SP500 Bumps Resistance

SUMMARY:
- Quiet expiration Friday, quiet expiration week as SP500 bumps resistance.
- Dollar's gain pushes stocks modestly lower on the week.
- SP500 works at resistance while NASDAQ, SP600 struggle to hold on.
- Dell earnings not a worry for the consumer, but what about businesses many are relying on to lead us out of recession?
- If more stimulus is to come, at least make it stimulus that works.
- Whether a correction or more weakness on a stronger dollar, liquidity keeps an underlying bid in the market.

Expiration is a sleeper.

It was a quiet expiration Friday for a relatively quiet expiration week. There were a few fireworks, however. SP500 and the NASDAQ broke above resistance on Monday, but by the end of the week (on Thursday in particular), they broke back below that level and gave it up. The break higher was not that strong and neither was the break back down. The indices are sparring a bit and feeling out the key resistance. That resistance is the 2007 downtrend line and the 2004 lateral consolidation on SP500, with the NASDAQ bumping up against the 2008 lows. You would expect that the indices would need to feel their way along and try to get over that level (SP500 in particular), especially when you consider how far they have run off the March lows. When a market slams or bumps into key resistance levels, it takes time either to get through them or to turn back down; markets rarely turn on a day or two. An extraordinary event can cause that, but usually it is more like the seasonal changes in weather. There is steady movement in the heart of the season, and then things get more volatile on the fringes of the season. The indices may be at a seasonal change given the bump up against key resistance.

The leading factor driving the market is the dollar. If the dollar is weaker, the stock market is up, and vice versa. The dollar ended the week stronger (1.4861 Euros versus 1.4920 Thursday).
It was at 1.4839 Euros earlier in the day, so it did lose strength as the day went on. The indices came back late in the session and finished down, but with modest losses. The losses were well below 1%, and much less than the levels on Thursday when there was sharper selling. The dollar is driving and there is an overlaying theme of liquidity. The word's central banks still have a lot of money circulating, and this past week they said that would not change. On Friday, Mr. Trichet of the ECB said that when the central banks pulled back the easy money, it would have to be done gradually. That was not an earth-shattering statement, but the fact that he even mentioned pulling back the stimulus rattled the market and led to some strengthening in the dollar. The dollar finished stronger and the market finished weaker, but there was not much change at the end of the session.

NASDAQ and SP500 are bumping up against the resistance and working their way along, waiting for the next bout of liquidity to push them higher. Alternately, if the dollar rebound continues to the upside, they may pull back some more and correct, and then move higher with the next liquidity bout. This is not going to be a serious pullback (if there is one at all). The liquidity is still putting a bid under the market. It will keep driving it up until the liquidity is pulled or until something so horrendous happens that it overwhelms the fact that money has been made cheap and available.

The other markets were impacted by the dollar being stronger for yet another day, trying to make the oversold bounce off the double bottom. Oil was down as a result ($76.72, -0.74). It was over $80 during the week, so it did fall back. Gold finished positively ($1,150.60, + 8.7 0), and it is not paying attention to the dollar right now. Gold is concerned with inflation, and there is hoarding with worry about what may happen in 2010. Many people are starting to see this as a liquidity-related financial rally. When the liquidity is over, I wonder where it will be left. Someone on the Fed said they might have to leave rates low until 2012. The dollar will be worth nothing at that point, but we will see what happens. We are feeling our way along in managing economic crisis, just as the market is feeling its way along at resistance.

TECHNICAL

INTRADAY

The market showed the same action it did on Thursday, just not as severe. There was a gap lower, an early selloff, the lateral move, and then a rebound back to the close. It was a very sleepy day on the market overall.

INTERNALS

The internals were very modest and flat (NASDAQ -1.2:1, NYSE -1.4:1). There are still laggards in the SP600, and when they lag the breadth lags in NYSE overall. The volume was mixed, but it remained well below average. The volume rose on SP500 and gained about 4%. It was at 1.1B - up, but still quite low.

Volume was lower on NASDAQ, and that is more interesting. When it gapped lower off the island reversal on Thursday, it was up near average. The prior Thursday when it struggled and was down, it was above-average. NASDAQ is showing distribution, but only a little bit. If you look back over the week, there was the breakout in NASDAQ and it was on no shakes on good volume. Then there was the breakdown. It was higher, and that may mean something, but it was no big move and there was no follow through on Friday.

It was the same situation on SP500. It broke out, but the volume was no great shakes and not approaching average at all. It was a bit higher when it broke back down on Thursday, but it was still nothing. There was below-average "blah" which is not showing much. That is interesting in itself because SP500 is hitting a new rally high, but is not going to break through the downtrend or the 2004 resistance level with that low volume. On the other hand, it is not batting it back down like a fly either. It is hanging in there.

CHARTS

There was a modest pullback on Friday, and it tapped the 18 day EMA on the low. That keeps SP500 below its 2007 downtrend line, below the March uptrend line, and below the 2004 trading range. It was no major break down, only sag back. It broke higher on low volume; it tried the water a bit and did not like it. It broke back down on low volume and it is sitting there. It will either make a pullback and trade down into this range following NASDAQ and SP600, or it will hold and make a breakout if the liquidity decides to come back in.

The dollar will play a factor. If the dollar continues to rally, then the dollar-sensitive stocks that make up the SP500 will have to come back and take some gain off the table while the dollar does its thing. It could stand for a consolidation - all the stocks in energy, steel, and industrials could use the breather to set up some better buy positions. I will not complain about that if it happens.

The SP500 has not tipped its hand at all, but we do know it has the liquidity underneath it that has helped keep a bid in that market. NASDAQ was a little more interesting with the gap higher on slightly higher volume, and then it tested the water as well. It then gapped lower on higher volume on Thursday - that was the island reversal, but there was no follow through on Friday (that does not mean there will not be one). Near term, this is a bearish signal, but it is not a bearish breakdown. We are just taking about a trade down to 2100 or to the bottom of the range. That is what I anticipate will happen if the liquidity does not take over and surge things back up. That would mean the dollar would stay stronger, which would help NASDAQ make the test. That certainly would not upset us. We have calls out on AAPL that we could ride down and then buy back when they go down and NASDAQ tests this level and holds. Then we can prepare for upside positions. I have no issues with what is going on so far; nothing has changed and nothing is too scary at this point.

The SP600 is the one that is a little bit scarier because it made the lower low, came back up, made a higher low, and then broke higher. It looked positive and got up to the resistance range, and then it fell back somewhat sharply on Thursday. It held the line on Friday and is going to try to hold up at the late-August peak. I am worried about the small caps. There is a head and shoulders that can be trouble. You can look at buying into the IWM. The problem with these patterns is that they set up but rarely consummate. We all saw that happen in June and July, and it got some people's feet slammed in the door. If the small caps break down, that is not a good portent for the economy moving into 2010 - but that is another story. We are worried about what will happen right now, toward the end of the year.

The SOX is similarly ugly. It has a double top. It broke down, made new lows, and rallied back, but then it gapped down. It gapped up, then gapped down, and made an island reversal. That could bring it back down to this 300 range (even to 290), and that is not that far. There is too much liquidity for a major correction, selloff, or rollover. There will be corrections, but they will be viewed as a buying opportunity as long as the central banks have the money out there. The central banks will not take the bid out of the market right now when talking about withdrawing liquidity in 2012.

The dollar-sensitive indices (SP500, Dow) are holding up the best because the dollar has been slammed. They have been performing well and leading the market. Now that the dollar is picking up steam, they are fading back, but it is not a massive selloff. The DXY0 has moved up off its low and it is trying to break up toward the 50 day EMA, but it has slammed the door shut on it in early November. That is the big test coming up next week. The dollar-sensitive indices have been leading. They are pulling back a bit now, but so are the other indices that have been lagging. It always works out that way: Leaders pull back some, laggards pull back more. That is why NASDAQ and SP600 are struggling more.

The dollar may bounce up to 76.50, perhaps to 77. That is good resistance. If it does that, we will get the pullback that we want and can then cash out of our downside plays and buy some more upside. You can add to what you have if you road some of these out and they held up during the downturn. Then you can buy some new positions to catch them as they move up.

LEADERSHIP

Leadership is still extended and showing some trouble, but there are some that have already pulled back and are try trying to regroup. It does not look pretty, but it is interesting. There was the trend higher, and it has broken lower. This is not an ABCD pattern because it is not a strong move, but there is an interesting feature of a gap, a consolidation, a gap, and then another consolidation. It looks like AKS may try to break higher. If it does, it is a nice trade up to 22-23. That is not 100% gain on a stocks position, but when the market is working through these issues with resistance, that is not too bad. STLD has a nice pattern as well; something of a double bottom with handle has formed. I can live with that. If it pulls back to the rising 10 day EMA and pops higher, we could make nice scratch on that as well.

Retail had some tough earnings this week that were not exactly pleasing, but the stocks held up well. PLCE has a nice ascending triangle. It traded in a wild range on the day it reported earnings, but it held its pattern. When a stock can do that in the face of less-than-great news, it shows it has sold out and is ready to break higher. ANN does not have a great pattern. I was looking at it as a downside play, but then it started to move laterally and hold its position, so I lost interest in that. It showed today that earnings were not as great as hoped. It was light on revenues and said its Q4 sales could be less than Q3, yet the selloff and the gap down to oblivion did not happen. As with PLCE, ANN may be sold out at this point, and that may be the case with other retailers as well. Why would BBY be moving up when California may ban flat screens? It must not be that bad (and that liquidity sure helps).

In energy, APA is holding the 50 day EMA and has come back to test it. It is down but not out. Others are having bigger pullbacks, such as HAL. It needs some work, but a pullback would not hurt it at all. RIG was selling off, and broke through its trendline on volume. That was not good, but if the market pulls back, maybe it will set a base, a double bottom, or an ABCD pattern. We have to remember that we cannot turn completely negative on the market just because it is in a correction. We have to look for the opportunities setting up and not forgot that these patterns formed during a lot of this market chop that gets everyone running scared.

