Sunday, October 25, 2009

Market Posts Second Reversal for the Week

- Market posts its second reversal for the week.
- UK having trouble escaping recession.
- Existing home sales show a nice September surge though again it was at the lower end.
- Market still holding its lateral move but having trouble putting good earnings to positive use.

Overall solid results but market reverses off gains once again.

More of the same with respect to earnings: some outstanding results shot individual stocks higher, e.g. AMZN, while most others were solid but not as spectacular. Indeed Friday saw AMZN and INTC beat across the board while others beat the bottom line but were light on revenues, e.g. HON. Thus far 40% of those reporting earnings are beating on the top line as well as the bottom line. Not bad given that in Q2 most saw zero top line growth and indeed top line declines. The mood created by AMZN and MSFT, at least early Friday, was enough for investors to overlook the top line misses. It was enough for investors to even overlook the UK failing to post its first positive GDP reading in six quarters.

Almost immediately after the bell, however, stocks started to peel back from the opening gains. A half hour into the session September home sales posted an unexpected 9.2% gain. The indices bolted higher . . . then rolled over and hit new session lows, all within minutes. That led to sharper selling and then after lunch a slow steady lateral slog into the close.

Second time in three days the market reversed from gains and did so on higher volume. There is definitely some overhead at DJ30 10K and 1100 for SP500.

The dollar was a bit stronger so maybe that was the plague on the market Friday. Oil sold (79.93, -1.26) after topping $80 on the week. Gold fell as well (1055.10, -3.50), continuing its lateral consolidation of the past three weeks. That fit the 'new normal' action of the market, i.e. a weak dollar driving near term gains. Bonds, however, sold even as stocks sold. There was no 'usual' flight to the safety of US bonds. That has cropped up on a few sessions the past two weeks. Bond and stock investors are either betting this is not a big deal pullback.

On the other hand, maybe they are saying the US just isn't what it used to be in terms of safety. We no longer honor contracts as seen when the secured debt holders were basically ignored when the Administration decided to take over Chrysler. We have not supported the dollar for two administrations now. The current Administration openly attacks insurance companies, news agencies, threatens a value added tax on top of the income tax, is planning limiting salaries of ANY publicly traded company, prints money as if it is worthless (it is getting there), and plans on adopting more entitlements requiring additional massive spending. Gee, put my money there honey.

Maybe that is a red herring, but even with all the liquidity in the market, investors take pause at this kind of bald faced power grab by the federal government. There are no controls on its actions; the Constitution is not even an afterthought. Once the liquidity rally abates the harsh reality of an unfriendly federal government, the decline of the rule of law and sanctity of contract, not to mention a second rate currency, will have their effect.


INTERNALS. Weak breadth at -3:1 on NYSE and -3.2:1 NASDAQ. Pretty serious downside breadth even though the indices held their lateral range for October. Volume bounced on NASDAQ (+6%), returning to above average for the second time this week, both on reversals from high to low. SP500 volume kindly faded, coming in below average as the NYSE indices turned lower and sold. Mixed price/volume action, and part of NASDAQ's big volume jump related to AMZN (58M versus 6M average) and MSFT (281M versus 48M average). So . . . not such a slap of distribution as it looks to be on first blush.

CHARTS. Higher on the open but as on Wednesday the indices turned over, this time quickly, and sold sharply with 1% and more losses on the NYSE indices. NASDAQ would have been worse but for AMZN and INTC surging. Even with the rollovers, the indices still held their lateral trading ranges. Good to get out of the week in the range, but the two intraday high to low reversals isn't giving traders warm feelings.

LEADERSHIP. Big techs named AMZN and INTC gave NASDAQ relative strength. The rest of tech was sluggish at best. Of course they fared better than the financials. Thursday the regional banks led the move higher; Friday they all were clocked. Energy's strength was sapped Friday as many strong stocks in those sectors sold on volume while posting significant price declines as well. Even industrials felt the sting; they were not down thanks to powerful earnings from BUCY, but they closed well off their intraday highs. About the only stocks that did not fade from their intraday peaks were the Chinese internet stocks; BIDU and SOHU surged for us. Overall, leadership enjoyed a good week once more but the end was not that great. Pullbacks are necessary, however, and they end up giving us new buy points on strong stocks. A little silver lining to a week that saw a couple of sharp downside moves.


UK stays in recession. Harbinger for the US?

After 5 negative quarters the elite in the UK were quietly confident that the sun would not again set on the British economy. Well, they better still be good at keeping a stiff upper lip. Mark it six in a row. At -0.4% GDP the UK marked its worst recession on record, unable to join Germany, Hong Kong, New Zealand, and even France in emerging from recession.

