Sunday, February 28, 2010

Good News, Bad News Faces the Market

SUMMARY:
- Good news, bad news faces the market again, and once more the market overcomes a sloppy start to close with gains.
- Gains on Friday, but still status quo after a week of lateral consolidation.
- GDP rises to 5.9% though consumption fails to match expectations.
- Chicago PMI rises nicely as manufacturing continues as the leading sector.
- Existing home sales drop 7.2%, a weak bookend to the 10.2% drop in new home sales.
- Leadership is solid in some sectors, but the old leaders need a lot of work.
- Indices appear to want an upside move to test the January rally peak. Then things get interesting.

Market shakes off weak start, continues weeklong lateral consolidation.

Things were choppy on Friday and in a relatively narrow range once more. Stocks started a bit higher, and the futures faded early before the bell only to rebound, fade, and then chop around through the afternoon. A steady trend higher closed the indices out with gains. It was not much of a gain, but not bad given the adversity the market had to overcome. It was the last day of trading for February, and I want to note that volume was higher on the SP500 and stocks held their range. After the two-week rally off the sharp January to February selling, the market slid sideways to consolidate and test. That is not bad action. It was good action with respect to NASDAQ and the SP600. They rebounded, broke above a resistance level, and then moved laterally to close out the week. SP600 had the same action. It was a solid rally, it broke back above the October peak (and even the late-January consolidation area), and then slid laterally above near support at the 10 day EMA. It is very difficult to find fault with that kind of action. The indices rallied back up to this prior January peak and moved sideways. They could not move past that level, and the indices rolled over. This is a classic point where they could weaken again and fall. When there is a steep correction after a run higher, often the rebound takes the stocks back up just below that level where they test and may ultimately fail. They were not doing that last week; indeed, they overcame adversity to do that.

The SP500 was a bit more problematic. It has not broken above its November and December consolidation range. It tested it, it kissed it last week, but it faded back. It also moved in the lateral range to consolidating the two-week rally off the February low. It is struggling to catch up with NASDAQ and the small caps and put itself in better position to rally back up toward the January peak. It may not catch up with them, but that remains to be seen. Friday and all of last week brought a status quo move, and that is the lateral consolidation after bouncing. The question is whether growth will win out (i.e., NASDAQ and SP600) and move up, or whether the struggling SP500 will dominate the market and weigh it down, pulling it back to the downside. Friday did not provide real answers to that effect, but it did show an important theme in the market last week. The economic data was better in some cases, but it was taxing the market in others. The market continually had to fight to overcome the negative data. On the positive side, the second iteration of the Q4 GDP came out on Friday at 5.9% versus 5.7% expected and originally reported. It was good news, but it was mostly with respect to inventory liquidations. That really did not change, and it cast doubt on whether this can continue in quarters to come. Most everyone believes it will not continue, but that is how a recovery often starts: inventories are written down and written off, and new production takes their place.

The Chicago PMI that came in stronger than expected. Manufacturing continues to improve and provide the backbone to the economic recovery. On the downside, there is still economic data that is weakening. Existing home sales fell 7.2% after an 11.2% decline in new home sales reported earlier in the week. There was very weak consumer confidence reported earlier in the week at 46. On Friday, Michigan Sentiment was not terrible at 73.6, but it did not meet expectations. That is still on the low end of the range for that particular economic report. As bad news tends to come in threes, there was the continuing saga of the European Union and the woes of Greece. On Friday, the Greek prime minister said the worst fears regarding the Greece economy are confirmed. The prime minister said that everything that could possibly be wrong with Greece and its economy is exactly as it was feared. You do not hear that very often. Either he has turned over a new austerity leaf and is trying to be as candid as possible (in an effort to get the unions under control and stop them from striking), or else he just wants to commit political suicide. Maybe it is a bit of both.

The market managed to rally back from this mixture of good and not-so-good data. That is the other theme of the week: overcoming bad news and managing to either rally or hold the lateral consolidation. That is always a positive for the upside. Whenever bad news hits the market and it refuses to go down, that indicates the sellers are done selling and the market can move higher. While the action for the week was good in that respect, there are still hurdles to climb even for NASDAQ and SP600 as the market moves forward.

OTHER MARKETS

Dollar. The dollar struggled on Friday. The dollar was trading in the 1.36-1.38 range, and the dollar rallied sharply last week. When economic times got concerning and there were fears concerning Europe, the dollar rallied. It is still a safe haven, and it was driven it below 1.36 Euros. It bounced back on Friday (1.3616 Euros versus 1.3554 Thursday). Against a basket of currencies, it closed flat, but it is still in a nice uptrend. The dollar may come back to test, as it has done periodically, but there is nothing negative with respect to where it is right now. Indeed, it broke over an important resistance level, tested it, and rallied further last week. The dollar remains strong, rebounding from that long selloff. That is aiding us with respect to inflation because as the dollar strengthens, oil becomes relatively cheaper for the US. We are no longer importing as much inflation with every barrel of oil.
http://investmenthouse.com/ihmedia/dxy0.jpeg

Oil. Oil traded in a range, just as stocks did last week. It was moving laterally after its two-week rally. It posted up below the November peaks, which is a resistance range, and it moved laterally to close out the week. It did manage to gain on Friday ($79.57, +1.25), but it was a widely varied week. Oil is approaching the top of its overall trading range and getting more volatile as it does so. That would be understandable given the mixed data coming out from Europe, the US, and other parts of the world. Demand levels are falling in Europe and the US. While they are still strong in China, India, and other BRIC countries. Oil is bouncing up and down, but note how it is bouncing in the top part of its range. It is not breaking out and does not look like it will threaten a breakout anytime soon. However, the higher low suggests it may attempt the top of the range once more. There is still demand out there. With the US growing to 5.9% GDP in Q4, I would expect oil to hang in there because we are still the largest consumer of oil on the planet.
http://investmenthouse.com/ihmedia/xoil.jpeg

Gold. Gold had a decent day on Friday. It is also trading in a range, moving laterally all week. It struggled, falling on Wednesday and almost giving up its breakout over its down trendline running from December into early February. It did hold that level, tapped it twice on Wednesday and Thursday, and gapped higher on Friday ($1,118.30, +11.20). It was a very strong move on the gold index to close out February. It is holding its breakout, but that does not mean it has resumed the uptrend. It looks favorable to do that, although it looked favorable to do that a week ago, and again as it tested. It is mired in its own breakout over the trendline and is having trouble getting back up.
http://investmenthouse.com/ihmedia/xgld.jpeg

Bonds. Bonds were rallying to end the week. The 10 year closed up (3.62% versus 3.64% Thursday). It was over 3.7% earlier in the week. It was a dramatic drop in bond yields as bond rallied. Why are bonds rallying? Ben Bernanke has said The Fed is going to have to raise rates and that is always the first step. They start talking about it before they can do it. Moreover, they made their first test run of a rate hike, raising the discount rate by 25BP two weeks ago. That tells everyone that The Fed is starting to take the necessary steps to move us back into a tightening mode. He is telling bondholders to get out of bonds over the next several months, yet they were not doing that last week. Worries about the economies and Europe are still pushing investors into US bonds. It is still a safety move despite our debt.

Bond investors, despite the Bernanke warnings, are not that sanguine about the economic future for the US. Much of that has to do with what is going on in the EU. Even though credit default swaps on US corporate debt are coming down faster than they are on European debt, there is still concern that the US is potentially facing a double dip, similar to what Europe is heading toward right now. We do not have the pull out of the recession we wanted. GDP was up at 5.9%, but this is not that strong of a recovery. It is not the recovery of Q3 in 2003 when the economy surged 7.4% and there was a massive explosion of new businesses in the United States. There are not that many new businesses being created when you look at the state rolls and filings with respect to LLCs, sole proprietorships and limited partnerships. They are not expanding the way they were in 2003 not even close. Small business continues to struggle, and it is not getting any relief despite the President's claims that he is a fierce advocate of small business. He is not. His policies are not benefiting small businesses, and it will get worse with healthcare and other issues that the Obama administration will continue to push (cap and trade, etc). There are problems out there and the bond market is acknowledging that. It is not ready to sign off on the 5.9% GDP gain as the indication that the recession is over.
http://investmenthouse.com/ihmedia/tip.jpeg


TECHNICAL

INTERNALS

Breadth. Flat at -1.1:1 on NASDAQ and + 1.6:1 on NYSE. Again helped by the small and mid caps.

Volume. Volume was down slightly on the NASDAQ, falling to 2.1B shares. It rose almost 9% on the NYSE to 1.2B shares, moving and staying above average on the NYSE. There were some positives there, but it was mainly the end-of-month volume as positions were moved around before March started. March is the last month of the first quarter, so we could potentially see new money put into the market to start next week.

CHARTS

NASDAQ. NASDAQ again posted a modest gain, but the main factor here is the range trade a week of moving laterally after the two-week rally. It managed to hold the November and December consolidation, and that is a positive. Volume remained above average as it moved laterally, testing lower and bouncing up. That can indicate that buyers are stepping in at this key support level, picking up stocks. It would suggest that NASDAQ could bounce higher and test the lows in the January lateral move, which would be near 2275.

SP600. SP600 had the same action. It reached lower intraday, bounced back, and held in a tight, lateral range. It is also holding above the October peak. It is at the lows in the lateral January consolidation. It was at an inflection point earlier in the week, where an index or stock will test and then fall back again after rebounding from a first significant correction. This will be the big test for the SP600 and NASDAQ if it rallies to that level next week. Will they turn back down at that point, sell off, and give a larger correction? That has happened many times in the past, and we will just have to see if it happens here.

SP500. SP500 is unable to break out above the significant November and December range. NASDAQ broke it and has held, and SP500 has failed to break it and has fallen back. It is still inside of the range that runs from 1100-1105. This is a jumbled area for the SP500. People like to pick out the 1100-1105 area as a significant level, and it is. There are many highs and lows in this range as well. Some of them are at 1085 where it has held many times and bounced back. Indeed, it sold back to 1086 on Thursday and snapped back from there. That will be a key level as well. The November and December peaks are an important level as is 1085. A break either way above that is a positive, and below that is a negative. Even if it breaks above this level, it is still going to have to test to move through the January peak. If it makes this breakout, that will be the inflection point for SP500 as well. NASDAQ is almost there, and SP600 is there right now. That will determine whether this market moves higher or corrects. Until then, it is banging around in a range. We are trying to play short-term trades up and down that range using stocks that are well positioned to move up or down. We do not want to play stocks that are in this jumble and do not have definite patterns or momentum going. I have been trying to put plays on the report that are very solid patterns whether upside or downside and not ricocheting back and forth inside of a trading range. The problem is that these trading ranges are narrow, and that makes it more difficult to play.

