Sunday, January 31, 2010

You Know the Market Wants to Correct When ...

SUMMARY:
- You know the market wants to correct when . . .
- Good earnings surge NASDAQ, then it purges
- GDP soars, but market yawns as the numbers behind the numbers are not as impressive . . . even as some pundits want you to believe.
- Market correcting because it rallied far and needs to or it sees something nefarious down the road. Can you tell which?
- Week packed with economic data, more earnings, and a market that has a lot of sellers.

Just needs to correct after a run or something wicked this way comes. Take your pick.

The market definitely wants to correct when there are strong earnings that are either ignored or a good initial gain is given up. MSFT posted outstanding earnings and gapped higher, but then it reversed on high volume. AMZN produced great earnings and gapped sharply higher, but then it reversed and gave it all up. Another sign of correction is selling after a strong economic report such as the GDP for Q4. That was the fastest growth in six years, and yet the market still sold. Initially, futures gapped higher and were holding their gains as the market opened and rallied. It did not hold up through the rest of the day, however. The market peaked, and the sellers came and sold off the market into the close on Friday. We expected short covering to come in, and it looked like it was doing so early in the session. There were good earnings and a good economic report. There was plenty to get the shorts scared and wanting to cover over the weekend, but even that was not enough to keep the sellers out of the market. They came back in and sold it despite those earnings and despite the good economic data. You know the market wants to sell when it ignores those two major areas that are the reasons why the markets rally.

Is the market ready to correct, or is there something more nefarious afoot? There has been a big run; the indices are up 70%. The March lows, where the SP500 bottoms, is a tremendous run up near 1200. It makes sense that there should be a correction, and one is underway. This is clearly a sharp pullback that is in a two-step process right now. Others have been one step down. There are two big legs both occurring at the end of the week. Selling off at the end of the week and down into the close on Friday is not necessarily a good sign, but there is still a lot of liquidity out there. After all, the Fed is still pumping out money. At the FOMC result this past week, it indicated that it will start taking the stimulus back, but it does not have a timetable for that. It has just started the talk about it, and that precedes actual actions by a few months. It looks like we will still have plenty of liquidity. The market looks many months down the road. It does not base long-term decisions on earnings this past quarter. We will see stocks gap higher or lower based on the past earnings and immediate outlook. As for the more sustained action several months down the road, the market prices that in over time rather than just on a day.

As seen on Friday, the economic data is still increasing. There was a good Chicago PMI, and the Michigan Sentiment was up. The GDP for Q4 the first iteration of it was very strong. There are other issues in the world, however. The EU is already heading back down. Germany is in trouble, and Greece is having issues selling its bonds without offering a lot of money. Spain and Portugal are under pressure, and Ireland is starting to turn up on the radar as a problem. S&P said that the UK was no longer the safest banking financial center on earth. Europe is starting to head back down. They had the same kind of stimulus as the US and are heading back down earlier than we are. They also started to recover faster than we did, but they may be going into a double dip and providing the US with a road map for the way down. We are essentially doing what they did, although their debt is not nearly as high as ours is.

This is a point to be very careful with worries of a double dip, yet the administration is talking about additional stimulus. This time it is talking about a small business stimulus, which may not help. It is based upon hiring, and it is very difficult to hire someone when you get just a credit. If you do not have the work for them and you get a one-time credit, then that does not offset the salary. The government is asking small business to get $5K off the taxes per employee, but you have to make up the rest of it out of your own pocket (and hopefully with profits). If there is not enough business in the first place that would require a business to hire someone, taking $5K off of a $15-50K salary is not going to induce them to bring that person on board if there is no work for them. The government is once again trying to tell you how to use your money very specifically instead of giving a credit and letting a business owner use it the way they see fit. How much can we rely on this being a potential move down ahead of a double dip? Not a lot at this point. The market rallied 70%, and it is down 7% right now. It is having a correction after a big run, and that is the most likely scenario. The path of least resistance has been down at this point. There is still room to correct and maintain a healthy overall gain. There are plenty of consolidation levels on SP500, NASDAQ, and other indices as well. It is jumping the gun to assume there will be a double dip and that the market is already pricing in a dive lower based on the action we saw the past two weeks. The economic data is still expanding and earnings are improving. Conspiracy theorists (and I have been called one on occasion) would tend to jump to that conclusion. I have my doubts about how strong this economy is, but the market is the market. It will do what it does and we have to watch it in order to position ourselves well. That is why we were taking gain off all the way up. We were buying new positions, but we were also taking a lot off the table and closing up positions as it started to sell. We are now are looking at downside positions. There could be real trouble out there, but no one knows at this point. The market is going to sell, we will make money as it goes down, and we will see how the leaders set up for a move back up. That will tell us a lot more than anything else will. That is when the leaders base out and get in good positions to rally once more.

OTHER MARKETS

The dollar was stronger, surging higher on Friday (1.3864 Euros versus 1.3970 Thursday). It was at roughly 1.42 just days ago. The greenback is surging after this test, continuing its relief bounce and coming up to critical resistance from the September 2008 peak, a low in December 2008, and then a range in the summer of 2009. There are lows and highs right at the 79.50 range it is trading at right now. A key week is coming ahead for the dollar, and it is likely to consolidate some more. We have had a strong move, a great test, and then another strong move. It could break up to 80 or even crack into the 81 area and then come back to consolidate. The dollar is very strong, and that is putting a damper on other sectors and other markets as well.

Oil closed down ($72.65, -1.20). It tried to consolidate near $75, but it has fallen down to the $72.50 level where there is support from August. It is trying to hold here. It bounced Wednesday and Thursday. It looked like it would bounce Friday because it was up a lot of the day, but then it turned over and closed at the lows. It may hold here, but it looks like it wants to sag down to 70. Oil is under pressure as the dollar continues to rally. They have an inverse relationship.

Gold, while it was somewhat down, was essentially flat again ($1,8180, -4.40). It is holding the December low and is still in play for a possible double bottom. That is just a pretty picture until it really makes a move that shows it is breaking higher from this support level. It keeps it interesting as we look ahead to see what the yellow will do and what the other markets might do in response.

Bonds rallied. As stocks were up originally on the GDP and earnings data, the 10 year was at 3.67%, up from 3.6 5% on Thursday. Then it reversed and closed at 3.60%. That is a hefty move in one session, and as bonds rally, yields fall. Concerns about the economy would send bonds higher. Why would bonds be rallying when the economy is supposedly recovering? It could be the lurking fear of a double dip or inflation, but one would think inflation would tear into bonds. There is something making investors nervous again and pushing bonds higher. Bonds did spike at the end of last year, but then they sold off and it looked like things were recovering. They are now marching back up and clearing an important interim peak. They are making a higher high again after the lower high. We have to keep our eye on bonds moving down the road.

TECHNICAL

INTERNALS

The advance/decline line was not too bad on Friday. NASDAQ saw -1.8:1, and that was better than the -2.5:1 on Thursday. The NYSE was a bit worse with -2.2:1 versus -2.6:1 on Thursday. It is still over 2:1 to the downside, which is more than we saw during the stagnation period. Things have started to move and the breadth ramped up.

Volume jumped again to over $3B shares on NASDAQ. That surge saw the biggest volume in months. The NYSE volume was up 41% to 1.58B shares. It was not the biggest volume in months, but it was big volume nonetheless. It occurred on the downside, and that showed distribution. That is high-volume selling where the institutions are dumping their shares they bought on the way up. If there is a lot of technical damage done, stocks will have to base out again before they can make substantiate moves higher.

CHARTS

SP500 had two big days down, three lateral, then two days down again. It was very heavy volume at the end of the week. Buyers are not rushing in to save the market, so the sellers are using the end of the week to dump shares. The SP500 closed roughly at the September peak, so it is still holding some support at this level. There is a significant layer of support from 1075 to 1050. It could come down to 1025 as well. There is a point in November, October, and then again a peak in August. There is a series of support levels that the SP500 could step its way down to. One of them is at 1025, and then down to 1000 where the 200 day EMA is lurking (but it is really more around 1112). There is no indication the selling is slowing with high volume on the downside. We will have to see where it lands. We were looking for a potential bounce back up to test the high, and it may still come. Trends do not like to give up easily. The S&P could come down to 1050, then rally back up, and try the level at 1100-1112. It could also go up to 1125-1130 before rolling back over. That is what makes these turns tricky. If it is a normal correction, it should bounce up and try to test. If there is something more insidious at work, it could dive straight down. The strength of the decline is indicative of the perceived problem in the market.

The NASDAQ is in the same situation. It tried to recapture 2200. It bounced up to that level on the high (2203), but it was unable to break back through the November and December peaks. It turned and made a new low on the selloff as it declined 1.5%. That puts it still in this range. There is a range of support running below 2100 and all the way down to 2040. There is a big range of consolidation as the market gave back many of the moves as it climbed higher. That is indicative of a momentum lag on the way up, but it gives it support points on the way down. As with SP500, it is still stepping lower with no indication of trying to slow down. I am looking at 2050 or 2000 as a pullback, and that is substantial. If it goes straight to that level, something bad is up. If it checks up in the general range of 2100-2150 and rebounds, then that is more in line with what has been seen before. Even if it fails, it would be more of a normal correction.

SP600 had a tough day, but it is not in as bad of shape as some of the others. It did break out of its lateral consolidation, as did the other indices on Thursday and Friday. It is holding at support at 20 and has a range down to 311-310. There is a lot of price congestion and a late August peak. There is a bit of head and shoulders action. Again, many of the same things the other indices are showing.

Semiconductors are struggling. They have given back most of their gain, knifing lower on Friday. It is in the middle of the range of consolidation from September into early December. There is support around 300 from an August peak, and then there are lows in September and one in early October. The 200 day EMA is coming up just over 300. It is the same as the others; it is selling hard, it will test some deeper support, and then we will see how it bounces and what kind of strength is there when it is done. The indices are in high-volume selloffs with the mutual funds dumping shares. It is a matter of how far they sell down on this move, and then how they bounce in response. Thus far, the bounces have been very anemic. We have not seen any type of big bounce just lateral shuffling that has been unable to bounce back and pick up any buyers to the upside. It is all downside right now, and we have to see where they bottom and how they bounce to tell what kind of correction the market will have.