Unfortunately for the US, the UK and the US appear to be joined at the hip with respect to our economic woes. Most pundits expect the US to emerge from recession in Q3 as well . . . just as the UK did. Everything looked positive - except for the numbers. Things look positive here as well and indeed the US could very easily bounce positive after its longest recession since WWII. Results are out Thursday. But 3% or better as some are suggesting? I guess if you count from where we came from last fall you get there, but the activity is not huge. The average of all experts is for a 3.2% gain. Wow.

That said, there are signs other than just government numbers. The trucking industry was deep in the muck long before last fall. For the two prior holiday seasons the industry never saw the rise in freight ahead of the holidays that indicates the build in sales heading into the season. CEO's sounded the alarm, suggesting that the US was heading into economic trouble. How prescient.

The trucking industry was hard hit and the pessimism in the sector was rife. Companies would not even talk to a vendor if it had anything to do with other than tires, oil or diesel, i.e. things that made the trucks roll. Just over the past month, however, trucking companies are interested once again in products other than tires. Indeed they are interested in new products and innovations, not just the standard fare. That indicates that there is not only something of a recovery underway, it suggests some optimism. Cool.

Trucking is one of the basics of the economy. If truckers see and feel things are turning, that is a positive. It is also a rather quick turn. Just a month ago we surveyed drivers and many were struggling to find routes as freight levels remained low. The trucking industry must indeed feel more optimistic about the future.

Existing home sales up again.

Sales surged once more, indeed at a record 9.4% pace. The driving factor: the looming deadline for the first time homebuyer credit. Just as sales surge when the Fed is expected to raise interest rates (beating the hike), when a credit is set to expire it gets the fence-sitters moving.

You can tell the action was predicated on the credit as the bulk, indeed almost all, of the sales are at the two lowest segments of the housing market. These are the homes first time buyers acquire.

There was enough action to push inventories down to 7.8 months. It kept price declines to their lowest in thirteen months, down 8.5%. That is the smallest? That simply shows the magnitude of the decline to this point.

Of course realtors are screaming for the credit extension to keep sales moving along. Of course most of these are FHA loans and that means at the prices of the houses, the $8K credit basically pays for the down payment FHA still only require 10%. The credit is basically putting people in the houses for 'nothing down' and that has many concerned if the government isn't just filling up the bubble that the housing crash deflated.

Then there is the issue of middle and higher level housing markets that are in terrible shape. Most of the citizens' wealth in this country is tied up into that end of the market, and until that is addressed the impact of the first time tax credit, while very helpful to those at the lower end, is minimal.

I am not suggesting the higher levels should get some kind of relief other than simply fixing our economic problems. Housing issues tend to fix themselves when the economy recovers. Thus real incentives that promote investment and R&D in the United States is what turn the economy and thus the housing market.

Tax cuts, investment incentives, a flat tax all things Europe, Australia and New Zealand have already done and they are all already out of recession. Malaysia just cut its income tax and its spending and its economy is prospering. German business confidence is surging as its recovery accelerates. China is predicted to add 11M jobs as its recovery expands as well.

It is so basic. Those countries are taking the plays right out of the US free enterprise handbook and prospering magnificently as a result. We have thrown away the playbook we wrote and are using the European manual from the 1960's and 1970's. The results are the same: crap.



VIX: 22.27; +1.58
VXN: 22.62; +1.04
VXO: 21.58; +1.4

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


Stats: -10.82 points (-0.5%) to close at 2154.47
Volume: 2.356B (+6.34%)

Up Volume: 727.187M (-785.94M)
Down Volume: 1.728B (+982.802M)

A/D and Hi/Lo: Decliners led 3.25 to 1
Previous Session: Advancers led 1.68 to 1

New Highs: 105 (+43)
New Lows: 15 (-2)





Stats: -13.31 points (-1.22%) to close at 1079.6
NYSE Volume: 1.265B (-3.77%)

Up Volume: 147.355M (-816.11M)
Down Volume: 1.054B (+719.088M)

A/D and Hi/Lo: Decliners led 3.01 to 1
Previous Session: Advancers led 1.89 to 1

New Highs: 252 (+50)
New Lows: 36 (+7)




Stats: -109.13 points (-1.08%) to close at 9972.18
Volume DJ30: 305M shares Friday versus 231M shares Thursday. Volume was up on the pullback but a lot of that was MSFT's soaring volume on its earnings.



