Quiet Trade Leads to Russell Rebalance

SUMMARY:
- Friday basically a throwaway session as quiet trade leads up to Russell rebalance
- Sentiment climbs, but Consumers continue to save much more than they spend.
- Quiet positives: business profits, business investment rising more than thought.
- The lateral consolidation continues at a higher level for NASDAQ but the same old range for SP500. Not that bad for the summer.

Most just waited for Friday to end.

The Russell rebalance dominated the Friday action though the flat as a board trade up to the last half hour makes the choice of the word 'dominated' somewhat curious. But that is what the rebalance did: the market just sat around all day in anticipation of the volatility and volume to come in late and thus no one did much of anything leading up to the last hour. When it hit, volume spiked, some prices surged, and some prices purged. It was over and done in about an hour.

So there was the Russell rebalance that kept the indices basically flat on Friday, and the end of quarter window dressing on Thursday that influenced the last half of the week after that Monday dive lower to get things started. Again, Thursday was end of quarter window dressing; the program trading that took over and the areas sold and sectors subsequently purchased show the fund managers were sprucing up the portfolios for the quarterly statements. Why Thursday? Because Friday was the Russell action and next week is a short week (Friday off) for Independence Day when many on Wall Street are gone. Thus the dressing up was taken care of Thursday.

The end result for SP500 on the week was similar to Friday's action, i.e. pancake flat. The Monday dive and the Thursday rebound evened things out. Even Steven as Kramer called Jerry on 'Seinfeld.' That kind of action doesn't tell you a whole lot. Monday SP500 looked just a session away from 875, but it turned as fast as it sold. That leaves SP500 in the middle of its 900 to 950 trading range and us waiting for next week once more to fill in more of the picture.

Maybe, however, what the market did not do, sell off, is the real story. Yes SP500 went nowhere on the week, but it did test just below the 900 level and recovered. NASDAQ sold on Monday as well, but it bounced and rallied on through Friday. The underlying bias remains positive, there remains an overall bid under the market, thanks to all of that liquidity still getting pumped into markets around the world. The G8 may have talked about removing some stimulus at some point, but they have done nothing along those lines. That means the presses are still running and money is still hitting the world economies.

Even with leadership from energy and commodities dropping like stones the past two weeks, the overall market has not dropped significantly, i.e. it has not broken down. Yes the dipped but they are also holding support levels and working laterally. After 30% runs off the lows, lateral consolidations are very decent action. It can frustrate investors but we continue to see good stocks set up and give us good runs. This past week saw some key Chinese stocks break higher again along with, of all things, steel stocks. Early leaders lead early, and while SP500 was not surging higher, it was not breaking down and indeed NASDAQ managed to hold its breakout and rebound with a quite decent move.

This is very telling action in the bigger picture as stocks move into the heat of the summer quarter. It may not be that stocks get away without SP500 testing the 875 level before any significant upside move transpires. It takes awhile to consolidate those kind of gains, and a test of 875 is, as DeNiro said in 'The Untouchables', NOTHING. The fact SP500 is so obstinate in giving up any ground toward that level only underscores the continuing, underlying liquidity bias.

TECHNICAL

INTRADAY. Lower to flat on the open, lower to flat midmorning, lower to flat in the afternoon, and then, finally, moving positive in the last hour. It could not hold, of course, at least for the large cap NYSE and the chips. Still flat overall though SP600 managed a 1.25% gain; lots of Russell type stocks in the small cap area.

INTERNALS. Breadth was pretty decent considering the flat session (1.8:1 NASDAQ, 1.6:1 NYSE). Volume surged; rebalance trade. Thus the internals tell you squat, at least for Friday. Indeed they told us basically squat for the entire week, particularly with Thursday getting the window dressing treatment followed by the Russell rebalance on Friday.

CHARTS. NASDAQ added to its rebound after testing the May peaks and holding its range of support. Its breakout is intact, and the techs are looking very much like the leaders they are. SP500 was down then recovered, coming within 13 points of 875. Maybe you can call that the test. We are still looking for it to make at least that drop as things even out next week and the one-off events of this past week are put behind it. Nonetheless, as noted above, there is that continuing bid under the market, and the indices continue to hold support and work slightly higher as they consolidate. That is underscored by the rising 50 day EMA crossing over the 200 day SMA on NASDAQ in early June and on SP500 on Wednesday. That crossover has historically been positive for the stock market. Stocks tend to gain, in the aggregate, 20% in the year following such a crossover. Again, another indication of a continuing and serious bid under the market.

LEADERSHIP. China is here, Mr. Burton. Again with the quote from 'Big Trouble in Little China;' didn't make sense to Kurt Russell in the movie, but it makes sense here. MR and CTRP are running higher and we wish we were in more of the China stocks; just missed some that gapped away on us this past week. And if you look up in the sky you see not the man of steel, but steel stocks moving back up. Some big techs are moving, some chips, and some industrials are recovering. It is not, however, a broad advance with patterns in great shape to move higher. Energy remains in serious trouble; the rebound late in the week only makes for good points to roll back over. There are many good stocks, but as far as good sectors loaded with leaders, that is not the case right now. The recent leadership fell apart and only a few are stepping back up. That is consistent with a consolidation, but more stocks will have to form up better in order to eventually lead things out of the consolidation.


THE ECONOMY

Better sentiment once more but more savings as well.

Michigan sentiment reported a brighter outlook at 70.8, up from 68.7 (revised from 69.0) and the 60.0 expected. Stock market gains accounted for most of the rise as higher gasoline and a bleak jobs outlook continue to weigh on citizens.

Indeed present conditions jumped to 73.2 from 67.7 while the outlook down the road fell to 69.2 from 69.4. That is typically the case when stocks rise and the consumer has a bit more money in the bank.

And in the bank is where it is. Incomes rose 1.4% thanks to the government tax rebates to certain segments of society. That beat the 0.3% expected and the 0.7% in April (revised from 0.5%). Real disposable income rose to 1.6%, but if you take out those tax rebates real disposable income rose a measly 0.2%. Private wage and salary payments fell 0.2%, the ninth straight month the private sector sees shrinking payrolls. Companies are still cutting back as the jobless claims and these figures show.

Spending, however, rose only 0.3%. That was up from the 0.0% prior (revised from -0.1%; see there IS progress), but it is not much. That pushed the savings rate up to 6.9% from 5.6% in April. As noted previously, citizens are scared. They are not spending extra money they receive because they are concerned about their jobs and the future. It thus goes under the mattress, and that sure doesn't help the economy much.

Even more, it again underscores what we should know from history, i.e. that if you want sudden impact (staying with my movie theme for the night) on the economy you have to require performance. In other words you only get the benefit if you spend. That insures the money hits the economy. Moreover, you don't tie it to obtuse purchases such as solar panels where you get $1,000 off a system that will cost you $40K to install. It simply is not going to happen unless you are a Hollywood type who feels it is 'cool' to spend some of your millions to be green (sticking with that movie theme), but of course if you make over $200K per year the credit is phased out. So, you have a credit for a $40K system that even if the credit was used those that can use it simply cannot afford even in GOOD times.

The moral of the story (or the simply lesson from history): you have to be smart about incentives. Tax cuts are good in general but they are not all created equal. More accurately, they are typically manipulated in a manner that makes them hardly useful. Thus an administration can crow about the tax cuts or incentives it provided but the real test is whether they work or are used. A credit unused is a recovery deferred, or something like that.


Could there be some economic recovery taking place?

The news remains bad on the economic front. You can try to sugar coat it or adjust the lights just right and make it look better, but the data is still bad. Sure it blipped higher for a couple of months but the recent more leading data is backsliding once more.

Our fear voiced a couple of months back was a double dip recession. That is where the economy rebounds some when it is recognized that Great Depression II is avoided. Businesses and consumers that had totally shut down then start to engage in some business again, not with the idea that everything is fine, but that they can emerge from the bomb shelters and walk around again. There is also a ton of monetary stimulus unleashed as the Fed slashes rates, buys treasuries, makes credit facilities available, etc.

Thus you have an improvement from the total shutdown. That is not the same, thing, however, as a recovery. It is a step back from the threshold of hell but the people are still feeling damned so to speak. You get that improvement and that ignites all of the excitement heard on the news channels about recovery underway. After that relief bounce from disaster, however, something has to take over and ignite real honest to goodness economic activity. With consumers not spending, credit and lending problematical, and the stimulus not really stimulus at all, the recovery is either very slow or mired in the mud.

Not ALL are backsliding.

That is why there is the backsliding in some of the key numbers. There are also key numbers, however, that are showing improvement.

