Market In Overall Great Shape

'Originally Published on 5/3/09'
SUMMARY:
- Throw away session caps another solid upside week for market in general, NASDAQ in particular.
- ISM shows solid progress as economy continues its road to recovery sans any federal stimulus.
- Fed to fend off next crisis by . . . spending more money.
- Uphold your fiduciary obligations, become a target of federal ire.
- Market in overall great shape as it heads into the slow period of the year.

New month comes but market hangs in again.

Watching SP500 is like watching a Rocky movie. It is stumbling around but it just won't give up. Despite the rally being a bit long in the tooth and SP500 bumping up against resistance the last half of the week the market put in a decent showing Friday and the week with the NYSE indices putting in an upside week after the prior week's hiatus. Breaks to new recovery highs by NASDAQ 100 and SOX. Breaks to new post-November highs by NASDAQ and SP600 added extra punch to the move. SP500 broke higher through next resistance at 878, but it has stage fright and could not make it stick. On the other hand it did not roll over, still hanging around the back door. Money kept coming in to fill in each low spot all week and it was still there Friday even with the new month. Of course it was Friday and May 1. A lot of markets around the world were closed and most of the work was done for the week. That makes this coming week and the real start of May much more interesting and will tell the next chapter in this rally.

As for Friday specifically the market was sloppy before the open. JPM cut its estimates on most of the big banks, likely anticipating the stress test results and factoring in the run the financials have enjoyed to this point. Then word came out that the stress test results would not be out Monday but on Thursday May 7. Seems there was dispute between Treasury and the banks over the results and what should be released. As we have discussed prior, will releasing the data put everyone at ease or will it only engender the same worries post-Lehman for those banks marked with the scarlet letter?

In any event, when the word got out the pressure was off and futures relaxed a bit. Chip sales were reported up 3.3% for March. They still stunk year over year (-30%), but as with all of the data of late it was an improvement. China reported its second consecutive PMI over 50 (expansion). Happy days are here again. Stocks opened flat, sold some, but only modestly. They staged a midday recovery after a stronger ISM report (though unlike China and its stimulus that is working, the US was still below expansion), sold to negative again, but in the last half, and in particular the last five minutes, they bounced the large cap indices to positive. It was low volume, directionless trade that didn't tell us anything, but it held the gains for the week.

TECHNICAL. Intraday the action showed a nothing session, just wandering on lower trade. As noted, it did not give up its gains, however. Some heralded SP500's close over the February peak as putting SP500 into an uptrend. A late bump higher in a light volume day does not start any trend. Whatever.

INTRADAY. Flat to modestly positive breadth, pretty much what you would expect given the point totals. Volume was what you would call significantly lower on NYSE and fell back to below average on NASDAQ. Pretty much standard fare for a Friday to end a month after a solid rally.

CHARTS. Some up, some down, and in the end no real change from Thursday. That means SP500 was left at resistance. NASDAQ 100 is just over resistance after moving to a new post-November and bear market high. NASDAQ was just below resistance at the 200 day SMA and November high after surging to those levels Thursday. SOX held its foray into new post-selloff highs. SP600 held its break to a new post-March high. Not a bad week at all even if SP500 could not fully blow out next resistance. SP500 is primed for a pullback toward 850; just the small fact that it has refused to give up the goods. With many anticipating such a move and others saying this is not an ordinary 'sell in May' season, the resolution of SP500's run to and stumble at resistance piques interest. NASDAQ and company have already moved to new highs on this move, rallying so well last week that they have already hit the next resistance level. SP500 could not follow their lead, somewhat telling in itself. If NASDAQ et al correct back, something they are now in prime position to do (though it does not look like a huge pullback at this juncture) then SP500 is likely to do the same without taking out this level. SOX remains an interesting play. It did its own thing the past month, taking a rest after leading the market higher, then breaking out again Thursday. First to breakout, first to rest, first to breakout again. It can conceivably lead the other indices higher without any more rest or it can rally and the other indices consolidate just as it did, basically taking turns. Yes, interesting, but overall still very positive for the market, test or continued rally.

LEADERSHIP. Yes. There is leadership. Friday techs (overall), chips and financials took a breather. Energy, metals, and industrial equipment, industrial parts were up. As the early leaders take a break others are stepping up. This is classic healthy action in a stronger market, i.e. money moving around to different sectors as the market sustains its moves. That shows money on the hunt for new places to go, and that is a big positive for the continued trend. Doesn't mean there are no pullbacks or rough spots, but the bigger picture remains positive with this kind of action.


