Sunday, March 28, 2010

Social Security Already in the Red

- Dollar is lower Friday, but stocks don't benefit.
- Another intraday reversal Friday leaves stocks flat, but no further damage done.
- EU has a plan: punt to the IMF.
- Social Security already in the red.
- Weaker bond auctions just a sign of things to come and our debt to rise.
- More healthcare surprises.
- Taxes to inevitably rise.
- This week will tell the ramifications of the Thursday intraday reversal.
- Jobs report on Friday, but the market will be closed.

Stocks reverse early gains again, but no further damage.

Compared to Thursday, Friday was a piker. The point swings were much less, volume was lower, and the market started higher on the day. The dollar was even lower because the EU has a plan. More accurately, it has a play borrowed by football: It is going to punt to the IMF. The plan states that the IMF is to be on standby, ready to lend Greece money if needed. The other countries in the EU will focus on shoring up the Euro because they do not want it to collapse. How they will do that is not clear, but at least they have a plan. As weak as that plan may appear, it did seem to work on Friday as the dollar was lower and stocks started higher in the morning. As on Thursday, however, the rally faded into the afternoon. That was not because the dollar rallied it did not. In the premarket alert, I suspected that there might have been an afternoon decline simply because of the action on Thursday and the immediate response to the upside with the gaps higher on Friday. Despite a decent GDP number it was lower but still solid and a better Michigan Sentiment indication, the market, could not support the gains into the afternoon. It slid down, and by the afternoon had turned the indices negative. There was a bounce in the back half of the afternoon, and that closed the indices basically flat but mostly mixed. The large cap NYSE indices were up, but the growth areas were slightly lower. The end result was another rally that ultimately failed just as it did on Thursday, although not nearly as spectacularly.


Dollar. The dollar had a spectacular week with huge gains on Wednesday and another surge Thursday that clearly broke it out of its consolidation and took it to a new rally high. Perhaps it had too much success during the week because it did sell back against the Euro and other currencies ahead of the weekend. It probably had something to do with the great European plan that was put in place, but the dollar was a bit overbought in the near term (1.3413 Euro versus 1.382 Thursday). This was a week that saw the dollar trade solidly below the key 1.35 Euro level. It was trying to hold 1.34-1.35 and was smashed, but the other currencies did recover some to end the week (again, just likely due to the dollar's success). Nothing indicates this with change anytime soon. The EU put in a punting play, but that is not really a plan. It is just ready to move in case Greece cannot get its own house in order. There are still the other PIIGS to worry about, including the UK. This is definitely not the end of the dollar's strength against the Euro. This is a giveback on Friday ahead of the weekend after a strong week.

Oil. Oil struggled a bit. It closed slightly lower ($80.12, -0.41). It is still holding in the top half of its range just as it has done on each of the last dips over the past three to four weeks. A good consolidation in November and in late February is propping it up. It is finding support despite a big build in inventories and despite issues in Europe. Oil is holding its gains, and thus gasoline holding up as well. It is keeping a high average per gallon in the US closing in on $3.00 and it is not even the end of March. Oil still looks like it could break out. Even though it is stalling at the top of its range, it is not breaking lower and smashing through this key level. It could hold the 50 day EMA or above 78 next week and try a breakout. It could be next week or the week after, but it looks like it will make a try unless very bad news comes out with respect to growth overseas.

Gold. Gold had an up day after a down week. It finished strong, moving back over the 1100 level that so many are watching ($1,108.80, +14.70). This made a new low for March, but that still kept it inside its overall base that started in early December. There is still a reverse head and shoulder trying to form, and it can still do that. The left shoulder dropped all the way to 1075, so it could still make that level and hold the pattern. It is not in position yet to make the buy. We will be watching it, but gold is still working through its base. It has reasons to rally ultimately, given the 0% interest rate policy with the US Fed and many other central banks. In fact, they are still printing a lot of money in order to pay for programs and bailouts. The US is going to be printing even more money. We have more programs that will require more money and will be in deficit despite claims to the contrary even as the healthcare bill was passed. Right after that, they will have to pass the so-called "doctor fix" for Medicare. That will immediately use any savings as elusory as they are and go into deficit to pay the doctors enough that they will continue to accept Medicare.