LEADERSHIP

Technology. AAPL was down. It has broken through the 200 level and is at a key range at 190. There was a big chunk torn off there. It is one of the major leaders and a bellwether, and it is struggling. MSFT gapped higher and reversed; it had good results but got no respect. There is a weakening top with MACD, a lower high, and it broke down. There is a bear flag and it is tanking lower. I did not want to get in front of it and its earnings, but it turned out that would have been a good play. Even though it reported strong earnings, MSFT was swept back. CSCO had a same kind of action. It did not break down at hard and it has key support at 22 that could hold it up.

Restaurants are still doing well. PNRA is holding up nicely, and BWLD is also holding up well. Retail stores are struggling, however. WSM is back to the downside, and it made a stronger breakout of the lateral consolidation at 20. There was a lot of this: the selloff, the inability to bounce, then sliding laterally and breaking lower.

Energy. APA tried to consolidate laterally and is breaking lower as well. CVX did not announce great earnings, and it is down all the way to the 200 day EMA. That is at least holding for now. SLB is breaking down from its lateral consolidation attempt. CHK is selling off as well. None of these are ready to buy yet they need to do some consolidation.

Biotechnology. CELG is holding up well. It had a nice pullback to the 50 day EMA, and it could result in a play at some point. We took AMMD off the table to let it make its test. It is now coming back and could set up another buy in a few days. ISRG is still holding its gap. It was down on the session, but it is in good position and could yield a buy.

Industrials. TEX finally broke down. It tried to slide laterally, but it broke on a bit higher volume. It was not a major selloff, however. BUCY was an early leader, but it has given back that gain. It broke down into the range from 50-55. It will be critical to see if it will hold and base out. It is interesting that it never broke back up to 60 to make the right shoulder of a head and shoulder pattern.

Metals. FCX has sold off steadily. It is now down to the 200 day EMA at 65 where there is other price support. Other metals are down as well. Dollar-related "over there" stocks are in trouble and selling off as the dollar rises. Most other sectors are under pressure as well. There are pockets of strength as there always are, but there is a lot of pressure on the market overall. The distribution makes it difficult for stocks to find any footing right now, and that is why we are playing a lot of downside.


THE ECONOMY

First look at Q4 GDP ostensibly solid but you have to look at the numbers behind the numbers.

The Q4 GDP was the first iteration (there are three), so a lot of estimates were made with respect to what some of the numbers are. It gives a good idea of what is going on. It came in at 5.7% versus the 4.7% expected and 2.2% in Q3. That shows that we have technically emerged from the recession. There were two back-to-back quarters of positive GDP data. That is the headline number and it was the fastest since Q3 of 2003. I am not here to say that GDP was terrible. I am not enamored of the number for a number of reasons, but there are positives there. Consumer consumption was up 2%, and that was better than anticipated. It was expected to come in at 1-1.15% growth, so it was quite good. Consumers are buying, but the question is whether any of this is sustainable. The big boost to the number was inventories, adding 3.4%. If you take out inventories, then there is a 2.3% GDP. That is not bad, it is still positive. It is the second one in a row matching Q3, but that shows the driving force behind the improvement. Was it the kind of inventory growth that shows a lot of buying? Inventories went from -150B to -30B. That means that, while there is improvement, there is still just slower liquidation of inventories. They are not growing. It is like the housing market; it is not going down as fast as it used to. When the PMI numbers were negative, they were not going down as fast as they were before. They were improving, but were still bad. Did this make a lot of difference to the market on Friday? The futures were up ahead of the number, and they bounced modestly on the number and then gave back the gains. They were trading exactly where they were with slight gains after the number came out. It did not surprise the market that it was 1% better than expected. Indeed, the market was not very excited about it.

In talking with some economists, they said the consumer consumption that was up 2% was due to Cash for Clunkers and the first-time homebuyer credit. The question is whether there be that kind of consumption in the first quarter of 2010 without that stimulus. They are planning other stimulus, but it will be difficult to get that through Congress. We will have to see because people are weary of spending a lot of money. We spent hundreds of billions already with what some would call good results. There was a 5.7% GDP increase, but you have to look at where the increase was. I am not saying it is a bad number, but it is not as strong as it could be. For instance, many pundits were crowing that there was a 13.3% increase in PC equipment and software purchases in Q4. They said that showed signs of sustainability, but if you go back each of the years in the fourth quarter, there is a similar type of jump in consumption. This is not true for last year because no one was buying anything, but there was purchasing at the end of the year all the way back to the previous recession and our emergence from that. That is because there was an increase in credits and expensing for equipment and software. If you bought it, you have to take advantage of the expensing and the credit. When companies try to take full tax advantage, they make all the purchases in the fourth quarter, as late as possible, so it shows up and they can take it on their taxes that they pay in March or April. That is being smart with their money, and it happens every fourth quarter while we have had credits and accelerated expensing in place. It was no surprise that it went up because that was the time of year. What was surprising was there were pundits thinking this was a sign of renewed buying. They have said that every fourth quarter now since 2003. We have to step back and look at what is really going on. It was inventories, and it was the particular quarter with expensing and tax considerations that helped push this higher. I will not complain this is good. I hope it is sustainable, but we will have to see. The market did not do much after the number came out. Indeed, later on in the session, it turned over and completely sold off into a close on Friday. Historically, that is a bad thing for the market.


THE MARKET

MARKET SENTIMENT

The VIX posted a modest gain, but it was no huge surge given the size of losses, at least on NASDAQ. The rest of the NYSE indices posted nominal losses, such as SP500 with a 1% loss. Considering that stocks were down 2% on the indices just the other day, that was not much. The VIX jumped a bit. It was down early when the market rallied, but it is not where it was and has not taken out the peak from last week when it surged on Thursday and Friday's selling. This Thursday and Friday were pikers by comparison, and it is still at a relatively low range. It is testing and could break higher, but it was interesting that it did not explode higher on Thursday or Friday when there was significant selling underway.

VIX: 24.62; +0.89
VXN: 25.8; +0.89
VXO: 24.46; +1.46
Put/Call Ratio (CBOE): 1; +0.2

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%. Once again bulls have peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Thus for now this is more of the same as bulls get a bit pessimistic as the indices rise again and VIX falls. Hit 52.2% three weeks back, the highest level on this run. 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: 16.9%. Virtually in a flat line the past 6 weeks, down from 28% in mid-November. No sign of real worry based on this reading. This is the lowest level of the entire rally and is at a bearish level. 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: -31.65 points (-1.45%) to close at 2147.35
Volume: 3.093B (+10.61%)

Up Volume: 649.357M (+46.501M)
Down Volume: 2.463B (+193.35M)

A/D and Hi/Lo: Decliners led 1.82 to 1
Previous Session: Decliners led 2.5 to 1

New Highs: 44 (+3)
New Lows: 33 (+13)

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: -10.66 points (-0.98%) to close at 1073.87
NYSE Volume: 1.581B (+41.71%)

Up Volume: 495.049M (+163.308M)
Down Volume: 1.076B (+298.83M)

A/D and Hi/Lo: Decliners led 2.21 to 1
Previous Session: Decliners led 2.6 to 1

New Highs: 83 (-12)
New Lows: 61 (+5)

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

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


DJ30

Stats: -53.13 points (-0.52%) to close at 10067.33
Volume DJ30: 316M shares Friday versus 240M shares Thursday.

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


MONDAY and the WEEK AHEAD

There is a lot of data coming out next week, along with many more earnings. Earnings are not just a January event anymore. The first two weeks of February can be every bit as busy as the heart of January. There will be personal income and spending and the ISM. The Chicago PMI, which is usually a precursor, was up to 61.5. That topped expectations of 57.2 and beat the 58.7 in December. They were expecting an improvement in ISM, and it will be written higher before Monday.
The other big news of the week will be the employment numbers. ADP is on Wednesday, and then initial claims will be out on Wednesday. Factory orders are important, but it will be the non-farm payrolls in the spotlight on Friday. That will take all of the interest, and they are expected to rise. That would make two out of three months of modest gains. When you couple that will improving data, many people will be saying we are out of the recession and home free. Maybe we will be, and I hope we are. That would be fantastic, but I do not know how strong the move will be. There are a lot of caveats based on the kind of spending we have taken out and the debt we have racked up. I am concerned with what the future holds, but I will enjoy what we are getting for now.

The market is engaged in an old-fashioned, butt-kicking selloff. There are big downside sessions where 1-2% is being lost to the downside. There has been a leg and somewhat of a pause (it is hard to call this a second leg), and then it is coming down further. It will continue to sell. It might be nervousness ahead of the jobs report, then there may be a bounce ahead of it. There are expectations of positive growth, and there will be nervousness that it could be better than expected. The shorts will want to cover. It is on Friday as well, so maybe we will get that covering at some point. For now, the market shows that the path of least resistance is still to the downside. There was no bounce to the upside when it tried to consolidate for three sessions and, indeed, fought as hard as it could to hold up before giving way. Consider the fact that it is giving way on good earnings reports and good economic data. That shows that this is a market that just wants to sell for whatever reason. We will see what positions hold. We have cleared off a lot and do not have many upside positions left. What we do have are at some kind of support or there is another reason, like we think they could hold this level. They may not. If this is an ugly selloff, it could give way and there could be no leaders left standing. We have also moved into several downside positions. We picked up more on Friday given that the selling was hard in the afternoon. There was a late bounce that allowed us to take some positions to the downside, but we took partial positions because we do not know what Monday will bring. I felt good enough about the way it was closing for the second week in a row to the downside on Friday to take some downside positions.