Wednesday saw a solid increase in durable goods orders, up 1.8% for the second straight month. Most importantly, business spending rose 4.7%, its second gain in the last four months. That is hardly a string of winners, but the improvement is strong. There is some replacement buying ongoing and some inventory replenishment; you can only hold off for so long without getting restocked, though you need to talk to Home Depot about that. Went in there the other day to pick up some electrical connectors and of course the most popular sizes were out of stock. Went to get some PVC fittings and again, out of stock. With gas prices at $2.50/gallon it gets kind of expensive to go to HD and only get half of your items, then drive to Lowe's to try and get the other half. You would think with a recession there would be plenty of stock on hand, but then again you are dealing with HD. Will I never learn.

Of course, I digress yet again. That is what happens on a slow market day. So business expenditures on equipment and the like rose 4.7% in May. The Thursday GDP revision showed a loss of 'just' 5.5% versus -5.7% previously reported. There was another revision, however, and it dealt with corporate profits. They were revised higher $120B. Seems corporations are cutting back along with the consumer and saving money where they can. But as the durables figures show (and they are post-Q1 at that so things could be even better this quarter), business spending is up as well. So maybe they are spending some of the money they are able to save.

The irony of all of this is that consumers are saving at a 6.9% rate and businesses are cutting costs to improve their bottom lines as well (just look at the jobless claims continuing their strong weekly levels), yet the government is spending as if happy days are here once more. Stimulus that is not stimulus. A bloated budget loaded with pork when no pork was to be included in the Obama budgets; though we learned you CAN eliminate all of the earmarks by just not calling them earmarks. Brilliant! You can eliminate tax hikes as well by just saying you are letting rates go back to where they were. Push an energy bill that will spike gasoline prices and utility rates in a recession with the idea of reducing greenhouse gases, but then give every major polluter impacted free credits. Moreover the plan, by the most generous standards, would only impact temperature one-half of one-tenth of a percent. Oh, and at the bargain price of $1.7T over 10 years.

Of course what plan is complete without taking over healthcare. It is estimated by the administration to cost $1T over 10 years. Of course it is supposed to save us money. Yet it will cost $1T. I missed that day in math class. Of course I did make it to history class and if you apply the typical government cost multiplier to these kinds of projects and you get a minimum of $10T over 10 years. Just look at Medicare as your guide. So happy to see the federal government tightening its belt some. All of course, in the name of saving money. My wife 'saved' me several hundred dollars recently when she bought a bunch of stuff on sale. I am still trying to recover from that savings.

It strains the imagination at how our government can spend so much with so little economic activity to back it up. Of course it is using cheaper dollars. It has gutted the dollar (closed at 1.4069 Friday after making it into the 1.37ish range during the week) so at least we are spending cheaper dollars. Wow, that makes you feel better, right? Man, maybe someday even I could make it in politics if I am able to disassociate myself with reality. I tried that once, but alas, I did not inhale.


Now who do you really work for?

Now I think I began this section talking about how some areas might be improving. When you juxtapose the improvements against the anticipated outlays and you feel a bit, just a bit, the despair many of us are experiencing as we realize in just 5 short months the federal government has strapped another $500K in debt on every man, woman, and child in the US. That is just if the projected costs are accurate. They are not, so the debt is even more massive. Many people do not make that much money in their lives. They are going to WORK THEIR ENTIRE LIVES to pay off the government's debt. They are now in effect working full-time for the government.

The next tragic irony is that the government is going to raise taxes on those now working for it through the private sector in order to further pay for the bills. It won't just be on the 'rich'. The burden is too huge. Some quick calculations show rates need to rise 18% to 20% on everyone to even approach paying for this. Of course if you raise taxes, particularly in a recession, you will ultimately get much less tax revenue. Clinton got more revenue because the boom was underway; he could have kept tax rates flat and would have still had surpluses. The higher taxes combined with poor monetary policy decisions, however, doomed the very boom that brought the surpluses.

Now the feds may not raise income taxes on everyone, but they are going to raise taxes on things that everyone uses. Gasoline, health insurance benefits, corporate 'loopholes' (items designed in the law to make our businesses better able to compete abroad given our high tax rates), certain foods, activities. Heck they are even talking about imposing huge taxes on people like you and me that make money buying and selling in the stock market. They basically want to tax short term swing traders (anything less than a year) and particularly day traders out of business as they think we are leeches on the system. Surely they jest when they see the taxes we pay on our profits.

Mark my words: there will be a tax increase mania coming to pay for these bills. Income taxes on the 'rich' will be raised (and the definition of 'rich' will continue to drop in dollars) while the lower incomes Obama said would not have their taxes raised will see taxes on goods go up. The President might be saying he won't raise taxes, but all the President's men (another movie reference) are saying they will rise. That has been the pattern: President says 'no,' but then the actions say 'yes.' Actions, as always speak louder than words. The hikes will be framed as doing the patriotic thing, but people, there is NOTHING patriotic about funding a runaway government that is exceeding the bounds of our law of the land, the Constitution. It is our duty as laid out by our founding fathers and those that died for this country to hem in the government when it goes astray. With both the democrats and republicans runaway spenders that will sacrifice their principals for money in times of need it likely will come upon us, the taxpayers that fund the madness, to simply say 'no.' And unlike the Administration, we will mean it.


THE MARKET

MARKET SENTIMENT

VIX: 25.93; -0.43
VXN: 26.53; -0.72
VXO: 25.35; -0.52

Put/Call Ratio (CBOE): 0.81; -0.09


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.

Bulls: 43.6%. Down from 44.8% as the choppy market is still culling the herd some. Fading from 47.7% it spiked to up from a low of 42.5%. Broke free from the 40.9% where it hung around for three weeks. Steady rise from 36.0% just 8 weeks back. Has passed 43.2% hit mid-April before anticipation of stress tests. 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: 28.7%. Up from 26.4% and 23.3% the week before. Still 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 and starting to approach bearish levels (for the overall market). 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: +8.68 points (+0.47%) to close at 1838.22
Volume: 3.433B (+57.95%). That is some volume. Means nothing but that is a lot of volume.

Up Volume: 1.953B (-2.504M)
Down Volume: 1.665B (+1.399B)

A/D and Hi/Lo: Advancers led 1.81 to 1
Previous Session: Advancers led 4.16 to 1

New Highs: 93 (+55)
New Lows: 12 (+4)

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

Gapped lower and then continued its bounce off the Tuesday test of the May highs. Held that 'range' of support from the November peak to the May highs and bounced nicely. Has set some good support at that level: it should act as support, but until it is tested and holds a bounce it is just soft support. Still not likely to break through the October gap down point, but NASDAQ is in the lead and showing great strength.

SOX (-0.08%) continued its bounce off the Tuesday low as well (where it held support at 250 to the dime), but it could not hold the gains scored Friday. Indeed on the upside it hit the March/May trendline and faded back. Chips remain important, but they also remain very volatile the past 2 months. Gave up a pair of breakouts and sold aggressively back to support. Holding for now but the action suggest more work to do.

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

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


SP500/NYSE

Stats: -1.36 points (-0.15%) to close at 918.9
NYSE Volume: 2.128B (+80.73%)

Up Volume: 1.167B (+168.831M)
Down Volume: 1.08B (+957.415M)

A/D and Hi/Lo: Advancers led 1.58 to 1
Previous Session: Advancers led 3.99 to 1

New Highs: 36 (+11)
New Lows: 40 (-7)

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

Tight range, showing a doji at resistance at 918. Big Thursday bounce, nothing doing Friday given it was a day for the small and mid-caps. SP500 is holding the 900 level, falling to 888 on the week low, just over 875. SP500 is working in a higher range and a narrow range at that. For next week? SP500 showed good support just over 875, but we feel the trend lower to test 875 will continue with the end of quarter window dressing ending and the Russell out of the way. Overall, however, that still means a consolidating SP500 versus one rolling over and selling off.

SP600 (+1.25%) is making higher lows off the May test, two major ones thus far, the most recent last week on Tuesday. As with SP500 the small caps looked ready to dive lower then recovered, making that higher low. The pattern, as with the other indices, is still in transition.

SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg


DJ30

Bounced off support at 8250, but stalled at 8500 on Friday. This keeps DJ30 right in the middle of its range from 8250 to 8800 with some inside resistance at 8588 from the May highs. Still working on it.

Stats: -34.01 points (-0.4%) to close at 8438.39
Volume: 307M shares Friday versus 222M shares Thursday. Gee, didn't even make it to average. Not much of a Russell influence on these stocks, however.

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


NEXT WEEK

The FOMC is out of the way, window dressing likely won't be too much of a factor given it is a shortened holiday week, and the annual Russell rebalance is in the books. Of course there is the Chicago PMI, ISM index, ADP, and jobs report. Plenty packed into a shortened week. Earnings kick off again less than two weeks away, and that means warnings as well.

What does this mean? To us, the overall trends will reassert themselves and that means we are still watching for the indices to consolidate in this lateral move but also watching for SP500 to test 875. The indices are in a transition phase, consolidating the 30% rallies off the March low. Outside of NASDAQ with its clean breakout and hold of support the indices are in that in between phase where overall the patterns remain positive but they could form a head and shoulders bearish pattern. With all of the liquidity out there that is less likely. What it does mean is that the indices still have work to do.