Bonds. Bonds did recover some on the session with the 10 year closing down (3.85% versus 3.88% Thursday). There was a big move during the week as bonds rallied, with the 10 year moving up from the 3.869% level close to 3.9%. There was a big move on Wednesday, and you can tie this into many things. The healthcare bill was passed. There will have to be more money printed. There was a bad 7 year auction on Thursday that had to offer a higher yield in order for investors to take the paper. That is symptomatic of the problems with a huge debt and deficit that is only going to get larger. Bonds are selling and interest rates are rising because of the amount of money required to be printed. That is inflationary, so interest rates will rise. Also, there is improvement in the US, and rates tend to rise when there is improvement in the economy. The Fed will also have to raise interest rates at some point. There is a triumvirate of issues pushing yields higher and driving bonds lower as a result. I do not expect that to change any time soon unless there is a major problem overseas to impact the price of oil and bonds, making US bonds look more attractive as a safe haven. Right now, it does not look like anything along those lines will appear, especially given that the EU now has a plan. With that, everything is coming up roses, no doubt.



Breadth. Breadth was basically flat on the NASDAQ as it closed lower by just a fraction of a percentage point. Breadth was flat on the NYSE as well with a slight gain of advancers over decliners. The session was basically flat and held no surprises and no big moves. Breadth never had major swings.

Volume. Volume was down. It fell to 2.2B on NASDAQ, and that took it back below average after a strong Thursday reversal that saw volume shoot above average on that exchange. NYSE volume fell as well, dropping to 1B shares, or 11%. After it traded up to average on the Thursday intraday reversal, it once again fell back below average where it has resided for most of the last three weeks. Not too much excitement with the internals on Friday, but again, most of that excitement was on Thursday with higher volume and a big reversal that saw good breadth turn into negative breadth as stocks sold off on higher volume.


SP500. The big move for SP500 was on Thursday with that new high on the rally followed by a reversal to negative on rising volume. There is a little more dramatic picture on NASDAQ, but it was very quiet on Friday, even though it did trade in a range and close in the middle. It tapped the 10 day EMA on the low and volume tapered off below average. There were no fireworks on Friday, and if the SP500 can hold above the January peak at 1151, all will be forgiven and it can continue to move higher. The tread is still in place and is not in any danger. Thursday was a reversal day, where it was higher and lower than a prior session (indeed the prior two sessions), and the ramifications of that would not show up on Friday. The ramifications will show up early next week, and Monday and Tuesday (particularly Tuesday) are days to watch after this kind of reversal. Again, the volatility day-to-day has been exaggerated. The market goes down and bounces right back up. It goes down the next day and then reverses intraday. Volume goes up and down. This is the kind of choppy action you see when a bottom or a top is trying to be put in. There was the same effect back in January when the market topped near term. Then when it bottomed in February, there was a sharp selloff, reversals, and a sell back down immediately followed by a bounce higher that sold off the high. Very choppy action and big volume as it was doing it that is characteristic of a turn in the market. It may not turn. It may hold support at 1151 with just a modest pullback. If that is the case, again, everything is forgiven and it can continue to move higher. It can sell back to 1150-1125 or even the top of the November and December range and not be in serious danger. It has had a great run off the February low with a pause, and it has had almost a month of straight runs to the upside. It is due for a rest or test, and it is going through the initial stages of that now.

NASDAQ. NASDAQ shows a similar picture the big rise on Thursday and then the reversal to negative on a spike oaf above-average volume. Friday it tested the 10 day EMA on the low, just as the SP500 did, and bounced off of that for a very modest loss. It is showing the same day-to-day chop. Big volume and low volume. It could easily come back and test 2350-2355, or go down to the January peak. It is very strong, plenty of momentum still. The uptrend is in place, so I am not looking for a major rollover or selloff, but it is showing indications that it wants to consolidate more and take a breather. In this instance, you should let it. The need to be patient still applies heading into next week.

SP600. SP600 is more of the same: Choppy after a great run. Up one, down one, reversing one. It is showing that it also wants to take a breather. It has support around 353; that is a key level it broke through. I would not be surprised if the selling takes it to that point to test. That would be absolutely normal after such a great move and strong leadership by the small caps.

SOX. The semiconductors posted a new closing high on Tuesday, and then immediately gave it back on Wednesday and Thursday. It finished lower on Friday, but it did hold the 10 day EMA on the close. It looks like a fairly orderly pullback. Big break, test, and holding over that mid-March peak. It does not look bad here at all. I cannot say you should run away from this, but it is not excellent. You could make the case for a double top with MACD making a lower peak even as the index broke to a new closing high. You have to watch for that because there are indications of trouble. Overall, however, it has been a laggard on the move up, and it is being dragged higher by the other indices that are much stronger and testing from a position of strength. We need to let the volatility work its way out and see what happens on Monday and Tuesday. That will tell more of the tale as to the significance and impact of the Thursday high-volume reversal after the indices struck gold and hit new rally highs.