DE looks great. It had a gap up, a nice test, and there could be a new entry point there. There are also some question marks. CAT is hanging in there, but we will see how many lives it has left on this move. TEX is trying to set up, but we will see. It is holding some support. The industrials have been the leaders and are now struggling as the dollar moves up a bit, but they are not giving up completely.

AAPL gapped higher and made somewhat of a double top. MACD sold off hard on Thursday on higher volume, and it could easily come down to the 190 level. You can still sell calls on this if it bounces up to the 10 day EMA on Monday and stalls. Buy them back when it hits 190 and holds.

Leadership could use more of a pullback, but some are already getting there. Steel is looking interesting again, and others will look interesting with more of a pullback. There are different waves of leadership, so different groups will move up. I have been looking for healthcare to make a move, and some stocks are, but they do not look great as a group. You have to pick and choose right now. When the dollar finishes making its rally, then the dollar-sensitive stocks should be coming back. We can then load up the boat in that direction once again.'

THE ECONOMY

DELL results a worry for a business led recovery?

There was no economic report out on Friday, but there were interesting economic developments. DELL announced its earnings on Thursday night, and they were terrible. That was a major drag on the NASDAQ because Dell has so many outstanding shares. It is heavily weighted, and it gapped lower and dragged NASDAQ down with it. It closed down 0.5%, down just over 10 points.

A lot of pundits said that HPQ is the consumer-related PC company, so we cannot worry about DELL having poor earnings. That is fine if we are only looking to the consumer to pull us out of this. HPQ's earnings were not that bad. As you recall from the 2000-2001 recession, the businesses play a huge role in whether or not the economy prospers. Consumers continued to buy houses and that sort of thing all through that recession, but businesses collapsed and their inventories killed them. The economy suffered greatly, and we are still feeling the repercussions for that because we gave away our technological advantage over that period. That is another story, but an important one because it ties into our problems today. We gave away a lead there and are paying the price today when we struggle even more with massive debt.

DELL is not doing well consumer-wise, and it was not doing well in business because most of its business IS with businesses, and its earnings were very weak. That does not bode well for the pundits who say that the business side is going to carry us out of the recession - you have to have consumers with you. I will agree that the business aspect is very important in getting any country out of a recession. They have to invest and create more jobs, and that helps pull it out. Unfortunately, we are not investing in the kind of businesses that pull us out of recessions. In the past, we have had nice booms that turn the economy around and produce the kind of growth that pays our deficits down and gets them to manageable levels (or, dare I say, even surpluses). Those are the kind of booms where small businesses create new technologies and create millions of jobs as they grow. MSFT, DELL, CSCO all started to dorm rooms, garages, and motel rooms, but went on to become huge companies that created millions of jobs. Once they get to a certain size however, they are no longer growing. AAPL is not creating the same kind of jobs it did in the past, and neither is MSFT or DELL. They are not growing the way they were, and they cannot. It is incumbent upon the next round of small businesses that start in garages and dorm rooms to become the next growth companies that produce the job machine.

We have a real problem. DELL's numbers give a look into what is happening with small business: They are not buying anything. We have seen in other pieces of economic data that there are no new orders coming out even though production is up. Regional manufacturing is improving, but there are no new orders are coming. It is all going to curtail unless something triggers some buying among the nuts and bolts of the US economy - that is small business. Something has to spark the entrepreneurial spirit to get the new businesses started so we can create new technologies and thus the new jobs that drive our economy and our standard of living higher.


New stimulus talk, but same old results? Tax credits for jobs or for businesses?

There is talk about there being another round of stimulus. The Democrats in charge say that is not going to be necessary because of all the jobs that have been "saved," but those jobs are bogus (and they cost $303K per job). Those jobs are not going to produce what we need in the US to make us a strong economic power once more. They are creating teacher, police, and firefighter jobs - they are all in the public sector. I have nothing against any of those jobs, but they do not produce new technologies and they are not going to bring us to the level where we need to be. The problem is jobs, so there is talk that we need to pass incentives to get small businesses to hire people. That always sounds great and it is something we have tried for many in years. If the economy is going well and you want to bring on some people, it is great to give an incentive, but right now, the economy is slack. It is not expanding, the numbers are not as strong as in other recoveries, and the data is showing that there is not a lot of momentum building to the upside.

Small businesses are struggling, and if there is a tax credit for hiring, it is usually a one-time credit. It offsets the cost of training a new hire, and that is expensive. When you hire someone, you have to train them in many things. They may have a certain level of experience, and they may not, but you have to tailor it to your job and it costs a lot of money to do that. It is nice to have that cost offset by a credit. Then next month, you have the salary - and the month after that, and the month after that. A one-time credit is not going to help. You have to have enough business to keep that person employed to pay their salary and to make a profit on your own. With the new healthcare bill, you will have to be able to either pay extra for the healthcare or pay a tax or penalty. On the other hand, there are one-off tax credit incentives that work. They are the "use it or lose it" type, where if you buy equipment for your business or engage in R&D, you get a credit that comes right off the bottom of your taxes. If you owe $5K in taxes, and you get a $5K credit, you owe no taxes. Then you take the $5K that you would have paid in taxes and you spend it on whatever you need to help grow your business. That is an order coming in. If enough businesses do that, that creates a snowball effect. It creates more demand and you are investing in your business and trying to grow. You are unleashing the entrepreneurial spirit, and that is what always takes us out of these recessions. It is a one-time credit, but you use it because if you do not, it becomes money sent to the government while you get nothing. It is a no-brainer. It worked and set off a boom in the 1960's. It set off a boom in the 1980's. It also set off booms in Russia and other Eastern Bloc countries. Ireland was the same. It is proven to work, but we are unfortunately not going that route.

When you invest in one-offs that people will take advantage of, then they invest in their business and you will generate new technology and businesses that create new jobs. If you just say "hire someone," and throw some money in that direction, that is not creating anything. Many people in Washington have never run a business. They have never had to figure out what works and what does not, how to make a payroll, and how to keep a business running. That is a big disconnect, and it is why you have ideas like a credit to hire. Unless that person comes on board and generates revenue in excess of their salary, they are not going to be worth it. That is especially the case with the healthcare bill that is going to be passed this weekend. There are all those expenses saddled on the small businesses, and then there is cap and trade in early 2010 that will add more expenses - and they do not even know what they are yet. Small business is not going to invest in anything or spend any money when the economy is this bad and they see more taxes and costs eating away at their business down the road. They are going to hoard their money versus spending it. The government the fighting very serious headwinds of its own creation in trying to get the economy back on its feet.

We have some problems and the solutions we hear are not up to the task, but we will muddle through it. It will be painful, but we may have liquidity in the market until 2012. That could keep things rolling despite the fact that we would lose the middle class and the small business base in the US.


THE MARKET

MARKET SENTIMENT

VIX: 22.19; -0.44
VXN: 22.49; -0.81
VXO: 21.12; -1.29

Put/Call Ratio (CBOE): 0.92; -0.08


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: 44.4%. Finally cracking some from the recent spike (48.3% last week, 49.5% prior). Of course this is just in time for SP500 to break key resistance. Believers may have waned but the liquidity did not. 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: 26.7%. Bounced up on the selling in conjunction with the decline in bulls. Up from 24.7% and 22.5% before that. Rebounding 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: -10.78 points (-0.5%) to close at 2146.04
Volume: 1.98B (-7.29%)

Up Volume: 621.67M (+331.592M)
Down Volume: 1.355B (-549.203M)

A/D and Hi/Lo: Decliners led 1.17 to 1
Previous Session: Decliners led 3.78 to 1

New Highs: 47 (+14)
New Lows: 31 (+1)

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: -3.52 points (-0.32%) to close at 1091.38
NYSE Volume: 1.128B (+4.1%)

Up Volume: 405.464M (+285.65M)
Down Volume: 685.156M (-269.385M)

A/D and Hi/Lo: Decliners led 1.42 to 1
Previous Session: Decliners led 4.05 to 1

New Highs: 83 (+7)
New Lows: 37 (-4)

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

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


DJ30

Stats: -14.28 points (-0.14%) to close at 10318.16
Volume DJ30: 230M shares Friday versus 196M shares Thursday.

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


MONDAY

SP500 is bumping up against key resistance, and the big question is whether (and how much) it will consolidate. Will it move laterally for a few days with the liquidity shoving it higher, or will the dollar go higher while SPP500 kicks back a bit and corrects more? There are plays setting up both ways, and we have seen some already pulling back. The steel stocks have pulled back ahead of others, and energy is pulling back. After a bit more consolidation, it may be ready to move upside again. There are also downside plays that continue to set up. We have to ride the fence while the market goes through this. We do not want to get too involved in any case because the market is in the process of working through serious resistance. With the liquidity out there, the presumption is that it will ultimately break higher off this. When you start assuming that, the problem is that there could be a deeper correction than anticipated.

NASDAQ had the island reversal. It did not do anything on Friday, but that does not mean it is not going to do anything with it on Monday. We took positions with respect to that pattern on Friday, and we have been taking others here and there and setting ourselves up for the moves. We will have to play the dollar factor and the liquidity factor against one another and mind our positions. As long as the upside is holding support, we can let them ride out because they are relying on liquidity coming back in. On the other hand, if there is a correction near term, many of the other stocks that have rallied up are going to come back. It does not mean they will break down and crash, it just means they will come back and test the moves they made. We can take advantage of that and make some money to the downside; indeed, we have some downside positions accordingly.