LEADERSHIP

Healthcare. Healthcare looks good across the board. MDZ has a nice cup-with-handle pattern, a breakout, and a test. SCLN had a big run and a selloff, but it has based and formed a nice flag pattern. HUM is trying to make a break off this nicely formed pennant pattern. AET is trying to rally off the 200 day EMA. HOLX is making a nice breakout on good volume. Across the board, healthcare has good patterns. That is an example of finding good patterns to the upside or downside that can make us money. Those are the ones we are focusing on, rather than those that are bouncing around in a trading range.

Transportation. KSU is in a nice pattern. A cup, it broke higher, it has tested. It was surging on Thursday, it came back some on Friday, but it is still holding. If it makes the break higher, it is ready to run further.

Auto Parts. Auto parts are doing well. TEN has a nice cup-with-handle pattern and is breaking higher. BWA has rallied, consolidated with a double bottom, broke out, and is testing again. It looks ready to make the break back to the upside.

Retail. Retail continues to look strong. ANN is surging higher on strong volume, hitting a new rally high. PCLN started back up on Friday after an excellent test of the gap higher on earnings. JOSB broke a downtrend, rallied, bounced back up, and it is consolidating laterally, looking to make a break higher as well.

Steel. MTL is not that great of a pattern. High, tried to double bottom and did rally, but it sold off and gapped lower. It is trying to hold at a key support level. It may do that, but it is not a great pattern. We might get a trade out of it, but it is an iffy proposition right now. AKS has a similar pattern, though it broke below its support levels and is now bouncing back up to them. Whether you are looking at metals, most industrials, or energy, the patterns are not as solid. Those areas led nicely in 2009, but then started to struggle over the past few months and have suffered. They have broken down their patterns and are now in the process of trying to rebuild them, though they are not there yet. Many of them are just jagged patterns, as you can see with AKS. Is neither in a good position to move upside nor one that would give you confidence to move into. That is what is happening with a lot of the older leadership. It has to consolidate again, but the bases have not set up yet. On the other hand, healthcare and auto parts have set up good bases and look as if they could continue higher and become leaders to the upside.


THE ECONOMY

Please see Economy Video at the following link:

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


THE MARKET

MARKET SENTIMENT

VIX: 19.5; -0.6
VXN: 19.78; -0.74
VXO: 19.16; -0.35

Put/Call Ratio (CBOE): 0.88; -0.15


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: 41.4%. Significant jump in bulls, rising from 35.6%. 35% is the threshold level below which suggests bullishness. After the move bulls moved up. Perhaps this lateral market consolidation will be enough to send the indices back up. After peaking at 53 on this move the bulls lost some nerve, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Getting close to the 35% level that is the threshold for what is considered a bullish climate. 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: 23.3%. As with bulls, a significant change in bears, falling from 27.8%. That indicates more overall market bullishness. Of course it comes after the rally, but at least the market is hold the gains with a consolidation. Down from 26.1% the prior week and 22.2% before that. Over 35% is considered bullish for the market, so still a ways off even though bulls are falling to a bullish level. Continuing the rise from 16%ish on the lows this leg where it held for several weeks. Peaked near 28% in November, 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: +4.04 points (+0.18%) to close at 2238.26
Volume: 2.146B (-2.29%)

Up Volume: 1.172B (+357.317M)
Down Volume: 1.007B (-475.164M)

A/D and Hi/Lo: Decliners led 1.16 to 1
Previous Session: Decliners led 1.32 to 1

New Highs: 100 (+19)
New Lows: 11 (-5)

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: +1.56 points (+0.14%) to close at 1104.49
NYSE Volume: 1.247B (+8.85%)

Up Volume: 734.639M (+189.283M)
Down Volume: 497.273M (-87.11M)

A/D and Hi/Lo: Advancers led 1.65 to 1
Previous Session: Decliners led 1.06 to 1

New Highs: 210 (+64)
New Lows: 18 (-5)

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

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


DJ30

Stats: +4.23 points (+0.04%) to close at 10325.26
Volume DJ30: 282M shares Friday versus 242M shares Thursday.

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


MONDAY

Next week is the start of March, and you will often see new money put to work as a month starts. Not only does the wind blow in March, but it typically is an upside month for the stock market. In other words, the probability is that March will be a positive month. That would mean that the consolidation that is happening in NASDAQ, SP600, and even SP500 would resolve to the upside and maybe get a breakout over this January consolidation range. That is going to be the big question as the market moves forward. Will it be able to get up to that level, in the case of SP500? If it does, the question is whether it will be able to move through, or whether it will go into a larger correction as you typically see after a nice trend higher. There is that deeper correction, a recovery attempt, and then a fall down to an even deeper and lengthier basing period. That is what this is right now a basing period. The economy is on the mend. The Fed is still being loose with money even though it says it will tighten. We are looking at a recovery period, but it is just a slow lethargic recovery. Thus, a basing process after the big 70% run in the stock market since the March 2009 low seems to be the most likely course of action. It is difficult, if not impossible, for the market to move 70% and then correct modestly over a four-week period only to resume another big upside move.

Even though the GDP is expanding, there are enough roadblocks to keep it from being a great recovery. The logical course of action is a further basing period. That might be the logical course of action, but often the market does not do what we think would be logical. Nonetheless, we have to watch for that as the market continuing higher. Indeed, it likely will try to continue higher next month with NASDAQ rallying up toward the January lows. I say that because of the consolidation this past week where the market overcame negatives almost on a daily basis and continued to hold the range. With that kind of tenacity over a key support level, we would look for it to continue up and test the next level as the minimum move it would make on the next bounce. Again, with NASDAQ as well as SP500 and SP600, that will be a key point and a potential inflection point for this correction from January to early February as well as the relief bounce experienced in response to that correction.

Economic data is well stacked for the week. There is nothing scheduled on Monday, but that does not mean nothing will happen. New money could be put in the market, we could hear something over the weekend with respect to Greece or Spain ( or Portugal or Ireland or Italy). There is always that potential, as well as income and spending. That leads to the inflation number with the PCE. We will have the ISM manufacturing index, the Challenger jobs survey, the ADP employment survey, and ISM services. Then there is continuing claims, productivity, factory orders will be important especially after durable orders this week. They were very solid, but it was all on orders of Boeing aircraft. That is not necessarily a bad thing, but I would like to see the orders spread out over more industries. There will be a full plate of economic data next week as the indices take on the January peaks.

While the market is in this in between range, we will continue to look for the solid patterns that are not jerking around in a trading range. That does not mean we will ignore trading ranges. If there is a range that has a large enough span, we can play that to the upside and downside when a stock or the index gets up to that level and looks like it will come back down. Most of what we are seeing right now have been narrow ranges over the past couple of weeks, so we are looking mainly at patterns whether they are auto parts, healthcare, or in retail. Those look solid for upside plays. We have other stocks in other sectors on the report as well, but we have to find the right range to take advantage of those. This is a choppy period; it is not a steady uptrend. There was the trend up, a break down from that trend, a larger correction, and a relief bounce. We are still in no-man's land. For instance, NASDAQ is over key support, but it is still below key resistance and is right in the middle of them. This is more difficult to invest and trade in. We are looking for great stocks in great positions to move into because they can deliver nice gains. They are not trapped inside of a range subject to the whims of the market. Stocks trapped in a range right now are trading with the market because the market is trapped in a range. That could be good or bad, but with the market bouncing back and forth each day inside the range, it is very difficult to trade a narrow range. Therefore, we have to avoid them for now and wait until a trend sets up for them meaning a break higher or break lower. I will be watching very closely to see if NASDAQ gets up into the 2275 range. From there all the way up to 2325, it has a key test ahead of it. If SP500 gets up as well and breaks out over the November and December peaks, it will also have an important test ahead of it. We do not want to be caught in plays that are trading on the range because gaps can kill you inside of a narrow range, especially if there is a breakdown of that range.

We still have plenty of action ahead of us. The market still has not tipped its hand. It looks like it wants to try higher toward the January peaks, given the action this last week where it shook off the bad news, held over support, and kept trying to make the move higher. With that in mind, we will look for a break to the upside. If it comes, we will play it with good stocks and see what happens. If we get the breakdown, we will be closing up our upside plays that are problematic and looking to play more downside. Have a great weekend.


Support and Resistance

NASDAQ: Closed at 2238.26
Resistance:
2245 from July 2008 through 2260 from late 2005.
2273 to 2282 marks bottom of January 2010 lateral peak
2275 - 2278 from the February 2008 and April 2008 lows
2292 is a low from January 2008
2319 from the September 2008 peak
2320 to 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:
2210 (from September 2008) to 2212 (the July 2009 closing low)
The 50 day EMA at 2211
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
The 200 day SMA at 20522055
2048 is the early October 2009 closing low
2015 from an early August 2008 peak


S&P 500: Closed at 1104.49
Resistance:
1106 is the September 2008 low
1114 is the November 2009 peak
1119 is the early December intraday high
Bottom of the January 2010 consolidation 1131 to 1136
1133 from a September 2008 intraday low
1151 is the January 2010 peak
1156 is the Sept 2008 low
1185 from late September 2008
1200 from the July 2008 low

Support:
1101 is the October 2009 high
The 50 day EMA at 1099
1084 to 1080 (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 200 day SMA at 1033
The early October 2009 closing low at 1025
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low


Dow: Closed at 10,325.26
Resistance:
10,365 is the late September 2008 low
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,730 is the January 2010 peak
10,963 is the July 2008 low

Support:
The 50 day EMA at 10,289
10,285 is the late December consolidation peak
10,120 is the October 2009 peak
9829 is the September 2008 closing high
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
The 200 day SMA at 9618
9430 is the early October low
9387 is the mid-October peak