Overall that means most stocks are in the same position, i.e. working through a transition, trying to base, trying to fight off some selling the past two weeks such as seen with energy stocks and commodities. Many energy stocks are still in trouble; they have bounced but not authoritatively. As with the indices, a lot of stocks still have work to do.

Picked up some good upside this past week or so even with the indices bouncing around. Looking for some more upside as the early leaders set up and attempt to make breaks higher. At the same time there are downside setups with the energy, industrials, and some commodities stocks bouncing back to resistance, forming some bearish flags that are good entries into the downside. With quite a few stocks in the bearish position near term that is another indication there is some more consolidation work ahead and that means SP500 could indeed show us that downside test.

Thus even though the indices are in a transition phase and not trending strongly (outside of NASDAQ though it is not a strong surge at this point), the market is yielding some good plays. We need to have some 'transition phase' targets, i.e. willing to shorten our profit horizons a bit near term, then if they continue to move we can let the remaining positions continue to run. Then if the market breaks out or breaks down we are well-positioned to reap strong returns. Right now we want to concentrate on entry points, i.e. picking good risk/reward points where the move is just starting. Then if it works we capture more of it and if it doesn't we have a good stop point to limit the downside.


Support and Resistance

NASDAQ: Closed at 1838.22
Resistance:
1880 is the June peak
1897 is the October post gap intraday high.
1947 is the October gap down point
1984 from late September
2099 is the mid-September low
2169 is the March 2008 double bottom low

Support:
1786 is the November intraday high
1780 is the November 2008 closing peak
1773 is the May intraday peak
1770 is the mid-October interim peak
The 50 day EMA at 1748
1716 is the May closing high
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 200 day SMA at 1645
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 918.90
Resistance:
919 is the early December peak is bending
930 is the May peak
935 is the January closing high
944 is the January 2009 high
956 is the June intraday peak
1000
1050

Support:
899 is the early October closing low
The 200 day SMA at 894
The 50 day EMA at 899
896 is the late November 2008 peak
888.70 is the April intraday high.
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
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
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


Dow: Closed at 8438.39
Resistance:
8451 is the early October closing low
The 10 day EMA at 8467
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
9387 is the mid-October peak
9625 is the October closing high

Support:
8419 is the late December closing low in that consolidation
The 50 day EMA at 8382
8375 is the late January 2009 interim peak
8315 is the February 2009 peak
8307 is the April 2009 intraday high
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 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.


June 30 - Tuesday
Consumer Confidence, June (09:00): 55.1 expected, 54.9 prior
S&P/Case-Shiller, Apr (09:00): -18.75% expected, -18.70% prior
Chicago PMI, June (09:45): 38.5 expected, 34.9 prior

July 01 - Thursday
ADP Employment Chang, June (08:15): -363K expected, -532K prior
Construction Spendin, May (10:00): -0.5% expected, 0.8% prior
ISM Index, June (10:00): 44.0 expected, 42.8 prior
Pending Home Sales, May (10:00): 1.1% expected, 6.7% prior
Crude Inventories, 06/26 (10:30): -3.87M prior
Auto Sales, June (14:00): 3.3M prior
Truck Sales, June (14:00): 4.1M prior

July 02 - Friday
Nonfarm Payrolls, June (08:30): -370K expected, -345K prior
Unemployment Rate, June (08:30): 9.6% expected, 9.4% prior
Hourly Earnings, June (08:30): 0.2% expected, 0.1% prior
Average Workweek, June (08:30): 33.1 expected, 33.1 prior
Initial Claims, 06/27 (08:30): 627K prior
Factory Orders, May (10:00): 0.2% expected, 0.7% 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

Looking for SP500 to Fall

SUMMARY:
- Wednesday to Friday bounce didn't change a thing.
- Expiration comes and goes rather quietly.
- Some interpret economic data as a recovery in process, but borrowing is still negligible.
- Looking for the SP500 to fall but for money to continue flowing toward healthcare.

Market bounces in relief but that still leaves SP500 vulnerable for a further fall.

Friday the market bounced, but it was a bounce that did not change anything. Indeed, Wednesday through Friday the market bounced and it did not change anything either. The prior Thursday SP500 tried to break through its January peak. It did, but then it failed and rolled over. Since then, the market sold off back to next support level and mid-week it tried to bounce. That bounce did not change the market character or our outlook on what will happen next.

There was not a whole lot of news Friday. RIMM announced its earnings on Thursday night and they were a bit disappointing, but as usual they impacted RIMM the most - the rest of the market was relatively immune. AAPL, its main competitor, actually enjoyed a good day as it released its next generation of faster iPhones.

Iran said no to the vote. It put its foot down and said the vote is going to stand as it is, and we will see what happens in the streets. Early on that news helped bump oil higher, but by the end of the day, even with Nigerian rebels attacking once more, oil closed down below $70 after hitting over $72 during the week. Oil closed at $69.64, down $1.73. It was expiration Friday and there was some volatility on the session, and certainly volume was up just as you would expect on a good, solid, quadruple expiration day. All in all, an ordinary expiration session.

The 10 year bond closed at 3.78% versus the 3.82% Thursday. During the week, the 10 year fell as low as 3.5%. There is been a lot of volatility in the yield. It was up to 4% the prior week, falling 0.5% this week before recovering somewhat to close things out. It still remains at an elevated level, but that sharp surge higher has mitigated for now. The dollar closed a little bit weaker Friday at 1.3948 Euros versus 1.3893 Euros Thursday. During the week it hit a low of 1.3791 Euros, and that was after hitting over 1.4 the prior week. Big moves and plenty of volatility in the dollar -there has been talk last week and this week about the G8 removing some of the stimulus, and that impacts the currencies as they have traded on the fear of debasing the world currencies. The key point for the week is that the dollar index remained over 80. It tested that level after breaking its downtrend and looked as if it might try to break back down. It closed out the week holding that support, trying to make a higher low and continue its move to the upside starting next week.

Gold was flat at $935. It got within 20 dollars of $1000 just a couple of weeks back, but it has come upon hard times. There has been a retrenchment of the inflation and liquidity trade after those strong surges higher. The market is somewhat in transition - in fact all of the markets are in transition, trying to figure out just where they want to shake out, and then either continue with the uptrend or start a new trend.


TECHNICAL

INTRADAY

The market was somewhat volatile as you would expect on expiration. A nice, higher open as the bounce off of the near support tested on Wednesday continued. The indices double-topped intraday and then they gave back all their gains on the Dow and on SP500. In the afternoon, they managed to recover again showing that expiration Friday volatility, moving positive. Only the Dow managed to close lower on the session, however, though it was just fractionally lower, down 15.87 points or 0.19%. No big loss, just a late fade took it out of positive territory. This was in character with the entire Wednesday through Friday move. The action didn't change anything as the indices trade in a narrow range around support.


INTERNALS.

Breadth came in at 1.4:1 on NASDAQ and 1.7:1 on the NYSE. Volume shot higher - definitely expiration trade. Wednesday saw it bump higher as well, but it was really not a blowout session. Thursday was light, and Friday saw 2.7B shares on NASDAQ and 2.1B on NYSE. Congratulations. That is the first time the NYSE volume has traded above average since June began. Until Friday, very thin trade, typical for a summer, was the rule on NYSE.


CHARTS.

The NASDAQ continued to exhibit the solid action shown after breaking out over the November high and challenging, to some extent, the October gapdown point. It touched down on its test Wednesday, tapping at the November peak and then rebounded through Thursday and Friday - very much a market leader, very much a continuing uptrend picture. It is showing solid action: the breakout, the test, and rebound; very solid thus far. With the other indices still weak, however, we have to see how NASDAQ will handle this short, small bounce off of resistance - its first test of the breakout. There was no great surge higher, just a bounce, and now it is looking around wondering "What next?" The important thing is that even though there was not a strong bounce, no one is selling NASDAQ. NASDAQ has not broken back through any support as have the other indices, which is a very key point. NASDAQ is showing excellent strength, and it is going to be one of the X factors in the market moves in the immediate future.

SP500: To recap, SP500 could not hold the lateral consolidation that it formed in June after breaking the December peaks. It failed its attempt to move through the January high at 944, but it reversed and has come back down on that reversal; indeed, now it has broken through the December peaks, the next support level. It managed to bounce up to end the week, but that bounce took it right back to the December peaks. The bounce was off some significant support at 900 - not the most important, but significant. It made it back up to the prior support, and when you break support it often becomes resistance. After Friday the chart has the look of stalling out at that resistance point. This is a textbook setup for more selling that could take it down back to 900, then on toward the bottom of this consolidation range at 875. That is what we have been anticipating once it rolled over two Thursdays back. It does not mean it will not make that break higher, but just that it failed its initial attempt to do so, and now it is back down in its former consolidation range. Typically that means it heads down for a test of that bottom again before it sets up, makes a higher low, and then makes another run at resistance.

