Sunday, July 19, 2009

Market Needs More Strong Earnings

- Sleepy session but market closes the week holding its solid gains.
- June Housing sales: 7 month high. More single family units than multi as was the case in June.
- Some economic improvement, some backsliding but nothing showing strong recovery is coming.
- Need a hugely strong economy to cover at least some of our debts.
- Market needs more strong earnings to breakout from the range.
- Opportunities are setting up along with another test by the indices this week.

Market puts in its time, holds its gains.

It was a quiet Friday, especially for expiration, but the market did what it had to do. It held its gains into the weekend after a very strong week that saw a 7% move on SP500. Earnings once again dominated the picture on Friday as they did all week. Earnings provided the catalyst for the upside move for the week, and after hours on Thursday night, IBM and GOOG both reported; IBM was up, GOOG was down. GOOG ran into its earnings, we took some gain off the table when it did, and then it sold down some on Friday. It did not break down, but just sold down to a support level. There were other earnings out as well (GE, Bank of America, C) and they were both good and bad. GE missed, Bank of America beat, Citi beat, but it was a one-time event as it sold Smith Barney. The financials are showing stronger results, and they should because of the very favorable spreads thanks to the Federal Reserve holding interest rates so low.

This entire earnings season is something of a red herring. Expectations are so low due to revisions that the beats are easy. It is a 'better than expected but very low expectations to begin with' season. Even so, GE missed its earnings. Now we know why its CEO spends so much time pandering to the Obama administration regarding the green initiatives. It has to have them to salvage the company. Despite being a very big company with a lot of irons in the fire, it is struggling. It really needs the inside track on the green initiatives that are in the stimulus package to get the ship moving forward again. The serious problem with GE getting a lot of stimulus business is that that GE does not create jobs - it has been a net job loser for ten years.

June housing sales were out, and they hit a seven-month high. This month there were more single family dwellings than multifamily dwellings. That was not the case back in May when more multifamily dwellings were built. A LOT more. Multifamily housing is recession housing because no one can afford homes. All they can do is pay rent because they cannot come up with a down payment. Therefore you see a proliferation of the multifamily housing units. Thus the June report with its better mix casts a better light on the housing market. Up seven months and now it is swinging toward single family.

The question is whether it can last. The economy is still weak, and what we hear from mortgage brokers and mortgage bankers is that there are still a lot of people who cannot qualify for home loans. Moreover, the people who would qualify, the speculators - those who buy homes, renovate and resell them - are not granted loans. The idea now is if you do not live in it, you are not going to get a loan. Thus the housing market is improving some, but the rate of acceleration can be measured with a calendar not in days or months, but in years.

It is not showing the kind of improvement we could have given the stimulus thrown at housing because as is always the case, banks and the Federal Reserve are too stringent with credit at the wrong time. They should have been more stringent three, four or five years ago. Only after things crash do they wake up and enforce reasonable lending standards. Unfortunately that is the cycle and how it always happens with administrative agencies. They are too loose, and their laissez faire attitude fuels the crisis. Only when the crisis hits do they wake up and clamp down, trying to show everyone they are doing their job. The problem is their job is to help get people into loans, and now is the time we need them. Despite all these trillions that we are giving to companies that screwed up, we are not helping the people who can help us out of this economic morass.

Statistics: The dollar was up on the day, closing at 1.4097 after a Thursday showing at 1.4139. Even though it was up on the day, it was still below $80 on the dollar index. $80-81 is acting as resistance for the dollar. It looked as if it was going to break through that level as it blasted through then fell back. Now it has formed an umbrella top over the past three weeks. An umbrella top is exactly what it sounds like: An umbrella shaped pattern that usually leads to a roll over.

Oil was up on the day despite the dollar being stronger as well. Oil was down in the $50's on the week but it has rebounded closing at $63.44, up $1.42 on Friday alone. Why after staying below $50 is oil surging, and why did it surge when the dollar was up on Friday? The reason is traders are seeing the trend on the dollar; the dollar WAS strengthening. Now there is that umbrella top and the dollar looks ready to roll over again. Oil, copper, and steel were up - all commodities were up and accordingly energy stocks, metal stocks and other commodity stocks were up as well. Traders see the trend in the dollar and thus the commodities head and shoulders back up in their inverse relationship.

Bonds are quite volatile as investors swing from fears of further slowing last week to more comfort with recovery this week. The 10 year closed at 3.66% on Friday. Investors were moving out of bonds on a little bit more favorable economic data on the week. If you recall, the 10 year was 3.3% in yield just a week ago, so there has been quite a reversal. There was a lot of concern about a double dip in the economy, but this week after the earnings came out, there was some improved confidence. Do the earnings tell the real story? I say they do not. As I noted earlier, these expectations have been knocked way down. Analysts do not know where to peg their earnings forecasts. They are just guessing, throwing darts at the board as to what they expect the companies to make. Companies are better at cost cutting than expected, and they thus are improving their bottom line, but the top lines have not grown very much. IBM reported strong bottom line results, but its top line did not grow that much.