THE ECONOMY

ISM national and Chicago PMI share the same vibe.

Thursday Chicago posted a 40.1 manufacturing score. Friday the national manufacturing index was 40.1. Both up from 30 and change. Both still below 50, the threshold to growth, but accelerating the improvement.

China put a stimulus package in place just a hair before the US' version was passed. China has had its second consecutive month of expanding manufacturing. We have not logged one.

Why not? As reported Thursday, ECRI's 'never been wrong' index shows the recession ending anytime from June to August. So you would think that the manufacturing index would be starting back up over 50 pretty quick.

Does that mean the stimulus is now working? Not at all. Most of this stimulus is back-end loaded. Way to the back. Years to the back. Indeed, in 2009 the stimulus is not supposed hit until the last part of the year. Yes there is talk of some police jobs being saved and some teachers in a city or two keeping their jobs, but we know CAT, a supporter of the bill originally, has now given it a thumbs down, having to lay off those workers and kill the jobs the President touted it would save . . . along with a lot more jobs than originally slated for elimination. CAT's CEO even came out and said we blew the stimulus plan and outlined how China's plan was superior to ours, namely in that it got money to the economy now versus later and it is the kind of stimulus that expands supply.

Economy recovering without stimulus.

Economic data started to turn back in February. It has been slow, but more and more areas are turning and the manufacturing sector is leading as it did in 2002. It has turned without a stimulus package. The recession is going to end before the Obama stimulus package ever takes root.

The recovery is going to be slow, however. There is nothing to kick the economy in the pants. Housing prices will remain depressed for 2009. We get a bottom then likely a hockey stick climb, i.e. a low trajectory climb right into the inflation all of this borrowing and spending is going to create. There will not be a boom in supply; the Obama package does not try to enhance supply, instead creating government paid jobs versus providing incentives for to the private sector to create businesses that need jobs. Thus the excess demand created by all of that liquidity will outstrip the amount of goods and services available and voila, inflation. Add to that the cap and trade regulations that will spike energy costs and you have crushing inflation in a slow economy. You have, once again, the 1970's and stagflation. Stagflation sucks. It saps the country of wealth and spirit.

Not much fun to look forward to and it begs the question why do we need this stimulus bill then? We don't. It was never intended as true stimulus, just sold that way. It allows some municipalities and states to keep some government workers employed, but it does not provide incentives to start new businesses. It is a spending bill on items that the Administration came in wanting to pass during its term and the economic crisis provided the cover to do so. Nothing new. It has happened before with other crises and tragedies.


What is another $1T?

Rather quietly Friday the Fed announced an additional are the TALF would cover: commercial property mortgage backed securities. Seems the Fed is anticipating that the commercial real estate market will continue to weaken and follow the housing market down the tubes. Thus it threw in another $200B for these MBS.

It doesn't end there, however. You would think Bernanke is from Texas, wanting everything bigger and better. While $200B was thrown into the kitty Friday, the Fed said it would expand the amount if needed. What, another $100B? $200B? Nope. It would take it up to a nice round, cool $1T if need be.

No one said a thing. No raised eyebrows. Just the Fed throwing around another trillion. On top of $12T each extra trillion loses is a lesser percentage, right? A child today is saddled with $114K in interest payments during his or her lifetime for the debt incurred in the past three months. Another trillion will bump that up a few thousand. As a percentage that is not that much, right?


Chrysler files for bankruptcy due to a few investors?

To hear the Administration's side of the story you would think Chrysler was a well run company that simply fell victim to some greedy Wall Street types trying to rip off the autoworkers and Main Street. These 'hedge funds' (and also bondholders and senior debt holders) were blamed for the lack of a deal that sent Chrysler to the courthouse to file bankruptcy papers.

Of course is there really any difference in Chrysler being in bankruptcy versus just operating under a structure organized by the executive branch? YES. In bankruptcy a federal judge makes the decisions following established bankruptcy law. Under the Administration's plan the federal government makes the decisions. It reminds me of a poster back in the early 1970's that showed a picture of President Nixon smiling with the caption 'Would you buy a used car from this man?' Do you want the federal government running the company that makes your cars? Talk about a stimulus plan for FOREIGN care dealers. Given that the Feds could not get their hands on the other big US car dealer outside of Ford, the Administration was rather miffed that these 'vultures' as they were called held out for a better deal.

