Wednesday, May 06, 2009

Good News Saturation?

'Originally Published on 4/26/09'
- Good news saturation? Market still hungry for positive news and drives higher.
- NASDAQ, SP600 break to new post-November highs.
- Low volume move suddenly turns to higher upside volume.
- Kernels of economic positives continue showing up here and abroad
- Stocks are moving higher, but not a lot are in buy position at the moment as new money chases many beyond good entry point.

More earnings and some of the indices start to break out.

Typically the market gets a week or two of earnings, figures the general gist, and then starts to head the other way after moving into earnings and continuing the move as the early returns come in. It is called the saturation point. Thus far, starting with the WFC pre-announcement and the BBBY earnings that start things off, the positive earnings results and outlooks have outweighed continuing government intervention issues and some guidance that in more instances than not is simply not that positive.

That continued last week with several key names in tech such as AAPL, MSFT and YHOO, retail (AMZN), and even autos (Ford) beat nicely. Their earnings overcame misses and weak outlooks from MS, UPS, RS, MRK and CAT's first quarterly loss in 17 years. In an ironic twist you may recall the President stumping at a CAT plant for his stimulus/spending/social engineering package, touting it would result in hundreds of jobs 'saved' at CAT. Last week CAT issued a statement that the stimulus package in its final form failed to be real stimulus, noting as we did back in February that China's stimulus package, if you are going the government spending route, was actually stimulus.

Despite some earnings issues, despite bank stress tests and concerns about the effect of released stress test results the indices, after a dive on Monday the indices mounted another rally. Not all finished positive for the week as SP500 and DJ30 broke their string of weekly gains at 6, but NASDAQ made it seven straight with its performance that saw a breakout to a new post-November high to close the week Friday. Even the small cap SP600 put in a new high for this bear market as the small caps, an important economic bellwether, try to shoulder into a leadership spot.

What was a low volume rise through late March and mid-April 'got volume' last week. It didn't start that well on Monday with a NASDAQ volume spike to the highest level of trade since the October low when the market gyrated in massive daily swings up and down. That did not look positive, but then again, most of the volume that day was due to JAVA and its takeover bid by ORCL. ORCL has no pride; it picks up the sloppy seconds but it has done quite well doing just that. Volume really started to come in Wednesday through Friday, however, as solid tech earnings helped propel and extended market higher.

As noted during the week, the action was modestly higher to modestly lower on the open, a lot of midday range-trading with dips to negative territory common, and then late the indices would climb. The earnings were not jacking the market higher on the open, instead just providing a bid. That made it look as if the indices were tired (they were) and that earnings results were wearing out their welcome.

Then LATE in the sessions the market would rally back to positive. Happened Tuesday, Thursday, and Friday. As noted Thursday, what is happening is that despite the indices logging 20+% gains off the lows 'chase money' is coming in on every dip. Good earnings fail to elicit a huge response? Use a dip to buy positions. There are many big hedge and other funds that were caught short by the upside move. They helped drive the move higher when they finally had to toss in the towel and cover, and now they are helping keep an extended market, near term at least, moving higher as they chase stocks that fall intraday and thus giving the characteristic late session rallies.

Nothing wrong with late session rallies; that shows big money is buying and that is bullish. The important thing as we said Thursday is to watch and see when the 'chase money' starts to fizzle out. As of Friday afternoon with the afternoon move it was not there yet though there was some late weakness that was likely due to pre-weekend profit taking by those already in the rally and taking gain on stocks such as, say PCLN or SINA as we were doing.

As noted above, we said that typically stocks get information overload or get the general theme of earnings season one to two weeks into the season and then the jig is up. This market is hardly typical in that it is an economic recession market, and a deep recession at that. Nothing typical about that, and as we have seen, money that missed the rally is not chasing the rally, keeping it going when it is pretty extended. The money helped prop up the market in a lateral move when it would likely have faded back to test the bottom of the range quicker. Again, it is still in the market as shown Friday after the MSFT earnings, it is not done yet.

So, is it totally 'different' this time? Dangerous words; when you hear the old 'it is different this time' you can be just about 100% sure the old patterns are about to reassert themselves. Look at the calendar. While earnings season starts in April, it does not really start until the end of the second week of the month. Thus it really is just the SECOND week of the season. Thus predictions that the earnings season will be different this time are likely a tad premature.

