Bernanke Changes the Theme

SUMMARY:
- Bernanke changes the theme: stocks still gain, oil gains, but so does the dollar.
- Canada jobs gains show the US is lagging the world and North America as well.
- Indices show no fear at the September highs as the late September lower his is no boogey man.
- Healthcare vote could act as its own catalyst.
- If revenues expand the market may not wait for another correction before taking off on its year end run.

Bernanke's acknowledgement of rate hikes at some 'extended period' enough to change the action.

The market traded under a different theme on Friday. It did not roll over and sell, but instead traded higher. Oil traded higher, which would lead one to suspect that the dollar would be lower, but the dollar was higher as well. What made the difference on Friday?

Federal chairman Bernanke said late Thursday night that even though the Fed was going to continue to keep rates low for an "extended period," the Fed would have to raise rates nonetheless. That was all it took. When the Fed Chairman says that we have to do something, it is on the table, and that is step one in the process of the Fed changing its policy. They have to talk about it and tell everyone on earth what they are going to do before they take steps to do it. It takes months to get to where they will actually raise rates, but the effect was immediate.

The dollar picked up strength. It was still weak, closing below 90 yen, which is an important mark having broken below that during the week. It did pick up strength on word that rates would be hiked, just as the Australian dollar picked up strength when it actually hiked its rates unexpectedly to start this past week.

Bonds, on the other hand, sold off sharply and yields jumped. Bonds did not like this. If we start raising interest rates, then that digs into the value of bonds. Many bond investors were avoiding a Christmas rush and selling early. It could be months and months before the Fed actually raises rates, but it does not matter. When it is out on the table, the die is cast, and unless something seriously negative happens in the world and to the US economy, then the Fed will be on this course. The Fed fund's futures contract for February immediately priced in a quarter-point rate hike. We will see what kind of hikes the Fed has in mind over the next few months. It could be quarter-point or half-point hikes to get things back up to where they need to be to fight the inflation beast that is ahead of us.

Oil was up ($72.29, +0.60). The dollar was stronger (1.4716 Euros, versus 1.4778 Thursday), but not as strong as it was earlier in the morning. It still held strength into the close, however. Gold was down ($1,050.10 -6.20). After the kind of hair-on-fire run that it had during the week, a little giveback is normal with the change in what the Fed is saying. Gold is not running over because of what Bernanke said. Just talking about having to raise rates down the road is not going to put the inflation genie back in the bottle. While we are not experiencing any inflation right now, but with the kind of money printing we have, we are seeing gold and other commodities indicate that inflation is on the way. That may not be true for the rest of the world, but it will be here in the US given all the money we have printed and intend to print.

Whether it was fall on Friday, or just the fact that the Federal Reserve has admitted it will have to change interest rates, there was a different theme in the air. The tone was changed, but did not tank the market at all.

TECHNICAL

INTRADAY

The market started lower. It gapped down, but then there was an immediate recovery mid-morning through early lunch. That was followed by a pause and a pullback to test over lunch, but it held in the thick range of support from the prior day and then rallied up through the close. There was a bit of giveback late in the session. That is where the market peaked on Thursday right at the late-September peaks, and then there is some congestion, but the market rallied late in the session. It was not really a surge of new buying. With Bernanke speaking on Friday and the healthcare bill to be voted on next week, there is concern that there may be some news over the weekend that could impact stocks on Monday. The shorts were a bit nervous, and they were squaring up ahead of the weekend. There was nothing unusual about the intraday action other than the fact that the market rallied up to that resistance and it held there.

INTERNALS

The internals were so-so. Volume was substantially lower (-18% NASDAQ, -22% NYSE). It was well below average. There was really no excitement there, and there was not much accumulation. It was more of a nervous trade on Friday that the market melted higher with the general upside bias versus any real buying.