Why did they hold out? Because the deal the Administration was trying to cram down on these secured parties was less than half of what they will likely get in bankruptcy court. They paid up for their debt to be in a secured position. Their attorneys correctly advised them that based on how bankruptcy debts are paid out in court they would receive more than they were being offered.

Given that these entities have clients they owe fiduciary duties, do you think they would take a worse deal for their clients than they could have a reasonable chance of LEGALLY getting in court? Doing so would violate their duties and open them up to lawsuits from investors and inhibit their profit they paid extra money to secure. The 'vultures' honored their contracts, something the federal government does not appear to believe is very important anymore.

Beyond the fiduciary duties owed to clients, should the funds and debt holders be required to agree to the government's plan? Don't they, as property holders, have the right to turn down a deal? Isn't there something called due process with respect to denying property rights?

There is and that is why the Administration had to resort to finger pointing and name calling when it did not get its way and wrest control of Chrysler as well as GM. This blame Wall Street and the investor class is an old ploy. The masses are still enthralled with the President but their devotion to his policies is waning. There is still some populist bang for these attacks, but the majority of citizens own stocks and bonds AS A MEANS to bettering themselves. If not careful the Administration can go too far with its attacks on the vehicles and people the majority of the US is using to provide for their futures.


THE MARKET

MARKET SENTIMENT

VIX: 35.3; -1.2
VXN: 35.05; -1.59
VXO: 35.83; -1.39

Put/Call Ratio (CBOE): 0.82; -0.1


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: 36.0%. Bulls were still feeling the effects of the lateral move for most all of April, falling from 39.1% and 43.2% prior to that. Still 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: 37.2%. Nice jump in bears, up from 34.5% the prior week, back up form 37.1% before that. Investors were not sure about the April action 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.


NASDAQ

Stats: +1.9 points (+0.11%) to close at 1719.2
Volume: 2.087B (-23.34%)

Up Volume: 1.272B (-433.403M)
Down Volume: 829.399M (-275.385M)

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

New Highs: 18 (-12)
New Lows: 11 (-1)

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

Nice break over the January high this past week, tapping at the 200 day SMA (1756) and the November high, then backing off. Not selling off, just backing off. That puts NASDAQ at a new post-November high and at the most important resistance on this rally. NASDAQ rallied 488 points off the March low to this resistance, a 38% run. Got the fork? Stick it in and see if it is done. A move to the January high (1668) or back toward 1600 over a couple of weeks would be a healthy pullback. Thing is, NASDAQ is not into healthy of late. It keeps cramming in the junk food, slamming down a Red Bull, and rallying higher. Of course that typically leads to a crash, and with NASDAQ spurting to key resistance last week the odds say a decline is coming, but nothing suggests it will be anything other than a correction in an ongoing rally.

NASDAQ 100 (+0.16%) was no powerhouse Friday, but it did hold the move over the November high and the 200 day SMA. Similar to NASDAQ the move is tremendous to this point, but unlike NASDAQ the large cap techs cleared key resistance. It broke the ice, but that does not mean it won't slip back below and check the depth before it continues higher.

SOX (-0.14%) broke to a new bear market recovery high Thursday and held it Friday. After almost four weeks of lateral movement the chips broke higher and are in position to resume their run even as NASDAQ looks done in the near term. We will be looking at some more chips for an upside move next week.

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

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


SP500/NYSE

Stats: +4.71 points (+0.54%) to close at 877.52
NYSE Volume: 1.289B (-25.93%)

Up Volume: 732.633M (-194.264M)
Down Volume: 540.831M (-259.524M)

A/D and Hi/Lo: Advancers led 1.68 to 1
Previous Session: Advancers led 1.29 to 1

New Highs: 18 (-2)
New Lows: 57 (-21)

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

The 'key' index in terms of those NOT breaking resistance last week. SP500 moved through 878 with a bit of authority twice but both times it didn't have the stones to hold the move. It closed right at resistance, not in bad shape to continue higher, but needing something to push it. With NASDAQ and NASDAQ 100 running to resistance and basically stalling the large cap financials will need some other catalyst. The stress test results are Thursday and that will create some financial anxiety with the talk of 6 to 8 of the banks failing the test. We would say SP500's action at this resistance is key next week, but it is no more key than how NASDAQ goes about holding its new breakout last week.

SP600 (-0.15%) broke to a new post-March high last week, moving over some interim resistance and tapping some key resistance on the Thursday peak. Nice easy pullback to test the top of the prior week's lateral consolidation Friday leaves SP600 in excellent position to try another break higher.


