Monday, August 03, 2009

Market Holding Gains

- Market slips out of the month holding gains after Thursday reversal attempt.
- GDP headlines better, but the back months and internal numbers remain worrisome.
- GDP gets the headlines while Chicago PMI remains in the ditch.
- Thursday reversal, new month make this week interesting, but there is still a lot of leadership in uptrends.

Some intrigue to end the month, but market holds the gains and most of the last break higher.

Futures were up in the pre-market, at least until the initial Q2 GDP figures came out. They handily beat expectations but futures dropped to negative on the news and bond yields tanked as investors turned to treasuries. Supposedly good news was shunned. Why? Because as discussed later, the revisions and internal data was just not that great.

The market was set to open lower, but it didn't. End of the month and strange things can happen, kind of like the old 'Andy Griffith' show episode where Barney Fife bought this old box off of some gypsies that supposedly contained the spirit of Count Istvan Tekely that could grant wishes. Stocks rallied initially, then sold off on the Chicago PMI data only to rebound into the afternoon. Then some late weakness took NASDAQ lower and left the other indices basically flat. The Thursday surge then reversal, beginning of a new month, a big run the past three weeks virtually uncontested - there are some interesting days ahead, but there are also great upside trends in place and those have to be reversed. The action to end the week certainly did not do that.

As for the stats in the other markets they were quite interesting as well. As noted, bond yields tanked as investors rushed to treasuries after the GDP report. If the report was so good then why the stampede to the safety of US bonds similar to kids chasing an ice cream truck on a 100 degree afternoon once the news hit? Bond yields, after surging to 1.2% on the 2 year and 3.8% on the 10 year, closed at 1.11% and 3.48% respectively. Those are very big moves.

The dollar fell like a dead goose, closing at 1.4253 euros versus 1.4062 on Thursday. The dollar index broke down out of its range from 79 to 80 and is now at the early June low that also matches the December 2008 low (that lead to a strong bounce). Critical point for the greenback. Interesting the dollar and bonds are bifurcating, heading in opposite directions now. Oil exploded higher again, closing at 69.04, +2.10. Big drop Wednesday and then blasting back to the upside Thursday and Friday. The weaker dollar certainly helped, but it is also interesting that oil rebounded sharply as the economic data was not necessarily as great as the headlines indicated. Investors moved toward treasuries and hard assets as the data has not been and still was not, that great.


INTERNALS. Breadth was flat at 1:1 on NASDAQ and a bit better at 1.7:1 on NYSE. That is chicken feed, however, as we have seen 4:1, 5:1 and better on the strong upside sessions. Volume backed off below average on NASDAQ after that higher volume reversal off the highs on Thursday. That is okay: no churn. NSYE, however, saw a volume surge, the second straight above average volume session as the NYSE indices tried to move higher but spun their wheels. That is churning and after runs higher or dives lower it can signal a move is about to turn.

CHARTS. The indices basically held position Friday, and that can be good or it can be not so good. It was a positive that the Thursday late reversal did not cascade into a selloff. On the other hand, after a big run higher the inability to push ahead and the rising volume as they stall a bit shows they are encountering resistance and could come back and test. Big run as the indices started to break lower and reversed to the upside in early July. Now they hit a new recovery high, and after what looked like a great breakout Thursday, it is faltering in the same manner the indices checked the breakdown in early July, moved laterally for three days, and then surged. Right now the indices show they are winded. A reversal ahead? They are still in nice uptrends and they have not broken those. Showing some signs of trouble and it behooves us to tread a little more carefully here. That is why we have been taking gain and not fooling around if a stock gets into some trouble.

LEADERSHIP. Another reason you have to discount a selloff a bit is the nice trends in the leaders. Techs, chips and internets are in established uptrends while commodities, industrials, and even some energy are setting up some nice patterns. It is hard to accept a selloff is imminent with so many good stocks in good uptrends. That said, it doesn't take much to flip a switch sometimes to turn buying into selling. When you look at what the dollar is doing (tanking), what bonds are doing (flattening curve), what commodities are doing (spiking oil yet again), you can argue there is money moving into safety over the past week, and once that move is over there will be less support for stock prices. As always, you have to 'watch for in your earn' as Shoeless Joe Jackson advised the rookie in 'Field of Dreams.'