SOX is out there on its own, closer to the SP500 than to the NASDAQ in its action. Usually NASDAQ and SOX go more hand and hand, but SOX made two attempts to break out and it failed both times. It is back down in its former range, trying to bounce off the 50 day EMA. It looked pretty good on Wednesday with that bounce, but Thursday and Friday it sputtered and stalled very similar to the action on SP500. There are some semiconductors that look very good and are continuing their uptrends. They look solid and may even present new buy points. The problem is a lot of the chip equipment stocks - those that make the equipment that makes chips - are not doing that well and are holding the index down. It is very much a bifurcated sector right now. As we noted last week, there are some people who are actually starting to like semiconductors. We have liked semiconductors ever since the bottom in the market, and even before that as they were leading higher before the rest of the market figured it out. Now that other people like them, they are having some trouble. Is that not the way it usually is? When the word gets out and they finally get the official sanction, they are getting close to the point where they will struggle, and that is what we are seeing from the semiconductors right now.


LEADERSHIP.

It was a tough week for the stocks that had been leading the market. There were not a lot of breakdowns from key stocks, which was good to see, but there were some in the commodities, energy, and industrial leadership groups. Those are the inflation trades, and as the dollar strengthened, the G8 talked of reducing stimulus, and the economic data was better than expected, the inflation trades sold back. The theory is that central banks around the world will not have to produce so much currency in order to fund their woeful economies. If there is economic improvement there are more jobs and more goods and services bought and sold, and that creates tax revenue and lessens the need to run the printing presses and continue massive spending in the name of stimulus. We are a long way from that kind of recovery, but that is what the market has been digesting over the past week - this idea that maybe there is an economic recovery, maybe there will not be as much money printed and that the Fed might have to hike rates. That is not going to be the case in all likelihood, given the policies - both monetary and fiscal - that we have in place right now, and the fact that we are talking about huge national healthcare program. It is going to be very hard to avoid printing money, especially when you have the kind of policies that echo the Great Depression era and the 1970's - policies that tend to prolong the malaise that occurs after these recessions.

The dollar was not strong, but it did not help all of the dollar trades. The dollar actually weakened as the week progressed, but the dollar trades still struggled. That was a telling factor and why we closed out some of those plays on Friday; indeed it is why we have closed these positions all week. Financials were interesting in that they actually bounced higher into the weekend. They have not gone anywhere over the past six to seven weeks, inclusive of the bounce into the weekend. Not all of them bounced, but some key names were moving up after selling off earlier in the week. This was likely just an expiration move as positions are rolled out on expiration. That is likely why financials sold down through Wednesday and then the bounce toward the end of the week. We are not putting too much into it, but this is another group that is an X factor ahead: will they participate, will they sell off, or will they do just what they have been doing - move sideways?

Steel was an aberration for the commodities. It held up nicely during the week, testing the surge higher, holding near support, and starting to bounce. Several tested back to the first Fibonacci level (38%) and held and are trying to bounce from there. It is not all doom and gloom for the commodities, but it is very selective as to which ones prosper.

The China stocks held up well. The consensus - and I hate following consensus because once something becomes a consensus, it is usually old news - is that China is doing well with its stimulus and is recovering. On top of that, you add the new interest in the US and around the rest of the world in medical and healthcare stocks - there is money flowing their way now. There are also interesting plays in the Chinese medical stocks, and we bought into some of those this week.

Technology continues to look solid, as you would expect given the action on NASDAQ. AAPL had a great day coming back after a nice, easy test. It could easily run to those prior highs. It may need a deeper test after that, but you cannot argue with the strength it has been showing. It is hard to get on the other side of that trade right now until it shows something else.

Again, healthcare in the US is looking better. ESRX and ISRG did well, and others are setting up. The problem they have had thus far is they are trying to set up but they take one stop forward and a couple of steps back. We are starting to see breakouts now as money gets moved in those areas. We will continue to look that way for some upside plays even as the market continues to struggle a bit. There is leadership out there, but it is not nearly as broad as it was. The commodities and energy have pulled back and scrapped their good patterns and uptrends for now, but maybe they can regroup, rebase, and break higher once more down the road. There is technology that looks decent, some healthcare looks good, and you've got other miscellaneous sectors that are doing quite well such as the Chinese areas. Overall, leadership has taken a hit and it needs to regroup at this juncture.


THE ECONOMY

Economic data shows improvement, but borrowing and credit continue to decline.

There was some data this week that some are suggesting shows that there is either an economic recovery in process or just around the corner. The Philly Fed was up, showing improvement after the Chicago Index and New York Regional Index started to show backsliding. There is a little conflict between the regional manufacturing indices - I have to say Chicago is more important. Philly was down for a long time, but there is some weight to the fact that Philly is making a reversal.

The continuing jobless claims on Thursday fell for the first time since January. That was viewed as a positive, although likely it is people just going off of the rolls (the chronically unemployed) that is bringing that number down. Nonetheless, you have to look at what the market is interpreting it as, and what people - the big money movers - are interpreting these signs to mean.

The Leading Economic Indicators improved as well and were better than expected. Many are taking this to mean that the economy is turning the corner, and it is hard to argue with improvement. The question, however, is what kind of improvement have we had? We were going into what everyone thought would be the Great Depression II, and now we are 'just' in recession. What we have seen are numbers factoring in a recession versus a depression. That is reason for some improvement, and that prompted some spending after the panic in October shut everything down - now at least they are trying to conduct business and spend some money. Hence, you are getting improvement in the numbers - not great numbers, but improvement.

Credit Issues Remain a Serious Problem.

As we have noted before, the economy cannot recover unless the credit picture gets better. We have to see borrowing and lending ongoing again. There were some serious signs this week and some hard data suggesting that is just not the case. The banks are quick to tell Capitol Hill that they are lending as much money as they can. They want to pay back the TARP and get out from under the thumb of the government, so they are saying that they are lending a bunch of money. After all, the TARP was designed to help repurchase assets, but then when that was scrapped, the money was given to banks in order to loan to businesses so they could conduct their business given the credit freeze-up. That is one of the reasons that the federal government wanted to keep some banks with TARP funds: so there would be ample liquidity to go out and lend. Now, however, they are starting to pay it back - there were some paybacks Thursday and Friday. The problem is that the numbers are showing that borrowing and credit is still an issue.

The numbers that came out showed that from Q4 2008 to Q1 2009, there was net negative borrowing; in other words, borrowing is still declining. Month-to-month and year-over-year it is declining as no new money is coming into the system- or at least not to the extent to where it is reversing the declines in lending. Either the banks are not loaning, or consumers and businesses are not borrowing. It is likely a combination of both. Recall there has been $121B in tax rebates through payroll deductions. Savings are $131B. There is net negative spending with respect to the money that people are getting back from the government, and thus it makes sense there is no borrowing. What also makes sense is that when times are bad and consumers and companies fear for jobs and their business they do not spend, opting to cut back and save. That is why I always say that tax rebates or tax cuts alone are insufficient. You have to give people and businesses a reason to spend the money when there is no reason to spend the money. That is one thing we have learned - or should have learned - in the past, but when we spent this $800B in stimulus we did not include nearly enough of the "use it or lose it" kind of stimulus.

What does this mean for an economic recovery? There are those that say the data shows that this is a recovery in process. We will recover... at some point. The problem is the government has policies in place, both fiscal and monetary, that history shows only promote slow growth or slow recovery while at the same time igniting inflation. The policies that the Fed has adopted not only promote inflation but they debase our currency, ramping up the inflation impact. It is that double whammy I keep talking about with respect to what happens when you debase your currency and most world commodities are priced in your currency.

How long will it take to improve? Look back to the 1973-1974 recession after the Arab Oil Embargo and the resulting economic shutdown. It took ten years to get out of that economic crisis. There was a regulatory crisis, a spending crisis, and an oil crisis; there were a lot of crises thrown into one mix and it took us ten years to crawl out of the hole.

This time things are similar yet different. We have had an oil crisis- no one can say that we have not with oil going up to $140 a barrel last summer and on the rampage once again with gasoline prices surging. We have had a credit crisis, a lending crisis, and a housing crisis. We have had a lot of crises once again, but these are ten times worse than the ones we had in 1973 and 1974. This credit crisis dwarfs everything since the Great Depression. If it took us ten years to get out of the 1973 and 1974 slowdown and malaise that followed, who knows how long it will take us to get out of this. I hope I am wrong, but the economic policies that we are using (which are the same ones we used in the 1970's and the Great Depression), historically (and according to the most recent research) prolong the agony. That does not sound too promising at all, but that is the reality that we have to deal with. Economic recovery? No. Economic improvement? Yes. We will never (or not nearly as quickly) get to what our potential is as long as we keep these types of spending and monetary debasing policies in place.