We will continue to look for downside positions, mindful of the fact that there may be an upside bounce at some point to test this. This could be an all-out, butt-kicking selloff that takes SP500 down to near 1000 in short order. Or it can hold in the range of 1050 and bounce back up and test the lows, and then come back down again. That is the more ordinary correction from going too far too fast. The other kind is that there is something bad out in the world that we are unsure of, and then it sells off hard without any rebound. You do get a rebound off that, but it does not come up anywhere near the old highs. It makes a lower high at a lower resistance point and turns back down. We will continue to look for downside. That is the play that seems to have the most in it, but there will be people who are looking to put some of the liquidity to work to the upside. There is still money out there, so there will be plays like CELG and some of the restaurants holding up in spite of the market selling. Right now, we do not put a ton of money to work on any one particular position, especially upside. We can put more to work downside because the market is showing which way it wants to go. There is no attempt to bounce, and it is selling off again, so we can be more aggressive to the downside. Remember, downside comes fast and it can leave fast. Move in, take your position, and take gain when it is there at least partial profits. If you get a bounce, then you will not be killed on it. Just exercise good stop-loss control, and as opportunities set up, you should take advantage of them. The market is selling on high volume, so you have to go with the flow. Many people do not like that, but it is the same as when it is going upside. You make your money and take it off the table when the play dissipates.

It has been a tough couple of weeks for the bulls. Again, we took a lot of money off the table on the way up. We made a lot of gain in the last several months on the way upside. We were light going into earnings, and that is the way you want to be . We are now seeing how earnings are shaking out and taking positions based on that. We will be looking for gaps to play both upside and downside because we love to play gaps off earnings. We will see how they hold, what sets up, and then take advantage of it. You should not get bent out of shape when the market sells just like you do not get bent out of shape when it rallies. Take what the market gives you and be smart about it. Have a great weekend and stay warm it will be a cold one for a lot of the nation.



Support and Resistance

NASDAQ: Closed at 2147.35
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
2205 is the November 2009 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
2218 is the August 2005 peak
The 50 day EMA at 2233
2245 from July 2008 through 2260 from late 2005.
2275 - 2278 from the February 2008 and April 2008 lows
2292 is a low from January 2008
2319 from the September 2008 peak
2326.28 is the January high
2324-2370 is a range of resistance from early 2008
2382-2395 from 2008
2412-2415 represents a series of peaks and lows in 2007, 2008
2453 is the August 2008 peak

Support:
2143 is the October 2009 range low
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


S&P 500: Closed at 1073.87
Resistance:
1078 is the October range low
1084 to 1080 (September 2009 peak)
1101 is the October high
1106 is the September 2008 low
The 50 day EMA at 1108
1114 is the November 2009 peak
1119 is the early December intraday high
1133 from a September 2008 intraday low
1150 is the January 2010 peak
1156 is the Sept 2008 low
1185 from late September 2008
1200 from the July 2008 low

Support:
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 200 day SMA at 1013
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low


Dow: Closed at 10,067.33
Resistance:
10,120 is the October 2009 peak
10,365 is the late September 2008 low
The 50 day EMA at 10,363
10,496 is the November 2009 high
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
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
The 200 day SMA at 9427
9387 is the mid-October peak


Economic Calendar

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

January 29 - Friday
GDP-Adv., Q4 (08:30): 5.7% actual versus 4.7% expected, 2.2% prior
Chain Deflator-Adv., Q4 (08:30): 0.6% actual versus 1.3% expected, 0.4% prior
Employment Cost Index, Q4 (08:30): 0.5% actual versus 0.4% expected, 0.4% prior
Chicago PMI, January (09:45): 61.5 actual versus 57.2 expected, 58.7 prior
University of Michigan, January (09:55): 74.4 actual versus 73.0 expected, 72.8 prior

February 01 - Monday
Personal Income, December (08:30): 0.3% expected, 0.4% prior
Personal Spending, December (08:30): 0.3% expected, 0.5% prior
Construction Spending, December (10:00): -0.5% expected, -0.6% prior
ISM Index, January (10:00): 55.2 expected, 55.9 prior

February 02 - Tuesday
Pending Home Sales, December (10:00): 1.1% expected, -16.0% prior
Auto Sales, January (14:00): 4.14M prior
Truck Sales, January (14:00): 4.49M prior

February 03 - Wednesday
Challenger Job Cuts, January (07:30): -72.9% prior
ADP Employment Change, January (08:15): -40K expected, -84K prior
ISM Services, January (10:00): 50.9 expected, 50.1 prior
Crude Inventories, 1/29 (10:30): -3.89M prior

February 04 - Thursday
Initial Claims, 01/30 (08:30): 454K expected, 470K prior
Continuing Claims, 01/30 (08:30): 4600K expected, 4602K prior
Productivity-Prel, Q4 (08:30): 6.0% expected, 8.1% prior
Unit Labor Costs - P, Q4 (08:30): -2.5% expected, -2.5% prior
Factory Orders, December (10:00): 0.6% expected, 1.1% prior

February 05 - Friday
Nonfarm Payrolls, January (08:30): 13K expected, -85K prior
Unemployment Rate, January (08:30): 10.0% expected, 10.0% prior
Average Workweek, January (08:30): 33.2 expected, 33.2 prior
Hourly Earnings, January (08:30): 0.2% expected, 0.2% prior
Consumer Credit, December (15:00): -$9.5B expected, -$17.5B prior

By: Jon Johnson, Editor
Copyright 2010 | All Rights Reserved

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

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Monday, January 25, 2010

Indices at Key Support

Summary:
Earnings were not necessarily stupendous, but there were not a lot of terrible misses. There were good beats on the top line and bottom line, but that was no salve with respect to what the future holds. Earnings are about looking in the rearview mirror. When there are worries about a double dip in Europe, worries about China overreacting, and then the US overreacting to an election that went against the party in power, then that creates a lot of worry and fear. You can hear it time after time on the financial and news stations. Very intelligent economists and market analysts said what the administration is doing is extremely dangerous. It took a loss, it cannot handle the loss, and it is afraid of losing its agenda. It is now pandering to populism where people are upset that the banks made a lot of money. I am upset that banks made a lot of money as well: they are getting free money and able to turn it into 4-5% gains in overseas investments. That bugs me as a taxpayer. I am never going to see that money come back, but I will not let that cloud my judgment and say we should regulate them out of business. We are trying to help them recover, so the regulations make no sense. The incongruous actions being taken will lead to serious problems.



TECHNICAL

INTERNALS

The VIX surged 23% on Friday, and this is a massive move. A one-week move from the 17 level up to 28 is huge. That does not mean that volatility is a problem, and it does not mean the market is oversold. When you get in the 40 and 50 range, it is majorly oversold. This was an aberration because the world financial systems almost collapsed. I was getting calls late at night to put all my money in a safe deposit box and these were smart, sane arbitrage players telling me this. You understand how difficult and crazy it was back then and why volatility was so high. This is a high level, and we are at 28. 28 used to be considered high in the range from 20-30; that was normal. I hate to use the term "new normal," but that is what this essentially is. The new normal is not 20-30. The new normal is anywhere from 15-50. Seriously, you can have low readings of volatility for a long time and not be in trouble. It does not necessarily mean anything other than it could be due for a selloff. You can have volatility decreasing down to 11 or 10 levels and still have the market in long-term rallies. The thing to worry about is when volatility spikes as the market rallies. That is when a serious market rollover is coming.

The breadth was again quite negative at -2.7:1 on NASDAQ versus -2.9:1 on Wednesday. There was not much improvement. Note that I said breadth was starting to show big swings over the last week and a half. That was a precursor. It was showing its own internal volatility, and now volatility picks up in a number and it does not matter what it is. It does not have to be the VIX it can be in any kind of measure. Then you can anticipate trouble ahead or a change coming. On the NYSE, it was massively negative at -4.2:1 after -3.5:1 on Thursday. Really negative action.

The volume shows that there was another serious selloff. This is the second day of very high volume on the NYSE. After very low volume in late December and most of January when NASDAQ volume was spiking, the NYSE finally took off to the downside. Indeed, the three big spikes were on the downside. There was similar action with the NASDAQ. There was higher volume, but the big downside was related to the big volume spikes. There were four out of five days with big volume to the downside. That means lots of distribution, and that tells you they are simply dumping stocks. Distribution begets more selling or it has selling, maybe a pause, and more selling afterwards.

CHARTS

All the large cap indices are already at or below the next important support level I talked about on Wednesday and Thursday. SP500 is already inside in November-December range. It blew through the tops of that level, and now we are looking at the bottom of that range and the September peak around 1085-1080. That is the range of key support. You could extend that down to 1075 if you wanted to because that is the closing point. It is in a range of support. It could sell a day or two more and find the bottom. The move down has been so sharp, and the question is what it will do when it gets there.

NASDAQ has had high-volume selling, and it is right at its level of support at roughly 2015-2000. It has an entire range it could sell off to down to 2165. It will try too hold at the top of this range or at least it touched it and bounced back a bit on Friday. I do not know if it will try to hold yet, but it is at a level. We could see some slowing in selling over the next couple of sessions if it is going to try to hold. It is a key level, and you would expect it to show a bounce attempt. It may try to undercut it and then reverse; it comes in many forms. Sometimes they bounce off the level, and sometimes they undercut it and reverse. We will have to see how it plays out. We can expect some kind of bounce in this range, whether from the Friday close or a bit deeper into the range.

As noted earlier, the SOX was a horrible disappointment. It turned tail and fled, and it has crashed all the way down to the bottom range of the next support level. SOX and semiconductors go into everything we make these days, and if the economies of the world will struggle, the chips are out the door quickly. The interesting indices were the small and mid caps. They sold, but they are holding the 50 day EMA. That is the start of a range of support down to 325 from the September peak. It also held in mid-December. They look decent because they are not selling as hard, although that is a dubious honor given the size of the selloff.

The SP400 had similar action. It is holding the 50 day EMA and is above the October peak. It is an awfully sharp fall, and it is not planing out at all. They can turn on a dime as we saw on the trendline in November. We will have to see how it plays out. They are holding up, but are not that strong. I am not yet convinced that they can turn on a dime.

