Dollar Explodes Higher

SUMMARY:
- Jobs report surprises with some positives but is not out of the woods yet.
- Dollar explodes higher and the related trades take a hit.
- Stocks and bonds acting as they should with a better economic outlook: growth is growing, bonds are selling.
- Leadership may be starting to rotate away from dollar trades to growth trades.
- Despite the rally on good news, the indices remain in their ranges: watching the small and mid-caps for the true direction.

Jobs report shows some tantalizing progress.

All the action was related to the jobs report on Friday. It was much better than expected (-11K non-farm payrolls versus -125K expected). There was a sharply reduced number for October
(-111K versus original -190K) and September, with a net of 159K fewer lost jobs than originally anticipated. The unemployment rate fell to 10.0% from 10.2% on top of that. It was expected to clone that for the month, so there was a significant gain. Those positives gapped futures higher; indeed, it gapped it over the midday action on Thursday. The SP futures topped out over the Thursday peak and then fell off. There were fewer losses, the revisions were positive, and the most important factor (for us) was the average workweek. It went up to 30.2 hours from 30.0. This is not just a one tenth bump as usual, so that shows significant action. Temporary employees were up. There have not been any temporaries hired of late, and those are where the full-time employees usually come from. It is good to see temps being picked up.

It was not all candy and roses, however. The work force fell by 100K. Those people have given up. It now stands at 861K, and that is significant. They say 65% of the workforce is disgruntled that is something to consider. When people start seeing the good job numbers, they will come back out in the labor force and the unemployment rate will likely rise even more. The administration was hinting at that today because that is the way it works. People hear that things are better and they go looking for jobs, but there are no real jobs yet. They will have rejoined the pool and not found a job, so the unemployment rate will tick higher. For people putting a lot of stock in 10% versus 10.2%: Remember there was a drop from 9.5% to 9.4% in September, and Robert Gibbs said this was a sign that the economy had pulled back from the brink and everything would be okay. It then immediately ran up to 10% and 10.2%, so you cannot put too much stock in one month. It could be a rogue month. The good news is the 10.2% may have been overly negative. There will be a move back up to 10.1-10.3 (or even higher) as the months unfold because more people will be looking for work given the "good news" shown on Friday.

Emergency benefits were up 265K even though the job market is supposedly getting better. They have been extended repeatedly. Someone can effectively have been on unemployment for two years now, and it is the small businesses paying that. The government keeps coming back to extort more money from them for people who are no longer working. It is a tough racket when you are a small business and your business is down. You cannot afford to have the employees anymore, yet you still have to pay for them.

Another thing to consider is the non-farm jobs versus the unemployment rate. Coming out of recessions, the unemployment rate is more important. The big companies do not create jobs. They have been net job losers for 20 years. The startups create the jobs, and that is what makes the job summit such a joke in the eyes of many: the large companies were there, and they do not do much of the hiring or innovation. They are getting handouts from the government stimulus package (GE and the like) but are not creating any jobs. The unions were there, and they are not going to create any jobs in and of themselves. 11K non-farm jobs lost does not mean a lot; you have to look at is what the unemployment rate is. It did come down, and that is positive, but it will not stay down yet. The jobs report was not the perfect news I would like to see, but I am not going to deny that it was good news.

The jobs report set the stage, and stocks opened much higher. The DXY0 had a massive surge all the way back to the EMA that held it in check in early November. This is a big move. It cleared some resistance, and it is approaching some other serious price resistance, but it was a big move. If the US economy will recover (as the data seemed to suggest), then the dollar will strengthen. That is the reason for the move. The Fed will raise rates and it makes the currency worth more as the economy recovers. There was short covering in the dollar, of course, and an unwinding of the dollar carry trades that contributed to the move in the dollar. You have to get out of those if it looks like the economy (and thus the dollar) will be stronger. If you do not move out, you can be in a word of hurt. You have to unwind those trades, and that gets the snowball rolling faster down the hill.

Gold dove lower ($1,162.50, -55.70). It was down $60, and pushing $70 at one point. We took nice gain over 200% on our GLD options, but gold took quite a hickey. That will happen with worry about money printing the Fed being incessantly lax. When there is an indication that something else may be afoot, the knee-jerk reaction was to sell off hard. The dollar closed well off yesterday's close (1.4846 Euros, versus 1.5069 Thursday). Oil did not sell off tremendously ($75.74, -0.72), but many energy stocks were hit hard. They have been under pressure the last few days, which is why we took several off the table and looked at downside plays in energy. We entered a bonus play on Friday with DUG.

