The economy remains weak and there is no incentive to invest in the economy. Despite the trumpeting of the 'shoots' of economic recovery, the economy is in very poor shape. There is no real stimulus to invest in your business as there was in with the second round of economic stimulus under Bush that jolted the economy and resulted in 7.4% GDP growth in Q3 2003, just a couple of quarters after passage. The Obama plan is government spending to states to keep some local government employees at work. And don't let the $17B in cuts announced this week make you think the spending has anyone in DC worried. These are the same spending cuts Bush proposed and the democratic Congress rejected. Sadly $17B in cuts is as insignificant as a smudge of excrement on a tissue being washed out to sea with a ton of other garbage ('Sideways'). That is pretty much the total of the 'stimulus' for the first year. It creates no incentive to spend on your business as do investment tax credits. With ITC's you either pay the money to the government in taxes and arguably get back nothing or spend the money on some equipment or other items you need instead of paying the tax. THAT gets people and businesses to spend when there is no demand to otherwise give a reason to improve your business.


Fed money going into world financial markets, not loans.

So what is the money doing? Despite the TARP and TALF, hardly any money is being lent. We have talked to many businesses and even Donald Trump is saying that the government's and Fed's statements about lending are flat wrong. All that money has to be put somewhere, however, and as in the second half of 1999 when Alan Greenspan flooded the economy with billions of dollars ahead of Y2K, dollars that were not needed and just idle, it is being invested by the banks. That is one reason their profits jumped so much beyond expectations: they are getting this money for nothing and investing in the markets. They are buying commodities, oil, stocks, etc. Voila. Stock market takes off and shows unnatural strength just as in the 75% NASDAQ run in the second half of 1999.

An example is oil. It is surging, closing Friday at 58.62, up another $1.91. Huge move in a short period. Huge move indeed, given that US demand is at 2001 levels. You remember 2001: recession, 9-11. Our commodities market contacts tell us there are large buys of futures that are driving oil prices higher. We are getting that same kind of speculation of sorts that was so maligned during the presidential campaign. This extra money is chasing hard assets as a safe way to hedge against the inflation that this very money is going to create.

Talk about a vicious cycle or a self-fulfilling prophecy. The money is creating demand for products, but it is artificial demand. It is sewing inflation because there is demand but no corresponding increase in supply as there is no investment in the US. The very low inventory levels (Friday showed wholesale inventories at a -1.6% on top of February's 1.7% decline. Demand with no production or increase in supply creates inflation as more money (lots more money) heightens demand and chases fewer goods.


Inflation and a 1970 malaise ahead.

What lies ahead as a result: look at the Thursday bond auction and what happened to treasury yields afterwards. Yields are steadily rising, some say due to economic recovery. Again, look at the Thursday bond auction. There were very few takers and demand for US bonds was slack. Thus the Treasury had to offer better interest rates to get buyers to take what we were offering. That is the problem with you put $12T of spending, lending and guarantees out in the real world. Your buyers get nervous about your ability to pay. A bookie that lends you $100K for a couple of days is making a risky deal and thus you pay a high interest rate. The Treasury is not at bookie status yet, but Geithner is still new on the job, right? Nonetheless, our debt buyers wanted more interest for their perceived risk and the 10 year yield jumped to 3.35%. Just a couple of weeks back it was at 2.8%. This is the second poorly received bond auction in a month and it shows the increasing worry about the US and its massive spending on healthcare the general 'Europeanization' of the US. Hell, even the Europeans are damn worried about us doing this (recall the 'road to hell' comment).

The weak bond auctions underscore the problem of rising interest rates that are signaling rising inflation, not the improving economy that some claim this indicates. Yes the economy is slowing its fall but that is all it is doing. The rise in bond yields is disproportionately high compared to any improvement in the economic data. If things do not change this is going to lead to a humdinger of an inflation spike, and with massive expansion of government, more regulation, and forced government programs just as in the 1970's, we can look for 1970's style results, i.e. stagflation and its malaise.


Never have so many been so enthusiastic about an economy so weak.

Okay, okay you say, but isn't the economy improving? Didn't we say the economy was getting better? Yes. The data is getting better. It is slowing its decline as all of that liquidity creates some demand. It is not creating supply because the numbers are still so weak no one is investing in business, but it is ginning up a bit of demand.