There were very sharp drops, and there is no sign of slowing yet. We will have to wait and see whether they can make a sharp turn at the support levels (such as on NASDAQ), or if they need to plane out a bit more or test and make smaller drops before making the turn. This is almost too fast of a decline to get a real feel for when exactly they will turn. We will talk more about what we can expect come Monday, and what we will be looking for in order to get that turn.

LEADERSHIP

BUCY gapped down and held similar to a small cap. There is interest there. TEX had the same type of action, showing a hammer doji at the 50 day EMA. There are possibilities there, especially when you juxtapose them with others such as JOYG or DE that look as if they are in freefall. Energy had a rough session, and these two tough days cast them down. They looked like they were trying to hold. APA was down hard. HAL is at its 50 day, but it was selling hard.

Metals were mostly down. FCX had a very tough week and gapped below support on Friday, but it did manage to hold. MTL showed a hammer doji at support, so not everything was down and out. I am trying to point out some positives in a market that was down overall.

Techs were a virtual wasteland on Friday. The selling got ugly on stocks such as AAPL, CSCO, INTC, and MSFT. Those are sharp selloffs and the very definition of trouble patterns. Biotechs are stable right now. DNDN came off the 50 day EMA with above-average volume. It could not hold the move, but it shows it was not selling. CELG was also trying to hold its end up and still make a new breakout.

Airlines were surprisingly strong. CAL was not up, but it held up well. LUV was not up on the session either, but it held up very well. TKC, a foreign telecom we sometimes look at, is not selling off sharply. It is holding above the prior peak in October. It is not all doom and gloom, but there are not a lot of pretty pictures out there right now. Nearly all sectors were lower. There were pockets of strength, but most sectors were beaten up severely because investors are uncertain about the future.


THE MARKET

MARKET SENTIMENT

VIX: 27.31; +5.04
VXN: 28.37; +5.18
VXO: 26.05; +4.86

Put/Call Ratio (CBOE): 1.07; +0.14

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%. Once again bulls have peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Thus for now this is more of the same as bulls get a bit pessimistic as the indices rise again and VIX falls. Hit 52.2% three weeks back, the highest level on this run. 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: 16.9%. Virtually in a flat line the past 6 weeks, down from 28% in mid-November. No sign of real worry based on this reading. This is the lowest level of the entire rally and is at a bearish level. 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: -60.41 points (-2.67%) to close at 2205.29
Volume: 2.764B (-3.06%)

Up Volume: 448.265M (-479.888M)
Down Volume: 2.367B (+411.212M)

A/D and Hi/Lo: Decliners led 2.7 to 1
Previous Session: Decliners led 2.89 to 1

New Highs: 44 (+44)
New Lows: 16 (+14)

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: -24.72 points (-2.21%) to close at 1091.76
NYSE Volume: 1.472B (-1.91%)

Up Volume: 161.408M (-33.84M)
Down Volume: 1.299B (-80K)

A/D and Hi/Lo: Decliners led 4.19 to 1
Previous Session: Decliners led 3.49 to 1

New Highs: 115 (-79)
New Lows: 47 (+4)

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

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


DJ30

Stats: -216.9 points (-2.09%) to close at 10172.98
Volume DJ30: 323M shares Friday versus 304M shares Thursday.

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


MONDAY

The market should not have sold as hard as it did based on the earnings and economic data, but there is the regulation fear and uncertainty driving the selling. With such a hard selloff into the close on Friday, Monday can be ugly. Tuesday can be ugly after that. Historically, a very negative Friday close during serious selling can bleed over into Monday and Tuesday. With that in mind, we were closing positions late in the day even though there is a chance for a bounce. The ones we closed had given up support and were not coming back. We did not want to see them get in any worse shape if the selling continued on Monday. That is why we took a lot of gains off the table on the way into earnings. We typically do that, but in all honesty, I did not anticipate such a violent pullback, primarily because we did not anticipate the government coming in and re-upping more regulation. That took the market down in a spiral lower.

I am concerned about the two hard days of selling, as well as the potential for more hard selling on Monday and possibly Tuesday. As a result we are not in a hurry to buy any upside positions, but that does not mean we will not be looking. There are good stocks holding up quite well in leadership areas they are out of step with the rest of the market and are showing the kind of strength you like to see. We will be looking at those and seeing if they can hold. The selling, too, may end sooner than later, and they would be good purchases as they would be in excellent shape to rebound.

We are in the middle of earnings season, and one would hope earnings would have more of an impact. Generally, if stocks are up ahead of earnings, they typically sell off when earnings first come out. If they are down when going into earnings, they tend to rally as earnings start. Then, a couple of weeks into earnings when everyone knows the gist of the story line, the earnings start running out of their mojo and the market quits rising on every result. Then the selloff starts.

Since stocks are down at the start of this earnings season, you would expect the good results could catch up eventually and send stocks higher. Maybe that will be the case with earnings providing the catalyst to turn things back up. That is often the pattern, but investors are going to have to resolve and digest the eco-political news that is upsetting the market for now. Maybe Barney Frank will speak out again to help calm things down after the President ruffled everyone's feathers. On the other hand, maybe something worse will come out the state of the union address is ahead this week and stocks continue lower.

Regardless, the market will probably sell more and further test the support. These are serious times and some new serious issues have arisen. This is, however, the market we have to work with right now. We will be patient and pick up positions when they present themselves, but I do not want to jump in on the first show of a turn because it likely will not be the case.

As I said in the Friday post-market alert, I am going to go in the cellar this weekend to find a nice bottle of wine. I am going to open it up, let it breathe, and I am going to sip it a lot. These kinds of days are why we took a lot of gain off the table on the way up. You cannot stop playing the game. You just close out positions when you get in trouble, and that is what we were doing. While the market can sell at any time, this type of selloff was rather unanticipated as the new war against financial institutions was more than anticipated as well. This too shall pass, however, and we will recover. Then we will have more opportunities. For now, we should stay in the bunker for a bit and see how the market reacts to the sharp Thursday and Friday decline. If a bounce higher that fails, we will play some downside off that. If there is a real turn that shows some buying, and the earnings are good and supporting the move, we can pick up some upside as well. Make moves in increments, not loading the boat all at once; we can always add more when the move tests and confirms itself.


Support and Resistance

NASDAQ: Closed at 2205.29
Resistance:
2210 (from September 2008) to 2212 (the July 2009 closing low)
2218 is the August 2005 peak
The 50 day EMA at 2276
2245 from July 2008 through 2260 from late 2005.
The July/November/December 2009 up trendline at 2274
2275 - 2278 from the February 2008 and April 2008 lows
2292 is a low from January 2008
2319 from the September 2008 peak
2326.28 is the January high
2324-2370 is a range of resistance from early 2008
2382-2395 from 2008
2412-2415 represents a series of peaks and lows in 2007, 2008
2453 is the August 2008 peak

Support:
2205 is the November 2009 peak
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
2155 is the March 2008 intraday low
2143 is the October 2009 range low
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


S&P 500: Closed at 1091.76
Resistance:
1101 is the October high
1106 is the September 2008 low
The 50 day EMA at 1112
1114 is the November 2009 peak
The July/November/December 2009 up trendline at 1116
1119 is the early December intraday high
1133 from a September 2008 intraday low
1150 is the January 2010 peak
1156 is the Sept 2008 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
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
The 200 day SMA at 1007
992 is the August 2009 consolidation low


Dow: Closed at 10,172.98
Resistance:
10,365 is the late September 2008 low
The 50 day EMA at 10,394
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

Support:
10,120 is the October 2009 peak
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
The 200 day SMA at 9373


Economic Calendar

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

January 25 - Monday
Existing Home Sales, December (10:00): 5.90M expected, 6.54M prior

January 26 - Tuesday
Case-Shiller 20-city, November (09:00): -5.00% expected, -7.28% prior
Consumer Confidence, January (10:00): 53.5 expected, 53.3 prior
FHFA Home Price Index, November (10:00): 0.1% expected, 0.6% prior

January 27 - Wednesday
New Home Sales, December (10:00): 370K expected, 355K prior
Crude Inventories, 1/22 (10:30): -0.471M prior
FOMC Rate Decision, 1/27 (14:15): 0.25% expected, 0.25% prior

January 28 - Thursday
Initial Claims, 01/23 (08:30): 450K expected, 482K prior
Continuing Claims, 01/16 (08:30): 4600K expected, 4599K prior
Durable Orders, December (08:30): 2.0% expected, 0.2% prior

January 29 - Friday
GDP-Adv., Q4 (08:30): 4.6% expected, 2.2% prior
Chain Deflator-Adv., Q4 (08:30): 1.3% expected, 0.4% prior
Employment Cost Index, Q4 (08:30): 0.4% expected, 0.4% prior
Chicago PMI, January (09:45): 57.4 expected, 58.7 prior
University of Michigan, January (09:55): 73.0 expected, 72.8 prior

By: Jon Johnson, Editor
Copyright 2010 | All Rights Reserved

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

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Monday, January 18, 2010

Earnings Are Good, but Market Responds Negatively

SUMMARY:
- News is not bad, earnings are good, but market responds negatively.
- SP500 rallies 8 out of 10 sessions and the financial stations act as if it was down 8 out of 10 sessions.
- Despite the chop on NASDAQ and being down two of three sessions, bigger picture the indices hold near support
- Economic data in line and improving, but it is not that great an improvement.
- With indices at next resistance market needs a bit of consolidation or a big catalyst to break them higher. Thus far earnings have not done the trick
- Time to be patient and let the good stocks test and set up entry points.

Intel earnings, decent economic data cannot drive stocks ahead of long weekend, earnings.

I did not feel the market would make a breakout on Friday, and it definitely did not. It is not that the news was bad. CPI was a bit better on the headline than expected, and the core was right in line at the 0.1% gain. Industrial production was in line at 0.6. Capacity was actually ahead at 72 versus 7 1.8 expected, and the New York PMI came in at a solid 15.92. That beat the 12 expected, and was much better than the 2.55 originally reported in December. Even that was revised up to 4.5.