The breakout by NASDAQ Friday is nothing to discount, but it is also not proof that it or any other index will avoid testing back. Look at SOX; it was the early leader in the rally, not only making the first higher high but also the only highest high following the bear market selloff. It is currently going through a three week consolidation that has it trading in quite a large range. It has come back all the way to test its breakout over the mid-level peaks before moving up late in the week. SP500 has not even broken out of its trading range, just making it up toward the 875 level that is a mid-level resistance point, this despite all the rallying in financials.

That is one reason we were not loading up with more upside positions to end the week and actually picked up some downside positions, including some additional downside SP500 positions heading into the Friday close. That does not mean we think the rally will fail. As noted Thursday this is great overall action. We just recognize where the rally is in its cycle, where we are in earnings, and know that the 'chase money' won't likely overcome this resistance in SP500, at least on this round of the move. Thus we are looking for some downside again while good stocks that surged really far, really fast test back some and set up for another move higher.

TECHNICAL. Once again the intraday action was bullish with that second half session, and particularly last hour, rally after a modest start and intraday trading range. That shows big money funds that missed the early rally still putting money to work to beef up their upside portfolios, and big money moves are always important.

INTERNALS. Solid breadth again with 3:1 NYSE and 2.5:1 NASDAQ. Volume was up to average on NYSE and was again above average and stronger on NASDAQ. Trade has been low on most of the latter part of this move. That is not necessarily bad for a lateral consolidation where quieter action is preferred, but a lot of the upside action was occurring on lower trade. Thus when NASDAQ volume jumped last week on the upside, that was very bullish. Earnings from AAPL, YHOO, MSFT and others helped pump up the volume. On NYSE trade remains lackluster with a big spike two Fridays back when SP500 hit near the top of its current range and turned back. Outside of that volume has been mediocre at best and is a key reason we feel SP500 is going to test back in its range before it moves higher again.

CHARTS. As noted, NASDAQ broke to a new post November high, clearing once more the January peak, and this time doing it with a bit more flare, moving on strong volume and putting some mileage on that level. Still below the November peak, but that is now at the 200 day SMA so that is the next story to worry about. SP600 broke to a new post March high itself, at least on the close. The small caps are trying their hand at returning to the leadership role. SOX bumped into its 200 day SMA again on its high as the chips continue their three week lateral trading range, bouncing to the top of the range last week after holding the February peak. The early market leaders they are in a well-deserved consolidation and are indeed holding their gains as they recover from the run. Last there is SP500 and it managed to close the week breaking back over 850 that was holding it back, moving toward next resistance at 875 in the form of the late January peak. We were looking for a rollover as it broke below the 850 level Monday, but it did not hold as the general market move took it higher. Now we see what it does with 875; we are still looking at a fade again toward the bottom of the range, anticipating that the 'chase money' cannot break it out on this run.

LEADERSHIP. Energy started getting back into the game late in the week, adding some support to the market as industrial metals took most of the week off along with semiconductors. With those leaders taking a needed rest another group stepped up. Indeed it was more than just metals as industrials enjoyed a good end to the week along with some technology stocks moving on those tech earnings. Small caps in general are moving higher though it is interesting that some of the early small cap leaders (HMSY, EPIQ) are in full retreat, turning the reins over to others. In sum the market continues to find new leadership stepping up when one group needs a pause, the kind of rotation that signals an overall healthy market.


Signs of slowing declines continue but do they mean recovery?

We have chronicled for a couple of months now, well in advance of any impact from the so-called stimulus bill, how the economy is showing signs of slowing the fall. That is not a recovery; that requires improvement. But of course the decline ahs to slow before a recovery can take place. Will it be a 'V', a 'U', a 'W' or an 'L' or hockey stick as some call it? Thus far we are still in the decline phase though it looks as if it is just before some kind of turn toward a leveling off or even some upside.

Shipping materials and shippers.

This past week saw corrugated box orders rise for at least on manufacturer. Cardboard boxes hold most of what we ship around the US, and if orders are indeed hitting year ago levels that is a large positive as it was one of the indicators we used in 2002 to hone in on an economic turn.

As for company news UPS in shipping, one that moves those cardboard boxes, said it sees no recovery until maybe 2010. Something to note about shipping companies: they have been bearish for three years now, starting with the 2006 holiday season when orders were lower and were not recovering. Were they early or just overly pessimistic? We had some good economic years during that time. Thus take what the shippers say with a grain though I can tell you they are in lockdown mode, i.e. they are only spending on the things that make the trucks roll, i.e. tires, gas and oil. So regardless of what reality is, that is their mentality and they are not spending money. Other businesses are in that same mentality, and they have to see tangible improvement before they start feeling better and then actually start spending money again.