CHARTS

We can look at each one of the charts of the major indices and see that they moved over that late-September lower high. The SP500 did that, as did NASDAQ - it made a closing high at that level. SP600 moved up over that level as well. There was no major breakout; they barely broke over that level, and trade was weaker. It was below average on NASDAQ as well, so it was not a strong move. The important point is that stocks did not hit this level and then high-tail it back down to this October low. It does not mean they will not do that, but it does show us that this level is not the boogeyman as it did not send stocks scurrying back down. Maybe earnings will come out and revenues will not grow as investors are anticipating. There may be more of the same kind of growth on cost-cutting at the bottom line - although how much longer can you do that and still have anyone left to do the work? We may not see that, but if that is the case, stocks could fall back down to this October low and make that double bottom similar to what the market showed in May. That may happen, but we cannot assume it will be the case because this level was not the boogeyman that it could have been. That does not mean the indices are not vulnerable. On each of them is something that could be setting up a double top. COULD be. That is the key. It does not mean it will happen; the market could be just getting a test down for a double bottom as we have seen before. Each index has an issue that it is dealing with as to the prior high.

The interesting index on the day was the Philadelphia SOX. It bounced but was making a lower high. Then it found a world of buyers on Friday. It took off, and some of the stocks in that index (and even those outside of it) performed very well. Maybe it is going to try to lead the way up. It has been one of those indices that look like it will fall about every month or so, but it is able to right the ship and break to new, post-low highs.

I was looking for this area to hold its resistance and possibly send the indices back down to May. It can still do that because the September peaks are right ahead and only points away. We will still have a serious test come this week with earnings. If they do not satisfy, we will see some pullback. Thus far, strong uptrends remain in place, bouncing off support levels where they should, including this trendline from March-July. They show the kind of strength that a strong market does (or, in the case of this market, one that is being driven by liquidity). There is a lot of liquidity, and it is maintaining the uptrend by filling in each dip that comes down and causes a test. There is a lot of strength here and an important test ahead, but at this point none of these tests have scuttled the rally. May and June there was a correction, but it was a correction within a range. Here we have the range. They held the same support. It is a big rectangle they formed and broke out of it. I surmise we might be doing this again if the earnings are not as good as people hope they will be. If they are, then we could see the market raise higher from here without stalling or pulling back. That would be an extraordinary event, but again, we are close to mid-October. If there is the right kind of news with all the money on the sideline, they could be high-tailing it onto the next level. That is very interesting and kind of exciting.

LEADERSHIP

The chips were strong. There are some decent formations from SLAB with a pullback to a support level. There is also the 50 day EMA rising to meet it, and there is a nice bounce on some good volume. We saw volume spike up at the end of the week; it looks promising. There is a somewhat choppy pattern here, but we are seeing the same type of pick up off of a support level from XLNX. Then, of course, there are the big boys such as INTC. It is trying to break over this six-week range that it formed, flat as a pancake, trying to make a move. There are many chip stocks that are picking up. LRCX made a gap out of a rectangle of its own. You can see the outline of the rectangle, it came down and held support and made the breakout. Chips are suddenly looking better, and we will be mining those for potential plays for next week because, if this thing breaks to the upside, they have been consolidating and could be nice leaders higher.

Energy was a leader all week, but it took the day off on Friday. There are big moves followed by a pause. I am not really worried about this. CVX, one of the majors, had a good week and it continued on Friday because it raised its guidance.

GS has rallied. It is showing a bit of trouble and was getting choppy intraday. It has not blown things away, but it has a nice trend - an ABCD and a breakout. It should now come back and test the A point near 187. If that holds, it should break higher. It might be an interesting play off of there for a quick trade.

As for tech, IBM had a great session. It had huge volume, a 3% gain. The options that we have expire next Friday and we might have to sell them. With this kind of move and surge higher, if it is going to continue, we will let it run because we will make more money with the gains than we would lose on the time decaying. It is looking really good and we will let it run for now.

Overall, the leadership is still solid. There is rotation all through the market, and it is classically filtering down into some small stocks. I put low priced stocks on the report on Thursday because they set up so well and have so much buying going on in them. The liquidity is definitely filtering out through the market.