It was just the fact that the market, SP500 namely, was up eight out of nine days moving into this session. It is also expiration, and there will be position shuffling. To top it off, the market is almost at the heart of earnings season. There is a lot coming out. Even with INTC's earnings on Thursday night - where it beat on both the bottom and top line and said it will expand operations - the market was not very pleased with it. You would think that would be good for all of the semiconductors (particularly the chip equipment makers), but they were down as well. The market was not ready to break higher. It is notable that it could not move on such good news with INTC.

The market has been up eight out of nine days on the SP500. The NASDAQ was still holding its gains, but had become a bit choppy. That may be telling more of the story. SP500 with its dollar-related or overseas-related stocks is moving higher, while some of the NASDAQ got up ahead of itself. Looking at the SOX chart, the small caps - particularly semiconductors - were ready to come back.

The indices may look heavy and are definitely getting choppier with the semiconductors and NASDAQ, but we have to look at the bigger picture. Do not get too tied up in the day-to-day, up and down movements. After all, on Friday, all the journalism majors that tried to pass themselves off as financial news anchors were very glum about the action. The market has gone down two out of the last three days, regardless of the fact that it broke out in late December and rallied up through mid-January. That did not matter; it was what happened Friday. A bunch of long faces, and many questions from the analysts: Is this going to be the start of a selloff? Is this the end of the run? Well, it may be, but I seriously doubt it. The liquidity is still out there pumping things up. Markets will still correct and test no matter what the uptrend is, and maybe that is what we are due for right now. It certainly looks as if the SOX is making a correction near term. The question is whether it will be a leader or just typically more volatile than the rest of the indices as it always is.

When you look at the macro picture, you have to note that NASDAQ tapped at the 18 day EMA once more and it held, despite all the chop and its loss of over 1% on the session. The SP500 also tapped at the 18 day EMA and held. The SP600 held at the 18 day EMA on the low and bounced back. It was not a total selloff it was not the kind of gutting you would imagine if you'd just stepped in from being gone a month or two and listened to the journalism majors on the financial channels.

The indices did lose over 1% across the board. That is except for the Dow, but it lost 0.94% itself, so it was not far away. Nonetheless, they are holding their trends. It was a tough day, but it was also the end of expiration. The market has rallied almost straight up for two weeks on SP500, and there is a long weekend ahead. There will be some profit taking after such a run. There will be positions shuffled thanks to expiration, and some people will want to take cash off the table with earnings coming up. I think we saw a bit of all of that on Friday.


OTHER MARKETS

The dollar was up on the day. It continues in a flag pattern it has formed after it reversed its trend and rallied off the late-November low. It has sold back all the way to the 50 day EMA. There is a bit of support there, and it is trying to bounce again but has not made it yet. It got some traction on Friday and managed to close higher (1.4378 Euros versus 1.4499 Thursday), and that colored the other markets.

http://investmenthouse.com/ihmedia/dxy0.jpeg

Oil traded lower again. It broke through the 18 day EMA it was trying to hold, and now it is down at the 50 day EMA in the meat of the consolidation from mid-October through November. Oil bounced up, hit the top of its range, and it is selling back. It did not help on Friday that the IEA lowered its 2010 expected oil demand. The IEA apparently does not think the world economies will recover as much as the other pundits out there do. That may have had an effect on oil, but oil is in a technical move right now, bouncing down from its prior peak. If it holds and can bounce up, that will be of real interest. It will then likely break through and out of the top of its range. If oil breaks out over $85.00 and rallies again, that would be a game-changer for many of the forecasts for 2010. That would be serious for the world economies.

http://investmenthouse.com/ihmedia/xoil.jpeg

With the dollar up, gold struggled again. It was up two days, Wednesday and Thursday, and it gave it back on Friday. We are still in the move higher. There was a higher low, and then it has come back and is testing right now. It is still making a higher low overall, so the pattern is still positive. It is much more sluggish than it has been in the past. It had a big run and is digesting the gains, but it is edging out something of a cup with handle. We will see if it can make the breakout and run up to the prior peak.

http://investmenthouse.com/ihmedia/xgld.jpeg

Bonds have been rallying, and interest rates are going down. If the economy is getting better as many people think it will, why are bonds rallying again? They had good demand on the auctions this week, but then again, that means bonds are rallying and people are concerned about being in stocks. That may be the case. Economic data was a bit worrisome, and it all started with AA. That got things off on the wrong foot with earnings season, and the market has been gun shy ever since. Bonds have been rallying and interest rates have been falling. The 10 year closed lower (3.68% versus 3.73% the prior session.) Even the short end at the 2 year was down (0.87% versus 0.92% Thursday). It was at 1% just over a week ago. Bonds are definitely rallying, and that often means discontent with respect to the economic future. I do not want to worry too much about that right now. I would just like to see bonds stabilize and avoid any sudden spikes in the 10 year that might indicate there is inflation. It is somewhat doing that with this move. As investors moved out of stocks a bit, they moved toward Treasuries, and that is normal.

http://investmenthouse.com/ihmedia/tip.jpeg


TECHNICAL

INTERNALS

The breadth is getting more volatile (as it was before the past few weeks). There has been +1.4:1 or -1.4:1; that seems to be the comfort zone for the indices. The breadth is now starting to expand on days that are decidedly stronger or decidedly weaker. On Friday breadth was - 2.75:1 on NASDAQ and -2.3:1 on NYSE. The last time there was breadth that strong was on Wednesday when the market was up. There is still capability to have strong breadth both ways, but it is something that has not happened in awhile. Does this mean volatility is moving back into the market? We are seeing some day-to-day. Looking at the NASDAQ chart, it has been bouncing around in this range, and it is not a tight range. It is very volatile. There are big moves up, gaps down, and then moves back up and down. There is volatility returning to the market, and that means breadth expands.

Volume surged. It was well above average on NASDAQ the strongest of the year. The NYSE volume was up as well. It moved back above average and had the strongest volume of the year. It is only the third time it has been above average in 2010, but that does not mean anything because it is expiration Friday. I will not attribute anything to this volume. Volume has been elevated on NASDAQ the entire year while it has not been on the NYSE. NASDAQ is considered more of a growth area with its technology, medical stocks, and smaller stocks (it is not just limited to the SP600). That makes the higher volume interesting because that indicates that investors are interested in growth stocks to start the new year. The index is still trending higher despite being choppy this year. You have to view that as a positive overall, but also take it with a grain of salt because there is a lot of volatility day-to-day coupled with a lot of volume on NASDAQ. That is typically not a great scenario when there has been a long run. Keep that in mind as earnings unfold and we see how stocks react. The earnings reaction to INTC was not great on Friday. It blew it out on the top and bottom line and had nothing but good things to say. Margins were at a record, yet it was down on the session; indeed, most of the chips and techs were down. With all of this chop and volatility coupled with above average volume on every session but one in 2010, that warrants being careful as we move forward in earnings season.


CHARTS

On Thursday, I talked about how the main indices have bumped into a resistance level, and that is still in play at this point. Selling back from that level is obviously a sign of weakness of a certain degree. NASDAQ is at its September 2008 peak that jumped up there in the middle of the month. The SP500 is at the mid-month low from September 2008. It has not quite made that level, but it is bouncing back. There is choppier trade on NASDAQ, and there is more volatile and choppy trade on SP500. There is some chop coming back into the market as they hit resistance. The sellers are there and the buyers are there, and they are fighting it out. Overall, however, the large indices held their 18 day EMAs. They have also held this near-term trendline. This is not a bad one because there are three points on it on NASDAQ. This is a solid trendline at 2255.

SP500 still has a trendline it is holding, and it tapped it on Friday. We have three points on this as well; if it holds, there will be a fourth point, and that would make a solid trendline. It is trying to hold this level, and that would be a good point for it to do so and continue on this breakout of rally and testing. It would be due to rally now, but it has to have a catalyst. SOX is already in correction mode. Will it be followed by NASDAQ and the other indices, or is it just being its usual volatile self and coming down to test? There is a potential for an ABCD pattern, but it is ragged. You want them to be clean and neat to be their most powerful. The question is whether it is leading the market into a deeper correction or just getting it out of its system first.


LEADERSHIP

Most of leadership is in modest pullbacks. The industrials, commodities, and materials are all in pullbacks. This all started on Tuesday when China said that it was going to raise the reserve limits for its banks. That typically leads to this kind of selling. It does not last that long, but it gets investors nervous about their positions in industrials, energy, and metals and they succumb to profit taking.

CMI was back. There was a big breakout, and then Tuesday knocked it back. It is still testing, and it is in a great pullback. BUCY gapped down on Tuesday and is now testing. We might get a nice play out of it in a few days. TEX was not affected. It had a nice break higher and a nice test. It could be ready for a new buy. CAT is struggling. It had a great pullback but a bad Friday, and it gapped down and then sold off. It is at the bottom of its range marked by the November and December peaks. It can find support there, continue higher, and salvage itself. Most of them are in pullbacks, but that is after good runs as well.

Oil was down, but energy stocks held their ground. SLB is moving laterally at its peak. APA is also moving laterally and consolidating its gains. BTU had a nice pullback, and we might get a buy out of that. CVX is not bad either. VLO is showing great volume as it breaks higher. It is still a sloppy pattern, so it is hard to get into that one. There are some good stocks holding their own even though oil is falling.

The chips are struggling. INTC had great earnings, it was hammered, but of course, it rose from $20 to all of $21.50 over the prior four weeks and got knocked back. It is not like the old days, back in the 80's and 90's, is it? It was knocked back 3% on high volume. They were not impressed with the earnings, but it did not destroy the pattern. AAPL took a hit as well. It has been trying to set up nicely over the October-November peaks, and it came back. It is trying to hold the lower part of the range right now. QCOM has been having a good run, and it just took it in stride. It is in an easy pullback and is still in good shape, but it will be hard to make money on QCOM. It has to move a long way, and it is not that big of a mover anymore. It went up for three weeks straight, and it was only a 10% move. QLGC has a nice pullback under way. Low volume, gapped higher. It is filling the gap. That is a very interesting play setting up.