Four quarters of negative GDP, but is it improving?

The headlines would indicate that with a -1% decline versus the -1.5% expected and the -6.4% final in Q1. Maybe, just maybe, after four consecutive negative GDP readings, the longest streak since WWII mind you, the end is in sight. Breakout the bubbly 'cause the good times are coming.

Better not breakout the good stuff just yet, however. The devil, or at least the economic doldrums, are in the details.

Yes the numbers were better, but better than what? The revisions of GDP over the past year were ALL down. The recession has been much deeper than estimated. That is not necessarily bad: if things were so bad and they are only at -1% now, that must be good. It is IF you can trust the data. As noted, everything was revised lower, 2 times lower. Things were twice as bad as thought. That casts massive doubts on the accuracy of this measly 1% decline. Some smart economists are saying to expect the same kind of revisions to this number. After all, it is the first iteration, and as sure as there was indeed blood spilled in 'There Will be Blood,' there will be revisions to this number.

The data mix, the areas that gained and the areas that lost, were not that encouraging either. The PCE (personal consumption expenditure) fell 1.2% and took off 0.88% from GDP. In Q1 the PCE ADDED to GDP. This was a big disappointment to investors.

It was not just the consumer. Business investment tanked 8.9%. Youch. To add insult, government spending rose surged 5.6%, adding 1.2% to GDP. In Q1 government spending subtracted over half a point. Sure government spending can help a recovery, but not the BS spending of this government. Gross private domestic investment, i.e. investment in the US by the private sector, cut 2.64% from GDP.

Can things get better? Sure they can. Durable goods orders show business investment is up the past two months. There comes a time that businesses have to replace worn out equipment. That is vastly different, however, from buying new equipment for expansion and new hires. Survival buying versus growth buying. That was familiar in the 1970's and frankly did nothing to get us out of the lost decade.

Yes there is improvement when the patient's vital signs stop crashing and he starts to stabilize. That is a far cry from waking up out of the coma and jumping up out of the hospital bed in recovery. We don't need 'House' to diagnose the problem; that is known. The debate over the cure is the problem. Unfortunately our leaders are using leeches to attempt the cure other than time proven techniques. Kind of an ironic analogy given the debate over nationalized healthcare. We are dooming ourselves to mediocre healthcare that you get in Europe, Canada, Australia, etc. versus the cutting edge drugs and equipment we have now. Again, I have personal experience with those systems and they are shockingly bad.

Chicago PMI: Better but cash for clunkers subsidies driving the move.

At 43.4 the Midwest showed its best reading all year, bouncing from 39.9 in June. Its 6-month average is 37.3. Happy days.

The internal numbers were not bad either. New orders bounced to 48.0 from 41.6. Cash for clunkers? This is a big auto region; cannot hurt. What happens when the incentives are over? What does that do for the rest of the country? Do we provide subsidies for their main industries as well? Likely not the government owns most of the US auto industry now so it has incentive to help it versus other areas.

Of course I digress. The other internals were all better. Production rose to 43.3 from 39.3. Employment 'surged' to 35.3 from 28.9. Inventories fell to 25.4 from 34.2. Improvements across the board.

Crowing about mediocrity.

So what does it mean? The patient's health decline is slowing. The patient is still getting worse but it is getting worse slower. Does that mean a rebound is coming? It can. It can also mean what it actually means, i.e. that the decline is slowing. With this 1930's and 1970's-style stimulus it strongly suggests that the decline, even though slowing, won't turn into any rip to recovery.

Thus when the Administration was visibly impressed with the numbers, stating that the job losses, GDP decline, etc. would have been much worse without the stimulus, it all rang hollow. We are not paying these people to let us slowly bleed to death. We are paying for recovery. And despite the notable preening on Friday, recovery is not here.

I again go back to the last recession and the recovery period. Sure they are not apples to apples, but if anything this one is much worse and thus recovery will be even more painstaking. Back in 2002 when things were turning the regional PMI reports were already turning positive as the market started the big surge off the October low. Real improvement was afoot, not the slowing decline still characteristic of this economy.

Why is that so important? Because there has to be foundation for growth and higher stock prices. Stock prices have rallied as a result of re-pricing from Great Depression fears. They are not rallying due to the kind of expectation of growth in 2002. The numbers are still pathetic, and unless there is a move to some expansion the economic rebound will stumble around as it did in the 1970's. Makes since given the fiscal policies mirror the 1970's when there was anything but recovery. The US was mocked as the failed experiment, a former economic power now in decline.

