Monday, August 17, 2009

Philly Fed Sees Growth

- Stocks close the week lower, the first in 4 weeks.
- Michigan sentiment rattles investors.
- Sellers have a chance to take the indices out of their range, but stocks bounce back from lows.
- CPI shows no inflation for now as production and capacity post nice surprises.
- Philly Fed sees growth. Some signs of real recovery . . . maybe.
- Leaning to the downside but the market is still in its range and ignoring calls for selling.

Lower close but sellers not able to close the deal.

The market sold off on Friday. It closed down for the week for the first time in four weeks. The renewed the speculation as to whether or not the market has topped near term. All week long I have been talking about the market moving laterally and that there are indications that it might be at the near term peak. On Monday I discussed the VIX and how it set up similarly to the way it was before the crash last fall. I also discussed the put options on the SP500 and how they are at the same level they were at before the crash, and then again in June when the market sold off.

There are concerns that the market is going to pull back down, but then again it does not do that. It was down on Friday and it closed lower, but it also held the range that it has been moving in for the past two weeks. That does not mean it will do that without selling off further. In June the market, particularly the SP500, moved laterally in a tight range for two weeks just as it is doing now, and then it sold down, found bottom, and rallied up at that big 15% move in July. That shows that even though things look good right now, it might not be that way next week; that is the life in the market. You play the probabilities, you look at what could happen, you weigh the probabilities on the scale and see what comes out. You skew your actions toward that, but also have to realize that the market often does the exact opposite thing that people anticipate. Despite a lot of talk about this market having peaked right now, there is a very good chance that it might continue to consolidate and continue higher, which is why I am looking both at upside and downside plays. If it shows opportunity, then we will take a little here and there, and when the market makes its break we will go more heavily in that direction and close out the others. The beauty of it is that you are in a good risk/reward position either way. The upside stocks are in very good position as they have pulled back into near support, while the downside has bounced up against resistance. If they fall they will be in a good risk/reward position as well. If it moves against us, we have a very clear and near stop level that we will use to close our positions, and then we will let the other positions that are working in sync with the market run to maximize our gain.

Friday saw a soggy market, no doubt. The interesting thing was that, even though it was down on the day with NASDAQ losing over 1% and the Dow and SP500 losing about 0.8% each, both NASDAQ and SP500 managed to hold the bottom of their recent range (that is 992 on SP500 and 1962 on NASDAQ). That is very positive because the market continues to show buyers at that level. On Thursday, I said it would be very likely that, after this rally up to the top of the range, that those two indices and the market in general would come back and test the bottom of the range. They are doing that. They did not get all the way down to the bottom of the range on Friday, and we may see them come down more on Monday - this will be more of the acid test as to whether or not the indices are going to hold up inside of this trading range.

Friday was another of those days where the market had every reason to sell. Even though it did sell somewhat, it did not sell off and the sellers could not push the market down and hold it down for the entire session. The market started a bit soft, sold very rapidly in the first half hour, and then held in a lateral move for 5 1/2 hours. It bounced higher again in the last hour and cut the losses more than in half on some of the indices. Once again, the sellers could not close the deal entirely. They could not take the market below its recent range lows and could not even keep most of the losses on the day. There was a bid coming in at the end of the day which may be due to it being Friday. There was some covering going on because a lot of traders do not like to stay in the market over the weekend, but nonetheless, it did bounce back.

The market showed weakness on Friday because that initial selloff was severe and sharp. It was already at the top of its range and due for somewhat of a pullback, and there is no real catalyst to send it higher right now. We have seen earnings and the economic data - some has been better than thought and others worse than thought. There is nothing to drive it through that range at the moment, so some sideways range trading makes a lot of sense from a historians view looking at the market. There was also a push downside from the Michigan Sentiment number. It was much worse than expected coming in at 63.2 versus the 69.0 expected and the 66.0 in July. This is a preliminary reading of this number and it only covers 200 people, so you cannot put a lot of significance in it. The market, however, without any catalyst to push it either way, took it the wrong way and it went lower as a result.

There was also better economic news out before the market. The CPI was out and it was basically flat. It is showing no inflation at all so there is no concern about that at this point, but I feel it is baked in the cake given all of this rather wild spending on the fiscal side and very easy money and Fed's facilities on the monetary side of the ledger.