The financials are having trouble right now. JPM came out with earnings and it just plain missed. It was having problems on its revenues with losses in mortgages and commercial loans. It had to increase its loan-loss reserve, and it just went down. The good thing about JPM is that it did not go down that much --- only 2.25%. It is still in consolidation, and we might get an ABCD pattern out of it and watch it head upside. Do not ever give up on them just because they do not do something you want them to do on one day. GS is having its issues, but an ABCD pattern had set up. It is at support at 165. Are we looking to bail? If it does not perform, yes. However, with an ABCD pattern, it could get back up to the November peak at 180 fairly easily, and that would make a great play to the upside. Going from 165 up to 180 --- playing some options, I would take that any day. MS is very similar. It sold off, but it is not bad. WFC sold back, but it is also holding in its recent range and could set up an ABCD pattern if it steps down a bit lower.

There are stocks that are pulling back, but they are not destroying themselves, and that is always a positive. You like to see stocks pull back, give you opportunities to move in, and then actually bounce. Then you can enjoy the ride back up. I really like it when the pundits on the financial stations are so negative. They are going to get a chance to buy these stocks at a better price and they are just so glum about it. I like when they get negative when there is a two-day pullback after an eight-day run. I will take that any day.


THE ECONOMY

Please see the ECONOMY video at the following link:

http://investmenthouse1.com/ihmedia/Economy.wmv


THE MARKET

MARKET SENTIMENT

VIX: 17.91; +0.28
VXN: 18.73; +0.53
VXO: 17.11; +0.53

Put/Call Ratio (CBOE): 0.82; +0.06

Bulls versus Bears:

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

Bulls: 48.3%. Once again bulls have peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Thus for now this is more of the same as bulls get a bit pessimistic as the indices rise again and VIX falls. Hit 52.2% three weeks back, the highest level on this run. 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: 16.9%. Virtually in a flat line the past 6 weeks, down from 28% in mid-November. No sign of real worry based on this reading. This is the lowest level of the entire rally and is at a bearish level. 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: -28.75 points (-1.24%) to close at 2287.99
Volume: 2.556B (+16.49%)

Up Volume: 569.157M (-743.322M)
Down Volume: 2.07B (+1.123B)

A/D and Hi/Lo: Decliners led 2.75 to 1
Previous Session: Advancers led 1.42 to 1

New Highs: 106 (-49)
New Lows: 8 (+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: -12.43 points (-1.08%) to close at 1136.03
NYSE Volume: 1.408B (+58.49%)

Up Volume: 246.422M (-239.793M)
Down Volume: 1.154B (+763.827M)

A/D and Hi/Lo: Decliners led 2.32 to 1
Previous Session: Advancers led 1.43 to 1

New Highs: 236 (-167)
New Lows: 34 (-12)

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

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


DJ30

Stats: -100.9 points (-0.94%) to close at 10609.65
Volume DJ30: 362M shares Friday versus 201M shares Thursday. Expiration trade in full gear.

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


TUESDAY

Monday is a holiday. Maybe things will finally get back to "normal" after that. There will not be any expiration, after all it will just be earnings season kicking off in full swing. The market is bumping up against that resistance. The September low at about 1152 is the next resistance. It is up there and having a bit of trouble. The same thing on NASDAQ: it is having problems at its resistance from that September peak as well. The small caps are having issues from way back in 2008 when there were 1,2, 3 lows. It is at that point now and bumping its head. The market needs a catalyst to get it to move through this resistance. It is acting tired. NASDAQ is volatile and choppy, moving laterally. INTC gave a good earnings report and went down. We will have to see what the other earnings are and how the companies are treated after they report. If it is similar treatment, you know that the market is tired and will need consolidation or a big catalyst to send it higher.

Our game plan is to look for more testing. There will be more chop and testing by stocks. Some of these are in excellent shape to move back up, and they may be early leaders. It may take a couple more days of moving laterally at support before the market is ready to let them go, but we will be ready when they do. Be patient and watch the test. We want to look for good stocks in good pullbacks that we can take advantage of. We will get good positions just as other people are wringing their hands worrying about them. Do not get overly excited when you see a stock dip and bounce. Let us make sure we can get a close to the upside that looks strong and that the rest of the market is gelling as well.

Do not feel bad about closing some positions now. We are in earnings season, and there has been a good run higher. We have taken a lot of gain and continued to take gain on Friday, but do not feel bad if you want to close a position. Do not feel bad about closing it, raising some cash, and being patient and picking new opportunities. If you can get out without too bad of a loss and you see others, such as CMI, setting up well for a break higher, then close one out and put it to work where you think it will make you some money. If CMI makes a break higher off this pullback, maybe you will go in, make some green, and feel good about the recovery after the first pullback of the new year.

There is nothing showing there will be a major correction. There is a lot more chop, but we have to mind our current positions. We have taken a lot of gain already. Remember that earnings are out there, and do not feel like you have to buy stocks just because earnings are coming. Indeed, it is a good time to wait and let stocks gap up or down, and then set up for much higher percentage plays. We are taking positions out that have earnings in February so we do not have to make squeeze plays on them. That is also why we are foregoing some if they do not show us exactly what we want to see. We can be patient, and we have the luxury to do that after a good gain after a good rally. We are going to pick our shots when they are available, then move in and feel good about it. We will get good entry points. If they turn against us, we will just close them out and will not have lost much of anything. If we hit them right, we let them run and we make great gains. Have a wonderful weekend.


Support and Resistance

NASDAQ: Closed at 2287.99
Resistance:
2292 is a low from January 2008
2319 from the September 2008 peak
2326.28 is the January high
2324-2370 is a range of resistance from early 2008
2382-2395 from 2008
2412-2415 represents a series of peaks and lows in 2007, 2008
2453 is the August 2008 peak

Support:
The 18 day EMA at 2282
2275 - 2278 from the February 2008 and April 2008 lows
2245 from July 2008 through 2260 from late 2005.
The 50 day EMA at 2224
2218 is the August 2005 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
2205 is the November 2009 peak
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
2155 is the March 2008 intraday low
2143 is the October 2009 range low
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
The 200 day SM A at 1980
1962 is the bottom of the August 2009 range.
1947 is the October gap down point


S&P 500: Closed at 1136.03
Resistance:
1150 is the January 2010 peak
1156 is the Sept 2008 low
1185 from late September 2008
1200 from the July 2008 low

Support:
1133 from a September 2008 intraday low
The 18 day EMA at 1132
1119 is the early December intraday high
1114 is the November 2009 peak
The 50 day EMA at 1110
1106 is the September 2008 low
1101 is the October high
1080 is the September 2009 peak
1078 is the October range low
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
The 200 day SMA at 1001
992 is the August 2009 consolidation low


Dow: Closed at 10,609.65
Resistance:
10,963 is the July 2008 low

Support:
10,609 from the Mid-September 2008 interim low
The 18 day EMA at 10,571
10,496 is the November 2009 high
The 50 day EMA at 10,382
10,365 is the late September 2008 low
10,120 is the October 2009 peak
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
The 200 day SMA at 9322


Economic Calendar

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

January 15 - Friday
Core CPI, December (08:30): 0.1% actual versus 0.1% expected, 0.0% prior
CPI, December (08:30): 0.1% actual versus 0.2% expected, 0.4% prior
Empire Manufacturing, January (08:30): 15.92 actual versus 12.00 expected, 4.50 prior (revised from 2.55)
Capacity Utilization, December (09:15): 72.0% actual versus 71.8% expected, 71.5% prior (revised from 71.3%)
Industrial Production, December (09:15): 0.6% actual versus 0.6% expected, 0.6% prior (revised from 0.8%)
Michigan Sentiment, January (09:55): 72.8 actual versus 74.0 expected, 72.5 prior

January 19 - Tuesday
Net Long-Term TIC Fl, November (09:00): $27.5B expected, $20.7B prior

January 20 - Wednesday
Building Permits, December (08:30): 580K expected, 584K prior
Housing Starts, December (08:30): 575K expected, 574K prior
Core PPI, December (08:30): 0.1% expected, 0.5% prior
PPI, December (08:30): 0.0% expected, 1.8% prior

January 21 - Thursday
Initial Claims, 1/16 (08:30): 440K expected, 444K prior
Continuing Claims, 1/09 (08:30): 4600K expected, 4596K prior
Leading Indicators, December (10:00): 0.7% expected, 0.9% prior
Philadelphia Fed, January (10:00): 18.8 expected, 20.4 prior
Crude Inventories, 1/15 (11:00): 3.70M prior

By: Jon Johnson, Editor
Copyright 2010 | All Rights Reserved

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

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Sunday, January 10, 2010

Market Focuses on Earnings

SUMMARY:
- Market absorbs the jobs report, rallies as it focuses on earnings, liquidity.
- Unemployment figures are much worse than the headline and will get worse even if non-farm jobs turn positive.
- Bottom line: layoffs may be over, but jobs are not in the offing.
- M3 money supply starting to contract in the US as it starts to follow the EU.
- Stocks already moving higher into earnings, and there are still some earnings runs setting up.
- What to hold into earnings: managing your money.

No upside surprise to send the market higher on the open, but it shakes off the news and recovers nonetheless.

Despite the cold weather, the market is staying hot. We are enjoying continued gains and taking more position as stocks continue their run into earnings season. This was the first Friday of the month, which means the jobs report was released. It looked like there might be a positive read because President Obama scheduled an afternoon press conference on Thursday night, but that was not the case. November was positive, turning in a 4K jobs gain, but that was offset by revisions to October. There was the wet blanket of the 85K jobs lost in December, a month that usually sees hiring in retail. There was no bailout for the jobs (so to speak), although the trend continued to improve and the unemployment rate remained at 10%. That is a loaded headline, however.