Economic Calendar

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

February 26 - Friday
GDP - Second Estimate, Q4 (08:30): 5.9% actual versus 5.7% expected, 5.7% prior
GDP Deflator - Second iteration, Q4 (08:30): 0.4% actual versus 0.6% expected, 0.6% prior
Chicago PMI, February (09:45): 62.6 actual versus 59.7 expected, 61.5 prior
Michigan Consumer Sentiment, February (09:55): 73.6 actual versus 73.9 expected, 73.7 prior
Existing Home Sales, January (10:00): 5.05M actual versus 5.50M expected, 5.44M prior (revised from 5.45M)

March 01 - Tuesday
Personal Income, January (08:30): 0.4% expected, 0.4% prior
Personal Spending, January (08:30): 0.4% expected, 0.2% prior
PCE Prices - Core, January (08:30): 0.1% expected, 0.1% prior
Construction Spending, January (10:00): -0.5% expected, -1.2% prior
ISM Index, February (10:00): 57.8 expected, 58.4 prior

March 02 - Wednesday
Auto Sales, February (14:00): 3.8M prior
Truck Sales, February (14:00): 4.4M prior

March 03 - Thursday
Challenger Job Cut Survey, February (07:30): -70.4% prior
ADP Employment Survey, February (08:15): -10K expected, -22K prior
ISM Services, February (10:00): 51.0 expected, 50.5 prior
Crude Inventories, 2/26 (10:30): 3.03M prior

March 04 - Friday
Initial Claims, 02/27 (08:30): 475K expected, 495K prior
Continuing Claims, 02/20 (08:30): 4617K prior
Productivity-Rev., Q4 (08:30): 6.2% expected, 6.2% prior
Unit Labor Costs, Q4 (08:30): -4.4% expected, -4.4% prior
Factory Orders, January (10:00): 1.2% expected, 1.0% prior
Pending Home Sales, January (10:00): 1.7% expected, 1.0% prior

March 05 - Saturday
Unemployment Rate, February (08:30): 9.8% expected, 9.7% prior
Nonfarm Payrolls, February (08:30): -20K expected, -20K prior
Hourly Earnings, February (08:30): 0.2% expected, 0.2% prior
Average Workweek, February (08:30): 33.7 expected, 33.9 prior
Consumer Credit, January (15:00): -$3.8B expected, -$1.7B 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, February 21, 2010

Fed Discount Rate Hike Rattles Market

SUMMARY:
- Fed after hours discount rate hike rattles market but cannot keep it down.
- CPI turns down the heat on the inflation after the PPI stoked the fire a bit.
- Dollar breaks below 1.36 euro again, but again recovers.
- Oil continues its rally toward the top of its range.
- Indices continue their climb toward the January peaks though SP500 still has to deal with another key level first.

Once more stocks overcome a tad of adversity.

A solid two week rally continued Friday as stocks once more faced some headwinds but in the end came out on top. Not a big move but you have to be at least somewhat impressed with how stocks fight back and how money rotates through the market. Friday the large cap techs struggled, but the 'over there' sectors (industrials, energy, metals and other commodities) scored solid gains.

The adversity du jour came from the Fed and the ripples fanning out from its move. After hours Thursday the Fed raised the Discount Rate, the rate banks charge one another for short term loans at the 'discount window' needed to meet liquidity demands, 25BP to 0.75%. The Fed and its band of merry soothsayers explained that this was a technical move and as such is not typically made at meetings but as a matter of ordinary course. Thus it was made outside the last meeting ended last week.

That it was raised is in keeping with exactly what Ben Bernanke said earlier in the week, i.e. that the Discount Rate would be raised; he just didn't say when. That it is done outside rate decision meetings is not exactly true. During the Greenspan era it was raised often in conjunction with the Fed Funds Rate, and I recall one specific event when it was raised with the FFR and the journalism majors on CNBC were lathered up about the move. It is a technical move: it is kept a bit higher than the FFR to make it something of a penalty to have to use it. The reason: the Fed wants banks to go to each other to meet capital requirements, not the Fed. The Fed removed the 'penalty' on the rate during the crisis to remove any stigma or hesitance about going to the window. Now it is just putting it back on in order to wean banks off of the free money from the Fed, preferring, as it should, that they go to the open market.

The market initially took the news as a necessary step before the Fed could start hiking rates. That is exactly what it is, but the Fed has not said when it will actually start hiking rates. One Fed official said about three months back that the 'extended period' language in the statement meant 6 or so months. Thus as that language was still in the last statement it is a pretty good guesstimate to say another six months from then, or in late summer. Regardless, the Fed is laying the necessary groundwork for the inevitable rate hiking, doing just what it said it was going to do.

Initially the market was down after hours and into the pre-market, but after investors digested the facts they again bought into the market. After all back in 2005 and 2006 the Fed was hiking rates 25BP each meeting and the stock market still climbed. Eventually the Fed goes too far and chokes things when it should be doing the opposite, but that is how the Fed, envisioned as evening things out and avoiding imbalances, creates the very imbalances it supposedly helps us avoid.

In any event, the market swallowed the news and once again, as it has done all week, it overcame adversity and rallied back to close positive. Not a big move by any means, but again stocks turned positive after opening lower.

Stocks also received some help from the CPI that came in tame, even negative on the core, cooling the worries the PPI stoked Thursday. The dollar bounced on the Fed move, falling below 1.36 euro, but as it lost some strength on the day stocks recovered. By the close the indices were all positive though SP500 still has an important fight ahead of it next week as it sits just below the top of the November/December consolidation.


OTHER MARKETS

Dollar. Again the dollar was up early, rallying on the Fed raising the Discount Rate. Why? If it suggested the Fed was closer to raising the FFR, the higher rates would support a stronger dollar. Pre-market the dollar traded to 1.3522 euro. As you know, that 1.36 level is the bottom of the range it has made with 1.38 at the top. The dollar faded some as the session wore on, and though it closed stronger (1.3606 versus 1.3612 Thursday), the fade was enough to bring stocks back up. It also rose on the Dollar Index as well, but there too it gave back a big upside gap.

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


Gold. The yellow stuff traded basically flat, and that is not bad at all. Thursday the PPI looked hotter and gold bounced up. Friday the Fed raising rates could have taken some luster off gold as it would be perceived the Fed would fight inflation possibilities. With the core CPI negative there was more pressure to push gold lower. It gapped lower but it rebounded after testing the same support at 1100. Gold, as with stocks, is overcoming adversity and holding up very well. The pattern is still the break over the December/January/February down trendline and a subsequent test. We could get a buy out of this.

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


Oil. Oil continued higher in its range, heading toward the peak at 82-83. It also overcame the rate hike and stronger dollar (stronger dollar means you can price oil in fewer US dollars) to continue its rally upside in its range. At 80 oil has his some resistance from the November consolidation range, but the range does run higher. After this two week move it could take a day off, but again, it could have done that Friday given the news, but it did not.

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


Bonds. The 10 year bond yield actually fell as bonds rallied even as the Fed took the first step in the tightening show. Typically bonds would sell as investors figure the Fed is going to raise rates and take the value out of their bonds. Wasn't the case Friday, similar to stocks, as bond investors figured it was still quite a ways off.

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


TECHNICAL

INTERNALS

Breadth. Flat as you would expect on the flat session (1.1:1 NASDAQ, 1.4:1 NYSE).

Volume. Volume picked up on Friday of all days, moving up to average on both NYSE and NASDAQ. That after three sessions of below average trade as the indices moved higher. A bit of adjusting before the weekend on expiration Friday, nothing more than that. Still a low volume move up and the next question is whether volume comes in as SP500 tries to break the last resistance before the January peak.


CHARTS

SP500. Another upside session but it took a bit to get there. Nicely tapped 1100 on the low, holding above the 50 day EMA, and then rallying for a modest gain. On the high it tapped at the range marking the top of the November/December consolidation and backed off. After a couple of weeks moving upside it was not ready to take on that resistance ahead of the weekend. This coming week is an important one as the large caps face the last serious resistance point before it can try and continue its climb to test the January peak, the high on this rally that started back in March 2009.


NASDAQ. Struggled at first as well, gapping lower, then recovering to a modest gain. NASDAQ is in the neutral zone, i.e. above the 2205 peak of the November/December consolidation and below the bottom of the January peak at roughly 2272 (resistance is always a range). Again, it is rather typical after the first significant correction for an index or stock to come back to test the prior range, either the bottom, middle, or even try a breakout. That is the key test; everything else is warm-up. NASDAQ was able to move even with the large cap NASDAQ 100 posting a modest loss. That indicates the techs could climb on up to that key level this coming week and give us the first real look at what is left in the tank for this recovery bounce.


SP600. The small caps are already at the lows of its January consolidation. From laggards to leaders the small caps are going to give us the look this coming week along with NASDAQ. Thus far they are showing no fear heading toward this level. No hesitation Friday as they led the market gains.


SOX. The chips are slowing down a bit. They cleared the December consolidation last week and advanced the gain a bit more Friday, but lost more off the high than they gained on the close. Slowing down the move. Maybe just a pause but a key group to watch: they led off the last low and led on the downside this time. They are not leaders in the sense of this upside move, but we will watch in the event they turn lower as a warning shot for the other indices.


LEADERSHIP

Energy, Industrials, Metals. These 'over there' stocks led Thursday and as the dollar weakened off its highs Friday these sectors scored another solid session.

Technology. Techs were not upside leaders Friday, but they were not in bad shape. AAPL is setting up an interesting pullback/flag over the 50 day EMA. GOOG was lower but looks good in a modest test.

Semiconductors. Some individual chips discussed in Thursday's report show some of the issues for the sector. BRCM has rallied just past the 78% Fibonacci retracement, sitting right under the January peak, showing a doji on the candlestick chart. Potential roll back down in its range. MRVL is showing a gravestone doji at the 61% retracement, also the C point in a potential ABCD pattern; that gives a potential play down toward 17 before a flip to play the upside off the D point. The point: chips are lagging and showing indications they can slide back. Not a massive rollover, just continuing existing patterns. Definitely worth watching this coming week.

Financial. Still not getting off the dime to help SP500 as that index tries to take on and take out the November/December consolidation. JPM rallied past its 200 day SMA and into the resistance over 40, but it gave it up on the close, showing a tombstone/gravestone doji. If SP500 is going to break through that consolidation level it will need their help. GS, MS, WFC are showing some kind of life, but they will have to improve if they are going to give SP500 the help it needs.