There was also information out with respect to industrial production and capacity. They were much better than expected, and that had people scratching their heads. You cannot dismiss those numbers, but a lot the same time they were so much stronger that it looked as if it was an anomaly. You can never pin your hopes on one data point on one month; we will have to see what happens over the next few months to see if there is a trend developing. What we saw on Friday was positive. What was interesting about this was that the sellers took their shot once more. The sellers have been in the market the last three weeks, and they stalled out this rally in July. After 15% you would expect some profit taking to come in, and the sellers have been coming in a couple of times a day. On Friday it was just once early on, and then they backed off. They pushed it down but were not able to close it down. The important point is that the sellers are here and taking their shots, so know they will try to push the market done below this consolidation range which is going to be one of the keys moving ahead of next week.



Breadth was pretty negative. It closed at -3.5:1 on NASDAQ and -2.5:1 on the NYSE. That was much better than it was intraday when we saw levels of -5:1. There was very negative trade across the entire market spectrum. In other words, every sector was getting hit - all the leaders and laggards were being taken out because they had had a good run and there was some worry about the economy (that was the reason du jour for the selloff according to the financial stations).

Volume on NASDAQ was down at 1.8B shares; there was no distribution and no nothing going on with NASDAQ. NYSE rose to $1.17B shares. On Thursday it did not even reach $1B shares, so while it was down 30% on Thursday, it was up 29% on Friday. So you might think that gives you some distribution, but that is not necessarily true. The market sold off, and did not really test the bottom of the range (though it came close). Then the market bounced back up, taking back more than half of what it lost. If you have a little rising volume, that does not necessarily show distribution, it just shows that some sellers came back in and pushed it back up. It is not necessarily a bad thing to have a rebound on some better volume.

On the NYSE, you have had three days of gains on rising volume versus just one day of losses on rising volume. You have three accumulation days to one distribution day, and that is not bad at all. That shows that, net, there is accumulation on the NYSE during this lateral consolidation. That is very positive. On the NASDAQ it is 3:2, so you have three up days on rising volume versus two down days on rising volume. That is not as clear cut as on the NYSE and NASDAQ has struggled quite a bit because it was one of the early leaders. The chips struggled and some of the big cap techs struggled as well during this consolidation. Nonetheless, a simple majority wins this game, and thus far NASDAQ is showing positive accumulation in this lateral consolidation. Put the two together, and that is a pretty good indication that things are not falling off of a cliff, although it still does not mean we will not get more of a pullback.


The indices are holding their lateral range and doing so nicely. It was going down more than you would anticipate in one day, but they held above those lows and bounced back up. They are holding that range but could still easily sell down further as it did in June. Just because it is moving laterally is no guarantee it will stay that way. The key will be whether or not SP500 breaks the 992 level - if it closes below that, say it goes down to 989 - 988 and closes, then you are looking at pretty much a trade likely down to 950 (the June peak).

You have to watch these technical indications. A lot of times it looks like a stock breaks down or breaks out only to then reverse and sell off sharply or reverse and rally sharply. That last little breakdown shakes out the rest of the sellers, and it can be on high volume. It look like you have a clean break, but then you have a reversal and are left holding the bag and hating life. One of the things that you need to avoid or limit - unless you have a great pattern and great other indicators behind it - is playing that first move. Whether it breaks higher and comes back to test or breaks down and comes back up to kiss that resistance level, you should let it make that test and see if it can break back through or not. If it can, then you have a great signal to the upside or downside because it has held and will continue to move. If it does not and it falls back down, you have a great signal as well, but just in the other direction. While we may see it break these levels, which will get a lot of people excited, we are not going to go flying into the tempest right off the bat. 95% of the time it pays to be patient in the market. Let them set up and take the easier money instead of trying to guess. I will be watching these key areas, but an initial break does not mean it is going there. We will have to see how it tests. If it breaks below 950, then you have a test down to 900-905 because that is where it gapped up to start this move. That is a pretty big selloff that takes back everything it has gained, and we will have to see how it plays out. Those are all contingencies however, and we are not even out of the bottom of the range yet.