The dollar is getting printed out of value. Our debt has exploded to absurd levels versus GDP. Continued talk of even more massive, massive spending and higher and higher taxes on capital and earnings drive away business and foreign investment. HISTORY is replete with examples of countries that could not resolve their economic issues by debasing their currency. Why on earth are we emulating those past mistakes? I am no fan of conspiracy theories but it makes you wonder just why our leaders, purportedly intelligent men and women, pursue historically discredited policies.

Back to the main point: this data is not suggesting recovery. It is suggesting the wanton selling is over but it is not investment. Indeed given the new car subsidies it is artificial improvement, improvement that does not even amount to expansion.

This continuing idea that the economy is turning around just because it is falling at a slower pace is the mentality of losers. If it is good enough to sail slower into the abyss then we are destined to sail into the abyss.



VIX: 25.92; +0.52
VXN: 26.16; -0.47
VXO: 25.59; +0.89

Put/Call Ratio (CBOE): 0.84; +0.18

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: 36.7%. Rebounding as you would expect as the market put in its second week of rallying. After falling to 35.6% last week the market bounce caught up with sentiment. 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%. Bears matched last week's 35.6%, showing that the bears are not convinced by this rally. That is a good indication for the market as there are bears still holding back their money. When the market rallies more it continues to find new fuel from the bear's money as they pitch in and buy to the upside. Nice surge higher from 30.3% in early July. 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: -5.8 points (-0.29%) to close at 1978.5
Volume: 2.15B (-12.96%)

Up Volume: 975.414M (-616.285M)
Down Volume: 1.217B (+274.878M)

A/D and Hi/Lo: Decliners led 1.04 to 1
Previous Session: Advancers led 2.18 to 1

New Highs: 71 (-51)
New Lows: 6 (-4)


Broke out Thursday once more, but couldn't do anything with it. NASDAQ remains in a solid uptrend but you always have to watch these gaps to new highs on a run then a reversal or stall on volume.




Stats: +0.73 points (+0.07%) to close at 987.48
NYSE Volume: 1.588B (+16.85%)

Up Volume: 1.018B (+74.629M)
Down Volume: 476.311M (+72.168M)

A/D and Hi/Lo: Advancers led 1.69 to 1
Previous Session: Advancers led 3.94 to 1

New Highs: 118 (-28)
New Lows: 51 (-40)


Super tight doji Friday after that surge and semi-reversal Thursday. Volume was big, the strongest since the Russell rebalance in late June. That is some churn, i.e. where the sellers are now as strong as the buyers, playing hot potato with stocks. That suggests there is big money moving out of the market, selling shares to those coming in late. Once this phase is over, the new money is spent and the early money is out and not coming in until it gets a better price. That often sets up a decline.

That said, the large caps are still in a nice three week uptrend over the 10 day EMA, a strong uptrend. Has not even tried to test the 10 day yet. Thus there are indications the move is having some issues, but thus far it is not showing signs of giving it up. New month this week, and that is where the tale is told.



Very similar action on DJ30 as SP500, i.e. the Thursday surge and purge and a Friday flat line on rising trade. Churning a bit and this week we see if the lateral consolidation can hold.

Stats: +17.15 points (+0.19%) to close at 9171.61
Volume: 265M shares Friday versus 230M shares Thursday.



New month and that can mean new money. Does that mean upside or downside? Even when the market was trending lower, the market was up the first days of November, December (after one day down), January, February (both down months). March was off - it was the bottom month. Then up in April, Jay, June . . . but not July, the best month in four. So the trend says that August would start higher for 1 to 3 days.

Now some twists. The market moved laterally to end July, trying a break higher to end the month. That break reversed some ground. It did not fail, but the sellers came in on Thursday. Friday they were not as pronounced; looked more like end of the month profit taking, but it did nothing to counter a potentially serious reversal on Thursday.

Remember, last week saw the return of sellers for the first time in three weeks. Each time the buyers answered then on Thursday the buyers were running . . . only to get pushed back as the sellers flexed some more. The sellers are getting stronger, not totally unexpected after a big three week surge.