Healthcare Video to come

Healthcare was big in the news today. Actually it was big all week because there is a real push to get the healthcare plan passed before the end of the summer. All of a sudden we had no time and we had to do it quickly. We have heard this story before: they say we have to get the stimulus passed quickly and no one even reads it. Something so important definitely needs to be laid completely on the table so we know what we are getting into, and we do not get into one of these $1T-over-ten-years plan that turns into a $10T plan over ten years (similar to Medicare).

One of the interesting exchanges today was when Senator McCain and Senator Dodd were talking about the cost. Essentially what Senator Dodd said was that we will pass it and then find out what the cost is after that. Of course, these are the same people railing against the free-and-easy mortgage lending. If you say people can go out and buy huge mansions and then worry about whether or not they can afford them and where the money would come from later, well - that is the kind of logic that, I am sorry, the head of the committee is using with respect to healthcare. It is illogical and we are all going to pay seriously for it. I will do a special video that I will post sometime this weekend or next week where I will talk about this healthcare issue in more detail. It is important because it impacts all of the economy and thus impacts the market.



THE MARKET

MARKET SENTIMENT

VIX: 27.99; -2.04
VXN: 28.3; -1.73
VXO: 26.54; -1.99

Put/Call Ratio (CBOE): 0.86; -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.

Bulls: 44.8%. Fading from 47.7%. The pullback has culled the herd a bit after the rally spiked the reading from 42.5%. Broke free from the 40.9% where it hung around for three weeks. Steady rise from 36.0% just 6 weeks back. Has passed 43.2% hit mid-April before anticipation of stress tests. 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: 26.4%. Bears growled a bit more, up from 23.3%. Still 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 and starting to approach bearish levels (for the overall market). 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: +19.75 points (+1.09%) to close at 1827.47
Volume: 2.732B (+33.98%)

Up Volume: 1.733B (+897.039M)
Down Volume: 1.171B (-71.142M)

A/D and Hi/Lo: Advancers led 1.44 to 1
Previous Session: Advancers led 1.14 to 1

New Highs: 33 (+6)
New Lows: 6 (0)

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

As noted, NASDAQ is the other X factor for the market, and for now it is acting in a very healthy manner. It is not showing the double-top-time action of SP500 and more poignantly SOX. It is acting quite healthy. The question is, what happens when SP500 tests further? Will NASDAQ be able to hold its support at the November peak? That makes it a very important week for NASDAQ. If SP500 continues to fall NASDAQ is going to test its November peak again. It did not have much of a bounce, so it would be putting in a lower high, and lower highs are never really technically positive. We will have to watch how NASDAQ responds once more at the November high. As an aside, some ask why November is such a key level. The reason is it was the initial high hit after the October selloff. Thus, it represented an over head supply point that NASDAQ had to show it could break back through to show that all of the supply had worked itself out and people still wanted to own Technology Stocks.

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

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


SP500/NYSE

Stats: +2.86 points (+0.31%) to close at 921.23
NYSE Volume: 2.128B (+95.5%)

Up Volume: 1.353B (+668.243M)
Down Volume: 758.61M (+363.861M)

A/D and Hi/Lo: Advancers led 1.67 to 1
Previous Session: Advancers led 1.37 to 1

New Highs: 23 (+8)
New Lows: 43 (+3)

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

SP500 bounced modestly back up to the December highs it broke early in the week. That former support now may become resistance. One failure, however, is not fatal; the fact that it was not able to break through the January peak and sold off is not a large concern in the bigger picture. No serious breakdown, just back in its consolidation range that it formed before it made the breakout attempt. It is not a collapse - what we will probably have is continuing trading in the range, and the odds are it will sell to 875 before it is all over. So, we look for a failure at the December highs, then a fade back to 900, followed by a move back down toward 875.

The financials are one of the X factors that could change the entire story. They are not breaking down but they are not helping either - they are just holding the line as they have been doing. If they get in the game either way, that will change the entire complexion of what SP500 is doing. They are not lending, they are mainly focused on getting out from under the TARP. What will happen when they do and lending does not pick up? That will be the issue. Can they still make money given the environment that they are in? I would say yes given the interest rate situation where the longer term is jumping up but the Fed is holding down the short end - or trying to at least.

SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg


DJ30

Stats: -15.87 points (-0.19%) to close at 8539.73
Volume: 528M shares Friday versus 220M shares Thursday.

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


NEXT WEEK

The headliner for the week is the FOMC rate decision Wednesday. The Fed is not likely to do anything because the economic recovery is just not there yet and we know the Fed always responds late to any economic recovery or slowdown. The statement will be the focus. Are they talking about inflation? Are they talking about the need to back off on stimulus and thus raise rates in the future? I doubt they will be that explicit in any respect. Change with the Fed comes very slowly - it telegraphs its moves long before it puts anything in writing. At this point we have not heard the usual "We will have to start thinking about taking back some of the stimulus." That has been coming through outside sources such as the G8 but not the Fed, and when the Fed starts talking about that, that is when the ball is being set in motion. Of course the market will sniff this out earlier and move accordingly. For now it is still weighing all of the factors, including the G8's comments. While the market is waffling right now, it has not rolled over or broken down. The interesting thing is the market might actually LIKE the idea of the Fed hiking interest rates because it is worried about inflation and wants to get the long and short end more aligned with each other.

In addition, there is the durable goods orders, existing and new home sales, personal income and spending - those are all important factors that gauge economic health. Earnings season is also coming. We saw RIMM's results this past week and we are seeing more and more come out with the ever-expanding season. Warnings season will start soon as well. The period is coming where companies have to come out and start saying whether they will miss, hit, or that they will make it but things do not look good in the future. They want to get it all out there so there are no surprises - Regulation FD; you know the story.

Our view of what will happen this week is, unless the financials join in on the upside, we are looking at SP500 coming back to test 900 and then working its way down to 875. That 875 will be an important test at the bottom of the prior consolidation range. The market is in a transition phase thanks to SP500 and the NYSE indices. SP500 failed the first test at the January peak and now it is coming back and has to consolidate and set up again. It is also going to have to pick up the financials along the way, again that is the X factor that determines SP500's movement or at least the magnitude. The dollar will continue its bounce - no pressure from oil and the related stocks that are tied to the dollar. The rest of the market will pause and likely come back. Again, NASDAQ is going to be the other X factor - what is it going to do at the November high? Up to this point, it has looked fantastic with respect to its technical action. Will it be able to fend off a lower high and still bounce or consolidate along that November peak?

Given NASDAQ's strength and growing strength in healthcare, we are still looking at some upside positions. There is leadership to the upside in those areas discussed earlier such as China and healthcare. They keep showing up and you cannot ignore them. Liquidity is still out there and is still going into areas that it thinks will return big gains long term, such as technology. Attention will be paid to the exchanges also - whether it is ICE or the CME. They are looking very good still and are setting up new buys. China still looks good and healthcare as well is improving.

With our anticipation of SP500 going down to test some more, we are looking at making some more plays to the downside based on that SP500 decline. It might be some more SPY positions, it might be related positions, maybe the OEX - those that we can take advantage of. There are also individual stocks that have set up in bearish patterns that, even after this pullback, can still break lower (particularly if SP500 is going to head lower as well). We are still looking for both upside and downside. What we need to do is, since the market is in somewhat of a transition and test phase, is take smaller positions on the upside. We need to limit our target somewhat and take smaller positions so if things turn against us, it will not hurt that much. For the downside, if it breaks as we think it will, we will get more exposure to the downside, play that move, and see how it handles support. We button them up when it gets there, and if it breaks through we can let part of our position ride.

It is never easy when the market transitions, but what we have overall is a continuing uptrend at this point and we cannot forget about that. There are a lot of people who are negative on the market and with good reason, given the potential for economic recovery. Is this going to be a great recovery? Probably not. Expect the market to come back and test, then if it holds that uptrend it should continue on up. We will play that, of course, because that is what the market gives us. Have a great weekend. We will be camping out - it will be hot - quite a Father's Day, but we have a Boy Scout event for the kids. See you next week.


Support and Resistance

NASDAQ: Closed at 1827.47
Resistance:
1880 is the June peak
1897 is the October post gap intraday high.
1947 is the October gap down point
1984 from late September
2099 is the mid-September low
2169 is the March 2008 double bottom low

Support:
1786 is the November intraday high
1780 is the November 2008 closing peak
1773 is the May peak
1770 is the mid-October interim peak
The 50 day EMA at 1734
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 200 day SMA at 1659
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
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 921.23
Resistance:
919 is the early December peak is bending
The 10 day EMA at 925
930 is the May peak
935 is the January closing high
944 is the January 2009 high
1000
1050

Support:
The 200 day SMA at 902
899 is the early October closing low
The 50 day EMA at 897
896 is the late November 2008 peak
888.70 is the April intraday high.
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
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
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


Dow: Closed at 8539.73
Resistance:
8588 is the May high
The 10 day EMA at 8602
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
9387 is the mid-October peak
9625 is the October closing high

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
The 50 day EMA at 8383
8375 is the late January 2009 interim peak
8315 is the February 2009 peak
8307 is the April 2009 intraday high
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 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.