And of course, the fall has to slow before it turns, and with all of this liquidity it is likely to continue to improve, but there is nothing to give it a real jolt and thus the improvement, as noted above, is likely to be very tepid, very 1970's.

Look at the manufacturing reports. Even before the stock market bottomed the ISM started to turn positive. Not slow the contraction, but turned to expansion. We were harping on this as a super positive development even as sentiment remained very negative. Indeed in October, the day the market turned, the despair was huge but the manufacturing data had turned the corner and the market picked up on it when not many others did.

Right now the manufacturing reports are off their lows (32.9), lows that were much worse than in 2001 and 2002. This was a bad recession, one teetering on depression. The ISM improved to 40.1 in April as the economy started to pull out of the depression dive. It has not turned positive and indeed is not close to turning positive unless someone monkeys with the data.

There is improvement in other areas as well, i.e. factory orders, durables orders, ECRI's indicators. They are pointing to an end of the recession, but there are two important points to consider. First, this recession was deeper and longer than any in recent history so we are starting at a much LOWER level in the recovery. Thus an end to the recession means it is over but are you 2 feet underwater or 20 feet underwater? This one we are the latter. Second, as noted all last week. An end to the recession doesn't equal rapid recovery. There are many reasons we are looking at a hockey stick, i.e. sharp down, long, slow and flat recovery. Weak dollar, inflation to come, overregulation, overspending. Many reasons.

YET, with such horrid data enthusiasm is erupting. Back in 2002 and early 2003 when the turn was being made the morale was horrible. The October to December stock market rally made everyone feel a bit better, but the whole time it was calls a bear market rally, and when the January to March test/correction ate up the gains the gloom was literally depressing. That correction actually showed great action with low volume down sessions, up volume rising sessions, and stocks setting up great patterns. We were positive and said so repeatedly just waiting for the moves by stocks such as EBYA, TSCO, AMZN and company to make the breaks higher. Man did they ever.

Right now everyone is gushing over and economic recovery when quite frankly the numbers on a comparative basis are much worse and the 'recovery' thus far still leaves all indicators massively underwater. Bernanke was not kidding when he said the pace of the decline was slowing. He did not say the economy was turning because it is not. It is halting the slide into depression but it needs a kick of stimulus to get everyone investing in the US again. As we saw again last week, foreigners are lukewarm in doing so with the weak bond auction. Thus it is up to us to create the investment, but the current policies are not doing that this year and it is highly debatable if they will ever do so as government spending historically fails to excite growth. It does debase your currency and lead to inflation, something that is happening faster than the economy's attempts at recovering.


No Great Depression II, but after this market run another bad recession.

In sum, because we were looking at Great Depression II in the face, the slowing of the swan dive in the economic data has elicited an over-exuberant conclusion that the economy is turning the corner. No, it is staving off another depression thanks to massive amounts of liquidity. Indeed the programs of government spending are the very things that are said to have prolonged the original Great Depression by 10 years. Thus the excitement about this turn is going to ultimately lead to disappointment and a pretty crushing double dip recession.

The good news? With all of this liquidity it might take two years to occur and the financial markets are likely to continue running higher. After all, even in the malaise of the 1970's the stock market had some very good upside years and indeed there was enough up and down volatility to make money trading the moves.


THE MARKET

MARKET SENTIMENT

VIX: 32.05; -1.39. VIX ready to bounce and watching this along with NASDAQ and SOX as an indication a correction is coming near term.
VXN: 33.67; -0.8
VXO: 32.77; -1.38

Put/Call Ratio (CBOE): 0.87; +0.06


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: 40.4%. As expected with the gains the bulls are jumping, starting to snort and stomp. Up from 36.0% the prior week though still below the 43.2% hit a month back before anticipation of stress tests and SOX' issues. Over the 35% threshold, below which is considered bullish, but this is not a bearish indication yet. Has to get up to the 60% to 65% level to be bearish. Dramatic rise from 21.3% in November 2008, the bottom on this leg. 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: 31.5%. Bears plummeted from 37.2% and the 37.1% four weeks back. As with bulls, below the 35% threshold considered bullish though not at bearish levels. Now far from off the high on this run at 47.2%. For reference, 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. Prior levels for comparison: 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). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +22.76 points (+1.33%) to close at 1739
Volume: 3.05B (-2.04%). Big volume Wednesday to Friday, and it was not all positive buying volume as NASDAQ struggles below the November peak.