Oil and gold were both under pressure. Bonds sold hard. The TIPS gapped lower indeed, the 10 year closed at 3.47%, up 10 basis points from 3.37 the day before. Bonds have been selling and yields have been rallying. Over the last week, it seems like the bond market, after looking for trouble, anticipated a better jobs report. Rates have been swinging violently over the last week: It was at 3.19% just over a week ago.

The SP500 and the Dow both surged to new highs but were unable to hold them. The small caps and NASDAQ surged and held most of their gains. The semiconductors had an explosive move -- like bonds, it looked like they anticipated this news. They rallied and closed at a new high for 2009. There was a lot of strength in growth areas, and that is what we like to see. Stronger growth stocks are an indication of a stronger economy, and that is why I have been watching SP600 so closely over the last few weeks to see if it could rally.

The sum total was positive action. It is the right kind of action. The dollar is up, and the stock market is up; they are anticipating a stronger economy in the future. The growth areas were moving while those that have been tied to the dollar and exports (and a second-rate US economy) were down. The NYSE large caps, the SP500, and the Dow were unable to hold their moves and showed much less relative strength than the other indices. Where SOX gained 2%, the SP500 gained 0.5%. The Dow gained 2%. NASDAQ posted a solid 1% gain and was at 1.5% at one point. Things are moving in the right direction, but the big question is whether it can last.


TECHNICAL

INTERNALS

The advance/decline line was not bad on NASDAQ at 2.8:1, but it was not huge. It was not the 3:1 or 4:1 one could expect on great news about jobs. NYSE was 2.1, which was also not great considering that decliners led nearly 2:1 on Thursday.

The volume was key. It rose 14% on NASDAQ and 22% on the NYSE, pushing both of them above average. That is not bad. We want to see the growth indices like NASDAQ rise on strong, above-average volume. The NYSE rallied to a new high but gave it back. As a matter of fact, it gave back 14 points off the high more than two times what it gained on the session and it kept it in this range. The high volume indicates that a lot of the stocks tied to the dollar were selling back. Commodities and energy were taking it on the chin, and industrials were not performing well either. They have been feeding off the weak dollar in the export market. They were knocked around a little, and that will keep happening if things continue this way.

The small caps posted a 2.3% gain. They have not moved over the November peak, but they are challenging it, and this will be a very important move. They are trying to make a higher low, and if they can make a higher high, they may keep the whole upside trend moving even after a lower low. As the small caps and mid-caps moved higher, the strong NYSE volume shows that the action was mixed. There was buying in the growth areas, while there may have been some higher volume selling in dollar-related areas. That shows that the action was mixed but still positive given the news on the day.

There is obviously short covering going on, some dollar selling, and some selling to the dollar-related stocks. That had to happen because they have had such a good rally. When things appear to change, they are quick to bail. There were positive developments related to growth areas.

CHARTS

SP500 moved to a new rally high, but could not hold it and traded in the same range. There was great news out there, but it could not hold onto the move. That is a negative for SP500 because many of the financial stocks were up on the news, but not substantially. The Dow did the same thing: It rallied to a new high and turned back unable to hold that new high on tremendous volume. There are still issues with the large cap stocks tied to the dollar. NASDAQ did not finish at its high and did not finish were it gapped open. It did hold a very solid gain and is trying to push out of this range, but it could not quite do it. It moved to a new high but could not close there. It is in the same position it was before, even though it is showing more strength. Until it clears that range, it is still in the same boat. The small caps held almost all of their gains, but they are still below the November peak. This is a good move. It has held its gain, but still has to make the break, and that is what we want to see. How it moves from here will be the key. It was not able to clear that high on a very good news day, and this is a concern.

The SOX moved to a new closing high, but just by a hair after a strong week of gains as if it was anticipating the news as well. It gapped to a doji, and that may show it needs a pullback, but the semiconductors have been on fire and they came out of nowhere to do it. This is an important growth area, so it is another example that feeds into the idea that things are improving and looking better down the road. Then again, the small caps and mid-caps still need to break out. Growth definitely led the market and led the gains on Friday, while the dollar-related stocks suffered that is how it should be. When looking at the overall picture, there was no real change in any of these indices (other than SP500) even with what many were saying was excellent news. This is a problem. Maybe they were too far down in their range to make the break on Friday. We will find out next week.