For NASDAQ, the key is the 1962 level. If it breaks that, holds, stays down, and then comes up and tests, you are looking at 1860 (its June peak). If that breaks, it will get ugly because then you are looking down at the 1765-1745 range. That is getting to more of a serious correction. I have been concerned all along that the economic data did not support a continued market rally because it is just a comeback from the essential shutdown of the economy back in the fall of 2008.


Friday everything pulled back, and you will see these pullbacks with that kind of negative breadth in the market. All of the stocks that did well were actually down. One of the reasons for this was that the dollar improved nicely on Friday. It closed at 1.4192 Euros, from 1.4284 the prior session. That put a lot of pressure on commodities and oil, which closed at $67.56, down $2.96. Oil rallied up to its peak again in the top of its range and is selling off again. Some are saying this is a double top. It could be, but it may very well just be more of trade inside its range. I think that is the situation.

Bond yields were down. Investors moved toward bond as they often do when the market is sold. The 2 year closed at 1.07% and the 10 year closed at 3.57%. It was up at 3.75% just a couple of days ago, which shows you that the bond market can be as volatile as the stock market.

Because the dollar was so strong, you saw many of the commodities and metals trade down. Energy stocks were down also. Everything went down across the board including the leaders and industrials, big tech, and chips. Semiconductors were up over 2% on Thursday, but they were down over 2% on Friday. There is some volatility there, and that is a sign of potential change. Overall, the leaders are all maintaining their uptrends, and they have recent consolidations and are setting up nicely in those as well. Sure there is day-to-day bouncing up and down - some days look worse than others. In the bigger picture, however, they are holding their trends and patterns and we have great leadership that is still in good shape. That is another reason that even though there are calls for a market top, you still have to take it with a grain of salt with leadership in such a good position. That does not mean they will hold up as well. As we saw in June, the leaders were in good shape, though we did have the semiconductors lagging at that point which they are not doing now. Watch for good plays that set up, and as long as the leaders are holding their patterns, we see the potential for the market to rise again. Of course, that is a positive when you couple that with the fact that the indices are also maintaining their uptrends quite nicely.


CPI shows no inflation for now.

The CPI showed no inflation in the picture for right now; it was flat again and that was what was expected. That was a nice reprieve from the 0.7% gain in June. The core was up 0.1% and that was expected, down from 0.2% in June.

The particulars are always interesting to look at. Cars were up 0.5%. Used car values have shot through the roof. Gasoline was down 0.8%. Apparel was up 0.6% and housing down 0.2%. Computers were down 3.2%, food was down 0.2%. Education was up 0.5% (it seems like you cannot get away from rising education costs). Inflation near term is under control. There is concern about inflation down the road, and that is one of the reasons we continue to see a bid in commodities and those things that, if they fall and hit the ground, make a lot of noise.

Same Store Sales provide better guidance, but that is already factored in.

More same store sales came out on Friday, and they were quite good overall. Abercrombie and Fitch sales were down 30%, but it had good guidance. JCPenney and Nordstom both increased their guidance as well, and they all sold off because they already announced that things are getting better. After the surprise in the earnings season that caught analysts flat-footed, they have all raised their estimates, and it is not that surprising when these retailers come out and say things are not as bad as they thought. Not to beat a dead horse, but this fits into the entire theme that things are not really expanding, they are just recovering from a standstill in the fall of 2008 when the market and the rest of the economy when into a panic.

Capacity and industrial production show signs of real improvement.

Industrial production topped expectations at 0.5%, which was much better than the -0.4% in June. Capacity rose to 68.5 from 68.1, revised higher from 68.0. We love to see upward revisions because it shows that the analysts may be wrong - they are still too negative - and momentum is changing. These are significant gains. It is hard to ignore them, but then again they are one data point. How to you reconcile that? You say this was a strong month. It will either be an anomaly or we will see an improvement over the next few months, and that will be the proof in the pudding. The interesting thing is it is going to dovetail with the lower wholesale inventories and lower business inventories. If you see capacity and production picking up, that is a good indication that we will see the inventories pick up and the GDP rise accordingly, since inventories add to GDP. We are not there yet since in the last couple of days inventories were down over 1% in both categories. The GDP is still struggling in that respect, but we will get a build at some point in our inventories because they are doing to get sold out and will have to replenish.

Philly Fed sees some growth ahead even with weaker employment.