Jun 23 - Tuesday
Existing Home Sales, May (10:00): 4.83M expected, 4.68M prior

Jun 24 - Wednesday
Durable Orders, May (08:30): -0.9% expected, 1.9% prior
Durable Orders, Ex-T, May (08:30): -0.5% expected, 0.8% prior
New Home Sales, May (10:00): 360K expected, 352K prior
Crude Inventories, 06/19 (10:30): -3.87M prior
FOMC Rate Decision, (2:15)

Jun 25 - Thursday
Initial Claims, 06/20 (08:30): 608K expected,
Q1 GDP - Final, Q1 (08:30): -5.7% expected, -5.7% prior

Jun 26 - Friday
Personal Income, May (08:30): 0.2% expected, 0.5% prior
Personal Spending, May (08:30): 0.4% expected, -0.1% prior
PCE Core, May (08:30): 0.2% expected, 0.3% prior
Michigan Sentiment-Rev, June (09:55): 69.0 expected, 69.0 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

Oil Spikes Import Prices

SUMMARY:
- Lackluster close for a market that was mixed on the week.
- Market has to digest news re the G8, bond auctions, and some plain old retrenching.
- Dollar bounces to end the week, trying to keep its attempted trend reversal intact.
- Tired NASDAQ trying to lead but receiving no support.
- Rising oil spikes import prices
- Oil spikes import prices.
- EU industrial production falls at a record pace. Remove the stimulus?
- Nothing fundamental has changed in the inflation and liquidity trades, just some tired leaders after pulling the train.

Market manages to come back from selling after giving up gains on Thursday.

Friday was a lackluster close for a market that was mixed on the week. Friday was the mirror image of Thursday where the market rallied higher early but was unable to hold the moves and reversed with SP500 giving up a breakout over 944. Friday, the market was weak early but then managed to rally back late and cut the losses, actually turning positive on the Dow and SP500. The entire week was choppy - a series of advances and a series of declines (or declines and then recoveries) as the market digested some actually new news that it had not considered up to this point during the inflation and liquidity rally higher.

There were several factors impacting the market's trade this past week. The G8 talked of removing the stimulus and investors suddenly realized that the Federal Reserve may have to raise interest rates much sooner than anticipated - that bears directly on the inflation trade. After surging higher, all of the inflation sectors (such as commodities, precious metals and energy) retrenched, digesting that news. They have been riding high on the trillions of dollars printed by the central banks' printing presses, but if they are going to pull back some of that stimulus, there will not be as much inflation impetus, at least that is the initial hope - investors had to adjust to this change in the landscape.

The specifics on the inflation trade: Oil sold some on Friday but still closed the week at $72.19. It was down, but just a modest $0.49. It closed near the high for the week even with pulling back due to a stronger dollar on the Friday session. Gold was down as well, closing at $939.66, off $22.40. Gold rallied up near $1K over the past three weeks, but it came back this week doing some retrenching on its own.

A better 30 year bond auction was another reason that some of the inflation trades retrenched. Wednesday, a weak 10 year auction jumped interest rates much higher. The 2 year Note finally got in on the action and it broke sharply higher. The 10 year Note, which has been leading the move higher, hit 4% on Wednesday though it backed down to end the week. It had to pull back; nothing can run that high that sharply and maintain the moves. It came back as the dollar gained a little strength on Friday, closing at 3.79%. The 2 year surged all week, hitting the zenith at 1.43% on Wednesday after that poor 10 year bond auction. Friday it closed at 1.27%, but this is still a huge move for the 2 year that was basically holding just over 1% - and indeed right below 1% - before this latest move started.

The third factor was just some plain old retrenching and backfilling after some great moves in commodities. We saw the steel stocks continue to move up through Thursday but take a little bit of a hit on Friday. It was a small hit because there were no major trend breaks or downturns by those stocks; indeed, many of the energy and commodity stocks, while they have pulled back a little bit from their recent runs, have just pulled back inside of continuing uptrends. This is not a break of the trend because really nothing has changed on the landscape. Investors were digesting the news that there could potentially be some stimulus withdrawal from the G8 countries. They are a long way from reaching that point, however, and so the moves back were basically taking some gain off the table after a good rally higher. Another way of saying that: profit taking.

All of this allowed the dollar to bounce in relief. It hit 1.389 Euros on the session Friday. That was a nice drop compared to trading well over 1.4 Wednesday after the 10 year bond auction. Another reason that the dollar rallied was that Japan came out on Friday and said that it had 100% confidence in the US Treasury - that is the only vote of confidence the Treasury has received over the past several months. China, Brazil, Russia, even our ally South Korea, are all bad mouthing the dollar. They want some world currency that they can have more control over. Of course we do not want that as it is not in our best interest - as every administration has said over the past 20 years, a strong dollar is in our best national interest. Some had more force behind them than others, though the last two executives appear to have the same problem with just lip service to a strong dollar. We are not standing up for it and we are paying the price.

There are also some very weak output numbers from the European Union (EU) helping strengthen the dollar. When major economies show weakness, investors around the world run to the dollar. Even with those gains, the dollar could not hold. It is struggling; it is not a relief bounce. It hit to 1.389 - much stronger, but it closed Friday at 1.4007. The dollar is choppy and volatile just as the commodities are at this point.


TECHNICAL

INTRADAY. The action was not bad for half of the market and it was not great for the other half of the market. Friday showed a soft start, a recovery to flat, and then a run higher in the last hour and a half. It almost squandered that move as well. On Thursday the buyers did not come in and finish the job. They did not hold the breakout and when stocks fell back late, they did not have the buyer support and surge back up as seen over the last several weeks. Friday the buyers almost abandoned the late rally as well. The gains in the last hour and a half were lost, and it took a late rally right into the close to retake those gains and mitigate the losses on NASDAQ and close the Dow and SP500 positive. There was nothing strong about this move, but that was in character with what the market showed late in the week. A good break, a continued move higher by NASDAQ, but it ran out of gas because it was getting no support. It was no surprise to see the market limp on into the weekend given the 'no decision' with respect to SP500's consolidation.

INTERNALS. Very flat breadth on the session. Volume dried up to the extent that it was a veritable dustbowl, particularly on NYSE. Trade did not even touch 1B shares, closing at 858M. That is as low as you would find on Christmas Eve. Terrible volume, even beyond typical low volume for the summertime. What this tells us is the action was totally untrustworthy on Friday. When volume is this low you cannot trust the moves because there are too few players. Perhaps we will see more when the new week starts, but recall that the past Monday volume was very low again. Down here in Texas this week, summer really hit. Last week was beautiful, but this week a high pressure system moved in and it is oppressively hot. We are already in the dog days of summer here in Texas, and it sure looks as if the market hit the dog days of summer and it is only mid-June.


CHARTS. NASDAQ continued its rally on the week though Friday it came back some. It was 25 points lower intraday from where it closed, so there was a substantial move back up from the selling in big-name techs and semiconductors. On Thursday it was the flipside, giving up a chunk of its move - 2/3 of its upside move - by the close. On Friday it was able to recover most of its losses and almost close flat-to-positive even though it had the look of a tired hound dog. Since breaking higher, NASDAQ has rallied over the November peak to take a look at challenging the October gap-down point. It came within 30 points but then it has stalled without really giving it a go. Again, NASDAQ is acting tired as it simply is not getting any help from the other indices. Doesn't' mean it is in serious trouble or in bad shape in any way. It is looking for a pullback after a breakout, and it looks like a rather typical pullback.

SP500 was flat, and the other NYSE indices are all showing the same pattern - a two-week, flat-as-a-board move, very tight ranges and low volume. Thursday it looked like it would make the breakout but it couldn't keep it up. It gave it up, and did soon a little higher volume. It turned what was really a good, positive consolidation (with all the leadership and NASDAQ leading the way) into a consolidation that is back to the 50/50 range as to which way it is going to break. When you see these tight consolidations, the break is typically sharp. What the trade and action to end the week showed was that SP500 is a coin toss at this point. I know no one likes hearing that, but that is what it is giving us. We are seeing erosion in the strength of NASDAQ given its run, and the financials refuse to participate in any move.


LEADERSHIP. With the dollar rising, we saw the same old leaders - commodities, energy, techs, chips and industrials - lag toward the end of the week. There were no breakdowns, and indeed many are fading and already setting up for another potential move higher. Several of them, even Friday, looked to be in position to make the break higher, but we always say it is just a pretty picture until they make the move. We have had liquidity under the market and the inflation trade to drive things higher. There has been a small monkey wrench thrown into the works this past week with the G8 talking about removing some stimulus. We had some retrenching, but we still saw good enough patterns to take positions in BJS in the oil services sector into the close. It is at a very good risk-reward position: if the trade works, we make a lot of money, and if it does not work and breaks down below its pattern, we get out with a minimal loss. Great risk-reward, and worth taking the position going into Monday when we could see the dollar start to weaken further as it did weaken intraday on Friday.