Up Volume: 1.965B (+1.279B)
Down Volume: 1.212B (-1.338B)

A/D and Hi/Lo: Advancers led 3 to 1
Previous Session: Decliners led 2.04 to 1

New Highs: 29 (+3)
New Lows: 8 (+2)

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

Sold negative after the gap higher, but with the financials rallying again SP500 pulled NASDAQ back up with it. NASDAQ is struggling below the November high and with SOX getting slapped around and the large cap techs fighting to hold up this coming week is a key one for the techs. Again, the January peak is at 1666 and a logical retracement point though 1600 would be better. The question is whether the liquidity allows NASDAQ to make this kind of 'normal' retracement.

NASDAQ 100 (+0.31%) was a clear laggard to end the week but its pattern is fine as it holds right over the November peak and the 200 day SMA. Indeed it showed a doji on the candlestick chart Friday, tapping the 200 day on the low. NASDAQ 100 remains in good technical position, holding these twin support levels as volume rises. Unlike NASDAQ, the large cap techs are sitting on top of support versus below resistance.

SOX (-1.92%) took it on the chin again Friday though it recovered off the low to hold its break over the November peak. The problem we have here is that SOX broke out Monday after a three week lateral consolidation and then it gave it right back up, falling into the range on Friday. The only thing it did not do is give up the November peak. Early leader in trouble, putting a drag on NASDAQ. How SOX responds this week is key.

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

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


SP500/NYSE

Stats: +21.84 points (+2.41%) to close at 929.23
NYSE Volume: 1.897B (-3.82%). Another solid above average volume session as SP500 moves toward the November peak. Some churn Thursday but the upside strength continued.

Up Volume: 1.68B (+1.071B)
Down Volume: 212.138M (-1.145B)

A/D and Hi/Lo: Advancers led 5.5 to 1
Previous Session: Decliners led 1.84 to 1

New Highs: 28 (+1)
New Lows: 72 (-7)

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

Financials continued higher along with energy and commodities. A potent combination for the SP500 as it pushes toward November closing high at 935 and the intraday high at 944. The strength remains impressive as chase money chases the financials and the Fed liquidity makes commodities, materials, industrials, etc. attractive. Thus far no real slowing in SP500 but if NASDAQ stumbles SP500 is likely to test back from the November peak to at least give it a breather. It is liquidity driven right now and thus far that has made it all but bulletproof.

SP600 (+3.59%) enjoyed the same success as the large caps, rallying closer to the January peak and setting a new post-March high. Long, long run and a logical place to test back, but that was the case for the SP500 as well and that hasn't stopped it.


DJ30

Followed SP500 higher, breaking to a new post-March high itself, clearing 8500. Still in a thick raft of resistance on up to 9000, and as long as SP500 moves higher on the back of financials and industrials, DJ30 is going to do the same.

Stats: +164.8 points (+1.96%) to close at 8574.65
Volume: 409M shares Friday versus 476M shares Thursday. Lower average trade Friday as volume remains stronger since Wednesday after three weeks of slow, low below average trade.

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


MONDAY

The jobs report is history and the stress test dog and pony show is over, but a flood of earnings continue along with plenty of economic data. Retail sales, PPI, CPI, production and capacity utilization. They are not expected to show much improvement outside of retail sales and the new-found excitement for the consumer. Given all of the slobbering over the 'shoots of growth' this past week you would think expectations would jump.

Liquidity is driving SP500 and if that holds the market is likely to keep running overall. For this week, however, SOX is in trouble and NASDAQ is struggling. With the stress tests in the bank so to speak and the jobs report logged SP500 is looking for another catalyst and if NASDAQ corrects more SP500 will likely do the same. Then we have to see how much it does correct. When these liquidity rallies run history shows they have sharp, high volume corrections, but they don't last long. The market is more than due for a correction and NASDAQ is in the initial stages, and we think the techs will give back some this week. As they do, how the financials respond will tell the rest of the tale.

If techs correct we will look for points of entry for the upside after they hit key support levels, but we are also looking to play the overall move lower with some Q's. Energy stocks have shot higher and need a pullback. Commodities are still interesting as are industrials and we looking at them for upside positions from here. As money continues to move into the market, 'hard' stocks (materials, agriculture, industrials, commodities, etc.) and other stocks tied to inflation will continue to perform. Those should provide continued upside opportunity as all of this liquidity chases those areas as a hedge against inflation and as a way to play a new rise in China, India and company.