Goods orders.

Durable goods orders fell 0.8% in March but that was almost twice as good as the -1.5% expected. February was revised lower to 2.1% from 3.4%, however, and revisions are what can make or break a turn. We are seeing mixed results in the revisions on the economic data, i.e. some up, some down. That is volatility that can indicate a change, but you want to see solid upside revisions to show a turn is really taking place versus still in the stage of feeling its way around.

Home sales.

The week saw home sales, existing and new, fade from the February gains. New home sales fell 0.6% versus gains in February, indeed big gains of 8.2% as the original 4.7% was revised upside. Existing home sales fell 3% versus the 4.95% February gain. A pause in housing though it is making use of those lower interest rates to show overall improvement. Looking at the housing stocks and you see a group that is preparing for a breakout. If they can make that move that is the best indicator for this sector. Improvement but not there yet.

Foreign indicators.

As noted last week, China's economy grew at 6.1%. Impressive for anyone else, but that was the slowest growth in over 10 years. Still, China said its stimulus was working and the economy was picking up momentum. Yee ha.

Europe observed that its overall PMI was showing 'signs of stabilization.' As with here in the US that means it is falling less than it was. Again, slowing does not equal a turn, though all trends slow before they turn. The question is whether this is THE slowdown to a turn or just an interim blip in a crappy manufacturing cycle.

German business confidence came in greater than expected last week. That was keeping me up at night; now I can sleep knowing they are more confident.

UK GDP fell 1.9% in Q1. That was the lowest since -2.4% in 1979 and it was worse than the -1.4% expected. The UK continues to languish, and while it is not the EU it shows the issues for Europe are bad and indeed most say worse than here.

SUM: there are signs that the world economies are slowing their decline. It helps when the credit markets are a bit better with LIBOR improving to 1.07% (3-month) last week as the decline finally got some wheels and is now close to the levels hit after all of the facilities were put in place last fall before the game plan changed and sent the credit markets back into freeze. It is interesting to not that Trump says that banks are NOT lending despite what the Fed and Treasury tell us. Our polls are mixes, but it is clear that there are still many issues with credit. It happens every recession: easy money caused by whatever source (bad management, government pressure, etc.) leads to bad loan decisions and in the aftermath the Fed cracks down, lenders get cold feet, and no money is lent. The credit market has to be healthy enough to respond to economic improvements or government policies that promote confidence. That is all you can hope for. Banks are not going to just dump money out as Congress wants; that is what caused the current problem. No, it takes a confidence in the future to get money lent and spent, and right now the government policies are not evoking confidence in banks or in small and medium businesses that make this economy work. Now your GE's are happy because the government programs basically subsidize their businesses, but they do not represent most of the economic activity in the US, particularly in jobs creation.



VIX: 36.82; -0.33
VXN: 36.8; -1.15
VXO: 38.13; +0.22

Put/Call Ratio (CBOE): 0.83; -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: 39.1%. Sharp decline from 43.2%. A bit of a cooling after the market rally revved up the bulls. 36.0% the prior week. Still over the 35% range considered bullish, but as noted 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: 34.5%. Not as large a gain , up from 34.1%. Halted the decline for a moment, falling from 37.1%. Well off the high on this run at 47.2%. Hit the 34's on the lows, falling from 38.5% and 46.2% in mid-December. Just slipped below the 35% level considered bullish for stocks. Bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment on this move. 35% is the level that historically indicates excessive pessimism. 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.


Stats: +42.08 points (+2.55%) to close at 1694.29
Volume: 2.477B (+3.42%)

Up Volume: 2.023B (+644.044M)
Down Volume: 555.239M (-523.806M)

A/D and Hi/Lo: Advancers led 2.54 to 1
Previous Session: Decliners led 1.59 to 1

New Highs: 18 (+4)
New Lows: 10 (+3)





Stats: +14.31 points (+1.68%) to close at 866.23
NYSE Volume: 1.733B (+10.64%)

Up Volume: 1.286B (+280.35M)
Down Volume: 408.993M (-146.243M)

A/D and Hi/Lo: Advancers led 3.23 to 1
Previous Session: Advancers led 1.5 to 1

New Highs: 11 (+5)
New Lows: 66 (+20)



As with SP500 the blue chips are moving up to the top of their range marked by the October closing low at 8175. With all the financial rallying the large cap NYSE indices are still in their ranges, still trying to break even the first resistance.