The Obama press conference dealing with the economy turned out to be the announcement of tax credits for green products such as solar panels etc. I love tax credits, but the problem is that these are so limited. Not many businesses particularly small businesses will be able to take advantage of it. It will not help the group that is struggling the most and the group that creates the most jobs in the United States. This administration has a very difficult time understanding how the economy works. They have some brilliant people, but they subscribe to the Phillips curve economic theory. Other than roughly six years in the history of mankind, that theory has not worked.

The jobs were negative, but that was not enough to seriously impact futures. They were modestly lower after the numbers, but they did not reverse much. I did not think it could keep a good market down, and it did not. Stocks started lower, but they recovered all session. NASDAQ led, but it eventually brought the others with it. A late, last-half-hour bid came into the market and pushed all of the indices positive, closing NASDAQ at about 0.73% and SP500 and the Dow with a modest gain.

The jobs report did impact the dollar, and it was up. It had a nice move higher on Thursday, and when the numbers came out, the dollar turned down (1.4414 Euros versus 1.4316 Thursday). Gold was not a huge mover on the session, but that reversal did turn it from negative to positive. It was somewhat positive ($1,137, +3.30), but it closed upside, and this is a great pattern in gold. If it eases out a day or two laterally, we will pick up more positions on the GLD and play the run up to the prior high.

Bonds were interesting because the 10 year stayed the same. It did not have a lot of movement (3.82% versus 3.83% Thursday). Bonds did rally and drive the yield down to 3.78% early, but then the 10 year faded back. The 2 year maintained its gains, moving 10BP. This is because the Fed will keep its stranglehold on the short end since it does not want rates to rise. It will do whatever it can to keep the short end down, so yields on the 2 year turned sharply lower. A 10BP move any day in bonds is a sharp move. Once again, the yield curve is getting very steep and the spread between the short and long end is getting very wide. That is not good because they can become detached from each other, and that means serious inflation issues. That is why I think gold is getting ready to make another run higher.

The industrials and techs were leaders. It is ironic that the industrials were leading because SP500 was lagging a bit. The dollar going down helped them along, as did UPS raising its guidance in an earnings preannouncement that was much better than expected. That pushed a lot of shippers and transports up higher and helped the SP industrials move up. It was a market weary of the jobs report, but the trends held. There was nothing to upset the market, and all of the indices turned and recovered after their slow start. It was not a bad day overall, and not a bad week either. The indices were up most of the week, and that is not a bad way to start the year. I always hear that the first three days in January tell how the month will go, and then how that month goes will tell how the year will go. It could be another very good year according to that old adage, although it is not always accurate. The market will forecast what the economy will do, but right now, it is forecasting the amount of liquidity that will remain in the system and not necessarily what the economy is going to do. The Fed is going to keep liquidity in the system as this job number shows.

TECHNICAL

INTERNALS

NASDAQ was the volume leader all week, and every day except Monday was above-average trade. Even though it was lower on Friday as the index moved higher, it was still a solid session. The volume stayed high as it moved laterally, and that was something of a concern. It showed a bit of churn, but you have to realize there was no volume and this is the start of a new year. Money is being put to work and positions are being shuffled, so the volume picks up. There are more players in the market doing more things. It held up and started to break higher. Overall, that is a good volume week for the NASDAQ. It is nice because it resolved the pullback with an upside break.

The SP500 was below average, only spending two days above average on the week. That is better than what it was, but is still not a lot of participation. That is important because the SP600 and SP400, the small and mid-caps, drive a lot of the volume as well. If they are not moving, then there is a worry about what the rest of the market will do. They were up however, so while this is a concern, it was not as big a deal. At least there were a couple of days above average.

Advancers led 1.7:1 on NASDAQ and 1.7:1 on the NYSE as well. The day before it was 1.45:1 on the NYSE and 1.4:1 on NASDAQ. They are matching their moves, but notice how the breadth has been tame of late versus in the fall when it was not uncommon to have days where breadth was 3:1, 4:1, or 5:1. The volatility has calmed down a bit. There is rotation in the market, and this is typical of the first of the year and this kind of action. Different sectors are getting money as it comes out of other sectors. There are not huge moves to the upside or huge breadth reads because money is just being moved around.

CHARTS

NASDAQ had the big volume and a better day being in leadership. There was a breakout from the ascending triangle. It was a nice breakout and a test to the 10 day EMA. That was right before the end of the year, so there was some selling ahead of the year. Then there was a break higher and a nice test starting back up on Friday.

The NASDAQ 100 had a nice day as well. It was leading the tech market at 0.85% gain. It helped that GOOG turned around, and AAPL looks good as well. There was general strength in the NASDAQ 100 helping to bring things higher. I like the pattern here, and it mirrors the NASDAQ. That is very healthy action that is building toward the future, and the future looks upside right now.

The SP500 had a jumbled pattern. It was moving higher, it narrowed into a tight trading range, but it made a breakout as well. It was not as neat and clean a pattern as the NASDAQ, but it did make a breakout. It rallied up, sold and then it bounced up this week led by the industrials and energy. They were moving higher every day of the week while NASDAQ struggled a bit on the way up. Note it was the same theme: a breakout, test, and another breakout. We will probably get some kind of test after this move. It could also still go up a few days. We will let it run, and I have no issues with that. That is important because it shows the stair-stepping pattern that you like to see as the indices move up. These are not huge moves as the market gets ready for earnings season, but it is still healthy action.

The small caps were not as neat and pretty, but they were breaking to a new high as well. They broke out of a sloppy range, tested, came up, and then tested again. They are now breaking higher once more. It is the same idea, just not as clean as NASDAQ. The semiconductor sector looks the same, stair stepping its way higher.

LEADERSHIP

TEX did not have a huge move after the nice Thursday run, but it continues its move higher. You have to like that break. BUCY is going to the moon. There is the same action breakout, test, rally and there is a lot of momentum there. ITW has not been moving as fast as the others have, but it looks like it might start to. MACD is turning up, there is an upside volume day as it broke up off a lateral consolidation above the 50 day EMA. ITW might be a play for us. You have to see how far it can move on these runs.

CSX was running because of the UPS news. It had a triangle and breakout, and it got moving on this news today. UPS you cannot play that. It looks like it just made it over a resistance point, so you want to see it move laterally and hold the gap. If it does hold the gap and does not fill it, you can buy it on the move higher. We will be watching UPS.

JBHT had a strong day upside, although the pattern is not showing anything we want to buy into. FDX could be a trade for us; it has volume and it is testing the 50 day EMA.

Energy took a pause and later it did not. APC paused, moving laterally. BTU has been moving well and is now taking some sideways action, but HAL is blasting off to the moon.

AAPL is setting up nicely. It had a breakout and has come back to test. It reaches down and bounces back each day. AAPL likes to run ahead of earnings, and we might get another squeeze play for a decent trade. We made great money with GOOG on a downside play. Today it sold down and started to reverse in the midst of this consolidation range. Buys are starting to come back in, so we took the rest of the gain of our downside play off the table. That was a sweet play, taking advantage that the stock was overbought and was ready for a correction.

Financials have been important all week and have been taking a pause. GS paused after a nice resumption of the move on Thursday. The entire section had its outlook lowered by an analyst who said they would not make as much trading this year, and that impacted the session on the day. This is not a bad move for GS. It can move laterally for a couple more days, and if it holds and starts to bounce, we can add a few more positions. It is the same with JPM: it just paused on the day. WFC had a nice rally and is taking a pause on lower volume.

The semiconductors have some interesting action going on. They broke higher, and some of them are testing while others are not. MCHP is coming down and testing, and it is holding over some old peaks. We will watch as it may develop into a play for us. CY bolted higher on the news of possible tax credits for solar panels. MXIM had a breakout, but then it reached down and turned back up in an ABCD pattern. The problem is that you have to see how much movement you get out of this. It had a lot of work to do to move 10%. You can trade it, but it will not give a huge amount of return.

CELG is in a six-month trading range, but note that it made a higher low at the 50 day EMA. It looks like it could break out, and that could make an interesting play because there will be some room to run. There is some resistance at 60-65, and that would give a nice trade if it can rally to that level.


THE ECONOMY

Non-Farm jobs ready to turn positive, but not employment. Only in government figures could that be.

The jobs report came in at -85K. That was worse than the -25K to 0 that was expected, but November was revised up to 4K from -11K. There was a net loss of 1K jobs between the revisions to October and November because October was written down heavily. The workweek held steady at 33.2 hours. Unemployment rate held steady at 10%. That seems like things are not too negative. First of all, you typically see the workweek rise before you see job creation. If employees are not working more, there is no need to hire anyone new.

The real key to the jobs number is the unemployment rate. The non-farms' payrolls could very well turn positive next month again if not then, definitely by the end of the first quarter in March. That does not show that the economy is improving, however. Despite what Greenspan used to say, the unemployment report is the one that tells the true story when the economy is coming out of recession. The non-farm payrolls are just the big companies. It does not pick up the small businesses that were lost. It does not pick up any of the people who are no longer in the workforce. Only the unemployment report does that. It asks if people are working, if they are looking or have given up. They ask those questions, and that is how to figure out what the unemployment rate really is. That is where a lot of the small businesses are. There has not been the surge in S corporations, limited liability corporations, or limited partnerships that came out of the 2000-2001 recession. We know that small businesses are not doing much, and when you look deeper in the numbers, you can really see they are not doing much.

That 10% hides the truth because 1K people left the jobs pool and are not looking anymore. We just leave them out, but that is not correct. If we factor in all the people who want to work but cannot get work, then the rate ticks up close to 11%. Then there is the other category called disgruntled workers who are unemployed or underemployed. They want a job but cannot get one. There were 929K of them in December, and if you add them back in, the unemployment rate spikes up to 17%. We are only utilizing 64.6% of our workforce now, the lowest since 1985. 25M Americans are out of work and 929K disgruntled workers is a record. The unemployment rate (even the inaccurate number reported by the government) will rise. People will try to seek jobs again when they think the economy is improving, but there are never enough jobs to absorb them all. The government's number will rise to at least 10.5%, and the overall unemployment rate will be 20%. That is the highest since the Great Depression.