A lot of stocks are in an overbought position. They rallied like crazy last week. Those would be gold stocks, silver, energy, and some of the commodity stocks. They had big runs. Even some technology was up as well and needs a pullback. That means the same thing it has meant for the past several months: There is rotation ongoing in the market. One area will have a nice run, then have to pullback and consolidate and set up its next move. As it is doing that, money moves out and moves into other areas and blasts them higher. Some are old areas that are being recycled back up (semiconductors, in this case). Others are completely new and trying to break higher - those are a lot of the small stocks. They are crossing a lot of sector boundaries, but the theme is that they are small. Remember, you have to look back at what the small-cap index did this past week. It was a leader and had some of the outsize moves. It did not make the breakout, but it did have very high percentage gains each session, and more than the larger-cap indices. That is where you see money filter down into smaller-priced stocks. They are making some impressive moves or getting set to do so. The interesting thing about those is you can have a relatively small move but have tremendous percentage gains. I will be looking more at those as next week arrives and as the indices test the September peak. We will see whether or not the next higher peak is the boogeyman or if it is something that the market will deal with as it has dealt with each peak thus far.

THE ECONOMY

U.S. lags the new economic powers, loses its dominance of North America.

On Friday, a big news story was Bernanke's comments regarding the US having to eventually embark upon rate hiking. This was no surprise, but whenever the Fed Chairman comes out and says it, it slaps the market in the face. Investors must admit that it will definitely happen and react accordingly. Earlier we saw the reaction, and it was fairly immediate.

Canada had an increase in jobs for the second month in a row; this was an important piece of economic data that was not talked about very much on Friday. They showed a 30K jobs increase for the past month. By our terms, 30K would not seem like much (of course, to us, any job increase should seem like a lot right now ) but, if one corrects for population, a 30K job increase in Canada is on par with a 300K job increase in the United States. Canada is not only producing jobs, but it is producing a lot of them. It must be well into its economic recovery, and we are not even close to doing that here. We still have 500K + new jobless claims each week and are way behind a lot of other countries in the world. The economies of China, India, Brazil, and Australia are all picking up, and ours is not.

The important thing with Canada is that it is in the northern hemisphere. This tells us that the stimulus package is not working. We have had modest improvement in some economic data, but we have not had the kind of improvement we need to see and that we have seen in past recoveries where, once things take hold, there is a swoosh higher. We are having a very slow, sporadic return to the upside. The ISM numbers are struggling. The service did finally move up over 50, but there is backsliding already on the national ISM, and Chicago faded back to contraction as opposed to being in expansion. Gold is surging, bonds are rallying, and the economic data is not picking up with the kind of tidal wave strength needed to propel our economy into the rapid growth that we need to recover.

One can say that Canada's rise is due to the improvement in the natural resource prices. There is high demand for natural resources, they are at high prices, and Canada produces a lot of oil and gas. We could say that is where the jobs are coming from, but we could do the same here, however. If we open the outer continental shelf, if we open ANWR, we could have a lot of new oil and gas jobs over night. They say it takes years to actually get the production online. It does take some time, although it is not nearly the amount of time we have given the technological improvements that we now have. We do not have to drill as many wells, and there are not as many production facilities to build. Things can get up and running much quicker. What has worked so well in past recessions, and what we should be doing now, is providing incentives for new development. If we want to, per se, get away from fossil fuels, we should provide incentives to the private sector to go out and produce a different kind of vehicle. It has worked in the past. When we want to get something done, we can do it if we incent people in the correct way. The problem is that we do not have the money to do it right now. We have spent our money on things such as turtle crossings, and will now spend it on healthcare that will leave 25M people uninsured. When the President spoke about this in August, he said that there were only 30M people in the United States that were uninsured. We are going to overhaul the entire healthcare system and dump very good healthcare plans for 5M people (net) covered? It does not give us much bang for our buck.