Many stocks surged in this last move that many are still very extended, but at the same time others are stepping up as money continues to move in and look for new targets. That pushes new stocks and sectors to the fore and we will continue looking for them to provide new opportunity.


Support and Resistance

NASDAQ: Closed at 1739.00
Resistance:
The 200 day SMA at 1742
1770 is the mid-October interim peak
1773 is the May peak
1780 is the November 2008 peak
1947 is the October gap down point

Support:
The 10 day EMA at 1721
The 18 day EMA at 1693
1673 is the prior April peak
1666 is the intraday January 2009 peak
1661 is the April 2009 prior peak
The January closing peak at 1653 (intraday)
1623 is the early April peak
1620 from the early 2001 low
The 50 day EMA at 1611
1603 is the December peak
1598 is the February 2009 peak, the last peak NASDAQ made
1587 is the March 2009 high is getting put to bed again
1569 is the late January 2009 peak
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


S&P 500: Closed at 929.23
Resistance:
919 is the early December peak
935 is the January closing high
944 is the January 2009 high
The 200 day SMA at 955

Support:
899 is the early October closing low
896 is the late November 2008 peak
The 10 day EMA at 896
888.70 is the April intraday high.
The 18 day EMA at 879
878 is the late January 2009 peak
The prior April peak at 876
866 is the second October 2008 low
857 is the December consolidation low; cracking but not broken
853 is the July 2002 low
848 is the October 2008 closing low
846 is the April peak
The 50 day EMA at 845
842 is the early April peak
839 is the early October 2008 low
833 is the March 2009 peak
The 90 day SMA at 826
818 is the early November 2008 low
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
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


Dow: Closed at 8574.65
Resistance:
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:
8521 is an interim high in March 2003 after the March 2003 low
8451 is the early October closing low
8419 is the late December closing low in that consolidation
8375 is the late January 2009 interim peak
The 10 day EMA at 8333
8315 is the February 2009 peak
8307 is the April 2009 intraday high
8197 was the second October 2008 low
8191 is the prior April peak
8175 is the October 2008 closing low. Key level to watch.
8141 is the early December low
The early April intraday peak at 8113
The early April peak at 8076
The 50 day EMA at 7970
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
7702 is the July 2002 low
7694 is the February intraday low
7552 is the November closing low. KEY Level.


Economic Calendar

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

May 8 - Friday
April Average Workweek (8:30): 33.2 actual versus 33.2 expected, 33.2 prior
Hourly Earnings, April (8:30): 0.1% actual versus 0.2% expected, 0.2% prior
Nonfarm Payrolls, April (8:30): -590K actual versus -620K expected, -699K prior (revised from -663K)
Unemployment Rate, April (8:30): 8.9% actual versus 8.9% expected, 8.5% prior
Wholesale Inventories, March (10:00): -1.6% actual versus -1.0% expected, -1.7% prior (revised from -1.5%)

May 12 - Tuesday
March Trade Balance (8:30): -$29.2B expected, -$26.0B prior
Treasury Budget, April (14:00): -$63.0B expected, $159.3B prior

May 13 - Wednesday
April Export Prices ex-aq. (8:30): 0.1% prior
Important Prices ex-oil, April (8:30): -0.6% prior
Retail Sales, April (8:30): -0.1% expected, -1.2% prior
Retail sales ex-auto (8:30): 0.0% expected, -1.0% prior
Business Inventories, March (10:00): -1.1% expected, -1.0% prior
Crude Oil Inventories, 05/08 (10:30): +605K prior

May 14 - Thursday
April Core PPI (8:30): 0.1% expected, -0.0% prior
Initial Jobless Claims, 05/09 (8:30): 601K prior
PPI, April (8:30): 0.1% expected, -1.2% prior

May 15 - Friday
Core CPI, April (8:30): 0.1% expected, 0.2% prior
CPI, April (8:30) 0.0% expected, -0.1% prior
Empire Manufacturing, May (8:30): -15.00 expected, -14.65 prior
Net Long-Term TIC Flows (9:00): NA expected, $22.0B
Capacity Utilization, April (9:15): 68.9% expected, 69.3% prior
Industrial Production, April (9:15): -0.6% expected, 69.3% prior
Michigan Sentiment-Preliminary, May (9:55): 65.0 expected, 65.1 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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