Sunday, January 10, 2010

Market Focuses on Earnings

- 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.



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.


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.


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.


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.



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.


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)





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)




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



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
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

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
1185 from late September 2008
1200 from the July 2008 low

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
10,609 from the Mid-September 2008 interim low is being tested.
10,963 is the July 2008 low

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

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