Support and Resistance

NASDAQ: Closed at 2146.04
Resistance:
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)
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

Support:
The 18 day EMA at 2147
2143 is the October 2009 range low
The 50 day EMA at 2110
2099 is the mid-September 2008 closing low
2070 is the September 2008 intraday low
2060 is the August peak
2048 is the early October 2009 closing low
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
The 200 day SM A at 1835


S&P 500: Closed at 1091.38
Resistance:
1100 is the 2007 down trendline
1101 is the October high
The March/July up trendline at 1104
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 1086
1080 is the September 2009 peak
1078 is the October range low
1070 is the late September 2009 peak
The 50 day EMA at 1065
1044 is the October 2008 intraday high
The August peak at 1040
The early October 2009 closing low 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
The 200 day SMA at 937
935 is the January closing high


Dow: Closed at 10,318.16
Resistance:
10,365 is the late September 2008 low
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

Support:
The 18 day EMA at 10,183
10,120 is the October 2009 peak
9918 is the September 2008 peak
The 50 day EMA at 9916
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
9430 is the early October low
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
The 200 day SMA at 8747


Economic Calendar

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

December 01 - Tuesday
Construction Spending, October (10:00): 0.8% prior
ISM Index, November (10:00): 55.7 prior
Pending Home Sales, October (10:00): 19.8% prior
Auto Sales, November (14:00)
Truck Sales, November (14:00)

December 02 - Wednesday
Challenger Job Cuts, November (07:30)
ADP Employment Report, November (08:15): -203K prior
Crude Inventories, 11/27 (10:30)
Fed Beige Book, (2:00)

December 03 - Thursday
Initial Claims, 11/28 (08:30)
Continuing Claims, 11/21 (08:30)
Productivity-Rev., Q3 (08:30): 9.5% prior
Employment Cost Index, Q4 (08:30)
ISM Services, November (10:00): 50.6 prior

December 04 - Friday
Nonfarm Payrolls, November (08:30): -190K prior
Unemployment Rate, November (08:30): 10.2% prior
Average Workweek, November (08:30): 33.0 prior
Hourly Earnings, November (08:30): 0.3% prior
Factory Orders, October (10:00): 0.9% prior

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

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Dollar Falls, Market Bounces

SUMMARY:
- Dollar falls, market bounces, but no change in relative position as market waits to see if liquidity comes back or the technical weakness prevails near term.
- EU emerges from recession, just not as strong as it wanted.
- Trade deficit jumps on imports, but they are not good imports.
- Return the TARP repayments to the taxpayers versus throwing it down the whole of federal debt retirement.
- Michigan a bit gloomier as jobs become a leading indicator
- Market is technically ready to trade back in its range, but it all depends first upon the liquidity and second upon the dollar.

Market rebounds from the Thursday loss but no relative change.

The market went nowhere on Friday. It was higher, but it only recaptured some of the ground it lost on Thursday when it sold back from resistance.

The market was banging its head against the next key resistance for the entire week. SP500 has its 2007 downtrend, the bottom of the 2004 lateral consolidation, and the October highs. NASDAQ has very important lows from the past three years that it is banging up against. There is that resistance met after a technically weak bounce on the one hand, and there is the liquidity held by all the financial institutions in the world on the other hand. Those are the dollars that the rest of the central banks have printed up that they are not lending out to anyone. That is what is going to determine the next move. In other words, when are the financial institutions going to push the "buy" button and move back into the market? Do they want the indices to test back inside their range over the next few weeks, or do they want to break things out now ahead of the Thanksgiving holiday and send the markets racing to new highs? That will be the determining factor as to whether the market moves higher.

On Friday, with the liquidity not coming into the market, the next most important factor was the dollar. The dollar was weaker, and it sold off after bouncing higher on Thursday (1.4915 Euros versus 1.4839 Thursday). The market sold on Thursday, but Friday when the dollar lost some strength, the market recovered and bounced back up. That did not change anything; it is still in the same position it was on Thursday and the entire week. It is bumping up against the next key resistance after a low-volume rally following higher-volume selling from the same resistance level back in mid-October. No change, only the dollar made the difference.

As the dollar goes up in price, usually you can bet that all the inverse indices - metals, energy, etc. - would go down. That was not the case. Even though the dollar did weaken on Friday, oil was down ($76.43, -0.51 versus $80 on the last bounce). It ran out of steam there again and pulled back. Gold surged ($1,119.40, +12.80).

The bond market was somewhat interesting. The 10 year closed lower (3.42%. versus 3.48% earlier in the week). There was some movement back to bonds late in the week. That shows there may be weakness ongoing in the stock market as the bond market anticipates some more selling. Stocks were higher on Friday, and bonds were higher as well. Money was moving into bonds and that usually is an inverse relationship - that could be foretelling. There may be that pullback next week starting down into the range, and that would not be such a bad thing. All it would do is put some extended stocks back into a better buy position and give the market a good breather for a move higher toward the end of the year - indeed, a move higher onto the January area where we get a January effect (or what I will call a "liquidity effect" this year).

The worst news out on Friday was that the EU GDP grew at 0.4%. It pulled out of recession, and some of its components had already done that. The gain was not as big as anticipated. Germany gained 0.7%, France 0.3%, and Italy 0.6%. Fashion and fast cars in Italy are doing the trick. On the other hand, the UK lost -0.4% and Spain was down -0.3%. There were not huge changes in the GDP, but enough to keep the overall level lower than anticipated. It was good news overall, just not quite as good as hoped. That was the case with the Michigan Sentiment report. It was lower than expected. After the market started higher, that gapped it lower, but it did not keep things down.

It was a Friday, and even though the sellers have been in the market, they are still leery of all the liquidity out there. Even though they tried to sell it off in mid-afternoon, they were not able to close the deal simply because there is a weekend coming. Liquidity is still out there, and sellers lost their nerve. The market was able to bounce back and close with gains across the board.


TECHNICAL

INTRADAY

The SP500 gapped higher at the open and continued higher. When the Michigan Sentiment came out it gapped lower, recovered, and then moved higher for the entire session only to fade back in the afternoon. Then the market bounced back in the last hour to recoup some of the mid-afternoon losses. That closed out the indices with decent gains. NASDAQ 0.88%, Dow 0.72%, SP500, 0.57%, SP600 0.9%.

It looked like a pretty strong, up session. The Friday high was at about 1097. If you go back to Thursday, there was a high hit in the morning, and then it trended lower for the rest of the session. There was a high early in the session on Wednesday, and then a trade down all day long. That tells us that we have had a series of progressively lower highs. Even though SP500 finished up for the week, it still finished below key resistance in the form of the October peaks as well as the 2004 trading range and the 2007 downtrend line. It made a series of lower highs to end the week. While that does not look too bad on a daily chart, there are issues at work on SP500. It is not necessarily as strong as the week shows, and looking at the intraday action is one way to tell that.

INTERNALS

SP400 is one of the reasons the internals were not bad on Friday at 2:1 advancers on NASDAQ and 2.7:1 advancers on the NYSE. The mid-caps held up well. Even though they made a lower low in early November, they have not sold off as hard and have not been lagging as bad as the small caps. They are very similar to NASDAQ's pattern, though they are still below key resistance in September that they never got through. The small caps were up almost 1% on the session. When that happens, it helps push the breadth higher. There was an improvement in the breadth, but on Thursday when the SP600 sold off, the NYSE breadth was -4:1. It was significantly stronger to the downside.

Volume on the NYSE was low once more, and it continued a string of lower session. It was slightly higher on the Thursday selling, but not significantly so. It was flatline and it is low trade, so not showing much of anything at this level. That does not necessarily mean it will hold and continue to move higher because when there is lower and lower volume as a market moves higher, it is running out of buyers. There are three levels of key resistance that it is butting up against. With the lower volume, it could simply have no buyers. It had plenty of sellers on the way down from this level in October, but there are not a lot of buyers on the way up. There can be low-volume deaths of indices. On the NASDAQ, trade was lower as well, dropping 13% and back below average as NASDAQ bounced up and hit the September peak and the middle of the October range. Thursday volume was higher as it sold back, touching average. That was the highest volume since the first day of the month, and it occurred on the downside. Once again, we see an overall lack of volume on the buy side, and plenty of volume on the downside. On the one session that it was down, the volume spiked up. We could be having the same type of issue here - a low volume (lack of buyers) death on the NASDAQ.

CHARTS

There are two key factors at loggerheads. There is resistance on both NASDAQ (long term resistance line) and on the SP500 with its three levels of resistance: one near term at the October peak, one longer term at the bottom of the 2004 consolidation range (where it spent a year moving laterally), and there is also the downtrend line from 2007. Three layers of ice all running together - that is a thick layer to break through. That resistance is opposed by the continuing liquidity in the market, gratis the US Fed and the other central banks in the world that have indicated that there will be no near term reduction in the amount of easy money and credit that is circulating the globe. There are two opposing forces right now, and the indices are at yet another inflection point where they will decide what they will do near term. They were at an inflection point in early November, and the liquidity won out. The volume has faded considerably as the buyers have been fewer on the rebound back up to this resistance level.

Friday's action left no relative change in the indices. They were up across the board, but after selling back on Thursday, that left them in the same place right below key resistance. SP500 is not showing any kind of major rollover. It has moved up to the resistance level, and that is important. It sold off on Thursday, but there was no real volume. It bounced up on Friday. The internals continued to be weak, and the action on the rebound was weak. It is not a strong move back up, but none of these moves have failed. Over this entire rally since March, the only moves that started to fail were in the June-July consolidation. It may very well get something like that with a low volume move higher. With all the resistance, certainly the market will need something to push it through. It would not hurt if SP500 came back and moved laterally for 2-4 weeks, consolidated and then rebounded back up. There is no major rollover, but the liquidity has not been able to drive it through the key resistance level.