The Philly Fed comes out every once in awhile and hits the market with a forecast of the future. It sees better growth ahead. From its region, things are looking better from a manufacturing point of view. Unemployment is going to be the pits; it says it will keep going up, but it thinks manufacturing is trying to turn. That is interesting because I talked on Thursday about how unemployment will peak just as the economy hits bottom and makes its turn. The Philly Fed's observations of what it is seeing in its district are rather interesting because, once more, we see some data dovetailing with historical actions in the direction of recovery.

Some real signs of improvement.

We have looked at the economy again and we know that we only essentially have a recovery right now from a panic, but there are some tantalizing indications of improvement. These are not the green shoots that everyone has been talking about, but these are real areas of improvement, and that is why I am interested and not as dismissive as I was one or two months back. I will keep watching these and see if there is a change. The reason that I am getting more excited is that I am seeing them dovetail with historical norms when there has been a recovery. The other stuff is nonsense, but these are showing some signs of positives and signs of hope.



VIX: 24.27; -0.44
VXN: 25.24; +0.15
VXO: 23.99; +0.19

Put/Call Ratio (CBOE): 0.95; +0.17

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: 49.4% versus 42.2% and 36.7% the week before that. Bulls are leaping higher, moving well past the 35% level considered the threshold for bullish or bearish action. Hit a high of 47.7% mid-June on the run from the March lows, and now it has surpassed that level. This is an additional indication that the market is getting overbought and in need of a correction or consolidation. To be seriously bearish it needs to get up to the 60% to 65% level. 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.

Bears: 21.3% versus 31.1% and 35.6% the prior week. Continuing the massive exodus from the ranks of bears. For reference, cracking above the 35% threshold considered bullish. Hit a 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: -23.83 points (-1.19%) to close at 1985.52
Volume: 1.876B (-7.64%)

Up Volume: 450.071M (-1.062B)
Down Volume: 1.455B (+870.814M)

A/D and Hi/Lo: Decliners led 3.5 to 1
Previous Session: Advancers led 1.23 to 1

New Highs: 22 (-43)
New Lows: 1 (-6)





Stats: -8.64 points (-0.85%) to close at 1004.09
NYSE Volume: 1.177B (+28.9%)

Up Volume: 223.791M (-353.88M)
Down Volume: 853.229M (+658.233M)

A/D and Hi/Lo: Decliners led 2.47 to 1
Previous Session: Advancers led 2.01 to 1

New Highs: 63 (-29)
New Lows: 41 (-2)




Stats: -23.83 points (-1.19%) to close at 1985.52
Volume: 172M shares Friday versus 93.6M shares Thursday.



We have the indices in a narrow range. We have been here before - not so long ago, in June - and the market was not able to hold up and it sold off. Was there a major roll over and a crash down to the March lows? Absolutely not. The chips sold, the techs sold, the commodity trade sold, all of the BRIC trades (China and Brazil related) sold off, but they did not collapse and they came back.

So what do we do now? We are right in the middle of a range. We have some upside and some downside plays in place, and we anticipate taking some money on either side depending on which way the market goes. We did not do much on Friday. We did not close many positions and only bought one downside position. We have plenty of upside exposure, and I wanted to have more exposure to the downside just in case. The reason I did not want to go hog wild is because the market held its range and it bounced back. Some of the plays we could have gotten into but, like on some of the downside plays where we wanted to buy puts, the spread was too wide. Even though it was a good technical position to get in, the option spreads did not narrow as I wanted them to, so I did not want to get into them because that would ruin our risk/reward position. We simply had to take a pass in stocks such as PFWD. It is a great downside move, but with the option spread so wide, we would not get the kind of gain that would make this a good risk/reward play.

As is usual on Friday, we did not do a whole lot, but that does not mean that will be the case on Monday. What we are going to be watching is how the market responds inside of this range. It is time to be patient. We have great upside positions and some great downside positions ready to move, and we also have some waiting in the wings that we can move into if the market makes a break.