DJ30

Edged over the October closing low to finish out the week, but the entire upside move was on volume that was well, well below average. It has flattened out and pinched out the 6 week ascending triangle so much that it is our view that DJ30 is going to fall from here instead of breakout. 8000 to 7800 is a good starting range.

Stats: +44.29 points (+0.54%) to close at 8212.41
Volume: 237M shares Friday versus 341M shares Thursday. Extremely dustbowl-like dry volume Friday. Low volume all the way up. No strength.

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


MONDAY

Earnings are still coming out in May and will continue to grab headlines. There is the stress test results released Thursday. Friday is the jobs report. Weekly jobless claims have improved to about a 635K average the past three weeks. An improvement but not enough to significantly dampen the jobs losses, and frankly with the manufacturing indicators still in on the decline though at a slower rate, a significant improvement in jobs is a long way off UNLESS the government jobs element jumps due to the government increasing stimulus package. That is not the kind of jobs growth that signifies a healthy thriving economy. History shows time and again that no government can borrow or print its way to prosperity.

The financials could show some nervous trade ahead of the Thursday release of test results. As noted above, JPM got on the wagon early with its lowering of estimates ahead of what it thought was a Monday release of the results. Others may join and increase the speculation as to the results.

It is also the beginning of the 'sell in May and go away' period. That was the hourly discussion on the financial stations Friday and the camps broke into two parts: the 'ain't going to happen this time' and the 'it ain't going to be different this time' group. There are good arguments for both. The huge selloff and a recovery from the recession say stocks can rise on through the summer. The other side argues with a weak economic recovery the market recovery won't have a whole lot more left in the tank. Both make some sense.

If the economy ends the recession in the summer there is likely more in the market's tank, but it cannot go straight up. It is going to rally and test, rally and test. We have been talking of the market running out of steam the past week and at the end of the week there were signs but no rollover. In a way the market is a victim of its own success: NASDAQ continued to surge without pause on up to the 200 day SMA and NASDAQ 100 to its November high where they have stalled to end the week. They blew through resistance and are extended. What goes up . . .

We will see if the money continues to seek low spots to fill and thus will continue to look for good upside plays. After testing the chips are looking interesting again. With the run higher we are also still looking at downside plays. Many look interesting hanging on the edge of a rollover. We banked quite a bit of gain last week with the run higher and thus we are looking to put some cash to work. We will take what the market gives though we start the week looking for a pullback given that last jump higher last week that took NASDAQ through resistance and onto the next very tough resistance point while SP500 stayed home.


Support and Resistance

NASDAQ: Closed at 1719.20
Resistance:
The 200 day SMA at 1756
1770 is the mid-October interim 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 18 day EMA at 1654
The January closing peak at 1653 (intraday)
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
The 50 day EMA at 1582
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 877.52
Resistance:
The prior April peak at 876
878 is the late January 2009 peak
888.70 is the April intraday high.
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

Support:
866 is the second October 2008 low
857 is the December consolidation low; cracking but not broken
853 is the July 2002 low
The 18 day EMA at 851
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 50 day EMA at 830
The 90 day SMA at 823
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 8212.41
Resistance:
8307 is the April 2009 intraday high
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
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:
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
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 7860
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 4 - Monday
March Construction Spending (10:00): -1.4% expected, -0.9% prior
Pending Home Sales, March (10:00): 0.0% expected, 2.1% prior

May 5 - Tuesday
April ISM Services (10:00): 42.0 expected, 40.8 prior

May 6 - Wednesday
April ADP Employment Change (8:15): -643K expected, -742K prior
Crude Inventories, 5/1 (10:30): +4.053M prior

May 7 - Thursday
Initial Jobless Claims (8:30): 631K prior
Productivity-Prel, Q1 (8:30): 0.9% expected, -0.4% prior
Unit Labor Costs, Q1 (8:30): 2.5% expected, 5.7% prior
Consumer Credit, March (3:00): -$3.3B expected, -$7.5B prior

May 8 - Friday
April Average Workweek (8:30): 33.2 expected, 33.2 prior
Hourly Earnings, April (8:30): 0.2% expected, 0.2% prior
Nonfarm Payrolls, April (8:30): -620K expected, -663K prior
Unemployment Rate, April (8:30): 8.9% expected, 8.5% prior
Wholesale Inventories, March (10:00): -1.0% expected, -1.5% 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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