The chips stocks remain somewhat of a worry. They held their latest breakout - and I do mean latest. They broke higher, they gave it up, they broke higher again, and now they are waffling. They managed to hold the breakout over the late October peak with the late comeback, but they were struggling. A lot of the semiconductor stocks had to fight their way back, and some did not make it. We had to take NSM off the table because it did not recover from its early breakdown. Chips were playing a little game with us. They goose us, look great, but then crawl back into the bottle and stew for a bit.

Health stocks were stronger again. They have been playing a cat-and-mouse game with us as well. They look better, their patterns are developing better, but every time they start to look good when the dollar and the inflation trades weaken, then the dollar weakens once more, the inflation trades come back to life and the healthcare stocks fade away and fritter back into their bases. We will keep watching them because there is something building there (which we see in the biotechs as well), but they just have not made serious moves yet.

Financials are still a big zero, and as a result the leadership is very mushy. They are still holding the gains but there is some top-heavy action going on late in the week - more accurately, there are patterns that could easily turn. This is not the case in a lot of the leadership, but in some of them. For instance, OPLK held up very well when the NASDAQ was waffling somewhat after its initial breakout move in June. OPLK kept moving up and volume was solid, but it has not been able to follow through. It is angling ever so slightly upside with small moves and waning momentum. It is flagging a bit, and I am not referring to the flag pattern. It is "getting tired" flagging - when you see that pattern and the momentum runs dry, you can see breakdowns. Pull up the stops and be ready on that one. If it does not improve, we likely take it off the table.

At this juncture that is the kind of diligence we have to have on positions that have not built in a cushion of gain yet. We have to be careful - if they start to show signs that they are not going to be able to continue the move they started, then we need to consider taking them off the table and then seeing how things shake out. We have built some great gains on these moves, so we want to protect that. We have also taken some beautiful gain off the table, including this past week. We can let some of those positions ride back because we have a nice cushion. If we let them ride back, correct, test, and then move forward, that is where we get the big gains - the 3:1, 4:1, 5:1 moves on our option plays and the 2- to- 3:1 moves on our stock plays. If the market starts to sell on heavy volume, however, that changes the picture and we need to lock them down.

For the leadership and for the market overall, it is time to be patient and time to be a bit careful and pick our shots. That is why we sold positions on the week as they were moving up. We saw some stocks this week fail to make any headway (what we called "on the bubble" stocks), so we took them off the table. We were not going to take the chance that they would run out of steam and gap down on us. We were basically involved in a little tidying up in case SP500 breaks down from this consolidation instead of breaking out.


SUMMARY.

At the end of the week, we were left with NASDAQ continuing its two-week breakout, but struggling late. To start June, NASDAQ broke sharply higher and has rallied up toward the October gap-down points. It cleared the November high on that move, which was a very important point that had held it in check until the start of June. It finished positive for the week, but it was backsliding. It simply looks tired at this point. It is the one that made the breakout and rallied, but it is getting absolutely no support from any of the NYSE indices. SP500 has been flat lining for the past two weeks and SOX, though it did break out and support NASDAQ, is once again having a hard time maintaining the breakout. So it is understandable that NASDAQ is a bit tired and is coming back some. A test back down of the breakout would not be atypical at this point.

SP500 continued to its two-week, pancake-flat move, and it can break either way from this. When you have a flat move up against some resistance, it is a good consolidation if there is leadership build to support the move. The problem we have now with SP500 is that NASDAQ is looking a bit tired, as is the SOX, and there is no help from the financials. If NASDAQ and the semiconductors come back to retrench then we could very well get a shakeout or a pullback in SP500 as well. In other words, SP500 could fall back from the 944 level and move down more toward the 925 or even the 875 level if NASDAQ decides to take a significant rest after a significant breakout.


THE ECONOMY

Import prices spike gratis oil.

Import prices rose 1.3% and it was all thanks to oil. Oil prices have been spiking which is no secret, and it is no secret that we import tremendous amounts of oil every day. Oil makes up the bulk of the products that we import, and thus has the largest impact on pricing. This was the largest monthly jump in import prices since July of 2008. Since then, oil has made its biggest jump because we all know oil ran up to $140 last summer. Now the same thing is happening and voila, another spike in prices.

If you take out oil, it was a 2% rise in prices. There you go - cannot be much clearer than that as to the impact of oil on our wallets. Once more we are importing inflation; as the dollar declines, oil goes up. So we have a double whammy here in that we have to pay more for the oil, and the inflation is eating away at other aspects of our life as well. Even at a time when our wages are down due to the recession you also have inflation eating into wages, even inflation adjusted. So it is really a triple whammy when you add on the recession. We are struggling and it is very hard for the American citizen to get off the mat when gasoline prices are now running over $2.66 a gallon, well on their way to $3.00. They may not hit the $4.00 of last summer, but the speculation is already working on driving them higher, and it would not take much of a shock to send them up.


EU industrial woes make one wonder about removing any stimulus anytime soon.

The EU posted some very disappointing numbers. The industrial production for the entire region fell 21.6% and of course that was a record. The EU's bank bailouts have now topped $6.8T. That is greater than Germany's GDP. Germany is the largest EU economy; similar to the United States, the EU is mortgaging everything it owns. I said similar to the United States, but we are actually following the EU. I suppose those who want us to be more like Europe can take heart since we are having the same debt problems that Europe has always has. Those debt problems always help kill every advance their economy tries to make.


THE MARKET

MARKET SENTIMENT

VIX: 28.11; -0.35
VXN: 29.73; -0.04
VXO: 27.16; -0.01

Put/Call Ratio (CBOE): 0.77; -0.09

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.

Bulls: 47.7%. Bulls are running on Wall Street, spiking from 42.5%. Broke free from the 40.9% where it hung around for three weeks. Steady rise from 36.0% just 6 weeks back. Has passed 43.2% hit mid-April before anticipation of stress tests. 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: 23.3%. Bears are scarcer, falling from, 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 and starting to approach bearish levels (for the overall market). 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: -3.57 points (-0.19%) to close at 1858.8
Volume: 2.005B (-16.58%)

Up Volume: 880.674M (-602.186M)
Down Volume: 1.164B (+320.092M)

A/D and Hi/Lo: Decliners led 1.15 to 1
Previous Session: Advancers led 1.8 to 1

New Highs: 34 (-17)
New Lows: 5 (-2)

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

NASDAQ is acting as if it is tired, but it has good reason. It is the only index that has made a strong breakout and made it stick. It has run well, its components have led the entire move, and it deserves a rest. If it was a human being you would think it would be a little miffed that none of the other indices are pulling their weight. The problem is that NASDAQ is tired, but it is a symptom of the rest of the market; NASDAQ cannot lead the market by itself. It can temporarily put in an uptrend or a downtrend with a strong move- as it has done with this move higher - but ultimately the rest of the indices have to come along or it fails. This repeats time and again in the market, about once a decade: A few generals lead the pack, but if the rest do not show up or they decide not to follow, after awhile the generals cannot continue to forge ahead and take new ground by themselves. At this point we have to be careful and watch NASDAQ closely. It may not make it up to the October gap-down point at 1897, and if it does not, it could come back down and easily test the November peak that it broke out over to start June at 1785 intraday and 1780 on the close. That is an 80-point decline. Nothing out of the ordinary there - it is still well above any Fibonacci near term retracement level, so this would be typical and normal. We would not have a problem with this but for the fact that we are not getting any help in the technology area from SP500, or now the small caps.

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

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


SP500/NYSE

Stats: +1.32 points (+0.14%) to close at 946.21
NYSE Volume: 858.232M (-29.84%)

Up Volume: 388.663M (-387.554M)
Down Volume: 458.72M (+52.899M)

A/D and Hi/Lo: Decliners led 1.25 to 1
Previous Session: Advancers led 1.8 to 1

New Highs: 51 (+10)
New Lows: 88 (+32)

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

You would think SP500 was well rested after two weeks of flat, lateral trade and would have all the vim and vigor it needed to make the breakout. It is still holding near 944 and above the 918 support level for this range. It keeps coming down and tapping it on the low and bouncing right back. It is maintaining this range but is weakening somewhat given the Thursday action. The longer it stretches out and we see other areas start to come back and retrench, then it may have a problem making the break and may have to come back and test further itself. If it does fade and breaks below the 918 level, then 880 to 875 would be the next area that you would really look for it to hold. 900 maybe, but those lower levels are where the real support lies. If NASDAQ comes back and finishes its test before SP500 breaks down and is ready to move back up, maybe NASDAQ can drag it back up once more. We will have to see. The action in the SP500 and refusal of the financial stocks to join the fray leaves the market vulnerable coming into next week. It is going to break one way or the other; SP500 cannot maintain this pattern forever. It just is not tipping its hand right now, and the longer it takes and the more trouble the other indices have, the more likely is it to give us a deeper shakeout before it rallies back up and tries to move higher once more.

SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg


DJ30

Moved higher on the session after tapping and holding the 10 day EMA on the low. Extremely low volume and still in the flat, 2-week range. As with SP500 it could break either way and will likely follow the large cap index. The Dow is a touch read given the new components so we are not paying too much attention to it right now.

Stats: +28.34 points (+0.32%) to close at 8799.26
Volume: 164M shares Friday versus 250M shares Thursday.

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


THIS WEEK

There is a pile of economic data coming. We have the regional PMI reports from New York City and Philadelphia, we have housing starts, we have industrial production and capacity utilization, and we have the CPI. A lot of these showed trouble last time around. Housing starts looked pretty good because of low mortgage rates and distressed sales. Prices are going to remain low, but now we have interest rates that jumped 1% in one week. That is going to impact sales as rates have been heading up over the past few weeks. That is going to impact the number of mortgage applications.

There is going to be a lot of economic data, and we are not sure we will get anything pleasing. Indeed, the data may revert some thinking with respect to thinking the G8 will not have to move any stimulus near term because these economic numbers stink. What will be driving the action is how the dollar fairs - whether or not it continues its relief bounce or if it is done, cooked, and ready to go back down again.

At close Friday, if you look at a chart of the DXY0 you will see that broke its April to early June downtrend with a nice push higher last week. It tested this entire week, a very choppy week, but it always held above the downtrend. On Friday it broke higher again. So we could very well see the dollar continue its relief bounce next week which would pressure the commodity and inflation trades again. They would be doing some more backfilling and we would be watching to see if they can hold their pullbacks and if they can hold near support or continue the little six-week bases they had been working on.

Remember, these stocks had a long, six-month base, they broke higher in May and into early June, and then they were testing back. They have been testing back over the last five to six weeks, forming these shallow, nice patterns whether they are ascending bases, pennants, double bottoms with handles, cup with handles - they run the gamut, but they are all nice consolidations. We want to see them ride those out as the dollar rebounds. If they hold, that is a very good sign of strength and that they will make the next break higher.

We may see more retrenching and backfilling as a result of the dollar, as a result of bonds firming up a bit more, but we will watch the important points: what leadership does with respect to its bases. Of course we will also watch what NASDAQ does with its pullback and whether it heads into a full-fledged pullback of the November breakout or it flattens out itself, similar to SP500. If SP500 cannot move, that suggests NASDAQ is going to come back and make potentially a full test of the breakout over the November high.

For our positions, this past week we took a lot of them off the table that were equivocating. In other words, they were unable to move up as NASDAQ and the rest of the market moved up. When they cannot show any kind of continued momentum after trying to break higher, we thought it best to take them off the table, with some gain in a lot of cases, and then others we just decided to nip it in the bud in case SP500 was unable to maintain its consolidation after the Thursday reversal. Indeed, on the Thursday move when we saw it start to come back, we were taking these positions off the table along with some gain as well.

We are still holding onto a lot of nice positions, but we have taken a lot of gain off of those and we have comfortable cushion there where we can let them come back and test a logical support level and then bounce again. As far as the others that are newer positions that have not had time to build that gap, we need to watch them, and if they cannot hold near support we will close them. If SP500 breaks down, usually these moves out of this flat time of consolidation are pretty brisk. If that is the case, the best option is to go ahead and play it a bit safe and get out of the positions. If they gap lower on you that is a problem, but we do not think we will see a gap right away to start the week.

What you have to do on positions with a lot of gain built in and that you have already taken some, is decide whether or not you want to ride them back. Do you want to just take the money off the table, especially in our short term option positions, and then ride them back down and see if you can get back in? If you banked a lot of gain and you are taking a free ride on them, if nothing changes for the worse in the market, then you want to let them come back and make the bounce back up. It depends on how nimble you are and if you feel like you can get in and out quickly enough to make the trade when it presents itself again.

As for new positions, we will watch for some downside opportunities given the market's action, or in SP500's case, the lack of action. We put some on the report the past week toward the end of the week and we picked up some downside positions. We are not looking for a really big rollover but that does not mean that will not happen or cannot happen, and that we cannot make good money if it is just a 'normal' pullback. We are looking to see if NASDAQ comes back and tests the November high and whether SP500 fades as well. Remember, it can still go down to 900, it can still go down to 875 or 870 and be very typical. Indeed, that would be a very small pullback considering the strong run off of the March low. So that will not be anything huge in the overall picture of the market, but if you are in short term option positions, that could be a big deal for you. That is why we take the interim gains on the way up, and then we are letting you know right now that it is not as positive as it was heading into Thursday. You need to adjust your mindset a little and know what you want to do in the event SP500 breaks lower. If you want to play it safe and take them off the table, there is nothing wrong with that, but you have to be ready to get back in if it hold and shows it is ready to bounce back up.

We are going to be looking at some downside, but still looking at some upside because, as of the close Friday, there are still a lot of great stocks in position to move higher. If the dollar continues to strengthen, commodity trades may take more time. If they hold their near support, and if they hold their patterns right before the shakeout, that is fine. They can break down intraday, but if they snap back and continue to hold, that is what you want to see. What that means is the sellers are taking it down, but the buyers are jumping right back in and pushing it up. The sellers lack the strength to hold it down. If the liquidity remains in the market, in other words if investors get used to the idea that the G8 may be taking off some stimulus - once they digest that and the liquidity is still there, they will be looking for opportunity. If we see that happening, we are happy and can stay in those positions and look for upside positions after they make that shakeout, close higher and then go into the next session closing higher again. That is when we can move in.

To sum up, nothing has really changed in terms of inflation trade or the liquidity trade. There was a little news this week with the G8 which caused some hiccups along the way, and it caused the dollar to get a little stronger. Some of our allies said they believe in the United States, and that caused the dollar to strengthen. It does not take much when you have been beaten up and kicked to make a little bit of a comeback and feel better. Relatively, however, things are still pretty weak. Since there is no real change in the market's character, we are going to continue to look for these inflation trades and liquidity trades, and that includes technology after this test. What would change this is if there was a serious character-changing move, such as seeing the sellers piling in on strong volume. We saw sellers try to come in later in the week, especially on Thursday when they reversed a breakout. We will have to watch and see if they show up any more. The liquidity is out there, the market is a little tired, though. SP500 and the financials are not playing ball with the semiconductors and NASDAQ. If they do not, they are going to test and we need to be ready for that. Have a great weekend - stay cool, it is hot out there. Good investing to you.


Support and Resistance

NASDAQ: Closed at 1862.37
Resistance:
1897 is the October post gap intraday high.
1947 is the October gap down point
1984 from late September
2099 is the mid-September low
2169 is the March 2008 double bottom low

Support:
The 10 day EMA at 1831
1780 is the November 2008 peak
1773 is the May peak
1770 is the mid-October interim peak
The 50 day EMA at 1715
The 200 day SMA at 1673
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)
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 944.89
Resistance:
944 is the January 2009 high
1000
1050

Support:
935 is the January closing high
The 10 day EMA at 935
930 is the May peak
919 is the early December peak
The 200 day SMA at 913
899 is the early October closing low
896 is the late November 2008 peak
The 50 day EMA at 891
888.70 is the April intraday high.
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
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
The 90 day SMA at 838
833 is the March 2009 peak
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


Dow: Closed at 8770.92
Resistance:
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
9387 is the mid-October peak
9625 is the October closing high

Support:
The 10 day EMA at 8692
8626 from December 2002
8588 is the May high
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 50 day EMA at 8330
8315 is the February 2009 peak
8307 is the April 2009 intraday high
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 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.

June 15 - Monday

NY Empire Manufactur, Jun (08:30):-5.10 expected, -4.55 prior
Net Long-Term TIC Fl, Apr (09:00): $52.9B expected, $55.8B prior

June 16 - Tuesday

Housing Starts, May (08:30): 483K expected, 458K prior
Building Permits, May (08:30): 500K expected, 498K prior
PPI, May (08:30): 0.6% expected, 0.3% prior
Core PPI, May (08:30): 0.1% expected, 0.1% prior
Capacity Utilization, May (09:15): 68.4% expected, 69.1% prior
Industrial Productio, May (09:15): -0.8% expected, -0.5% prior

June 17 - Wednesday

Core CPI, May (08:30): 0.1% expected, 0.3% prior
CPI, May (08:30): -0.9% expected, -0.7% prior
Current Account Bala, Q1 (08:30): -$85.0B expected, -$132.8B prior
Crude Oil Inventories, 06/12 (10:30): -4.38M prior

June 18 - Thursday

Initial Jobless Claims, 06/13 (08:30): 610K expected, 601K prior
Leading Indicators, May (10:00): 0.9% expected, 1.0% prior
Philadelphia Fed, Jun (10:00): -17.0 expected, -22.6 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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