What are the odds of the market making a definitive move next week? It could definitely break upside or downside, and frankly I am leaning toward the downside at this point. We saw what happened in June, so even though things still look good now, I still do not see a catalyst at this point to send it higher. Next week we are going to have a couple of regional PMI reports, there will be housing starts and there will be other data along those lines. Earnings are mostly over and we kind of know what the economic data is right now, so there is not going to be a lot of catalysts to move it higher. Based on that, I am leaning toward the downside for the market to move next, but as long as the indices and the leaders hold their trends, I am not going to say that I am smarter than the market. We have a lot of gain build into a lot of positions, and we have the stocks in place and will let them take us out. On the close Friday, a lot of the stocks that had sold down during the day bounced and cleared up above their stock points, so we did stop out of them. We will be watching because even if it breaks sharply lower, it may come back up and test and continue higher. Or it may not; we will be minding our stops. We do not want to get caught out in this thing if it turns down sharply.

We can always get back in, which is something that I say all the time. It is always easier to get back in the market if you are coming back in with a nice wad of profit behind you that you made on the last run. Now is a time to be patient. The market is moving laterally. It made a strong run. It takes time to change a trend up or down, so it is moving laterally. The bulls and bears, buyers and sellers, are fighting it out right now to see which way they will push the market. We are going to sit back and take good shots when the opportunity presents itself and we have a good risk/reward point where we can enter. We like to stack the deck in our favor, and one of those things is having a great stock in great position and in good risk/reward. We can come out smelling great whether or not we win all of our trades are not, and the ones we win we will make a bunch of money on.

While I am leaning to the downside, as soon as you commit to one way, the market will slap you in the face. Remember it has not committed yet. Everyone thinks that just because it stopped moving up it is going to move down, but that is not the case. What we will do is let the market show us the break, be patient, move in after it tests or at least move in significantly. We will always take positions on a break, but we will not load the boat. Let them come back and test and see which way that test holds, and that is when you really load the boat.

I hope you have fun whenever you are this weekend. We have had a great run in the market and have made a lot of money on this, so take some out and enjoy life with it. Do the things you want to do and that you know you need to do. Have a great weekend.

Support and Resistance

NASDAQ: Closed at 1985.52
2010 from the Thursday peak
2015 is turning out to be near term resistance
2099 is the mid-September low
2169 is the March 2008 double bottom low

1984 from late September
The 18 day EMA at 1967
1962 is the bottom of the August 2009 range.
1947 is the October gap down point
1897 is the October post gap intraday high.
The 50 day EMA at 1888
1880 is the June peak
1862 is the July peak
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 1643

S&P 500: Closed at 1004.09
The August intraday peak at 1018
1106 is the September 2008 low

The November 2008 peak at 1006
The 10 day EMA at 1000
The 18 day EMA at 988
962 is the August 2009 consolidation low
956 is the June intraday peak
The 50 day EMA at 952
944 is the January 2009 high
935 is the January closing high
932 is the July peak
930 is the May peak
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 875
866 is the second October 2008 low
857 is the December consolidation low

Dow: Closed at 9321.40
9387 is the mid-October peak
9625 is the October closing high
10,365 is the late September low

The 10 day EMA at 9285
The 18 day EMA at 9173
9088 is the January 2009 peak
8985 is the closing low in the mid-2003 consolidation
8934 is the December closing high
8878 is the June peak
8829 is the late November 2008 peak
The 50 day EMA at 8844
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
8375 is the late January 2009 interim peak
8315 is the February 2009 peak
The 200 day SMA at 8312
8307 is the April 2009 intraday high
8221 is the May 2008 low

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

August 17 - Monday
Empire Manufacturing, August (08:30): 2.20 expected, -0.55 prior
Net Long-Term TIC Fl, June (09:00): $17.5B expected, -$19.8B prior

August 18 - Tuesday
Building Permits, July (08:30): 576K expected, 570K prior
Core PPI, July (08:30): 0.1% expected, 0.5% prior
Housing Starts, July (08:30): 598K expected, 582K prior
PPI, July (08:30): -0.2% expected, 1.8% prior

August 19 - Wednesday
Crude Inventories, 08/14 (10:30): +2.52M prior

August 20 - Thursday
Initial Claims, 08/15 (08:30): 553K expected, 558K prior
Leading Indicators, July (10:00): 0.6% expected, 0.7% prior
Philadelphia Fed, August (10:00): -2.0 expected, -7.5 prior

August 21 - Friday
Existing Home Sales, July (10:00): 5.00M expected, 4.89M prior

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

Jon Johnson is the Editor of The Daily at

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