Earnings season is about half over and the revenues are posting beats. Not across the board, but the leaders are performing as leaders should: AAPL, INTC, AMZN, JPM, MS, CAT. The market made initial gains on the news, particularly with INTC's beat that gapped the indices over the September peak and to a new rally high.

Since that time the market has had numerous opportunities to extend the gap on stellar earnings reports, but has failed to do so. Indeed two breaks higher were reversed to losses on Wednesday and again on Friday. Sellers are stepping in despite the revenue beats and stymieing attempts to extend higher.

Thus far the indices are still in the lateral range, still moving sideways as they consolidate the early October run. This has been the pattern for this rally, i.e. surging with strong 2 to 3 week runs then lateral to slightly lower moves to consolidate before repeating. This move is not quite the magnitude of the March to early June run, but it is with respect to time. Not sure if I want to go down that road; comparisons to the initial run have yet come true in terms of the May to June consolidation. Thus far the trendline remains in very solid shape, not even challenged on SP500. Betting on the downside without more reason than the length of the run has been a losing proposition. It may be even more so now that the market has seen the earnings and they are not bad. The sprint to the year end could be underway.

At the same time the action late last week was shaky and many strong stocks and sectors were under pressure. Financials sold, surged Thursday, then sold again Friday. Retail stocks did the same. As with financials the stocks in the sectors are mixed with some heading higher, some in danger of rolling over.

We will see how they play out. We have some downside positions in these sectors. If the selling continues and the downside setups are showing up with more frequency we will add more downside.

What we are seeing is that with the modest chop and pullback there are some good upside setups taking shape. Modest and rather shallow pullback to the near Fibonacci retracement level and other good patterns are forming, and we are looking at several as potential upside vehicles for next week. As they set up and show good entry points we will move in, still looking for the run higher to end the year.

Support and Resistance

NASDAQ: Closed at 2154.47
2155 is the March 2008 intraday low
2167 from the July 2008 intraday low
The March up trendline at 2170
2168 is the September 2009, intraday peak
2169 is the March 2008 closing low (double bottom)
2177 is a low from March 2008
2191 is the October 2009 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
2275 - 2278 from the February 2008 and April 2008 lows

2143 is the October range low
The 18 day EMA at 2140
2099 is the mid-September 2008 closing low
The 50 day EMA at 2080
2070 is the September 2008 intraday low
2060 is the August peak
2016 is the early August peak
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
The 200 day SM A at 1774

S&P 500: Closed at 1079.60
1101 is the October high
1106 is the September 2008 low
1133 from a September 2008 intraday low
1185 from late September 2008
1200 from the July 2008 low

1080 is the September 2009 peak
1078 is the October range low
The 18 day EMA at 1076
1070 is the late September 2009 peak
The March/July up trendline at 1066
The 50 day EMA at 1045
1044 is the October 2008 intraday high
The August peak at 1040
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 914

Dow: Closed at 9972.18
10,365 is the late September low
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

9918 is the September 2008 peak
The 18 day EMA at 9901
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak
9654 is the November 2008 high
The 50 day EMA at 9646
9625 is the October 2008 closing high
9620 is the August 2009 peak
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
The 200 day SMA at 8557

Economic Calendar

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

October 27 - Tuesday
Case/Shiller Home Price Report, August (09:00): -11.90% expected, -13.30% prior
Consumer Confidence, October (09:00): 53.5 expected, 53.1 prior

October 28 - Wednesday
Durable Orders, September (08:30): 1.0% expected, -2.4% prior
Durable Orders ex Transportation, September (08:30): 0.7% expected, 0.0% prior
New Home Sales, September (10:00): 440K expected, 429K prior
Crude Inventories, 10/23 (10:30): 1.31M prior

October 29 - Thursday
Chain Deflator-Adv., Q3 (08:30): 1.3% expected, 0.0% prior
GDP-Adv., Q3 (08:30): 3.2% expected, -0.7% prior
Initial Claims, 10/24 (08:30): 525K expected, 531K prior
Continuing Claims, 10/17 (08:30): 5915K expected, 5923K prior

October 30 - Friday
Personal Income, September (08:30): 0.0% expected, 0.2% prior
Personal Spending, September (08:30): -0.5% expected, 1.3% prior
PCE Prices, September (08:30): -0.5% expected, -0.5% prior
Core PCE Prices, September (08:30): 0.2% expected, 0.1% prior
Chicago PMI, October (09:45): 48.7 expected, 46.1 prior
Michigan Sentiment-Rev, October (09:55): 70.0 expected, 69.4 prior
Employment Cost Index, Q3 (10:00): 0.4% expected, 0.4% prior

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

Jon Johnson is the Editor of The Daily at

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