As for NASDAQ, it has a clearer weakness than the SP500 as the sellers showed their hand on Thursday when volume spiked up as the index sold lower. That showed that the sellers were still a bit stronger than the buyers overall. The stronger selling volume is still outperforming the upside move, and the inability to move through that October peak and the higher volume on Thursday again shows the sellers were trying to assert their hand. There is still no definitive break down. There is a lower low and then a rebound. It is definitely not a strong technical position, and not as strong as it was in the move from July to October, but it is not a breakdown yet. It is showing indications that that may be the case, but there are still a lot of leaders on NASDAQ holding up just fine. It could come back down if it fails, and trade in the range to the 2,025 level. That would be fine. It would set up many more positive patterns for another move higher when the liquidity comes back in the market.

SP600 has been a focus because it has been lagging, and because it is the canary for the rest of the economy. Many people are saying (particularly the government) that the economy is improving while the small caps have been lagging. Indeed all of the growth indices have been lagging somewhat, and that is a concern. SP600 moved up as well this week, but it came nowhere near its prior highs, the prior peak in October, and not even the lower peak in September. It has made the lower low and is struggling at a resistance level. It sold off on Thursday, tried to recover on Friday after a selloff, but was not able to break back through that level; indeed, it closed right at the 50 day EMA.

It did rebound off the low, so there were buyers coming in and trying to push it back up, but it is still a very weak pattern. I still believe that this may be the lead for the rest of the market and it could trade down to the 290 level. That could send NASDAQ and SP500 down as well, but again they would just be in their trading range - down toward the bottom of their trading range, or even half or three quarters of the way down versus a complete selloff. I do not think the liquidity will allow a complete selloff. It will allow trading inside the range and then a move higher when buyers feel the time is right, i.e., after some of the extended leaders pull back to support or consolidate or form new bases and are ready to break higher once more. That will be a boon for a new buying opportunity if that occurs. I would like to see a pullback. We have taken some downside positions in anticipation of a potential pullback, and we now have to see how it plays out.

In sum, we have a technical setup for a failure. If it were not for the liquidity, this would be ripe for a rollover, and a serious one at that. Given the liquidity, if the buyers decide to come back in ahead of the end of the year, they could push the market higher even from these resistance levels at the October peaks. They can still push it higher from here. I am anticipating more of a pullback, but that means the buyers are willing to wait a bit.

The two forces at loggerheads are a weak technical position versus the liquidity that has been pushing the market higher. I think the liquidity will win out, but now I am leaning toward a test lower in the range. We have positions to the downside, and if they do not hold and it breaks higher over the peaks, we will close them out and will be in decent shape because we are in a very good risk/reward point.

LEADERSHIP

The dollar was down on the session. There was no change in the leadership other than bouncing back somewhat after being boxed around Thursday as the dollar rebounded.

The dollar's double bottom is still holding right now. It is trying to hold at a key level back in late 2007 and 2008. If you look at the weekly chart, you see a reach down to the same lower support level and a sharp recovery. There was buying of the dollar as it reached lower. Then, as you go back to a daily chart, there was a nice surge up. It was down on Friday, and early next week will be an important time for the dollar. We will see if the 1.5-Euro level still holds and if it can make a break higher up to the 77.25-78 level. If that is the case, we will get the pullback in the indices that will take them back down toward the bottom of their trading range. Again, that is not a terrible outcome at all. It sets up some good upside buys for when it is over, and it gives great downside gains on the positions we have taken.

With that, you know that energy was higher on the session. HAL, which was in a bit of trouble, sold off early but came back. SLB looks just fine, bouncing higher on rising trade. The oil stocks are not in any serious trouble. RIG is holding up above a support level as well. There is no issue here.

Looking at metals, you see the same thing. We have a position in CLF, and it is going to town. It broke to a new rally high on higher volume, clearing the October peaks and doing so with panache as volume moved above average. Of course, there is copper and FCX. The two go hand and hand, and you cannot look at metals without looking at copper. It is making a pullback, but it is holding at support nicely. I would not be surprised if it holds the gap, continues higher, and breaks to a new high. There is nothing wrong with this chart pattern. No lower lows and nothing of the sort - just continuing strength all the way up.

While we are looking at metals, let us look at GLD, the gold ETF. We sold some gold positions on Wednesday when it gapped higher to a hanging man doji. It sold off on Thursday and it looked like that was a prescient move, but gold recaptured all of that loss on Friday and is back at a rally high. We are looking for more of a pullback - down to 106 or 105 would be an excellent opportunity to add to positions. We did not sell our entire position. We will let our current position run higher and then look for opportunities to step in as they present themselves.

Industrials were fine on the session. CAT showed a nice, tight doji at the 10 day EMA. There was a modest pullback, low volume, no lower lows, and no issues here. You can look at this and say it is a potential double top, but there is no sign of trouble at all with the rising lows. Looking across the board, most industrials are in the same position.

Retail is good and it is also not so good. ANF announced decent results and guidance, and it was rewarded. We have a play on BBY. What a nice pullback it has to test the breakout of the ascending triangle. A great pullback and low volume. It tapped near that peak, bounced up, and continues its move higher; it is going to be a buy as well. Retail is not in bad shape.

There is no change in leadership overall, but it has pulled back modestly. A lot of leadership is extended and could use a 2-3 week consolidation in the overall market to set up better positions to buy into. The question is whether the liquidity will allow the market to pull back at the end of the year. There is extension in leadership, and it would be great to have a consolidation for entry. The technical pattern looks as if the market is ripe to pull back. The question is whether the investors - the big money banks and financial institutions - are going to put that money into the financial markets before the end of the year, or if they will wait for a pullback. If they decide to pull the trigger, and the money goes into the market, it is going to trump because there is plenty of money to go into the market. There has been no removal of any liquidity around the globe. That is what we are watching and waiting for. We are playing what the market tells us to play while we wait to see what the money does. It adds that element that is not usually in the market where you can look at technicals and make decisions based on that. You look at the technical position, realize what the stocks and indices can do short term, and then overlay the liquidity on that and take your positions accordingly. That is why we are taking downside positions up against the resistance on SP500 and the NASDAQ. If it works out, we make great money to the downside. On the other hand, if the liquidity runs into the market, we have near term stops so we do not get hurt. We can have one of the scenarios where the market gaps higher or races higher and then reverses. If it does, it will usually show its hand relatively quickly. We will likely get stopped out of some positions - maybe not all of them. If we do and the market does reverse, we will get right back into it. In other words, if SP500 makes the breakout over the resistance levels and we are stopped out, when it tests this, we see whether it reverses and closes back in this range on higher volume. That would show that there has been a reversal in the move and it is going to trade lower. It could also hold and bounce up. If so, we have an upside play, and we will take it whatever way the market goes. A lot of that is dependent on when the big financial institutions want to pull the trigger with respect to putting more money to work in the markets.


THE ECONOMY

Trade deficit jumps sharply as imports surge.

Trade deficit numbers were out on Friday. Without going into specifics, I will note that it was much larger than expected and the fastest-rated growth in over a decade. Imports were up much more than expected, swamping exports that were still relatively high. The dollar is low, and the administration wants to promote exports as our way out of this mess (versus helping small business), so there are more exports as the dollar was being crushed. That tends to help our GDP number. The problem is that imports totally outstripped that number, so there is legitimate concern that the GDP will be revised to something like 3.1% growth from the 3.5% originally reported. That is usually not a bad thing. History shows that when the economy is good in the United States, imports go up. When the consumer feels good, they buy a lot of domestic and foreign goods, and that typically means the dollar is stronger and we can buy more with our money. That is not the case right now, so there is to wonder how the consumer is driving the imports that high with a weak dollar. The consumer is NOT buying that much. Do not be fooled. Oil imports cost a lot more because the dollar is so much weaker, and as we come out of the zero growth from Q4 of 2008, we are using more oil than we were using then. Remember, it is not just the amount used, but how much it costs. We have to pay more as the dollar is crushed, and that drives up the deficit.

We are importing more than oil. We are importing autos and auto parts, but we are not buying a bunch of BMWs, Ferraris, and Porsches. If you look deeper than the headlines of the less-than-reputable news agencies, you see that the imports are from Canada and Mexico. That is where we get all of our auto parts. Cash for Clunkers depleted some of the inventory of cars and auto parts, so that was the gain in imports. We were not buying a bunch of foreign cars. These are domestic parts for domestic cars for our government motors, GM and Chrysler. This is no surge in consumer consumption that would indicate a healthy market. We are getting the double whammy of inflated oil prices through the dollar's decline as well as having to restock domestic parts and autos after the Cash for Clunkers program. That program cost the taxpayers over $20K per vehicle sold through the program. That sounds like the $303K-per-job saved or created through the stimulus package. What a deal for the American taxpayers. I prefer they give me the $20K and let me buy a car than to have this nonsensical government giveaway.

I had to get on my soapbox because it has been that kind of week. It has been one thing after another that just makes you shake your head and sigh. There is to laugh to keep from crying when you see what is happening in our government.

TARP to taxpayers versus to debt.

There was news that the banks are paying back their TARP funds with interest. That is nice, but Treasury Secretary Giethner says we are going to use that to pay down the deficit. What good will it do to pay it down if we do not get any growth in the economy? Even though it does sound good, it will only take money out of the economy. History has shown that the best way to pay down our deficit is for the economy to surge in a massive recovery. That has cured all deficits in the past, and it is how we got the surpluses of the 1990s. There was huge growth in R&D and a tech revolution that started in the 1980s - it has its roots there from those tax cuts that invested money in the United States. We then paid down our debt with the surplus.