Stats: +119.23 points (+1.5%) to close at 8076.29
Volume: 402M shares Friday versus 327M shares Thursday.



Earnings continue. Will the market finally get the 'gist' and hit the earnings saturation point and test back? Will SP500 and DJ30 hit the top of their ranges and follow NASDAQ with the breakout or fade back? Will NASDAQ turn back after a breakout, the worst action you can see?

Mondays have generally tended to undercut some of the gains of the prior week but that pattern can change if the market character changes, and there was some character change last week with NASDAQ volume growing as it made a new post-November high. As noted it can reverse head and shoulders but that would require a failure of the new money and prior holders. We do anticipate a test of the breakout as some important names such as AAPL, RIMM and others test back after their long runs and now that earnings are out. We are looking to play that; RIMM looks particularly ripe and AAPL gapped higher Thursday and lower Friday in a reversal move.

SP500 and DJ30 are not nearly as strong as NASDAQ, and if the chips are coming back to test those two will likely come back to test in their ranges as well, the key being whether SP500 returns just to 850 or heads on down to 800ish again. 800 would be better as it sets up a better move and gives us more gain on our SPY plays, but the market does not always do what folks think is better.

We have a mix downside and upside plays this week. We are looking at some strong stocks to the downside; that may surprise some but if they show gaps lower, etc. they are ready to play to the downside. As for upside we have some plays that are setting up for moves, but if the overall market pulls back they likely continue their consolidations, etc. Moreover, a test allows some sectors that are consolidating already to finish up their bases, e.g. semiconductors.

In short a pullback would really set up the next run nicely. Again, however, the market does what it wants to do and thus we are ready with new buys at this point as well as some downside. Friday we had some chances to take some upside positions, but Fridays, especially when the market is extended, are not our favorite entry points. Thus on a weak Monday we may get some more opportunities but we are also watching for what could be a more substantial test, particularly if NASDAQ stumbles after its break to a new high. It did that in late March, Early April, and twice mid-April: every time it hit a new high it sold back 2 to 3 sessions to test it.

Support and Resistance

NASDAQ: Closed at 1694.29
The 200 day SMA at 1770
1770 is the mid-October interim peak
1780 is the November 2008 peak
1947 is the October gap down point

1666 is the intraday January 2009 peak
1661 is the April 2009 prior peak
The January closing peak at 1653 (intraday)
The 18 day EMA at 1618
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
The 50 day EMA at 1555
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 866.23
866 is the second October 2008 low
878 is the late January 2009 peak
889 is an interim 2002 peak
896 is the late November 2008 peak
899 is the early October closing low
919 is the early December peak
944 is the January 2009 high

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
The 50 day EMA at 821
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 8076.29
The early April peak at 8076
The April peak at 8113
8141 is the early December low
8175 is the October 2008 closing low. Key level to watch.
8197 was the second October 2008 low
8375 is the late January 2009 interim peak
8419 is the late December closing low in that consolidation
8451 is the early October closing low
8521 is an interim high in March 2003 after the March 2003 low
8626 from December 2002
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
9088 is the January 2009 peak

7965 is the mid-November 2008 interim intraday low.
7932 is the March 2009 peak
7909 is the early January low
7882 is the early October 2008 intraday low. Key level to watch.
7867 is the early February low
The 50 day EMA at 7801
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.

April 28 - Tuesday

Consumer Confidence, April (9:00): 28.8 expected, 26.0 prior
Case/Schiller Home price index , February (10:00): -18.85 expected, -18.97% prior

April 29 - Wednesday

Q1 GDP advance (8:30): -4.95 expected, -6.3% prior
Q1 Chain deflator (8:30): 1.7% expected, 0.5%
Crude oil inventories (10:30): 3.8M prior
FOMC Monetary Policy Decision (2:15)

April 30 - Thursday

Initial jobless claims (8:30): 640K prior
Personal income, March (8:30): -0.2% expected, -0.2% prior
Personal spending, March (8:30): -0.1% expected, 0.2% prior
Employment cost index (8:30): 0.5% expected, 0.5% prior
Chicago PMI, April (9:45): 34.0 expected, 31.4 prior

May 1 - Friday
Michigan sentiment, revised for April (9:55): 61.5 expected, 61.9 prior
Factory Orders, March (10:00): -0.7% expected, 1.8% prior
ISM Index, April (10:00): 38.0 expected, 36.3 prior

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

Jon Johnson is the Editor of The Daily at

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