THE MARKET

MARKET SENTIMENT

Volatility is in a nose dive, making a lower low Thursday and again Friday after spiking to a new high since early November. Getting to the level it bounced in past moves but no indication right now it is ready to turn.

VIX: 20.02; -0.61
VXN: 20.81; +0.16
VXO: 19.19; -0.44

Put/Call Ratio (CBOE): 0.84; +0.04


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: 35.6%. Moved back over the 35% threshold level below which suggests bullishness. Bulls fell even as the market rallied for two weeks. Bounced up from 34.1% last week. After peaking at 53 on this move the bulls lost some nerve, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Getting close to the 35% level that is the threshold for what is considered a bullish climate. 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: 27.8%. As bulls rose bears did as well, indicating more bearishness in the market still despite a modest tick higher in the bulls. Up from 26.1% the prior week and 22.2% before that. Over 35% is considered bullish for the market, so still a ways off even though bulls are falling to a bullish level. Continuing the rise from 16%ish on the lows this leg where it held for several weeks. Peaked near 28% in November, 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: +2.16 points (+0.1%) to close at 2243.87
Volume: 2.07B (+3.95%)

Up Volume: 1.058B (-331.444M)
Down Volume: 1.054B (+419.425M)

A/D and Hi/Lo: Advancers led 1.13 to 1
Previous Session: Advancers led 1.45 to 1

New Highs: 147 (+45)
New Lows: 11 (-2)

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

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

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


SP500/NYSE

Stats: +2.42 points (+0.22%) to close at 1109.17
NYSE Volume: 1.121B (+16.67%)

Up Volume: 621.04M (-90.863M)
Down Volume: 438.328M (+200.687M)

A/D and Hi/Lo: Advancers led 1.4 to 1
Previous Session: Advancers led 2.21 to 1

New Highs: 147 (+42)
New Lows: 14 (+2)

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

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


DJ30

Stats: +9.45 points (+0.09%) to close at 10402.35
Volume DJ30: 241M shares Friday versus 185M shares Thursday.

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


MONDAY

The Fed is likely on the sidelines for awhile and the market can focus on domestic reports (new and existing home sales, GDP second iteration, Chicago PMI) as well as anything that comes out of Europe and its Greece issues. Didn't hear much from the continent to end the week other than the strikes occurring in Greece in protest of austerity requirements given the Greek government lied about its spending. Hmm. Kind of like the US and all its 'off balance sheet' expenditures that don't really count in the budget, right? Greece, US, UK, Ireland, Italy, Portugal, Spain. Who else is out there? Don't you get a d j vu all over again to something called the Latin American debt crisis of the 1980's and early 1990's? Same problems but of course that could never happen in the more stately economies of Europe and the US.

Of course I digress, but that is the backdrop to this entire stock market move. It may end up with some additional calamity to settle the books and obtain balance once more (as many sage economists have said, you don't solve a massive credit problem with more credit, though that is what we are trying to do here and in Europe); that is down the road. As always we simply watch what the market is doing and how we can profit from it. We cannot avoid a calamity, and if it is as bad as it could be it really won't matter other than whether we sock away enough food and such. But again, I digress.

As noted in the Summary, there are many places to watch. SP500 as it takes on the top of the November/December consolidation. SP500 as it tests its January peak and NASDAQ as it rallies to do the same. SOX as it tries to continue after something of a stall as the mid-December lateral move. There is definitely a showdown coming with the January high. For a time it looked as if the indices would not make that move and indeed they may not all manage it. Nonetheless SP600 will do it and NASDAQ likely will as well. That would also mean that SP500 would break through the next to last resistance level to at least wave at that January high. Then the next major inflection point is reached and the market will show its hand.

We will continue to play that move. Even though the market is up for two weeks and many stocks are a bit stretched, the market tends to move in waves and thus there will be stocks to play upside if the move continues. Then we see how the test plays out and if need be take the gain and look to the downside.

It is not cut and dried what the market does if it reaches that prior high. With the correction preceding this bounce history says anticipate a bigger corrective move to the downside. Of course there is still massive liquidity in the system and as noted early last week, that money could mean that the January selling is all the market takes and would be heading toward a new breakout now as in June and July 2009.

So we play the upside as the move continues but we also note that many stocks are stumbling even as the market moves higher, an indication that the market may indeed hit the wall at that prior January high. We can play some of those as well. Indeed, as noted in the Market Summary, some of the chips are in position to head lower near term before they continue overall upside moves. Take what the market gets, right? Just have to be a bit nimble here and look for entry points in patterns, using shorter term timeframes such as the 60 minute chart in conjunction with the daily chart to fine tune entry points. We play the move and then see what happens at the critical inflection point as again, it looks as if at least NASDAQ will join SP600 at that level.


Support and Resistance

NASDAQ: Closed at 2243.87
Resistance:
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:
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
The 200 day SMA at 2042
2015 from an early August 2008 peak


S&P 500: Closed at 1109.17
Resistance:
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:
1106 is the September 2008 low
1101 is the October 2009 high
The 50 day EMA at 1098
1084 to 1080 (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 200 day SMA at 1028
The early October 2009 closing low at 1025
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low


Dow: Closed at 10,402.35
Resistance:
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

Support:
10,365 is the late September 2008 low
10,285 is the late December consolidation peak
The 50 day EMA at 10,279
10,120 is the October 2009 peak
9829 is the September 2008 closing high
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
The 200 day SMA at 9572
9430 is the early October low
9387 is the mid-October peak


Economic Calendar

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

February 19 - Friday
CPI, January (08:30): 0.2% actual versus 0.3% expected, 0.2% prior (revised from 0.1%)
Core CPI, January (08:30): -0.1% actual versus 0.1% expected, 0.1% prior (no revisions)

February 23 - Tuesday
Case-Shiller 20-city, December (09:00): -3.1% expected, -5.3% prior
Consumer Confidence, February (10:00): 55.0 expected, 55.9 prior

February 24 - Wednesday
New Home Sales, January (10:00): 355K expected, 342K prior
Crude Inventories, 2/19 (10:30): 3.08M prior

February 25 - Thursday
Initial Jobless Claims, 02/20 (08:30): 460K expected, 473K prior
Continuing Claims, 02/13 (08:30): 4570K expected, 4563K prior
Durable Orders, January (08:30): 1.5% expected, 0.3% prior
FHFA Housing Price I, December (10:00): 0.7& prior

February 26 - Friday
GDP - Second Iteration, Q4 (08:30): 5.7% expected, 5.7% prior
GDP Deflator - 2nd, Q4 (08:30): 0.6% expected, 0.6% prior
Chicago PMI, February (09:45): 59.0 expected, 61.5 prior
Michigan Consumer Sentiment, February (09:55): 74.0 expected, 73.7 prior
Existing Home Sales, January (10:00): 5.50M expected, 5.45M 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, February 14, 2010

Retail Sector Shows Strength Friday

SUMMARY:
- Market survives a week full of news and geopolitical intrigue.
- Greece was bad, but Friday EU GDP was disappointing and China again raised bank reserve requirements.
- China real estate, industrial capacity facing big Japan-like bubbles
- Retail sector faces adversity, shows strength Friday.
- Market looks a lot like June and July 2009 so don't write it off just yet.

Earnings may be mostly over but there is no lack of news or intrigue.

Earnings were mostly over, but there was no shortage of news. The news was dominated by Greece and the PIIGS and whether there will be a bailout from significant countries in the European Union. That dominated the trade on the week and pressured the market considerably. Note that the market did not break down on the week; indeed, it drifted to the upside even with the bad news. Looking at a 60-minute chart of the week, you can see how the action unfolded. Typically, there were gaps up or down, but there were recoveries. There was a gap lower with a recovery on Wednesday, Thursday, and Friday. The market continued to show resilience in the face of negative news. Most of that negative news was outside of the US. The US had good earnings, and there were decent economic reports that showed a continued, steady (though not dramatic) improvement in the underlying economics. That has been enough, thus far, to hold the market together and keep it moving higher. Friday was an explosive news day taking everything into consideration. It was settled during the week that the EU, or the IMF, or a combination thereof would bail out Greece and, by extension, bail out the other PIIGS (Portugal, Ireland, Italy, and Spain). The issue was whether the rest of Europe could handle the bailout.

There was more water splashed on the situation on Friday when China increased the reserve requirements for its banks by 50BP. That is the second such increase within a month. The European Union's GDP was much lower than expected at 0.1% growth versus 0.3% expected and 0.4% in Q3. It is down 2.1% year-over-year. That is a significant drop as Europe is supposedly emerging and growing stronger coming out of the 2008 crash. That is obviously not the case. Germany's GDP was flat versus a 0.7% gain in Q3. Italy fell 0.2%. France was strong at least as far as EU terms are concerned rising 0.6% versus the 0.2% gain expected. This slowing of GDP growth in Europe is very serious. Europe never got over the problems of 2008. It papered over them, as did the US, trying to fill the chasm with printed Euros. It has never cured the problem, and cracks are starting to show up cracks that a lot of money printing and huge deficits are causing. They cannot hem in the underlying problem, and that is a major concern moving ahead in 2010. It may not show up until later in the US, but I am very concerned that it will eventually appear.

As noted earlier, it did not hamper the US markets. They did not go much of anywhere, but it did not break them down. There was a lot of bad news swallowed by them, and that is a good sign. Looking at the SPY intraday chart, Friday is an indication of the same. There was a big gap lower because there was serious news to deal with a rally, a selloff, and then a steady comeback. There was the same action on Thursday. It was both short covering and real buying. There was buying because at the end of the day, Berkshire was moving into the SP500. There had to be a lot of reshuffling with respect to market cap and what stocks were bought and sold. Berkshire was going in with a big market cap, taking the place of the stock that was coming out, so there had to be a lot of buying and selling. There was buying, but we also had the short covering along with that. Considering that the indices have been in a roughly five-week pullback, you can understand why there was a bounce into the end of the week in front of a three-day weekend. No one wanted to be caught on the wrong side of the fence with a long weekend and with all the issues still on the table. There was a nice bounce coming up, but when you look at the patterns, there are also good-looking stock patterns. They are down at the start, but vastly improved as the day went on. Again, that was a pattern for the week. The market was able to overcome bad news and weak starts to make some headway against the rather new short-term downtrend for 2010.