We had a surplus because President Clinton raised taxes to pay our debts, and it brought in more money than anticipated because the economy boomed more than anticipated. There was only a slowdown in 1991-1992 rather than a serious recession. The economy was still throwing off billions, even trillions of dollars in revenues, so there was a huge surplus. Did the government return the excess money back to the citizens after saying it had to raise taxes in order to pay our debts? They paid them, and kept the rest of the money that would have been pumped back into the economy through the businesses, in R&D, and through the citizens consuming more. Instead of keeping the economy going, that became one of the factors (along with Greenspan's blunders) that contributed to the crash in 2000. Earned money is the lifeblood of the economy, and that taxation threw it down the hole of retiring our debt. The growth had already retired our debt and we were in surplus territory, so we should have pumped it back into the economy. That is what a good business does. It keeps some money for a rainy day, but it pumps the rest of it into growth - getting the business bigger and stronger, getting more employees, and funding more R&D. There is to do that to be a leader. That is not what we did, and it is one of the reasons we crashed.

We are getting some money back on our investment in these companies through TARP, and we are going to throw it down a rat hole of retiring debt instead of trying to revitalize small business, which is the engine of the United States (and the world) economy. Be sure to look at my video from Thursday. It was posted incorrectly because my computer played a trick on me and renamed the one from Wednesday for Thursday. We are going to keep it on so you can take a look, and in it I talk about the death of the small business in the United States. We are not going to give money and stimulate the small businesses through incentives, we are instead going to retire debt. As I said, history shows the way we get out of debt and retire our debt is to grow our economy, but they are choosing to take more money out of the system. We have taken it out of the system in these giveaways, and the money they are paying back is not going to come back to those who footed the bill. It is going to go to retiring debts that our government has accumulated and is going to continue to accumulate. I dare say it will have the same effect. We are not going to have a strong recovery. All of the metrics that gauge the strength of recovery say this is a weak recovery at best. It does not take a think tank to figure that out. You need only look at how poor the jobs are [8:56] and the prediction that the unemployment rate is going to be over 10% through mid-2010 at least. The administration is finding out that its great stimulus plan that was going to peak unemployment at 8% and create all these jobs has not done that, and it is not going to do that. History has a nasty way of repeating itself.

Today in a small business I was visiting, they were saying that we have a Jimmy Carter times two in the White House now. That is the joke among the small businesses that were almost killed off entirely in the 1970s. I got on the soapbox again, but it helps to rail at the government sometimes, right?

Michigan sentiment shows jobs are now a leading indicator.

Michigan Sentiment came in on Friday (66 versus 70.6 prior and 71.0 expected). That was a three-month low, and it was the unemployment rate that brought it down. That is what is weighing on the respondents (maybe we should call them "despondents" instead). With the new expectations of a 10% + unemployment rate through at least mid-2010, that has respondents worried about their future and spending less. Those planning to make a major purchase over the next six months fell almost 10%. It is a very difficult situation for consumers and the small businesses out there. Just to put this in perspective, the 66 level is a recession level. From the recovery in late 2001, the Sentiment recovered and averaged 89 from late 2001 to the peak in December 2007. We are nowhere near that level. 66 is a tad lower than 89. Suffice to say that when we were in late 2001 and starting to come out of that recession, Sentiment was rising rapidly because people sensed a recovery coming. Right now, it is heading the other way again - a double dip. They are despondent, and they are worried about jobs.

Jobs are a lagging indicator and are generally the last thing to turn, but when the numbers get this bad, it becomes a leading indicator because small businesses are crushed and have no money to invest. They are also getting no loans. It is an out-and-out lie when you hear the financial institutions that were bailed out by the government say that they are loaning to anybody. I had lunch with some Wells Fargo and other bankers, and we talked candidly about loans to small businesses. They said small businesses cannot have enough collateral and they cannot have a good enough balance sheet to get a loan right now. They are making more money in the stock market than they would lending it to small businesses, so they are not doing it. With small business despondency and consumer despondency over jobs, we have a serious problem creating this leading effect that the jobs report is showing. We are not recovering as rapidly as we could be. The administration is pushing exports and depressing the dollar so we can buy less here. We are hurting our small businesses because energy is purchased with dollars, so every time the dollar goes lower it costs them more to do their business when they cannot get the money they need.

WMT recognizes the problem and is cosigning with its apparel manufacturers that supply it so they can get the money they need to make the goods that WMT sells. It sees the problem and is taking proactive steps to help it. The problem is that the company that usually does this, CIT Group, was allowed to go bankrupt without one iota of concern from the administration. It is the primary lender for small businesses so they can make their payrolls and put the money down to get their goods manufactured. This administration says it is for the small guy, but every policy that it is promulgating only helps the big boys. It is pushing the strongest driver of US economy - the small businesses -out of business. When they go, it is going to be left with the big companies it is in bed with through the stimulus package such as GE and others that have made deals with the administration to get the money. It is not a good situation for the US economy, so do not be beguiled by what is going on.


THE MARKET

MARKET SENTIMENT

VIX: 23.36; -0.88
VXN: 22.92; -1.13
VXO: 22.27; -0.95

Put/Call Ratio (CBOE): 1.01; +0.16. More bets that the market is going to fall nearer term. Not enough closes over 1.0 to mean anything at this point.


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: 48.3%. Surprisingly holding steady for the second week after a drop from 49.5% two weeks back. Still a lot of believers in the rally, and that may be to investors' detriment near term as the market consolidates a bit more. Bulls have held in the 48% to 50% range for several weeks now though that will start changing some now, and that is for the better in terms of a renewed upside move. 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: 24.7%. A rise as expected, but not a surge despite the rather sharp, high volume selling to end October. Bears remains relatively low, hardly in excess numbers but not so low to start looking for a reversal. Last week 22.5%, and hanging around in the 23% range before that. 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: +18.86 points (+0.88%) to close at 2167.88
Volume: 1.833B (-13.18%)

Up Volume: 1.407B (+553.779M)
Down Volume: 477.105M (-952.991M)

A/D and Hi/Lo: Advancers led 2.01 to 1
Previous Session: Decliners led 3.13 to 1

New Highs: 59 (-10)
New Lows: 41 (-6)

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: +6.24 points (+0.57%) to close at 1093.48
NYSE Volume: 971.403M (-7.52%)

Up Volume: 681.453M (+534.117M)
Down Volume: 273.51M (-603.846M)

A/D and Hi/Lo: Advancers led 2.73 to 1
Previous Session: Decliners led 3.93 to 1

New Highs: 157 (-49)
New Lows: 34 (-3)

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

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


DJ30

Stats: +73 points (+0.72%) to close at 10270.47
Volume DJ30: 167M shares Friday versus 183M shares Thursday.

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


MONDAY

There are the loggerheads of a weak technical picture versus the liquidity. When are the big financial institutions going to put that money back in the market? It is like Hamlet: To invest or not to invest? That is the question for the guys with all the money. If they hold off, the dollar could continue with its double bottom bounce higher. That would send the market lower, and it would be something of a blessing for investors because it would come down, and we would make money on our downside positions. It would put many extended leaders in new position to buy. When they are ripe, when they base out a bit and consolidate, they will be ready to buy and we could move in because you can bet that the big boys holding the money will see that as an opportunity as well and push the button. We can hope that that is what they do. If they hold off, then we get a nice rally on into Christmas and into January with the liquidity effect for early 2010. We will have to see how it plays out.

We have downside positions in play, and we were not taking any new positions on Friday. We have upside positions that we are letting run higher as well. We can see which way the market goes. If it goes higher and makes the breakout, then we will close our downside positions because we picked them up at a good place right at the resistance level. We will not lose much on it, but it is a good bet for a rollover because the technical picture certainly indicates that that is what the market wants to do (but for that liquidity hanging out there). The liquidity is the wildcard rolling around on the deck, and we have to play ball with it. When it comes in, it is the 800-pound gorilla in the room - can I string together enough metaphors? In any event, when the liquidity comes in, we have to make note of it and play accordingly.

We will look for the pullback. The market is ripe for that technically, and we will see if we get it. If we do, it will be a nice payday that sets up new buys, and we will go forward. We will have upside plays and downside plays for the start of next week, so we can take it whichever way it goes. We still have the three scenarios in effect. There could still be the breakout and the reversal. There could be a stall out as it has been doing thus far. We could also get the breakout, then it comes back, tests, holds, and then moves higher. We will play whichever one the market wants to give us. I will see you next week.


Support and Resistance

NASDAQ: Closed at 2167.88
Resistance:
2167 from the July 2008 intraday low
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

Support:
2155 is the March 2008 intraday low
2143 is the October 2009 range low
2099 is the mid-September 2008 closing low
The 50 day EMA at 2095
2070 is the September 2008 intraday low
2060 is the August peak
2048 is the early October 2009 closing low
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
The 200 day SM A at 1818


S&P 500: Closed at 1093.48
Resistance:
The March/July up trendline at 1094
1101 is the October high
1105 is the 2007 down trendline
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:
1080 is the September 2009 peak
1078 is the October range low
The 18 day EMA at 1075
1070 is the late September 2009 peak
The 50 day EMA at 1056
1044 is the October 2008 intraday high
The August peak at 1040
The early October 2009 closing low 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
The 200 day SMA at 931
930 is the May peak
919 is the early December peak is bending


Dow: Closed at 10,270.47
Resistance:
10,365 is the late September 2008 low
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

Support:
10,120 is the October 2009 peak
The 18 day EMA at 10,019
9918 is the September 2008 peak
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak
The 50 day EMA at 9813
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
9430 is the early October low
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
The 200 day SMA at 8689


Economic Calendar

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

November 16 - Monday
Retail Sales, October (08:30): 0.9% expected, -1.5% prior
Retail Sales ex-auto, October (08:30): 0.4% expected, 0.5% prior
Empire Manufacturing, November (08:30): 30.00 expected, 34.57 prior
Business Inventories, September (10:00): -0.7% expected, -1.5% prior

November 17 - Tuesday
Core PPI, October (08:30): 0.1% expected, -0.1% prior
PPI, October (08:30): 0.5% expected, -0.6% prior
Net Long-term TIC Fl, Sep (09:00): $35.0B expected, $28.6B prior
Capacity Utilization, October (09:15): 70.8% expected, 70.5% prior
Industrial Production, October (09:15): 0.4% expected, 0.7% prior

November 18 - Wednesday
Housing Starts, October (08:30): 600K expected, 590K prior
Building Permits, October (08:30): 580K expected, 573K prior
CPI, October (08:30): 0.2% expected, 0.2% prior
Core CPI, October (08:30): 0.1% expected, 0.2% prior
Crude Inventories, 11/13 (10:30): 1.76M prior

November 19 - Thursday
Initial Claims, 11/14 (08:30): 504K expected, 502K prior
Continuing Claims, 11/13 (08:30): 5600K expected, 5631K prior
Leading Indicators, October (10:00): 0.4% expected, 1.0% prior
Philadelphia Fed, November (10:00): 12.0 expected, 11.5 prior

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

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Recovery Not Strong By Historical Standards

SUMMARY:
- Investors mull jobs report in a volatile first hour then punt and leave for the weekend.
- Dollar/Stocks/Oil relationship may be waning.
- Non-farm jobs versus household survey: which is supreme?
- Recovery yes, but it is not a strong one by historical standards
- Stock market not predicting the economy this time around.
- Rebound quality not that great as stocks may opt for a consolidation before a new rally.