LEADERSHIP

The chips were in the lead and have been doing very well. NVLS gapped higher and continued its run. RMBS continued its run with a gap higher. They are running and getting a lot of money on a lot of volume. It was trading in that range, made a higher low, and made a big breakout. We are lamenting that one because we were trying to get in and play it.

Tech was not doing badly at all. GLW has been running higher. AAPL was off again, but it looks like it has made a test of support and may be ready to run. Net stocks were doing fine. AKAM was having a good day. NTGR had a nice day; it was not runaway, but it moved up out of a good pullback. Many good stocks were making moves, but others (such as energy) were struggling. We are playing HAL to the downside. OII is heading lower. BTU hit its 50 day EMA and it has bounced off it many times before. It has some serious downside volume. The metals were also in trouble. AKS is a good indication, and it has had two tough days. It is not totally broken down, but it is struggling. If the idea holds that the economy is recovering and the dollar continues to gain, there could be more of this.

Agriculture has been leading up, and it is still okay after the breakouts. MOS sold back hard, and that is how it was across the agricultural sector, just as it was with energy and metals. There is a bifurcation here as in the major indices. Growth areas were moving higher, and areas tied to the rest of the world and the weaker dollar moved lower. There is still a plethora of leadership out there, but it is rotating. Rotation is not only good for the tires on your car, but it is good for the stock market. New money has to move into other areas when stocks become overextended as many of these have. It is healthy for the stock market when they pull back as others move higher. This change in leadership is not bad at all.


THE MARKET

MARKET SENTIMENT

VIX: 21.25; -1.21
VXN: 23.1; -0.9
VXO: 20.53; -1.13

Put/Call Ratio (CBOE): 0.85; +0.17


Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 50.6% Up from 44.4%. Moving to a high on this last run, matching the levels from September and October. Hitting highs again just as SP500 bumps prior peaks yet again. 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: 17.6%. Bears are leaving the building the past three weeks, falling sharply from 26.7%. This is the lowest level of the entire rally and is at a bearish level. Just in time for the SP500 testing the prior peak. Peaked near 28% on this round, falling short of the 35.6% hit in July 2009. 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: +21.21 points (+0.98%) to close at 2194.35
Volume: 2.247B (+14.34%)

Up Volume: 1.722B (+1.011B)
Down Volume: 547.684M (-711.032M)

A/D and Hi/Lo: Advancers led 2.81 to 1
Previous Session: Decliners led 2.1 to 1

New Highs: 142 (+38)
New Lows: 34 (+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: +6.06 points (+0.55%) to close at 1105.98
NYSE Volume: 1.383B (+22.04%)

Up Volume: 974.742M (+652.839M)
Down Volume: 382.883M (-415.125M)

A/D and Hi/Lo: Advancers led 2.01 to 1
Previous Session: Decliners led 1.78 to 1

New Highs: 387 (+39)
New Lows: 68 (+7)

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

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


DJ30

Stats: +22.75 points (+0.22%) to close at 10388.9
Volume DJ30: 460M shares Friday versus 243M shares Thursday. Some unwinding of the dollar related trades led to some massive volume.

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


MONDAY

If SP600 can break over the November peak, then maybe the rally to the end of the year is coming early. We can get a nice run, kick started by the jobs report, after the indices have traded for a month in a lateral range. However, the action shows that there was no relative change in the position of any of the indices other than the SOX. They could not make the breakout even with the good news. You have to take the jobs claims with a grain of salt. There was good news, but it has not been able to break the market free and rally into the end of the year. It is very possible it could do it next week; I am only saying it was not able to do it on Friday despite all the good news.

That does not mean there are not good stocks out there. We picked up several on Friday that were in good position and making moves higher. I am definitely going to keep looking for those. The chips have rallied. They are a bit overextended and we may still find buys there, but there may be pullbacks over the next week as they come back and test. That will give us good entry points. There are small techs looking good and some business services looking good. These are all areas that you want to see do well if the economy is going to improve because they will tend to lead the way up. Remember, in late 2008 and early 2009, small business stocks started to move higher. They tend to lead out if things are going to recover. That was a false lead, but it happens. We got the stimulus package passed and optimism was higher, so those stocks built in some gains in anticipation of economic recovery. That has obviously taken longer than many hoped, and some have fallen to the wayside. We should see growth stocks and small and mid-cap stocks start to perform again (as they seem to be doing now) if there is going to be economic recovery.