Is UPS a good sign? It raised its guidance, but it also announced it was cutting 1800 jobs. One of the things you can conclude from the jobs report is that the layoffs may be over but there are no jobs being created. UPS is laying off 1800, and then other companies announced they would be laying people off as well. That is one of the reasons that UPS cited it would be able to increase its earnings expectations because it will not have 1800 management salaries to pay. That is not the kind of top line revenue growth we are looking for; that is bottom line growth. We saw a lot of that in 2008 and 2009. In 2009, the earnings rallied mainly because of that. It is not necessarily a great sign that UPS raised its guidance. We need to see the other companies saying they are growing their top line and are anticipating hiring people, but the jobs report indicates that is not the case. We have to produce 3K jobs a month for over a year to replace everyone that lost a job during this depression. The big companies will not do that. You can give GE all the green contracts you want, and it will still lay people off or not hire anyone because it will use automation and build these products with as few people as possible. They are not expanding; they are just trying to keep their cash flow going. Small businesses expand and hire people. Remember MSFT, AAPL, and CSCO. They started as 3-5 people and then grew to create all the jobs in the 80's and 90's.


Money Supply Following the EU?

There was also news on our money supply. The M3 includes everything, even non-bank deposits such as savings and loan and longer-term deposits. That is starting to contract, and that is a bad sign. That means consumers have less money. In Europe, it is negative for the first time in history. That is a concerning scenario because that indicates things will slow again and we might get the double dip that everyone discounts because the stock market is up. They are erroneously assuming that the stock market is rising because it is predicting a rising economy, but it is rising because of all the money in the system not being put to work. The jobs report shows that. Small businesses are nowhere to be found. They cannot get loans. Banks are saying they are lending, but the big banks are not they are investing money overseas. They are lending it to somebody overseas, getting paid interest for it, and getting free money. Over here, the regional banks are getting clocked because they are not getting any money. They are the ones who often lend to small businesses. The jobs market is down as a result and does not look like it will recover any time soon.


THE MARKET

MARKET SENTIMENT

VIX: 18.13; -0.93
VXN: 18.92; -1.07
VXO: 17.01; -0.88

Put/Call Ratio (CBOE): 0.65; -0.07


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: 52.2%. Rising again after a slight dip the prior week. This is the highest level on this run. 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: 16.7%. Holding basically steady for the past three weeks, down from a 17.6% reading. Bears are down but still skeptical as the lateral slide indicates. This is the lowest level of the entire rally and is at a bearish level. 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: +17.12 points (+0.74%) to close at 2317.17
Volume: 2.085B (-5.34%)

Up Volume: 1.531B (+241.028M)
Down Volume: 560.308M (-476.511M)

A/D and Hi/Lo: Advancers led 1.69 to 1
Previous Session: Advancers led 1.4 to 1

New Highs: 179 (+52)
New Lows: 10 (+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: +3.29 points (+0.29%) to close at 1144.98
NYSE Volume: 994.866M (-16.67%)

Up Volume: 511.975M (-299.971M)
Down Volume: 474.638M (+99.303M)

A/D and Hi/Lo: Advancers led 1.68 to 1
Previous Session: Advancers led 1.45 to 1

New Highs: 520 (+60)
New Lows: 71 (+13)

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

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


DJ30

Stats: +11.33 points (+0.11%) to close at 10618.19
Volume DJ30: 172M shares Friday versus 217M shares Thursday.

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


MONDAY

The market is preparing for earnings, and there will be preannouncements. They are already coming in with UPS, and there has been nothing bad thus far. Very few negative announcements are a good thing. Very few announcements at all are good because they will come out and be in line or better. The market has been anticipating this and is up along with a January effect move. It can still run into earnings. There are stocks that like to run into earnings like GS and AAPL. Others like to pop when earnings come out such as RIMM. We will look at the plays that like to run into earnings. If GS moves laterally a couple more days, we might take more positions in it. I have no problem focusing assets in great stocks that are ready to make a run higher. AAPL looks like it wants to make a run into earnings, and we are going to play those that like to make those moves. The moves will not be as big on these, but they are still very lucrative. The prices on GS and AAPL are not chicken feed, and these stocks can move. We can play options on those, run them into earnings, and make a lot of money. If you get a good run, you take the gain. If you want to, if it is in your character, you can let part of it run into earnings. If you get a good run into earnings, you better take some money off the table. You like to go into earnings a bit light. We still have a lot of positions, but we have taken a lot of gain off the table and so those positions are smaller. As they move up and move toward earnings, our positions in them and our exposure gets lower while our bank accounts are growing. We may miss out on some big moves, but if a stock has run into earnings, what are the odds that it will give up some of that after the earnings are reported, unless it is just stupendous numbers? We have seen stupendous numbers, do not get me wrong. BBBY was great, but it did not run into earnings it based ahead of earnings and gapped. If you are playing a pre-earnings run and you have the gain, then take it. When we do let them run, it is because our exposure is low at that point.

We have taken a lot of gain and anticipate getting more of a run higher toward earnings. We will use it to take more off the table. We are down to a third or quarter position on a lot of stocks because we have taken gain on some of them twice. Others we have taken one time and will take some more (or all) of it as we move toward earnings. The decision is yours, whether you like to hold them through earnings or fold them and take the money ahead of time. It is a matter of your risk tolerance, your money management, and how much money you have in the play. Our plan is take it off as it goes up so exposure is minimized by the time earnings come out. We will miss huge moves at times, but we will participant in it because we still have some options in play.

Upside surprises are always possible, but the market looks to be building in a potential surprise ahead of time. Look at your stocks to see if they are moving higher or not into earnings. That will tell you whether you want to chance holding some through the earnings report.

It was a nice week, it was good upside for the bulls, and we still anticipate more coming with the earnings run and a January effect move. After that, who knows what will happen. The liquidity is staying in the market. That is positive, but the market will see the writing on the wall at some point, start to take some gains, and then it will come back. We will take what the market gives us regardless of what we think will happen. We are not smarter than the market. When the market says to buy, we buy. If it shows us reason to sell, we sell. We stick to what the market gives and stick by good money management moves. We make a lot of money that way. 2009 was a great year, and 2010 is starting out great as well. Have a good weekend and stay warm.


Support and Resistance

NASDAQ: Closed at 2317.17
Resistance:
2324-2370 is a range of resistance from early 2008
2382-2395 from 2008
2412-2415 represents a series of peaks and lows in 2007, 2008
2453 is the August 2008 peak

Support:
2292 is a low from January 2008
The 10 day EMA at 2290
2275 - 2278 from the February 2008 and April 2008 lows
The 18 day EMA at 2268
2245 from July 2008 through 2260 from late 2005.
2218 is the August 2005 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
The 50 day EMA at 2207
2205 is the November 2009 peak
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
2155 is the March 2008 intraday low
2143 is the October 2009 range low
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.
The 200 day SM A at 19561
1947 is the October gap down point


S&P 500: Closed at 1144.98
Resistance:
1185 from late September 2008
1200 from the July 2008 low

Support:
1133 from a September 2008 intraday low
The 18 day EMA at 1125
1119 is the early December intraday high
1114 is the November 2009 peak
1106 is the September 2008 low
The 50 day EMA at 1103
1101 is the October high
1080 is the September 2009 peak
1078 is the October range low
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
The 200 day SMA at 993
992 is the August 2009 consolidation low


Dow: Closed at 10,618.19
Resistance:
10,609 from the Mid-September 2008 interim low is being tested.
10,963 is the July 2008 low

Support:
The 18 day EMA at 10,508
10,496 is the November 2009 high
10,365 is the late September 2008 low
The 50 day EMA at 10,321
10,120 is the October 2009 peak
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
The 200 day SMA at 9249


Economic Calendar

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

January 08 - Friday
Average Workweek, December (08:30): 33.2 actual versus 33.2 expected, 33.2 prior (no revisions)
Hourly Earnings, December (08:30): 0.2% actual versus 0.2% expected, 0.1% prior (no revisions)
Nonfarm Payrolls, December (08:30): -85K actual versus 0K expected, 4K prior (revised from -11K)
Unemployment Rate, December (08:30): 10.0% actual versus 10.0% expected, 10.0% prior (no revisions)
Wholesale Inventorie, November (10:00): 1.5% actual versus -0.3% expected, 0.6% prior (revised from 0.3%)
Consumer Credit, November (15:00): -$17.5B actual versus -$5.0B expected, -$4.2B prior (revised from -$3.5B)

January 12 - Tuesday
Trade Balance, November (08:30): -$34.5B expected, -$32.9B prior

January 13 - Wednesday
Crude Inventories, 1/08 (10:30): 1.33M prior
Treasury Budget, December (14:00): -$92.0B expected, -$120.3B prior

January 14 - Thursday
Initial Claims, 01/09 (08:30): 433K expected, 434K prior
Continuing Claims, 1/2 (08:30): 4800K expected, 4802K prior
Retail Sales, December (08:30): 0.5% expected, 1.3% prior
Retail Sales ex-auto, December (08:30): 0.3% expected, 1.2% prior
Export Prices ex-ag., December (08:30): 0.7% prior
Import Prices ex-oil, December (08:30): 0.4% prior
Business Inventories, November (10:00): 0.2% expected, 0.2% prior

January 15 - Friday
Core CPI, December (08:30): 0.1% expected, 0.0% prior
CPI, December (08:30): 0.2% expected, 0.4% prior
Empire Manufacturing, January (08:30): 11.25 expected, 2.55 prior
Capacity Utilization, December (09:15): 71.8% expected, 71.3% prior
Industrial Production, December (09:15): 0.6% expected, 0.8% prior
Michigan Sentiment, January (09:55): 73.8 expected, 72.5 prior

By: Jon Johnson, Editor
Copyright 2010 | All Rights Reserved

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

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