We have some serious issues, and now it is showing up in our ranking in the world economic recovery. The United States is at a pivotal point in its economic history. We have always been the country that has been the economic power, thanks to our great standard of living and our purchasing of foreign goods. With the aid of our trading partners, we have been able to buy our way out of past recessions because they were willing to underwrite our debt if we bought their goods. China, Brazil, and India (among other emerging countries) are now discovering that they are wealthy and do not have to hold our dollars anymore. They do not need us, and we saw some evidence of that last week with talk that countries were going to look for more divesting of US dollars and would buy gold and other currencies that they see as a better store of value than our diving dollar. We have some very difficult times ahead of us economically. What the data is showing across the globe is that we have taking the wrong track when it comes to getting out of this recession. We are letting ideology rule over logic, and that is hurting our economy and our futures. We are pegging ourselves at a lower status than we have been in all of the other economic recoveries in the world. We are in a dangerous time right now, and we are ready to dig the hole deeper with a healthcare package that will probably pass, and will be much more expensive than anyone anticipates. That is history talking; all of the entitlements that we have passed have been more expensive than anticipated by at least a factor of ten.

With these serious issues ahead, you have to question what is going on in the economy and who is actually in charge. There was an FOI Act request that recently revealed that during a critical time when there was monetary policy being set, Rahm Emanuel had 108 telephone calls with Treasury Secretary Geithner. It makes one wonder who is actually running things over at the Treasury. The boss of the Treasury is the President, there is no question about that, but we need a bit of independence also. It has not been that way, and that is the reason why Treasury Secretary Geithner is laughed at when speaking to other countries about the US being in favor of a strong dollar.

We have serious issues, and our neighbors to the north are kicking our pants right now. Their economy is taking off while we are left in the muck and mire. We have to ask ourselves and our leaders what is going on and why we are not enjoying a recovery. The answer is that we are pursuing the wrong kind of stimulus. Again, this is ideology over logic. We will have issues as long as that is the case, and it is not fair to us, our parents, or to our kids.


THE MARKET

MARKET SENTIMENT

VIX: 23.12; -1.06
VXN: 24.18; -1.5
VXO: 21.76; -1.31

Put/Call Ratio (CBOE): 0.79; +0.06

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: 48.9%. Paring back from the 50.6% the prior week. Tough week of selling knocked the bulls back but the bounce will bring them up again. Still well over the 35% level that is the threshold for what is considered a bullish climate. It does not mean things are necessarily bearish; that takes a reading in the 60% range. Hit a high of 47.7% mid-June on the run from the March lows. Again, 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: 24.4%. Climbing on the market selloff, up from 23.6%. That puts it back up to the level hit three weeks back, still showing sufficient pessimism. Hit a low of 21.3% on this leg. Rebounding some from the big drop 31.1% and 35.6%. 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.


NASDAQ

Stats: +15.35 points (+0.72%) to close at 2139.28
Volume: 1.886B (-18.09%)

Up Volume: 1.241B (-380.581M)
Down Volume: 708.31M (-10.924M)

A/D and Hi/Lo: Advancers led 2.12 to 1
Previous Session: Advancers led 1.35 to 1

New Highs: 151 (-27)
New Lows: 11 (0)

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

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

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


SP500/NYSE

Stats: +6.01 points (+0.56%) to close at 1071.49
NYSE Volume: 990.061M (-22.31%)

Up Volume: 592.335M (-353.085M)
Down Volume: 384.234M (+71.141M)

A/D and Hi/Lo: Advancers led 1.44 to 1
Previous Session: Advancers led 2.73 to 1

New Highs: 335 (-161)
New Lows: 43 (-1)

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

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


DJ30

Stats: +78.07 points (+0.8%) to close at 9864.94
Volume DJ30: 161M shares Friday versus 209M shares Thursday.

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


MONDAY

There are two major things coming up next week, and one of them is the healthcare vote. If it is defeated (I do not think it will be), then perhaps the market will rally further. It seems to have had no trouble rallying up to this point, and is not afraid of any of the old highs. It is getting plenty of money pushed into it and it is pushing it up again, but if the healthcare bill is killed, that could send the market rushing even higher.

Earnings will be picking up full speed next week, and investors will be looking for revenue growth versus cost cutting. There were tantalizing tastes of better revenue growth a few weeks ago with some preannouncements, and we are now at the lick log and need to see it showing up in the actual numbers.