OTHER MARKETS

Dollar. With the trouble in Europe, there was a flight to safety in the dollar. That bolstered it and its continued trend to the upside. It was not a runaway move, however, because the dollar has moved into a significant resistance point from the June and July consolidation. It runs from roughly 79 to 81.50. Intraday, the dollar hit at 80.75 on the high, so it is right in the middle of that range and bouncing. Nonetheless, it put in another good day (1.3618 Euros versus 1.3692 Thursday). During the day, it was down below 1.36 Euros, trading in the 1.35 range. That is significant. 1.36 - 1.38 is the range it has bounced up and down in lately, and that is what the traders are watching. If it makes a breakout above that, then it has cleared this resistance and we are looking up at 82 - 83 as the next range. 84 is the next serious resistance for the dollar.
http://investmenthouse.com/ihmedia/dxy0.jpeg

Oil. Oil had a difficult session. It had a good week, bouncing off the 200 day EMA and making a higher low above the December low. It sold back somewhat on Friday and was roughed up a bit given the strength in the dollar and given that oil inventories were higher than expected at 2.4M barrels. It had a bit of a rough day, but it was a modest setback. It bounced well off the low.
http://investmenthouse.com/ihmedia/xoil.jpeg

Gold. Gold had another session of flat trade after a good bounce for the week. It was slaughtered over a week ago with Chinese news and the problems in Greece. It recovered and held up very well on Friday even with more trouble out of Europe and China raising its bank reserves. It sold off a little but bounced back. It was a deflationary move when it tanked on the news, but it has recovered and shrugged it off on Friday. It is not that much of a deflationary story with this particular move. Nonetheless, the yellow metal is in a base it has come back. It tried to double bottom but failed. It has now come back and looks like it will make a lower high and continue back down to 1050 (where there is solid support from the October peak) and base out. It could be just over halfway through a longer base, and bases set the foundation for further gains. Thus, I do not see gold as an immediate buy given that it failed on this move. It is setting up for a break higher in the not-too-distant future, however.
http://investmenthouse.com/ihmedia/xgld.jpeg

Bonds. Bonds sold off despite the economic uncertainty coming out of Europe and the turmoil with bank regulation in China. On Friday, the 10 year bond closed down (3.69% versus 3.72% Thursday) as bonds rallied back given some of the uncertainty over in Europe. There was some of that factored in, but bonds were selling off overall. That is typically an indication that investors do not see much trouble down the road.

The US sold many treasury notes, as it has been doing, but they were not well-received auctions. They were not complete busts, as with some Greek auctions, but the US had to offer significantly higher interest rates than anticipated to lure buyers into the market. We raised the money we wanted to raise, but it will cost us more. That adds to the debt burden that every man, woman, and child in the US bears right now (roughly $125K by conservative GAO estimates). We are bringing in the money, but it is costing more, so our debt service goes up as well. We are engaged in a vicious cycle, and the bond market is showing the wear and tear since fewer people want our paper. We are not nearly as bad as some of the other countries. Some are already above 100% with respect to their debt-to-GDP ratio. We are not near that, so I suppose we are a bastion of economic sanity over here. Although, when you look at the rest of the western economies, that seems to be the case.
http://investmenthouse.com/ihmedia/tip.jpeg

TECHNICAL

INTERNALS

Volume. Volume was up 5.5% to 2.1B on NASDAQ, and it rose 25% to 1.3B on the NYSE. I cannot put too much emphasis on that because a lot of that volume was late in the day with the SP500 rebalance. That is why volume jumped back above average on SP500. Do not take that to the bank, however. Even though it is an incongruity with a Friday trade before a three-day weekend, the SP500 rebalance was the culprit.

Breadth. The advance/decline line was tame. Advancers led 1.5:1 on NASDAQ, and it was a dead heat on the NYSE at 1:1. That is not too bad given that the Dow and SP500 closed down for the session.

CHARTS

NASDAQ. NASDAQ was able to break through its 10 day EMA on both Thursday and Friday after giving them up intraday. It closed at the 18 day EMA. There is better volume, but I am throwing that out even though that is on NASDAQ as well. It just does not tell us much. It is in the teeth of the November and December trading range, putting it just below the October peak. This is a very important resistance range, all the way up to 2205. The 50 day EMA is sitting there as well. There are a few layers of ice on top of NASDAQ. It looks as if it wants to break down again, but there are days were it is moving higher. Techs are trying to lead, and it very well could break out. Liquidity is still there. The Fed is still printing money even though Bernanke's testimony said they would stop at some point. The money is still hitting, but it is a matter of whether there is enough to push it through. If SP500 does not make it, NASDAQ has less of a chance.

SP500. The SP500 made a recovery during the week, and that was in the face of a lot of bad news. That can be viewed as a positive. It never did break over the 10 day EMA, which is the closest resistance in any downtrend. It tried to make the move, but it has not yet. It has not collapsed yet, however, so there is a positive. It is holding at the September peak, unable to make the break through at this juncture. This pattern is a bear flag. There is a selloff and a rebound that takes it to resistance. It took it to the October peak when it bounced in early February. It then collapsed down to the bottom of that range before bouncing this week and taking it up to resistance at the September peak. The question is whether it will collapse to the next lower rung at 1025 or make the break to the upside. Looking at the pattern, you would say no. Even though it did show resilience last week, the path still appears to be downside for the SP500. Will it hold 1050 or can it break through 1075? It is in an important range, and we will see how it plays out. If I were to throw a dart against the wall, I would say it will test a bit more, but you never know what the market will do, particularly when there are so many geopolitical events affecting the market on a daily basis.

SOX. The semiconductors were an important mover. They were the first to fall, and they were the first to try to bottom and start to bounce. They made it back up to a key level at the September and October twin peaks. They actually moved through the 50 day EMA intraday on Friday, only to give it up on the close. It also closed just below the top of the range represented by September and October. That is showing its own bear flag after making a lower low, but it did pop up to an interim high. It has broken the immediate trend, but it still has serious resistance to crack through. Many people are looking at semiconductors right now, and they had a good week. The question is whether they can continue after a week of decent gains or if they will fall back down. The overall bias in the entire market is somewhat down, and it will be tough for them to make the move. They were the leaders, however, and if anyone in any group will make a move, I would anticipate it being the semiconductors.

SP600. The SP600 had a decent bounce of its own, particularly to end the week. That took it up to the September peak and the 50 day EMA. That is a good move. It closed the high and did not back off at all. The small caps are the canaries of the economy, and we will see if they continue to improve as the numbers have been showing. If it does not follow the European model, then it could break higher and give us a good look and indication as to what will happen with our economy in the summer.

LEADERSHIP

Retail. On Thursday night, there were after-hours earnings in the casual dining area that were taking those stocks down, and that sector had been a solid leader in the market. I was concerned, with the after-hours selling, that it would bleed into Friday the market would lose a leadership group. BWLD had its wings plucked off and it crashed and burned. PNRA reported earnings and was down after hours, but after gapping lower, it reversed and closed higher. It is maintaining its uptrend. The buyers were ready to step in, and that is a very good sign. One of the other after-hours reports was CMG, and it gapped lower as well, but then it reversed and surged close to 4% on the session. That is big volume, and I am happy to see that one of the leadership groups in the market was still able to show strength in the face of adversity.

Energy. Energy continues to struggle. HAL has a bear flag. There was the same action in SLB on Thursday. CHK is a stock in natural gas that I still like. It is trying to hold at the 200 day EMA and make a higher low. These are not what you would call fantastic patterns to the upside, but they are possibilities for rebounds (at least with respect to CHK). We will see if HAL can make something positive out of a bear flag. Across the energy sector, the patterns are not good. They have work to do, and that is the case in many of the market sectors.

Metals. FCX double bottomed and bounced, finally showing some good volume to end the week. There is nothing wrong with that, although it is not taking off to the upside given the general sluggishness in the market. It performed very well considering what China was doing with the banks and the reserve requirements. Metals are tied to what happens in China and Brazil. Whenever China sneezes or does something to slow down its expansion, it shows up in the metals. AKS shows that steel is recovering, similar to copper, but the patterns are not fabulous. They are not the good patterns we were playing before the start of the New Year.

Agriculture. MOS broke through the 50 day EMA, and this is interesting. This is similar to FCX, CHK, and some of the other stocks that have come down and held the 200 day EMA and put in a double bottom and bounced. That is the one pattern that is working near term to the upside right now. It is that short double bottom over a key support level, mostly (and usually) at the 200 day EMA.

Financials. I have not looked at financials lately because they have not done anything. That can be something good given that a lot of the market was selling off. GS has been moving laterally for a couple of weeks after selling off sharply and jumping higher in early February. It has not done anything, but it has been holding up the SP500 because it has not sold off. All of the financials are in a similar situation. They sold down early in the month and have now rebounded some. They are trying to hang on but are struggling. JPM is showing the same kind of action.

Healthcare. Healthcare remains one of the strong areas, but it is sporadic. RMD is a position we picked up as it gapped over resistance, held on a test, and took off to the upside again on solid volume. We always look for that kind of solid, consistent play. AMED continued higher on Friday as well. They are showing gains. They are not runaway gains, but they are positive. Not all stocks in healthcare are performing well, although there are better setups across those sectors versus other areas of the market. That is because it is a more defensive area. I like healthcare because it is defensive as well as a growth area. You can still get great moves in upside even when the rest of the market turns a bit negative.



THE ECONOMY

China is learning the Greenspan lesson from 1999.

Please view the Economy Video at the following link:

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



THE MARKET

MARKET SENTIMENT

VIX: 22.73; -1.23
VXN: 22.97; -0.46
VXO: 23.24; +0.15

Put/Call Ratio (CBOE): 0.91; +0.05


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: 34.1%. Sharp decline in bulls as the impact of the prior 4 week decline finally hit. Of course it hit just as the market bounced this past week. Still, it is now below the 35% level, down from 38.9%, and that is considered bullish for the market overall. After peaking at 53 on this move the bulls continue to run, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Getting close to the 35% level that is the threshold for what is considered a bullish climate. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator.