That is the issue that will dog the economy until there is a turnaround. Companies have to have more people coming through the door to expand sales. For now, companies are growing earnings by cutting costs by . . . letting people go. You cannot keep cutting away at the company forever, however. Eventually you hit bone and have to stop - if you go too deep, the company dies. The government needs to come up with a way to get more money into the economy, money that will help the entrepreneurs and small businesses get started. Right now that is not happening there was a lot of talk at the end of the week about just how effective this so-called stimulus plan as been.



The futures were lower pre-market, but not massively. The market started a bit weak and sold from there, but it came right back up and traded around the flat line all day. A bit volatile after that but mostly trended higher steadily into the afternoon. In the last 1.5 hours, there was some volatility, but it was expiration week and we expected that. As soon as it went down, however, it popped back up, and the indices closed around the flat line. NASDAQ and SP500 closed as flat as pancakes. The Dow sported a 0.37% gain, or 32 points. SOX (1.22%) was the leader all week and Friday it broke to a new post-March high, an important move. Good to see the chips leading once more as that bodes well for the rest of the market. SP600 (-0.49%) and NASDAQ 100 (+0.55%) mirrored one another on opposite sides of the flat line.


The internals were about as tame as a 1950's hygiene film. There was not a lot going on Friday despite it being July expiration. Breadth was -1.4:1 on NASDAQ, flat on NYSE. NASDAQ breadth did not match the modest gain on the technology index. The weak breadth shows a little weakness. It was led by AAPL's big gain on the session, but not a lot else was moving.

You would never know it was expiration Friday by looking at the volume. Trade was a bit higher on the NYSE but still below average. NASDAQ trade actually fell on expiration Friday. There were not a lot of positions rolled out. That means maybe a lot of investors are rather bullish at this point and did not have a lot of short positions to roll out from.


There was no real change in the SP500 or NASDAQ from Thursday. As a matter of fact we can just talk about basically what was said on Thursday. NASDAQ 100 and SOX continued with some modest gains. SOX was better than others and making that new post-March high as noted. The big moves for the week were already logged, so Thursday and Friday were just kind of coasting into the finish line since they had already put in the big work on the hills earlier in the week and enjoyed great results. There was the big 7% gain on SP500 and 5 1/2% on NASDAQ. Strong moves.

The indices made some great moves, but once again they are already at the next resistance point. As I noted on Thursday, what happens when you recover from heavy selling? You hit resistance levels on the way back up. SP500 is back up near the January peaks and the June peak and looking to try to make a breakthrough. It failed at this effort in June and then what did we have? It was not disaster - five weeks of testing that brought it back down to 875. It held that level and it bolted right back up this week. When SP500 rolled over in June we said it would make another run at it and that is exactly what has happened. It might fail again. There is no guarantee it will make the breakout this time, just as there is no guarantee it was going to make the breakout back in June. The difference now is that there has been a bit of character change last week. There was a test and then a strong run higher on some decent volume. It was not great volume so we shouldn't get carried away. It was expiration week, the big volume for the week was on Wednesday. Often, expiration volume occurs on Wednesday and it was associated with that big move up on that day. So we have to take all of this with a grain of salt. It looked better, there was a change of character, but it was not definitive in and of itself.


What was more telling was leadership. As I noted on Thursday, it looked like April and May again - the same stocks were putting in great moves this past week. Whether it was commodities, materials, industrials or energy - they are all moving up. Not all of them were in great position to begin with - some such as energy were rebounding from some harsh selling over the five previous weeks and have more work to do.

The chips were a different story. The chips where the clear leaders again just as they were the clear leaders off of the March bottom. They put in a new post-March high, and that is significant. Higher highs are always important, particularly so after you test and hold a prior level after clearing to a new high. It also helps when the new highs are made by a perennial leader out of deep declines. Who was the leader off of the 2002 bottom? The chips. Who was the leader in March? The chips. And now the semiconductors leading this move.

Financials came to life on the week. After ten weeks of dormancy, they turned higher. Some broke to new post-March highs. The question is can they maintain the move or was it just a first-of-the-month earnings blip when GS and JPM and Bank of America, et al., reported decent results? That will be the question that tells the story for SP500 moving forward. It has come up to its old highs again, making the second test. One of the reasons it did so was financials. If it is going to make the break, financials will make the break as well. The question is do investors believe that the financial earnings are real? They were better than expected, but are they going to continue to improve? And what happens if the Fed has to start removing stimulus? That is the cloud on the horizon that continues to dog the financials. Lending remains tepid for mortgages and small businesses. The question again is what are the financials going to do and how there their earnings react in the situation where the Fed feels it may have to take back some of the stimulus at some point, yet we have not recovered from this economic downdraft.