What to look for over the next week: stocks that are moving up those smaller ones doing well and ready to make the breaks higher as we watch how SP600 plays off the prior November peak. I sound like a broken record, but it touched that level and pulled back on Friday. This is going to be important. It needs to make a higher high, and then take on the two levels at 325 and up to the October peak. If it makes a breakout, things look good for a January effect rally with the small caps leading the way. That could be positive for the economy, but we will see. It looked good earlier in the year as well. The small caps were trying to lead higher, it looked positive, but then things waffled. They still went higher but lost their leadership move in August. It was overtaken by SP500 and the Dow the dollar-related stocks. That will have to change to avoid the double dip recession. If the unemployment rate can be brought down to where it is no longer a leading indicator of trouble, but falls in line with some of the economic data, then that is a huge positive. The small and mid-caps should rally in that case. We will be right in there with them because they will be on the reports. As they make the move, we will move into them.

Have a great weekend. I will see you Monday, and we will see how the SP600 fairs with respect to that November peak.


Support and Resistance

NASDAQ: Closed at 2194.35
Resistance:
2205 is the November 2009 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
2275 - 2278 from the February 2008 and April 2008 lows

Support:
2191 is the October 2009 peak
2177 is a low from March 2008
2169 is the March 2008 closing low (double bottom)
2168 is the September 2009, intraday peak
2167 from the July 2008 intraday low
The 18 day EMA at 2163
2155 is the March 2008 intraday low
2143 is the October 2009 range low
The 50 day EMA at 2128
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
The 200 day SM A at 1865
1862 is the July peak


S&P 500: Closed at 1105.98
Resistance:
1106 is the September 2008 low
1114 is the November 2009 peak
The March/July up trendline at 1121
1133 from a September 2008 intraday low
1185 from late September 2008
1200 from the July 2008 low

Support:
1101 is the October high
The 18 day EMA at 1097
1090 is the 2007 down trendline
1080 is the September 2009 peak
1078 is the October range low
The 50 day EMA at 1077
1070 is the late September 2009 peak
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
The 200 day SMA at 950


Dow: Closed at 10,388.90
Resistance:
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

Support:
10,365 is the late September 2008 low
The 18 day EMA at 10,324
10,120 is the October 2009 peak
The 50 day EMA at 10,065
9918 is the September 2008 peak
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
The 200 day SMA at 8866
8829 is the late November 2008 peak


Economic Calendar

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

December 04 - Friday
Nonfarm Payrolls, November (08:30): -11K actual versus -125K expected, -111K prior (revised from -190K)
Unemployment Rate, November (08:30): 10.0% actual versus 10.2% expected, 10.2% prior
Average Workweek, November (08:30): 33.2 actual versus 33.1 expected, 33.0 prior
Hourly Earnings, November (08:30): 0.1% actual versus 0.2% expected, 0.3% prior
Factory Orders, October (10:00): 0.6% actual versus 0.0% expected, 1.6% prior (revised from 0.9%)

December 07 - Monday
Consumer Credit, October (14:00): -$9.3B expected, -$14.8B prior

December 09 - Wednesday
Wholesale Inventories, October (10:00): -0.5% expected, -0.9% prior
Crude Inventories, 12/04 (10:30): 2.09M prior

December 10 - Thursday
Initial Claims, 12/05 (08:30): 465K expected, 457K prior
Continuing Claims, 12/04 (08:30): 5435K expected, 5465K prior
Trade Balance, October (08:30): -$37.0B expected, -$36.5B prior
Treasury Budget, November (14:00): -$134.1B expected, -$176.4B prior

December 11 - Friday
Export Prices ex-ag., November (08:30): 0.3% prior
Import Prices ex-oil, November (08:30): 0.4% prior
Retail Sales, November (08:30): 0.7% expected, 1.4% prior
Retail Sales ex-auto, November (08:30): 0.4% expected, 0.2% prior
Michigan Sentiment-Preliminary, December (09:55): 68.5 expected, 67.4 prior
Business Inventories, October (10:00): -0.3% expected, -0.4% 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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