Bears: 26.1%. A commensurate rise in bears, jumping from 22.2%. Over 35% is considered bullish for the market, so still a ways off even though bulls are falling to a bullish level. Continuing the rise from 16%ish on the lows this leg where it held for several weeks. Peaked near 28% in November, 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: +6.12 points (+0.28%) to close at 2183.53
Volume: 2.162B (+5.45%)

Up Volume: 1.331B (-440.453M)
Down Volume: 808.504M (+482.233M)

A/D and Hi/Lo: Advancers led 1.47 to 1
Previous Session: Advancers led 2.88 to 1

New Highs: 63 (+8)
New Lows: 22 (+2)

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

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

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


SP500/NYSE

Stats: -2.96 points (-0.27%) to close at 1075.51
NYSE Volume: 1.328B (+25.08%). Volume was up but thanks to the Berkshire addition to the index.

Up Volume: 550.91M (-291.498M)
Down Volume: 758.725M (+550.969M)

A/D and Hi/Lo: Advancers led 1.04 to 1
Previous Session: Advancers led 3.17 to 1

New Highs: 96 (+10)
New Lows: 38 (-1)

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

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


DJ30

Stats: -45.05 points (-0.44%) to close at 10099.14
Volume DJ30: 296M shares Friday versus 194M shares Thursday. SP500 rebalance volume my friends.

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


TUESDAY

There will be plenty of economic data coming out, and you can bet there will be more data with respect to what is happening in Europe and China. The US will get a good look at what is going on with capacity utilization and industrial production. There will be minutes from the FOMC. There will be several regional PMI or manufacturing reports. That will give a good look into just how the US is proceeding. This is all after a three-day weekend, which is a very long time when you have so much information and intrigue swirling through the world. Asia and Europe will be open on Monday, so there is plenty of time for news to hit, and the market is extremely news driven right now.

The market still looks weak from our perspective. The SP500 and the bear flag it formed this past week could be viewed as a positive because it absorbed a lot of bad news and still rose. Looking at the overall pattern, however, this is a stair step lower. It is not even an ABCD pattern because there is not the sharp impulse move higher. It moved up, leveled off, and then just carried through the momentum to the peak. It is simply stair stepping right now, making lower highs and lower lows. It is at an important level, and it could make the break higher. They are showing resilience, and we could get a continued bounce higher if there is no bad news. A test up to the bottom of this old peak in January would be a very good indicator of how the market strength is. If it did, it would likely fail and come down for a deeper test. That is historically what the market does, but it does not necessarily have to do that. It can stair step down to the 1025 level or 1000 level and form a nice base in through March or April. That is just about the time that earnings are ready to come in for Q1, and then it could be ready to make a move higher.

The question is what news is out there to drive stocks higher at this point. We are through earnings, and they were not bad. There has been plenty of decent US economic news, but the market has sold off over the past month or so. Where will the good news come from with Europe in trouble and China trying to reign in its economy? The liquidity that has been driving the market is still out there. Ben Bernanke says it will be removed at some point, but he cannot afford to remove it now. He is a student of history, and he has seen what Japan did and what the US did during the Great Depression and the 1970's. He does not want to be saddled in the history books as the Fed Chief who pulled away the punchbowl too quickly before we were in a recovery. The problem is that he is not getting much help from the administration. Their policies will not do much to create the kind of booming economy that our free enterprise system works best with. He has his hands full with a difficult task. He will keep the liquidity open as long as he can because there is no sign of inflation. There is something of a deflation worry, as gold has been telling us. When the news hit out of Europe and China, when the negatives came in, gold went down instead of bouncing. People were afraid that there would be deflation, not inflation. Remember, gold is at its best when there is uncertainty and a worry of inflation. Worries of deflation spiked it out of a double bottom and it made a lower low. Given the news coming out of Europe (even though there will be a rescue), I am still leaning toward there being further downside before there can be a sustained bounce. By sustained bounce, I mean one that can have a real chance of breaking the January peaks. There can be that bounce I was talking about that moves up to those levels to test. Historically, that would be something seen in a deeper correction. We will have to watch for that.

We have some downside plays and will continue to look at them over the weekend. Since the market bounced back this past week, you can bet there will be more bear flags from stocks that were hit hard, recovered, but are stalling at a resistance level. We will be able to pick some downside plays in the event that the market continues lower. If that is the case, we will let our current downside plays run. We will also look for some upside because, as you have seen, there are great stocks in good position to move higher. We have had excellent gaps to the upside that have held, and the stocks are moving higher. There is a dichotomy in the market. It is not sure what it wants to do internally because there are stocks heading higher and stocks heading lower. We have not reached the point where there is a predominant negative or positive theme that drives all stocks one way or the other. Indeed, we are in a rather mild and ordinary correction after a whale of a run off the March lows. The closest thing we can look back to is the June and July correction after that initial run. If you look at this and compare it to now, they look very much the same. Step down, bounce, a lower low, and then a takeoff.

It still looks negative to me, but it still could come back. As in June and July, if it will hold, it will hold right where it has been at the September and October lows. They look very similar in pattern. They held at those prior lows and bounced off that. It has made significant lows, it has come back to test them, and it is either going to hold or break higher. We are in an important inflection point, and we will stay flexible. Keep buying stocks or positions (up or down) that are at good risk/reward levels. That means you have plenty of upside or downside, but you have a good stop point close at hand. Then, if it breaks, you can get out of dodge and look for bigger and better gain. We will try to play both sides of the fence to be ready for the break because, at some point, it will break. Without a doubt, the market does not move sideways forever. With the similar look right now from June and July, I want to be ready to take the ball either way. Once the market tips its hand, we will close out one side and move in the other direction. We can still make money even as the market bounces up and down in this range. Have a great weekend.


Support and Resistance

NASDAQ: Closed at 2183.53
Resistance:
2167 from the July 2008 intraday low
2168 is the September 2009, intraday peak
2169 is the March 2008 closing low (double bottom)
2177 is a low from March 2008
2191 is the October 2009 peak
The 50 day EMA at 2203
2205 is the November 2009 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
2218 is the August 2005 peak
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:
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
The 200 day SMA at 2032
2015 from an early August 2008 peak


S&P 500: Closed at 1075.51
Resistance:
1078 is the October range low
The 10 day EMA at 1078
1084 to 1080 (September 2009 peak)
The 50 day EMA at 1098
1101 is the October 2009 high
1106 is the September 2008 low
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 200 day SMA at 1024
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low


Dow: Closed at 10,099.14
Resistance:
The 50 day EMA at 10,267
10,285 is the late December consolidation peak
10,365 is the late September 2008 low
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
9829 is the September 2008 closing high
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
The 200 day SMA at 9531
9430 is the early October low
9387 is the mid-October peak


Economic Calendar

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

February 12 - Friday
Retail Sales, January (08:30): 0.5% actual versus 0.3% expected, -0.1% prior (revised from -0.3%)
Retail Sales ex-auto, January (08:30): 0.6% actual versus 0.5% expected, -0.2% prior
Mich Sentiment, February (09:55): 73.7 actual versus 75.0 expected, 74.4 prior
Business Inventories, December (10:00): -0.2% actual versus 0.2% expected, 0.5% prior (revised from 0.4%)
Crude Inventories, 2/5 (11:00): 2.42M actual versus 2.32M prior

February 16 - Tuesday
Empire Manufacturing, February (08:30): 18.00 expected, 15.92 prior
Net Long-Term TIC Fl, December (09:00): $50.0B expected, $126.8B prior

February 17 - Wednesday
Housing Starts, January (08:30): 580K expected, 557K prior
Building Permits, January (08:30): 615K expected, 653K prior
Export Prices ex-ag., January (08:30): 0.5% prior
Import Prices ex-oil, January (08:30): 0.4% prior
Industrial Production, January (09:15): 0.8% expected, 0.6% prior
Capacity Utilization, January (09:15): 72.6% expected, 72.0% prior
Treasury Budget, January (14:00): -$46.0B expected, -$91.9B prior
Minutes of FOMC Meet, 1/28 (14:00)

February 18 - Thursday
Continuing Claims, 02/6 (08:30): 4500K expected, 4538K prior
Initial Claims, 02/13 (08:30): 430K expected, 440K prior
PPI, January (08:30): 0.8% expected, 0.2% prior
Core PPI, January (08:30): 0.1% expected, 0.0% prior
Leading Indicators, January (10:00): 0.5% expected, 1.1% prior
Philadelphia Fed, February (10:00): 17.0 expected, 15.2 prior
Crude Inventories, 2/12 (11:00): 2.42M prior

February 19 - Friday
CPI, January (08:30): 0.3% expected, 0.1% prior
Core CPI, January (08:30): 0.2% expected, 0.1% 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, February 07, 2010

Market Responds with Afternoon Rally

SUMMARY:
- Market responds as expected with an afternoon rally on the heels of further selling.
- Jobs data pulls the old switch-a-roo as payrolls fail to post a gain but unemployment falls.
- European PIIGS threaten a 2008-like slump as leverage questions breed fear.
- Friday rebound eases worries, but has to prove it was a character change.

Market sells again but rebounds in the last hour.

The Friday jobs report was somewhat preempted by the PIIGS running through the European Union on Thursday and its deleterious effect upon the stock market. Nonetheless, jobs did have their impact on Friday. The futures were negative beforehand, but bounced positive after the jobs report. There was a dichotomy in the report, and it was not as expected. There were 20K non-farm payroll jobs lost, but the unemployment number fell (9.7% versus 10% the prior month, 10% expected). The latter was able to boost the market higher despite massive revisions in the true number of jobs lost during the recession. That is rearview mirror information, so the market did not pay it much mind. The market opened a bit lower and tried a bounce, but then sold negative. We used that failed bounce to take some downside gain off the table. Then we would sit back and wait for the market to bounce. We were anticipating some short covering and wanted to get in on some other downside positions. We still thought the character of the market had not changed. The market bounced and sold, and it held the same low it held on two prior occasions during the day. It bounced higher, made a lower high, and it bounced and started to roll over after lunch. We took some positions there, but they came back to bite us somewhat as the market rebounded late and gave us the expected short covering to end the week. We did not panic, but we took a few more positions in the stocks that were still good plays to the downside. We did not get into many of the others from the report on Thursday because they sold early and did not rebound enough to make them good plays. We would be playing the edges, and that is more difficult. I thought we should wait and see if they rebounded more next week. There was a big reversal at the end of the day that sent many stocks back up even to positive; it even sent the indices positive by the end of the day. The question is whether this was just a short-covering rally or if there was a reversal. You cannot tell on the first day, particularly since the index patterns are atrocious. We will have to see how the market plays out in the first part of next week. It is important to note that the move itself did not change the downside character of the market.