In summary, you can say leadership is coming back. Slowly but surely it is building after five-weeks of basing.



VIX: 25.42; -0.47
VXN: 24.8; -0.48
VXO: 25.54; -0.53

Put/Call Ratio (CBOE): 0.76; -0.02

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: 35.6%. Major drop in bulls and of course the market jumped. Hit a high of 47.7% mid-June on the run from the March lows. Steady rise from 36.0% in late April. Barely over the 35% threshold, below which is considered bullish. Of course it will jump after this past week. 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: 35.6%. Bolting higher from 30.3% last week. Up from 23.3% in mid-June. Still well off the 37.2% and the 37.1% in mid-April as the rally continued higher. Cracking above the 35% threshold considered bullish. Still 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.


Stats: +1.58 points (+0.08%) to close at 1886.61
Volume: 1.844B (-9.47%)

Up Volume: 1.022B (-536.615M)
Down Volume: 838.436M (+325.608M)

A/D and Hi/Lo: Decliners led 1.39 to 1
Previous Session: Advancers led 1.72 to 1

New Highs: 64 (+10)
New Lows: 19 (+7)


NASDAQ reclaimed its leadership role last week, helped a lot by the semiconductors. It cleared the June peak but it was not a crushing, "smashing all of its rivals" kind of ride. No, it cleared it, but it could fall right back. It has shown leadership on better volume with a good mix of large caps and smaller caps leading the way higher. It still has the October gapdown points, 1905 and 1897 to deal with (Friday close 1886). You can see there is still a ways to go to take care of those levels, but it is making a positive move.

SOX, even though it is a leader, is going to experience the same problems or issues that the rest of the indices are going to be facing next week: what to do about this near resistance that it has bumped into again. Note that NASDAQ has made a higher high and SOX has made a higher high on this move. That is a change of character as well and that shows that there is a shift going on in the market. The key for next week is that they hold the gains or come back without a sharp reversal. The one thing you hate to see is an index break to a new high and then reverse sharply. That shows that the sellers came right back in and drop kicked it back down. That opens the door for a tumble. We will see how it pans out, but on the whole, the week was positive with the closes and the leadership shown by NASDAQ, the semiconductors and then the resurgents, the commodities, energy, and in the industrials.




Stats: -0.36 points (-0.04%) to close at 940.38
NYSE Volume: 1.29B (+9.84%)

Up Volume: 544.018M (-187.365M)
Down Volume: 730.437M (+300.318M)

A/D and Hi/Lo: Decliners led 1 to 1
Previous Session: Advancers led 2.39 to 1

New Highs: 53 (+4)
New Lows: 51 (-3)


SP500's motto: if at first you do not succeed, try again. SP rallied from 875 back up to the January high at 944 and is trying to take on the June peak at 956. Been there before have we not? Then it went down and back up and it is making another try. This time it did move back through that May peak after failing in early June. That is the change in character we saw - made a little higher high. The definitive move will be moving through the January and the June peaks. This is a critical point for the SP500 - it either makes the breakout or rolls back down in the range again and continues the consolidation. That may mean it goes down to 875, or it may mean it just pops down to 900 or so, makes a higher low and tries again. Often that is how a trading range comes to an end. You see another test of the high followed by some selling, but then a higher low. From that higher ledge it makes a cleaner run at resistance and makes a breakthrough. In summary, SP500 showed improvement overall for the upside - the bias was definitely upside. Investors were looking for the silver lining in every news story and using dips to buy into. That is a turn from what we have seen the last five weeks leading up to this.



Stats: +32.12 points (+0.37%) to close at 8743.94
Volume: 301M shares Friday 216M shares Thursday. Another session of above average volume. Two on the week.



Lots more earnings, the heaviest week of the earning season. It will be a little bit lighter on the economic data which is fine - we have to deal with the earnings and they really drive the cart when we get into earning season. What we have thus far are big headliners that are beating lowered expectations. Some of them look really good. IBM and Intel looked much better and they actually had some decent revenues to go along with an improved bottom line.

Late in the week, however, there was some waffling because the earnings were not as good. There was still enough momentum to keep the upside moving and hold the gains, but there was not that kicker from a good, solid earnings report from maybe GOOG or so many others that reported. They were good but not stupendous, so there was a little bit of slowing at the end of the week at the next resistance levels.