The market is rallying up into earnings and is right at the September peak. There is a potential double top there, but you cannot assume that the market is going to fall simply because it is at a double top and earnings could be bad. On this rally, that assumption has brought a slap in the face every time. You cannot assume that because it has had a good run and has not corrected enough that it will not keep on running. Take note that the market has yet to pay attention to that late-September lower peak that was made. It has not broken through convincingly, but it has not fallen back from it. That is important. It was not scared of it, and it did not back away; the market finished just over that level this past week. That shows that there is plenty of money and still no fear there. Thus, it is up to earnings and whether or not the revenue numbers come in better than expectations. If we get a few of those coming in on key stocks that are above expectations, they can take right off on this run. That new money can come in and start chasing results and performance up into the end of the year.

With the SP500 closing at 1065 on Friday, if it breaks through, it will be over 1100 and pushing towards 1200 by the end of the year. That is the kind of strong rally that we can get, and it may not wait for any correction if the revenue numbers come in stronger than expected. That is a real bullish call, and a reluctant one because there needs to be more work done. I know we are just buying time. We are stealing from our principal to keep the party going now, and we will no doubt pay for it later. For now, why fight it? We will make what we can going forward. If it is going to run like a banshee to the upside, we will get in the big names that are going to take us there. There are plenty of good stocks that are in position. The chip stocks just came back and turned around from what looked like a dive lower. They are going to provide opportunity, and they can run like the wind.

Support and Resistance

NASDAQ: Closed at 2139.28
Resistance:
2142 is the late September 2009 peak
2155 is the March 2008 intraday low
2167 from the July 2008 intraday low
2168 is the September 2009, intraday peak
2169 is the March 2008 closing low (double bottom)

Support:
The March up trendline at 2132
2099 is the mid-September 2008 closing low
The 18 day EMA at 2099
2070 is the September 2008 intraday low
2060 is the August peak
The 50 day EMA at 2041
2016 is the early August peak. Key level.
1984 from late September
1962 is the bottom of the August 2009 range.
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
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 200 day SM A at 1745


S&P 500: Closed at 1071.49
Resistance:
1070 is the late September 2009 peak. Bending.
1080 is the September 2009 peak
1106 is the September 2008 low
1133 from a September 2008 intraday low
1185 from late September 2008
1200 from the July 2008 low

Support:
The 18 day EMA at 1051
1044 is the October 2008 intraday high
The August peak at 1040
The March/July up trendline at 1036
The 50 day EMA at 1025
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low
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
919 is the early December peak is bending
The 200 day SMA at 905
899 is the early October closing low
896 is the late November 2008 peak
888.70 is the April intraday high.


Dow: Closed at 9864.94
Resistance:
9855 is the early September peak in its lateral range. Bending as well.
9918 is the September 2008 peak
10,365 is the late September low

Support:
9835 is the late September 2009 peak
The 18 day EMA at 9688
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
The 50 day EMA at 9471
9387 is the mid-October peak
9116 is the August low
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
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
The 200 day SMA at 8494
8451 is the early October closing low
8419 is the late December closing low in that consolidation


Economic Calendar

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

October 14 - Wednesday
Export Prices ex-ag., September (08:30): 0.8% prior
Import Prices ex-oil, September (08:30): 0.4% prior
Retail Sales, September (08:30): -2.1% expected, 2.7% prior
Retail Sales ex-auto, September (08:30): 0.2% expected, 1.1% prior
Business Inventories, August (10:00): -0.9% expected, -1.0% prior
FOMC Minutes, September (14:00)

October 15 - Thursday
Initial Claims, 10/10 (08:30): 525K expected, 521K prior
Continuing Claims, 10/03 (08:30): 6060K expected, 6040K prior
Core CPI, September (08:30): 0.1% expected, 0.1% prior
CPI, September (08:30): 0.2% expected, 0.4% prior
Philadelphia Fed, October (10:00): 12.3 expected, 14.1 prior
Crude Inventories, 10/09 (13:00): -0.98M prior

October 16 - Friday
Net Long-Term TIC Fl, August (09:00): 15.3B prior
Capacity Utilization, September (09:15): 69.7% expected, 69.6% prior
Industrial Production, September (09:15): 0.1% expected, 0.8% prior
Michigan Sentiment-Preliminary, October (09:55): 73.5 expected, 73.5 prior

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

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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