Jobs report dominates but investors decide to leave it for next week.


Friday was all about the monthly jobs report. They came in a bit heavier than expected (-190K versus -175K expected) but investors could handle that. The problem was that the unemployment aspect of the household survey came in at 10.2%, leapfrogging expectations of 9.9% and topping that 10% level that everyone feared could get here. That is the worst showing since 1983.

There was good and there was bad in the report for the market. The good, on top of the decent non-farm payrolls, were their revisions from August and September. There were some other bad areas that I will discuss later. Suffice to say, the market was a bit confused after the report came out, and the futures turned lower. They were up a bit, but turned lower after the number. The market opened lower as well, but it was not a tanking. The market almost immediately rebounded and went up to a session high, turning positive within an hour. It then turned back down and was negative once more. It was a volatile open because investors had to chew on the numbers and decide whether the good outweighed the bad or vice versa. By the end of the day, the investors went out and the market flat-lined for the rest of the session and went out with virtually no gains. The big indices posted modest gains, while the small caps and semiconductors posted modest losses. Investors punted and did not tell us anything about what they were going to do with respect to the overall patterns in the indices that I will talk about in the technical section.

With that "nothing happening" action, we did not do a lot either. The market was not conducive to great buys. There were stocks that were moving higher and continuing a move from earlier in the week. There were some moving lower, continuing what they had been doing and setting up some downside patterns. We have a split market right now. Some stocks are setting up downside such as semiconductors, while others (most of the same leaders we have seen all along) continue to hold up very well.

The market has run a long way and is running into some important resistance levels, so it has decided to consolidate somewhat. This was seen in June and July, and seems more likely versus a major, massive rollover given all the liquidity that is out in the world. If that were the case, you would think that the same forces that have been driving the market higher are still in place. If the market decides to consolidate as opposed to running into the end of the year as I was looking for it to do, that is fine because then the money is still out there. There will be consolidation, and maybe another run higher just as there was after the June and July consolidation. There has been a little change here, just the fact that it has run further now having put in another 30%. In addition, there was some heavy-volume selling over the past two weeks, and that has to be factored into the equation. When you look at the picture, there was not a lot of change, and that is how the market seems to have viewed it on Friday.

The dollar closed slightly stronger (1.4849 versus 1.4877 Euros on Thursday). That bit of strengthening took its toll on oil ($77.70, -1.92). Gold was up again to a new high ($1,095.90,
+ 6.60). The 10 year bond was down (3.5% from 3.53% on Thursday). Bonds rallied a bit after the jobs report, but there were not a lot of issues overall. One of the interesting things this week was that the dollar was stronger, only by fractions of a cent, yet oil lost almost $2.00. That seems disproportionate, and that is very interesting. There was this relationship between the dollar and oil and the market. If the dollar went up, then the market went down (and consequently energy went down as well) and vice versa. There was a bit of a break in that relationship this past week. On Thursday, the market rallied and the dollar was moving up, but it was not hurting the market. There is a cutting of the link between the two. It may or may not stay that way, but this is the first significant change that has happened in this relationship. It did not completely do away with it, but it is something to watch as the market moves forward because it was definitely working last week. Friday was another example. Energy was killed, but the dollar was just slightly higher. Maybe it will take more pounding of the dollar in order to make the same impact on energy and the market overall. Maybe not. Maybe the link is getting broken. Maybe the dollar is going to try to rally and the market will say that that trade is over and will look at something else (like a liquidity trade). We will see how it plays out.

That does not change the game a lot for us. We may redefine the parameters somewhat and maybe also the sectors that we are going to be playing in more, but we look at good stocks and good patterns. We look for stocks that have broken down, have hit resistance, and will roll back over. We have been hitting the industrials, energy, metals, and that type quite hard over the past six months. That may change if the relationship between the dollar and the market and energy changes. I will keep an eye on that.

TECHNICAL

INTRADAY

The market started quite volatile. The jobs report was somewhat of a mixed quantity with positive and negative aspects, and investors took their time to digest exactly what it meant. The market opened lower and SP500 gapped down. It quickly recovered to positive only to return to negative just as quickly, but the market was able to bounce after that. Though it whittled away the gains for most of the day, the indices held positive in the end by a slim margin. It was not a great day as far as the market was concerned. The best you can say is it did not sell off early on as one might have expected given the jobs report.

INTERNALS

The internals were not too impressive. There were small gains on each of the indices, and losses on the SOX and SP600. Breadth was slightly negative on NASDAQ at -1.1:1. On the NYSE, advancers led 1.1:1. After some hefty days of 4:1 advancers on the NYSE on Thursday, things calmed down to end the week.

Volume was terrible. Volume fell below average for the fourth day in a row on NASDAQ. This was all during gains, so it was not the best volume week as far as price/volume action. I like to see buyers coming in quantity and pushing stocks higher. When that is not the case, two things can happen. It can continue to work its way up with these kinds of gains if there is no selling impetus, or what goes up on light volume typically comes down on heavier volume, like what we saw in late October.

The volume on SP500 was down 16%. It turned just over $1B shares, but that pushed the trade well below average. The NYSE ended the week with two days of below-average volume preceded by two days of average to slightly above-average trade. There is higher volume selling in late October, and then there is a rebound with volume declining. Price is going one direction and volume is going the other, and that is not good price/volume action. It does not show that buyers are stepping in with any kind of force, and that means these kinds of moves are more subject to upset in the event that more investors show up in the market deciding to be sellers.

CHARTS

I have been saying that it would be the quality of the bounce after the October selling that would determine whether the market would continue rallying or run into trouble. Thus far, the quality is so-so. The indices are bouncing and they moved up the entire week; SP500 was up for the week and those gains are great. That may have been a good feat given the amount of data and some of the negative data that was out this week. There was lower volume, however, so the quality was not beautiful. That being said, is the SP500 in a lot of trouble? It looks like it will be up to SP500 to do a lot of the leading if the market is going to continue the rally. As it turns out, SP500 sold off hard to end October, but made a higher low again. Even though it did break its trendline from March, it nonetheless made the higher low and the overall upside bias remains. It held above some key support levels in August and the early-October low, so you cannot complain. Nothing will keep SP500 from moving higher as long as the liquidity comes back in and pushes it that way. SP500 is very much can continue the run higher and lead the market. It looks like there will have to be some leadership when you look at the other markets.

The NASDAQ is not in terrible shape either, but it did break its trendline a long time ago and made a lower low. It has recovered, but it did so on declining volume. It is not as severe a decline as on the NYSE because there were a couple of days of upside pop, but it was below-average and, indeed, much lower than the downside trade to end October. There is a bounce from NASDAQ. It held above some support in the August peaks as well, and it did manage to break some resistance in the 2,100 area. It is now in that band of resistance that takes it up to the September peak. The September peak is key because that is where the market bottomed three times in 2008. There is some serious resistance there, and that is why it turned back and will need a hand (perhaps from SP500) to get through that resistance next week. It is not in terrible shape, but is also not showing a lot of pop. This is not a slam-dunk roll over. It looks like a June and July type of correction. What has happened to NASDAQ over the past three weeks is not necessarily the kiss of death. Even though this bounce was not great, it held where it needed to hold.

The small caps are not so cheery. They made the higher high but also a lower low, and it broke through the August levels that the other two indices held. That put it below the early-October low. It made a lower low, it has rebounded on the lower NYSE volume, and it is now at a lower peak in August and is having an issue. There is a doji on the candlestick chart. It is not definitive, but given the fact that it has bumped resistance, it suggests that it is going to face trouble. The SP600 is a growth index, so you have to be concerned when it starts to show signs of rollover.

The SOX is really in trouble. There was a double top, and it broke below a key support level in the July and August peaks as well as the early October low. It managed to bounce at some support in the June peaks and August low. It has rebounded but gone back up to resistance, and (similar to SP600) it is showing doji. There is something of a tombstone doji, and that could suggest that it is not going to have a lot of upside unless it gets help from some of the other indices. When you look at the individual semiconductor stocks, you see that they are mirroring this type of action. This is not just a couple of stocks in the SOX index that are showing this kind of action, but semiconductors in general that look to be in trouble.