There comes a time in the season when it shifts gears or runs out of gas. If earnings stay strong, that time is pushed down the road further. If the earnings start to waffle or become the same story without anything extra - without more of those Intel reports that really grab people and tell them that things look good, then you will start to see the momentum slow. With the indices at resistance, if it happens next week you can see them fade back. The best case scenario is that they go ahead and break on through resistance and then test from the upside. Maybe then they could make those old resistance levels support and set up a really solid upside run.

What we want to do obviously is have them test from the upside - have them break on through and come back and test support from above. If it cannot make the breakout, then it becomes a question of how far they are going to fall back in the range before they turn back up. All we know right now is we have had improvement. The bias has shifted more to the upside. There were big gains in the indices, the market and investors were looking at reports in a positive manner, not in a negative manner. Believe me, if the market is in a bad mood, a report can be pretty doggone good, but they are going to find some reason to kick it and spit on it. When you see things turn positive and you have a report that is okay but not great they will do the opposite and find whatever they can that is positive about it and put money into the market. There were people trying to get into the market at the end of the week. If that sentiment continues - we know there is plenty of money out there from all of the liquidity that is not going into the economy - and if earnings remains solid enough and there is reason to invest that money, then that money will come, and we will see the break higher.

As for us, we would love to see a test to start the beginning of the week. I would like to see a bunch of these stocks that gapped higher Wednesday come back a little bit more and test. We could have entered more on Friday, but I figured why do it ahead of the weekend? It is expiration Friday, it has been an up week, and the indices are at resistance- no matter what happens we are likely to get a test back to start the new week. So, don't chase them up, but instead see if they come back a little more. Again, patience is your friend in this market. We are already getting a little bit of a pullback and I was tempted on Friday to take more positions than we did, but again, why rush when we have run this far so fast in one week? Now we are at resistance - or in the case of NASDAQ and SOX they broke their resistance - and we are going to get a test one way or the other. Thus we kept our finger off of the "buy" button for the most part. We did take some gain for the same reasons we did not buy a lot. I think there is going to be a modest pullback, so we banked some gains on the positions that ran well for us.

Now we watch and see how the indices react to the sharp upside moves. After a break to a new high such as on NASDAQ and SOX you keep an eye out for a possible reversal, particularly with the other indices lagging and unable to make their breaks yet. You do not want to see the sellers come in and push it down, and thus you do not want to be too hasty jumping into a bunch of new upside just because some indices make an initial break higher. For the same reason you do not want to be too hasty on the downside. If it is just a test, you do not want to pile into downside positions that showed renewed strength last week only to have them test for a day or two or three and then turn around and blow right back up. Again a little patience - there are setups out there that we are seeing made right now. I am seeing some bull flags and some bear flags. They are obviously going in opposite directions by their names and we will probably get plays in opposite directions, particularly if the indices cannot make the breakout of these ranges.

In summary, we will get opportunities coming up, and there are opportunities out there right now. We are going to be patient and let them setup and then we move in. The market is at a critical point and is showing new strength. We just want to be in the right positions as it makes the break. Let us face it, we have some great upside positions right now and we have some downside plays that are going to come back again. We will see how far they come back. We also have others that we are ready to jump in that the stocks just did not show the kind of strength that would be breakout strength. We are going to get plenty of plays out of this and plenty of opportunity to make more money. Just be patient, let them set up, and let the money come to us. That is how we take what the market gives. Have a great weekend and I will see you Monday.

Support and Resistance

NASDAQ: Closed at 1886.61
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

1880 is the June peak
1862 is the July peak
1786 is the November intraday high
1780 is the November 2008 closing peak
The 50 day EMA at 1776
1773 is the May intraday peak
1770 is the mid-October interim peak
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
The 200 day SMA at 1620
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 940.38
944 is the January 2009 high
956 is the June intraday peak

935 is the January closing high
932 is the July peak
930 is the May peak. Bending.
919 is the early December peak is bending
The 50 day EMA at 903
899 is the early October closing low
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 200 day SMA at 874
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 8743.94
8829 is the late November 2008 peak
8878 is the June 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

8626 from December 2002
8588 is the May high
8581 is the July peak
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 18 day EMA at 8423
8375 is the late January 2009 interim peak
The 50 day EMA at 8378
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.

July 20 - Monday
Leading Indicators, June (10:00): 0.5% expected, 1.2% prior

July 22 - Wednesday
Crude Inventories, 07/17 (10:30): -2.81M prior

July 23 - Thursday
Initial Jobless Claims, 07/18 (08:30): 522K prior
Existing Home Sales, June (10:00): 4.80M expected, 4.77M prior

July 24 - Friday
Michigan Sentiment-Revised, July (09:55): 64.6 expected, 64.6 prior

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

Jon Johnson is the Editor of The Daily at

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