Thus we approach this week looking both ways, i.e. at potential upside plays and downside reversals off the move. Indeed some are at a point they could break either way and we won't be snobs; whichever way they break we can play them, the classic 'take what the market gives' approach. The point is, after this kind of move and with the sellers and buyers starting to fight it out we need to be ready to take the side that gains the upper hand.

We have been maneuvering that way all week anyway. We took gain on the moves higher. We buttoned up positions that came under fire, protecting our gains in them. When we took upside positions we did so piecemeal, legging in with partial buys versus loading the boat. No one knows for sure what the market is going to do next; you just weigh the probabilities and stack the deck as much in your favor as possible. That has paid off handsomely this year as it typically does.

So this week we are watching closely how the leaders hold their trends and how some developing set ups in energy and industrials, to name two areas, continue to develop. It could be one of those transition weeks where it takes some time to develop. If the market is going to turn back down then it typically takes some time to turn such a strong move; the buyers were in control and it has to be wrested from them. Last week the buyers showed some weakness and the sellers some growing strength; this kind of consolidation can lead to more upside, but it can also be part of a transition to some downside, especially when you get high volume reversals.

Thus we approach the week with some caution but in good shape regardless given we have banked some great gain, have protected positions, and have exposure to more upside while at the same time have reduced our downside exposure by banking gain. As always we will be patient and let the plays develop.

Support and Resistance

NASDAQ: Closed at 1978.50
1984 from late September
2099 is the mid-September low
2169 is the March 2008 double bottom low

The 10 day EMA at 1949
1947 is the October gap down point
1897 is the October post gap intraday high.
1880 is the June peak
1862 is the July peak
The 50 day EMA at 1836
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
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 1626
1623 is the early April peak
1620 from the early 2001 low
1603 is the December peak
1598 is the February 2009 peak, the last peak NASDAQ made
1587 is the March 2009 high is getting put to bed again
1569 is the late January 2009 peak
1542 is the early October 2008 low
1536 is the late November 2008 peak
1521 is the late 2002 peak following the bounce off the bear market low
1505 is the late October 2008 closing low.
1493 is the October 2008 low & late December 2008 consolidation low

S&P 500: Closed at 987.48
The November 2008 peak at 1006
1106 is the September 2008 low

The 10 day EMA at 970
956 is the June intraday peak
944 is the January 2009 high
935 is the January closing high
932 is the July peak
930 is the May peak
The 50 day EMA at 926
919 is the early December peak is bending
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 prior April peak at 876
The 200 day SMA at 871
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 9171.61
9387 is the mid-October peak
9625 is the October closing high
10,365 is the late September low

9088 is the January 2009 peak
The 10 day EMA at 9008
8985 is the closing low in the mid-2003 consolidation
8934 is the December closing high
8878 is the June peak
The 18 day EMA at 8866
8829 is the late November 2008 peak
8626 from December 2002
The 50 day EMA at 8610
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
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.

August 03 - Monday
Construction Spending, June (10:00): -0.6% expected, -0.9% prior
ISM Index, July (10:00): 46.5 expected, 44.8 prior
Auto Sales, July (14:00): 3.4M prior
Truck Sales, July (14:00): 3.8M prior

August 04 - Tuesday
Personal Income, June (08:30): -1.0% expected, 1.4% prior
Personal Spending, June (08:30): 0.3% expected, 0.2% prior
Pending Home Sales, June (10:00): 0.3% expected, 0.1% prior

August 05 - Wednesday
ADP Employment, July (08:15): -340K expected, -473K prior
Factory Orders, June (10:00): 0.5% expected, 1.2% prior
ISM Services, July (10:00): 48.0 expected, 48.8 prior
Crude Inventories, 07/31 (10:30): +5.15M prior

August 06 - Thursday
Initial Jobless Claims, 08/01 (08:30): 584K prior

August 07 - Friday
Average Workweek, July (08:30): 33.0 expected, 33.0 prior
Hourly Earnings, July (08:30): 0.1% expected, 0.0% prior
Nonfarm Payrolls, July (08:30): -333K expected, -467K prior
Unemployment Rate, July (08:30): 9.6% expected, 9.5% prior
Consumer Credit, June (14:00): -$4.1B expected, -$3.2B prior

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

Jon Johnson is the Editor of The Daily at

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