The SP500 has to do the lion's share of work in order to get the rest of the indices moving higher toward the end of the year. It can do it. The overall bias remains intact to the upside because it did not make the lower low; in fact, it bounced off of that level and just above it. I do not want to say that it is heading down for sure because it has not broken its overall trend. As I talked about earlier in the week, there are some serious issues that the index has to face. The first issue is the trendline from late 2007. That trendline is at the 1,100 level, and that is what SP500 has started to bunch up against. Looking at the 1,100 area where the trendline is rapidly approaching, that is the bottom of the 2004 consolidation. That is where market moved laterally for nearly a year after the 2002-2003 run higher. There are other lows and price points at that level as well from back in 2001 and 2002. It is a significant level. There are two important pieces of resistance coming together at the point where SP500 is approaching, and that is at the October peaks. It failed there once, and it did not turn over and drop dead, but it is a serious level. There has been a huge run off of the lows, similar to 2003. After the end of this year, there could very easily be a lateral move in 2010 similar to 2004. Keep that in mind as we move into next week.

We can still get more upside out of the indices because there is still room to move to the upside. SP500 closed at just about 1,070. If it moves up to 1,100, that gives it some leeway to work higher toward Thanksgiving. The real test is going to be after it gets there. 1,075 is going to be interesting in and of itself because this pattern might be trying to develop a little head and shoulders. We have seen that before back in May, June, and July. That did not pan out too well as it sprinted from 875 up to 1,100. You have to take this pattern with a grain of salt, but it is worth watching and seeing how SP500 behaves at 1,075.

Looking at NASDAQ again, it is setting up a looping top as well. Its peak is at 2,150, and it is not even close to it having closed at 2,112. There is still some work ahead, and there is a definite neckline formed. If it breaks down or stalls out in the 2,150 level, then that makes it interesting, particularly if SP500 stalls out at 1,075.

In summary, there are issues, but that is always the case after a big run. Stocks cannot go up forever in a straight line. This correction is similar to June and July, where the initial trend off the March low was broken, and then it formed a new trend off the July low. That is the one that has held up to this point, and now it has been broken. What is going to happen? You cannot keep the steep, 45-degree angle of attack indefinitely; it has to break off, consolidate, and then move higher. The only thing different right now versus back in June and July is the gain. That is a big difference, no doubt, but there is all that money flowing through the world with not much of it being used to get the economies going. If it is not going to be used by the economy, it will be used by the financial markets. After the market gets a consolidation, maybe there will not be that sprint to the end of the year that I am anticipating. The markets are a bit weary, and some of the funds that have made good money might not want to blow it all in the last month of the year. They may sit on it and let other funds do the driving if they can. If that is the case and the liquidity is still out there, we could have a nice consolidation into the end of the year. Then with the liquidity hitting, we could see a good January effect, so to speak. This January effect would be a liquidity effect as money runs into the market and pushes stocks higher once more.

LEADERSHIP

Leadership has not changed a lot, although there is an interesting addition recently with the regional airlines. Oil has gone down as the dollar has strengthened over the last couple of weeks, and some of the regional airlines are performing better and setting up nice patterns. JBLU has an ABCD pattern, and it broke higher on stronger volume on Friday. RJET did not fare as well on the day, but it has an interesting pattern. It has an ABCD pattern as well, with a big reach down on the Friday intraday low and a reversal with a hammer doji. That could be a very interesting race higher from this point.

Things might turn a bit defensive, so drugs might be more interesting. AUXL has a set up an ABCD pattern as well and is bouncing up. There is no volume, but you cannot argue with the pattern and what it is doing right now.

Retail is still holding up quite well. BBY has formed something of a triangle that you can see rather clearly. It has resistance levels, but is banging back and forth and making a series of higher lows. It would be very interesting if it comes back up to the 41 level, pulls back down, and holds. You would then look for a play off of the bottom trendline because it is in the last part of the triangle and the odds of a breakout are much improved. You can get a good risk/reward point off of that lower uptrend line. That is not ready yet, but it will be if it keeps doing what it is doing. TJX is a leader. It is not in great shape as far as a buy right now, but shows its continuing uptrend. There is no issue with the trend higher, but it is just putting in a lateral consolidation. We will see in it shapes up better. Retail is still looking good despite the worries about the consumer.

Even with the dollar rising and oil falling, there is a good uptrend in energy. HAL had a good day. APC has a bit of a triangle trying to form which makes it interesting. There is a higher low and there could be a breakout. There are patterns setting up in these leaders even though a lot of them are tired.

In industrials, CAT is still trending higher, and is still in its channel and looking solid. TEX, even though it sold down, has an interesting pattern itself. It is almost an ABCD, and is consolidating at a nice support level. If it sets up a triangle, it might be a good break higher.

Leadership is still there. Some of it is winded, but that does not mean there is not good money going into other stocks. The neat thing that keeps happening is that leadership groups pull back, consolidate, and then money hits them fresh again and pushes them back higher. We have that going for us, and the liquidity trade is basically all there is out there. There are issues with there being some wear and tear on the indices. They look like they want to consolidate. If they do get a big boost of money at the end of the year, that could trump all patterns altogether and push them higher. If you are looking at them just from a technical perspective, that does not look like the case. It looks like they want to consolidate, and we could use that to play some downside and set up good upside for when the money does hit. If it does not hit before the end of the year, and it has a nice, long consolidation, we can bet that it will come in to start the new year. There could be quite a rush higher in January. It may be a rally deferred, but there is nothing confirmed in that respect as of Friday.


THE ECONOMY

Jobs report has some good and some bad, but the bad is much more worrisome.

The jobs report was the big news on Friday. It was one of the most important jobs reports in quite some time because the non-farm payrolls have been trending lower and everyone is looking to when they actually get to zero. It is the same with the weekly claims - right now, we just want it to get below 500K. Not much luck with that. It did not make it on Friday either, but there were interesting parts to feed the people who feel there are positives in the job market.

Jobs were down more than expected (-190K. Revised -154K from -201K in August; -219K from
-263K in September). The revisions more than made up for the miss on the non-farm payrolls number, and that heartened people. They said they are seeing the improvement. Indeed some are saying that the rate of change in the trend shows positive job creation sometime in the spring, probably toward the end of Q1. That is, if everything stays the same and the trend remains. That is a positive.

The non-farm payrolls are interesting because it is mostly the large companies that they survey. They try to factor in the smaller companies and small businesses, but it is very difficult for the government to get that information accurately and quickly enough. That was a positive and they are saying things are looking good for the future. On the other hand, there is a 10.2% unemployment rate, and that is the highest since 1983. There is an argument about whether the non-farm payrolls or the household survey is more important. Greenspan always said the non-farms payroll was more important, but as we saw coming out of the recession in 2001, the household survey was more accurate. We saw that it was improving, and it was showing the right kind of improvement because there were many small businesses that were created thanks to tax incentives. We saw S corporations proliferate. The filings for those proliferated and small partnerships also surged. We are not seeing that this time, however. There is not a surge of any kind of small businesses as the non-farm payrolls number improved, and the household number is getting worse and worse. It is my view, and the view of many smart economists, that household is more important when you come out of recession because many of the jobs are gone. JNJ and GE and those places are not going to be hiring people because they are still laying people off. The jobs are going to come from the smaller businesses, and if the smaller ones are still saying things are bad, then things are bad.

There was a 10.2 unemployment rate, but there were interesting figures with respect to the headlines below the headlines. 17.5% of the work force is either unemployed or underemployed. Underemployed means they would like to work more but cannot get the jobs. That is why we are seeing the temporary jobs growing. That is a key factor, and it has been up for two months in a row. People want to work but they cannot. Some of the protagonists are saying that more people came into the market looking for jobs, and that is why the number rose to 10.2%. I saw people tonight taking about that, but they are wrong. They did not go back, look at the figures, and figure out what was going on. The job pool actually decreased by 500K workers. At the same time, the new unemployed increased by 1M. It was not just a factor of more people entering into the jobs market and thus pumping up the number of people out there unemployed. The number of new employed rose, so we have a serious problem. The headlines under the headlines are showing that things are not improving in employment, but they are worsening. Some of the anecdotal data from Challenger says that the layoffs are fewer, but those are only the big companies. They do not cover the small ones as closely and cannot cover them as accurately. Some of the anecdotal evidence that that things are improving is belied under the actual jobs report and what it is showing underneath the headline numbers.

More than that, the average workweek is critical. It has to increase before there will be new hires. It stayed flat at 33.0, and that is after declining from 33.3 to 33.2, to 33.1 and now holding at 33.0 for two months in a row. We have a serious problem because it has to get up to 3.5 - 3.6 before they get to the point of thinking about adding even temporary workers. All the productivity we saw and talked about on Thursday does not mean a lot does it? You can have a lot of productivity, but if companies do not feel things will get better, they are not going to hire anyway. They are just going to reap the benefits of having higher productivity and then stockpile the cash. That is good for earnings, but we are looking for jobs and getting the economy back on track. If companies are worried that jobs are going to be bad in 2010, so much so that they are not spending any of their cash on new employees, then that is a serious problem.

They are not spending money because there is a lot of uncertainty out there. There is cap and trade, and though no one knows exactly how that will impact them, they know it will not be good. There is the healthcare bill that, if it passes, will place taxes on the businesses that provide the healthcare for their employees. Either they have to pay the tax, or they are going to jettison the program altogether. That is uncertainty, and that leads to indecision. They are not going to act on it because it is always the case when the governments are considering promulgates serious legislation. Everyone waits to see how it will affect them. If they think interest rates will go down or if they think tax cuts will be passed, they are going to wait and see if they pass so they can take advantage of them. On the other hand, they may be inclined to spend if things get worse, but if they do not know what to spend it on, that could be foolish admission, so they sit back and do nothing. I am afraid that is what we are seeing now. There is a lot of stockpiling of cash that is being reaped by the increase in productivity without the usual hiring of new employees. That is not a great scenario for the rest of the country.

One to have things I heard today was comparisons to 1983. This was the worst unemployment since 1983 when there was a bad recession coming out of the long 1970's malaise. People are saying that we have the kind of issues there were back then, but that we knocked the cover off the ball coming out of that recession. That is true, but we had already gone through the 70's and then had to break the back of inflation and rally higher.