The main issue facing the market was when the PIIGS started running through Europe on Thursday. Portugal, Italy, Ireland, Greece, and Spain are all in trouble. They have huge deficits, and the problem is the cost of insuring their debt through credit default swaps. You may remember those from the fall of 2008 everyone had too learn what they were very quickly because their spreads were rapidly widening, and the cost of these insurance policies in some cases went up 1000% overnight. The credit default swap spreads are exploding in Europe. They are getting much wider, and wide equals risk. If a spread is wide on an option, then it is either thinly traded or there is a lot of risk associated with it (or both). This is happening with the credit default swaps in these countries. It is becoming an increasingly expensive proposition for the countries that have been buying the debt of Greece. This is a dangerous time, and the ramifications are huge if Greece goes under. If Greece has to default, that is a serious issue that will ripple across the globe. Even the US 5 year credit default swap spreads widened by 30-40BP on Thursday alone. This is not just a European issue, and you can see that when you look at gold. One would think that gold would be surging during all this uncertainty, but it had a very tough week. It rebounded on Friday from its lows to close positive, but the fact that it is not rising when there is great uncertainty in the world indicates there is a worry of deflation rather than inflation.

OTHER MARKETS

Dollar. After a slight pause to start the week, the dollar surged higher Wednesday through Friday. It was fueled by the fear in the rest of the world, and particularly world currencies such as the Euro that dove down versus the dollar. Even the yen was lower against the dollar. Some are saying this was just because of an unwinding of the carry trade that is where you borrow against one currency and invest elsewhere and pocket the difference. With the dollar rising, they say it had to be unwound because it was being used as a carry currency to some extent. That was probably part of what caused the spike higher, but it was also a safe-haven play. One cannot ignore that the EU is in trouble, and it boggles the mind to see some people on TV treat this episode just as they treated the summer of 2008. Things were going down rapidly, but they refused to acknowledge that fact. The Euro had been moving up steadily against the dollar, and it is now being squashed because of the worries in the EU with the PIIGS nations. The dollar is rallying because people want to put their money in a safe currency. Even with all of our debt, we are still considered safe. The question is, if we keep spending as we are now, will we be in the same place Greece is five years down the road? Our credit worthiness could be questioned by the credit-rating mechanisms and, more importantly, the investors around the world. They are the ones with the final say. The dollar enjoyed a solid week, but it was at the expense of other currencies and at the expense of many stocks as well.

Gold. Gold tried to bounce and make a double bottom off the December low, but it was unable to do so. It peaked on Wednesday and then was massively crushed on Thursday. It sold again on Friday. It broke through support, but managed to rebound and close positive ($1,065.38, +.38).

Oil. Oil had another tough week of its own. It did bounce as well, but it was shoved lower. It was unable to recapture all of the losses it felt during the day and closed down ($71.85, 1.29). When it was posting $4.00 losses intraday, then -$1.29 was not a bad session. It also held at the key support from December where it bottomed. It is right at the average of the trading range from August through September. Everything was on the recovery trail at the end of the session. That leads me to question whether it was just short covering (which I believe it was), versus some renewed buying just because it was time to buy. That is possible; maybe the economic data in the US is good enough. We will have to see how that plays out next week.

Bonds. Bonds were up all week, but they were back and forth. At the end of the day on Friday, the 10 year closed at 3.57%. That yield was down from the 3.60% posted on Thursday. Bond were rallying and pushing the yields lower once more. It was not too long ago that bond yields were up at 3.8%, and they are now down at 3.57%. There are worries out there, and the bonds have rallied accordingly.

TECHNICAL

INTERNALS

The internals were hardly impressive. Advancers did move positive on the NASDAQ as it recovered, and it lead the recovery at 1.2:1. That was pale compared to the -6:1 on Thursday, but you have to take into account that it was a reversal session, so they do not swing that quickly. Interestingly, decliners on the NYSE led -1.4:1. That shows that there were still plenty of stocks downside, even though the indices recovered to positive. Narrow rebounds indicate short covering.

Volume moved up on NASDAQ to 2.7B and on the NYSE to 1.5B. You can argue that that is a reversal: the markets came back, rallied off lows, and closed positive on rising gain. There has definitely been a sharp selloff for the past three weeks and a good reversal off a support level. It could be a reversal, and maybe they will move up from here. The momentum could keep things going on Monday or Tuesday. We will see, but again, I view this as something of a short-covering move. The selling is not over yet. There are issues out there bigger than the economic data from the US, and that is a major overhang for the market as it trades over the next few weeks. In other words, investors will have to see what happens with these credit default swaps, what their spreads do, and how the rest of the world reacts to the debts in the EU PIIGS.

CHARTS

SP500. The SP500 reversed off support and did so on volume. This does not tell us whether or not the selling is over. It could be good for a short-term bounce since it held a support point and bounced. There was a significant selloff. It was 1100 down to 1050. 50 points in a couple of days is a lot of selling in a short period of time, and a bounce-back is normal. We could see a bounce back up to 1075 (the prior low from late January). There is other resistance there from the September peak. We will have to see how high it bounces, but I do not feel this changed the character of the move. The bias is still downwards, although the buyers might have put in a statement on Friday.

NASDAQ. NASDAQ showed the same action. There was higher volume (higher than already high volume on the Thursday selling), a selloff down to some support at 2100, and then a reversal to positive. Once again, you had the move back up after a selloff. Will that lead to more upside? It very well could. 2150 is a barrier, but the big barrier is at 2200-2205. NASDAQ will have to show us. If there is a big reversal like that, it could definitely be a sea change in the market. However, looking at the selloffs over the prior three weeks, it was due for a short-covering rally this time around. That is what we got, and now the question is whether a short-covering rally can turn into a full-fledged bull rally (in other words, the longer-term buyers come back in and buy). There has been significant damage done, and there is significant resistance to overcome. It is hard for an index to sell off like this and then find the kind of support it needs to break out and run again. It could be that this reversal leads to a rebound that comes higher than these prior levels. It may slingshot it back up to test the bottom of this range. There are many possibilities, but you also have to look at probabilities. I think this was short covering after a big selloff. We have been putting our money on it finding resistance and continuing down. Unless it proves otherwise, that is what we will continue to do.

SP600. The small caps showed the same action. They came down to an important support level where we figured they would come to. 310 was one of the levels that showed a lot of support. It could fall to 300 as well, but it decided to reverse off that level. It had a nice recovery to positive, and we will see how far it bounces to start the week. It has serious resistance of its own, but we will have so see how it works.

SOX. SOX was never down as much. It was down, but it reversed and was sold off harder than the other indices. It tested close to the bottom of its support range and reversed, basically following the rest of the market.

The indices reversed, they did so on high volume, but the internals were rather weak as far as breadth. There are many patterns that have the same look they did before Thursday. They bounce, but they still have that downside bias to them. If the buyers come back in flush with money and ready to buy, nothing is going to stop them. There has been a lot of technical damage, however, and it has hard for those kinds of moves to hold up. It will probably sell off again and have more downside before this is resolved. That makes sense because that is the way stocks typically act. They shoot up, they have big gains, and then they come back and start selling (and sell a bit harder than before). The downside is a bit stronger than it has been on any of the other moves. When that happens, there is technical damage done and they tend to move laterally and base out before they take back off to the upside. When you have this kind of selloff, "V" or knifepoint turns are not as common.

LEADERSHIP

Technology. It is interesting to note that technology performed better. There is hardly a pattern of strength for AAPL, but it bottomed, bounced, and it bottomed again. It is still holding support at 190. It could very well bounce higher and come back to test the prior peaks. It is not a pattern of strength, but there is a double bottom set, and techs were showing more money flowing their way. GOOG was the same story. It did not break down further as the rest of the market sold off to end the week. It held tight at 525 and is showing some strength. INTC held at this steady and constant support level at 19. MCHP also did not sell off; it held tight at 26. This pattern repeated over and over again.

Industrials. Industrials came back. BUCY was in free fall, breaking below a key level at 50, but it reversed to close above that level and showed a hammer doji. After a selloff, that can mean a break higher, but it can also just be continuation doji. This has not been a huge selloff it has been a one-day event, so it is less likely to be a meaningful rebound. JOYG may be in position for a bounce. It has come down to support at the August peak, and it coincides with the 200 day EMA. It is showing a hammer doji as well. It is at a more significant selloff and may be ready for a bounce. That would be all because this is what you would call a damaged pattern that has to base out. DE did not break down, either. It hit the intraday low, but it reversed to hold the range it has been trading in for just over a week.

Metals. The metals are showing some of the same type of action. FCX has been in the doghouse for a while, but it has made a double bottom at the 200 day EMA as well as other important price points at 65. MTL reversed off this trendline. If it holds, that makes it a good trendline because that would be a third test of it. It is not a pretty pattern, but it looks like it wants to bounce. They do not all look great, but there is enough life in some of these. They are holding support and could put in a bounce to start next week.

Energy. APA sold down to a support level and rebounded off the intraday low. This is a common theme. SLB came down to our target, tapped above the 200 day EMA as well, and reversed. It made us nice gain and bounced. This is not a good pattern, but it is one where it could bounce higher as it trades in this range. We will have to see how much strength there is next week. DO recovered too, and it recovered off a support level. This is damaged goods, however. It could have a knifepoint turn, but the odds are not great for that.

Retail. Retail continues to be one of the stronger areas. ANN had nice same store sales, and it had a nice doji test on the gap. It could be ready to move back up. COH was a downside play. It bounced, but this is not what you would call a strong pattern. BWLD is another stock that, while it was down on the week, it did not really sell off. It is just moving in a range, holding the short term EMAs.

Overall, the indices are still showing a downside bias. There is also leadership that is showing a downside bias, but there are pockets (tech, retail, and some metals) that show they could post a near term rally or bounce off of the selloffs because they held a prior low and are trying to put in small double bottoms.

THE ECONOMY

'Backwards' jobs report leaves pundits puzzled.

The jobs report on Friday was the main news after Thursday rattled the entire world's financial markets with the issues arising out of the EU countries. Non-farm payrolls fell 20K, and that was almost the mirror image of the expected gain. That was not helpful, but the unemployment rate fell to 9.7%, versus the 10% reported prior and expected. An important aspect was that the workweek moved up to 33.3 hours versus 33.2. It has been stagnant for quite some time at that level, and any rise is a positive. Although, that is a very low number of hours worked for the week, and it has to get closer to 36 before it makes a difference. Nonetheless, this market will grasp at anything, and you have to start turning before you can get to good levels.