We may be going into the 70's all over again. What made the 1980's special were the policies put in place that propelled us out of that long, terrible recession. It was called the Emergency Economic Recovery Act of 1981, and it created tax incentives, it slashed marginal rates, it gave tax credits, and it gave accelerated depreciation. It gave all kinds of incentives to invest once more in the United States. All the money had been put in tax shelters because it was too expensive to do business or to live in the US. That money came crawling out of the woodwork because it became cheaper to invest in the US and make a return and pay a lower tax than to have exotic tax shelters. The tax shelters tied up your money and kept it from being taxed, but they were expensive to create and run, so the incentives brought it all out. Russia had the same thing when it slashed its flat tax to 11%. Billions upon billions of dollars came flying out that they did not know they had, and it set off an economic boom. Of course, they mismanaged it and had problems, but nonetheless, you see where I am going.

We do not have the same policies that there were in the 1980's; indeed, we are going in the exact opposite direction. Ronald Reagan said the solution was less government, not more government. The new administration says the solution the more government, not less. We are having more regulation, there are massive bills being contemplated and passed, and it is creating uncertainty, creating regulation, and is going to stifle out the entrepreneurship in the US. You can say that as bad as it was, in 1983 we were coming out big time. I have a bad feeling that in 2009 we are going back in 2010. 2009 and the liquidity rally there was in the stock market may go back in and hibernate if the Fed has to eventually (and it will) have to raise interest rates and stop its 0% interest rate policy that Japan did. It did not get it anywhere, right? It is going to have to do that, and if there are no policies to invest in the United States, then we have serious problems. We heard today that we might need another stimulus package. We are talking about more infrastructure, maybe some job incentives - but no one is going to hire anyone for a job if you do not know if you will have to provide insurance for them or how costly it will be - if you are going to be taxed another $8,000 or 40% on what you provide if you do. I am not going to do that, and I know many small businesses who feel the same way. There is just too much uncertainty, and you cannot bet the company on just a tax credit when there is something much more serious that could take away many of your revenue streams or what you have already made. You cannot risk it, and it is not the right kind of incentive. You want to invest in your business and in America, not just do busy work and try to put band-aids on things. That is the way we have to do it, however, and what we have to live with for now.

This recovery is not a 1980's style recovery.

You cannot deny that we are having a recovery, but it is relative. If you came from zero, it is different from coming from another output. This was one of the worst shutdowns since the Great Depression. Even though the percentages may be impressive and comparable to other eras and recoveries, it is where we came from that makes the difference. Even though we are recovering, that makes this not a very strong recovery. The output factors we showed from Thursday were not that great, and they are not nearly what they were in the 2001 recovery. There has been analysis done of the 1980's recovery, and this is, at best, half the strength of that recovery.

There are many issues to deal with. This recovery is no doubt a recovery, but it is not the best we can do. As history has shown, we can try other tactics that get people to invest in the United States. I am very concerned that we are going to have this 10.2% rate go up to unprecedented levels in early 2010, maybe touching 10.8 or 11%. That seems totally off-the-wall, and some people could be howling with dismay. Even the people who think this is a bogus recovery just do not want to contemplate that kind of unemployment. I hate to be a downer, but we have to prepare for what may come. The key right now, and one of the things that is throwing everyone a curve, is the stock market and the reason it is up.

The stock market typically forecasts economic expansion. I believe in that, but there are times when that is not the case, such as when there is a tremendous amount of liquidity driving the market. There have been other times, no doubt, that the Fed is lowered rates to practically nothing and they had a bunch of money printed. Why then was the stock market recovery not indicative of an economic recovery? This time the money is not being used because banks are not lending money. There are stats everywhere showing what is and is not being lent, and the money is not getting out there, so it is being pushed into the financial markets. That makes this a bogus rally in terms of economic forecasts. It is just not that strong. There were times where it looked good, but now we see serious issues with the small caps. They are in trouble and breaking down, and they are the canary with respect to the economy. Stocks that are doing well are the exporters - those that are tied overseas. That is not going to help the companies that make the US great, and those are the small businesses that generate all of the jobs. We are going to have serious issues coming this year because this recovery is nothing compared to the strong recoveries we have had in the past. Thus, comparisons to the 1980's are not just wrong, but are horribly wrong.


THE MARKET

MARKET SENTIMENT

VIX: 24.19; -1.24
VXN: 24.6; -1.24
VXO: 22.97; -1.57

Put/Call Ratio (CBOE): 1.02; +0.15. Not much downside but a big jump in put activity. Too quick on the trigger for the put buyers?

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: 48.3%. Surprisingly holding steady for the second week after a drop from 49.5% two weeks back. Still a lot of believers in the rally, and that may be to investors' detriment near term as the market consolidates a bit more. Bulls have held in the 48% to 50% range for several weeks now though that will start changing some now, and that is for the better in terms of a renewed upside move. 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: 24.7%. A rise as expected, but not a surge despite the rather sharp, high volume selling to end October. Bears remains relatively low, hardly in excess numbers but not so low to start looking for a reversal. Last week 22.5%, and hanging around in the 23% range before that. 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: +7.12 points (+0.34%) to close at 2112.44
Volume: 1.878B (-9.19%)

Up Volume: 1.134B (-867.977M)
Down Volume: 678.705M (+457.841M)

A/D and Hi/Lo: Decliners led 1.14 to 1
Previous Session: Advancers led 3.56 to 1

New Highs: 80 (+30)
New Lows: 21 (-4)

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: +2.67 points (+0.25%) to close at 1069.3
NYSE Volume: 1.08B (-16.39%)

Up Volume: 509.025M (-593.706M)
Down Volume: 498.584M (+325.522M)

A/D and Hi/Lo: Advancers led 1.09 to 1
Previous Session: Advancers led 4.07 to 1

New Highs: 127 (+15)
New Lows: 39 (+7)

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

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


DJ30

Stats: +17.46 points (+0.17%) to close at 10023.42
Volume DJ30: 181M shares Friday versus 211M shares Thursday.

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


MONDAY

SP500 and NASDAQ may end up leading the market. It looks like there is a consolidation when you look at the semiconductor index and the small caps. Those are the growth areas and they are in trouble. They are not ready to roll over and give back the entire rally; I do not think that is the case at all. The liquidity has not gone away. It is going to keep supporting the rally unless something devastating happens where it will not matter what money is or is not out there.

I think the market may go into a June-like correction or consolidation. It has had every opportunity to move higher, but it has not done so. Indeed, it was shedding shares on high volume to end October. It looks like that was the start of a corrective move and now the volume has dried up. We have bounced up and now we see how hard it breaks to the downside. I am looking for it to hold in a range and start moving somewhat laterally as it did in June. That would mean this is not the end of the world and the liquidity is still out there to prop things up. It will be one of two things. I think we are going to go into a correction toward the end of the year where the big-money funds play it safe and do not make any new bets to end the year. They will not drive the market higher, but things will pick up in the new year.
For now, leadership is still in good shape, and I see some buys there. There are always some struggling areas that we can take advantage of to the downside. It looks like there is that kind of dichotomy where you can play upside and downside a bit as the market chops through this. I will be looking for trades in the range and looking for bouncing up and down. There will always be those that go up or down regardless of what everything else does, and I will be looking at those as well.

We have been pulling back, as you know. We have been taking a few buys here and there, but now we will be able to shift gears and play the moves in the range. We are going to play some downside as well, and we will take what the market gives. We will not be able toll look at huge runs right now unless it breaks to the downside big time. If it does that, we will let it run and take those as far as they can go. I think it will be more like June, however, so we will just play the moves back and forth and take what the market gives. We will not have as huge of gains, but we can pile them up and make good money there. I will see you on Monday.


Support and Resistance

NASDAQ: Closed at 2112.44
Resistance:
2143 is the October 2009 range low
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)
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

Support:
2099 is the mid-September 2008 closing low
The 50 day EMA at 2081
2070 is the September 2008 intraday low
2060 is the August peak
2048 is the early October 2009 closing low
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
The 200 day SM A at 1802


S&P 500: Closed at 1069.30
Resistance:
1070 is the late September 2009 peak
The March/July up trendline at 1078
1078 is the October range low
1080 is the September 2009 peak
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

Support:
The 50 day EMA at 1048
1044 is the October 2008 intraday high
The August peak at 1040
The early October 2009 closing low 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
The 200 day SMA at 925
919 is the early December peak is bending


Dow: Closed at 10,023.42
Resistance:
10,120 is the October 2009 peak
10,365 is the late September 2008 low
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

Support:
9918 is the September 2008 peak
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak
The 50 day EMA at 9717
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
9430 is the early October low
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
The 200 day SMA at 8637


Economic Calendar

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

November 06 - Friday
Nonfarm Payrolls, October (08:30): -190K versus -175K expected, -219K prior (revised from -263K)
Unemployment Rate, October (08:30): 10.2% actual versus 9.9% expected, 9.8% prior
Average Workweek, October (08:30): 33.0 actual versus 33.1 expected, 33.0 prior
Hourly Earnings, October (08:30): 0.3% actual versus 0.1% expected, 0.1% prior
Wholesale Inventories, September (10:00): -0.9% actual versus -1.0% expected, -1.3% prior
Consumer Credit, September (2:00): -$14.8B actual versus -$10.0B expected, -$12.0B prior

November 12 - Thursday
Initial Claims, 11/07 (08:30)
Continuing Claims, 10/31 (08:30)
Crude Inventories, 11/06 (11:00): -3.94M prior
Treasury Budget, October (14:00): -$150.0B expected, -$155.5B prior

November 13 - Friday
Export Prices ex-ag., October (08:30)
Import Prices ex-oil, October (08:30)
Trade Balance, September (08:30): -$31.9B expected, -$30.7B prior
Michigan Sentiment-Preliminary, November (09:55): 71.8 expected, 70.6 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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