The non-farm payrolls were down 20K, but that was not the worst of it. Revisions were terrible. December was -150K versus -80K originally reported. November was written up to 64K versus the 4K reported. In October, it was written way down to -224K versus the -127K originally shown. Overall, the revisions were based upon a change in the benchmarks to more accurately reflect what happened during the year. The revisions showed 1.2M additional jobs lost. In other words, since the recession started, there were -8.4M jobs lost versus the -7.2M previously reported. That is fairly staggering. That leaves 14M people unemployed. The tough aspect of this recession is that the unemployed typically stay unemployed for a period of two months. During this recession, the average period of unemployment has been seven months. As the weekly new jobless claims show, they continue to add onto the unemployed payrolls. That is a great burden on the economy and society. The unemployment rate did fall to 9.7%, and that is a positive. This usually means that, as the country comes out of recession, the entrepreneurs cannot find a job so they start their own businesses out of desperation and the inability to find a "normal" job. The interesting thing is that the household survey showed that 541K more people were working in January. That is the largest jump in 5 years. That is a positive because jobs recover ahead of the non-farm payrolls number. That topped the 430K that were unemployed or lost their jobs in the household survey, and that gave the net jump higher to jobs. Further, the job pool fell by around 250K. That always makes the unemployment rate look better simply because people are leaving the workforce. You have a mixed showing. There are actual positives where, in the months before, there were no positives at all. There is improvement in the household survey. Even the disgruntled workers came in at 16.5%, down almost 1 point from the 17.4% in December. There is improvement even on that level.

Temporaries rose 52K. That is four months in a row temporary hiring has improved. That is important because companies typically hire people on a temporary basis before they make permanent offers. On a temporary basis, an employer does not have to provide healthcare and that type of thing. You can hire them, see if they work out, and then make a full time offer. It starts in baby steps, and there were good forward steps taken in January. Without the revisions and adjustments, there is still a 10.6% unemployment rate. That shows where the problem is because many of the other numbers are just numbers games. The actual number of people is what we should be measuring, and that puts it at about 10.6%. That is as the government does it as most people would measure it, it would be around 16%. There are still discouraged workers that have given up, and there is a 50% increase since President Obama took the office. He has the unfortunate position of being the president at the time a recession hit. George Bush had the same issues, and other presidents did as well. There is improvement, but the question is whether it is sustainable. That depends on whether the economic bounce we see is sustainable as well. It would be nice to see some of the stimulus money given back to people to invest in businesses versus trying to prime the pump with credits for hiring employees. It is somewhat heartening to hear that many people on the financial stations and other places are saying a jobs credit will not do anything. It is interesting to note that when George Bush was dealing with his recession, the idea was floated by some to have a credit for hiring people just like we are doing now. The irony is that there were many Democrats who came out against it saying they tried it in the past and it had no impact on net jobs. They were absolutely right; it does not. It is interesting how the focus and logic shifts depending on who is in the White House or who is in charge of Congress.

THE MARKET

MARKET SENTIMENT

The VIX surged to a new rally high on Friday as the market sold off early. Remember, the market did sell off through the middle of the day, but then it recovered. As it recovered, of course, the volatility fell. There was a higher low and a huge surge on Thursday. It was running well on Friday before it came back. Once the VIX makes a big move, it can really run. It will hold tight for a long time, but then it breaks the ice and can easily slide higher or lower. Thus, what happened on Friday may not mean much. There is a big gravestone doji, and that could mean it is going to turn down. However, you have to think that it has broken through the ice. It may shoot back up if the market was just subject to short covering on Friday ahead of a weekend and after a big selloff. Although volatility faded back, that does not say to me that there was a major problem with respect to a reversal to the upside in the market.

VIX: 26.11; +0.03
VXN: 25.96; -0.03
VXO: 25.28; -1.25

Put/Call Ratio (CBOE): 1.21; +0.15

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: 38.9%. The selling took further toll on bulls, dropping them from 40.0%. After peaking at 53 on this move the bulls continue to run, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Getting close to the 35% level that is the threshold for what is considered a bullish climate. 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: 22.2%. Surprisingly bears fell for the week, down from 23.3% after a brisk rise up from 16%ish on the lows this leg where it held for several weeks. Peaked near 28% in November, 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: +15.69 points (+0.74%) to close at 2141.12
Volume: 2.751B (+0.41%)

Up Volume: 1.907B (+1.61B)
Down Volume: 866.637M (-1.666B)

A/D and Hi/Lo: Advancers led 1.19 to 1
Previous Session: Decliners led 6.03 to 1

New Highs: 16 (-4)
New Lows: 52 (-1)

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

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

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


SP500/NYSE

Stats: +3.07 points (+0.29%) to close at 1066.18
NYSE Volume: 1.563B (+5.33%)

Up Volume: 832.375M (+792.031M)
Down Volume: 712.345M (-727.385M)

A/D and Hi/Lo: Decliners led 1.42 to 1
Previous Session: Decliners led 7.64 to 1

New Highs: 63 (-15)
New Lows: 89 (+25)

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

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


DJ30

Stats: +10.05 points (+0.1%) to close at 10012.23
Volume DJ30: 308m shares Friday versus 304M shares Thursday.

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


MONDAY

The dollar will play a role in what happens in the stock market. It may not be the leading cause, but it may be a symptom of what is going on. Whether the dollar continues to rise or not could tell what will happen with the rest of the stock market. The dollar is gaining strength because of worries overseas. Maybe that is what it was telling us when it reversed its downtrend and started this rally the rally that is becoming stronger as the world economic picture grows weaker. People move to US currency even though we have unreal amounts of debt. It is just not as unreal as some of the places in Europe and other parts of the world. People are putting their money into US currency, and that is a symptom of what may happen next week. One of the things we need to consider is the reversal on Friday. I consider that short covering while others consider it a reversal signal. We will find out in the first couple of days in the week.

The earnings season is winding down, and there will be more economic data. Retail sales are a big component, but that is out late in the week. There is not a lot in the beginning of the week to drive things, so we will get to see what the market will do. The bias is down right now. We will have to see if liquidity comes back in to stir it back to the upside. Many Fed members, including Bernanke, are going to be speaking next week to Congress with respect to how and when they will remove all of the stimulus. That is something the market has factored in and will be listening to next week. There are still a lot of negatives out there, but it is when everything gets negative that things can turn positive again. I just do not think the selling is over yet. There are still unresolved issues. As long as serious issues remain unresolved and are incalculable (such as how bad the credit default swap will be in the EU), the market views that as uncertainty and does not like to move higher. No one wants to buy in that kind of uncertainty. When things get as bad as they can get, that is typically when the uncertainty is resolved (because it cannot get any worse than it is) and the market rallies. We are not at that stage right now.

We have downside positions we took on Friday and that we have had over the course of the last few weeks. We will keep those on. We will see how the stocks bounce early in the week. We can play upside bounces on stocks that can move well. There are stocks that can race higher if things go well. FCX is capable of doing that. There are other stocks that have sold off but held support and have set up a double bottom pattern. We can make a play off those. As for the others, we will be watching for them to rebound in their downtrends, hit resistance, and set up new downside. We have played others to the upside while they rebound and set up to the downside. Then we take our gains, flip out of the upside, and look at the downside plays. This is a market you have to trade right now because many patterns are broken and have to go through a healing process. There has been a deeper selloff than on any of the prior moves to the upside, so you have to do some work to get your house back in order. Then you can set up another run like the one we see in FCX spanning July through November. We will employ the same theory right now, which is to take what the market gives. That means we play good movers as the market bounces, and as it stalls out, we switch into plays that are set up to fall and can let our current plays fall again. Have a great weekend, and enjoy the Super Bowl.


Support and Resistance

NASDAQ: Closed at 2141.12
Resistance:
2143 is the October 2009 range low
2155 is the March 2008 intraday low
2167 from the July 2008 intraday low
2168 is the September 2009, intraday peak
2169 is the March 2008 closing low (double bottom)
2177 is a low from March 2008
2191 is the October 2009 peak
2205 is the November 2009 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
The 50 day EMA at 2212
2218 is the August 2005 peak
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:
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
The 200 day SMA at 2020
2015 from an early August 2008 peak


S&P 500: Closed at 1066.19
Resistance:
1070 is the late September 2009 peak
1078 is the October range low
1084 to 1080 (September 2009 peak)
1101 is the October 2009 high
The 50 day EMA at 1104
1106 is the September 2008 low
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:
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 1019
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low


Dow: Closed at 10,012.23
Resistance:
10,120 is the October 2009 peak
10,285 is the late December consolidation peak
The 50 day EMA at 10,314
10,365 is the late September 2008 low
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

Support:
9829 is the September 2008 closing high
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
The 200 day SMA at 9481
9430 is the early October low
9387 is the mid-October peak


Economic Calendar

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

February 05 - Friday
Nonfarm Payrolls, January (08:30): -20K actual versus 15K expected, -150K prior (revised from -85K)
Unemployment Rate, January (08:30): 9.7% actual versus 10.0% expected, 10.0% prior
Average Workweek, January (08:30): 33.3 actual versus 33.2 expected, 33.2 prior
Hourly Earnings, January (08:30): 0.3% actual versus 0.2% expected, 0.2% prior
Consumer Credit, December (15:00): -$1.7B actual versus -$10.0B expected, -$21.8B prior (revised from -$17.5B)

February 09 - Tuesday
Wholesale Inventories, December (10:00): 0.6% expected, 1.5% prior

February 10 - Wednesday
Trade Balance, December (08:30): -$35.0B expected, -$36.4B prior
Crude Inventories, 2/5 (10:30): 2.32M prior
Treasury Budget, January (14:00): -$60.0B expected, -$91.9B prior

February 11 - Thursday
Initial Claims, 02/06 (08:30)
Continuing Claims, 02/06 (08:30)
Retail Sales, January (08:30): 0.4% expected, -0.3% prior
Retail Sales ex-auto, January (08:30): 0.4% expected, -0.2% prior
Business Inventories, December (10:00): 0.4% expected, 0.4% prior

February 12 - Friday
Michigan Sentiment, February (09:55): 74.8 expected, 74.4 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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