Financial. JPM has thrown a pair of tombstone doji on the last two sessions just as it broke to a new rally high off the February low, crossing over the January peak. That did not put it at a new high on this rally that is still over in October. The financials had a great run. They are a little winded and are showing indications that, along with the indices, they may want to test somewhat. No danger here from the look of it, but I will keep an eye on them to see if we can get a decent setup from these stocks. GS is one I am looking at already. It tried to make the move on Thursday, but reversed and Friday and tapped the 18 day EMA on the low, selling further. To me, this sets the play up a bit better. It, too, is having trouble with the January high, which is actually an interim recovery high. But, MACD is still in very good shape. Momentum has built for the stock, and I am looking for it to hold in the area of the 18 day EMA or the support at 170. It is pretty well delineated there. If there is a move down to 170 and get any kind of bounce, we will be all over that. We are looking at the play right now, but we need to see how far it will come back and keep adjusting our buy point until it can show us the move higher. WFC is also showing a pair of doji at the prior high. It did clear the January peak, but now it is up at the October. MACD is solid. It had a great run, and it just needs to take a breather.

Retail. Retail had another great week. There is more good news coming out and more upgrades during the week. Good news keeps flowing with respect to the retailers. ANN showed a good consolidation during the week and then broke higher again on Friday on rising average volume. Strength building upon strength. JWN is showing no signs of slowing. It continues to move higher after breaking to a new rally high early in the month. At the other end of the spectrum with respect to target clientele, WMT is performing well also. It broke higher and is putting in a nice flag test. It could make a break to the upside further. The thing is, how much upside can you get? Maybe it will run up to the prior high, and that would be a decent play. WMT just kind of plods along; it is not a great trading stock.

Healthcare. With the healthcare bill passing, this is a bifurcated sector. Some of the medical device stocks had a delayed effect to the healthcare bill. They will have a 3.8% tax placed on every device produced. HOLX had one of the delayed reactions. It sold ahead of it, bounced a bit when the news came out, but then it rolled over toward the end of the week. ZOLL is a defibrillator manufacturer. It sees serious trouble for itself with the healthcare costs for its company as well as the tax on each of its devices. It was rolling over on higher volume on Friday. HUM is in the Medicare Advantage and is being boxed around, but it sold on light volume to end the week. There was not an effort to dump the stock. Others are benefitting, such as hospitals. LPNT had a great rally ahead of the bill passage, and then it broke higher earlier in the week. It is testing in a nice flag. There are winners and losers based upon this bill.

Industrial. DE is setting up nicely. It broke higher, very nice test in progress, and it showed a doji on Friday. CAT says it will take $100M in charges related to the healthcare bill. Indeed, DE will take around $100M in charges with respect to healthcare costs. BUCY broke higher on Tuesday with a nice fade back to test. That is an interesting stock, too. DE, BUCY, and GS all look interesting. Maybe some of the hospitals will be able to give us some buys or trades higher off of the flags they are forming.

Technology. AAPL had an up session after selling off on Thursday, reversing from a new high. It actually hit a new closing high on Friday. It had its price target raised to $300 by one of the firms covering it; AAPL still seems to be attracting more money its way.



Healthcare passed just in time . . . to see Social Security go into the red.

Weak bond auctions becoming commonplace.

1) Worsening credit position.
2) Credit rating could be cut from AAA
3) Cost of servicing debt rising for US, pushing the price tag of our individual debt higher and higher.

More Surprises in healthcare.

Not Armageddon, at least not this week.

3.8% tax and other taxes not indexed to inflation: another AMT.

Taxes, taxes as far as the eye can see.

In 10 years, perhaps earlier, tax rates will have to explode higher.



The VIX is undercutting the lows from January, and that is an indication that the market is somewhat overbought in the near term. That showed up in the action last week with the day-to-day volatility, although it did not show up in the VIX itself. This is that day-to-day volatility where the market chops back and forth in a big range, but there are not the surges in volatility overall. This could mean an interim pullback, but it is not suggesting a major top of any kind in place.

VIX: 17.77; -0.63
VXN: 18.67; -0.15
VXO: 16.91; -0.73

Put/Call Ratio (CBOE): 0.92; +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: 48.9%. Up from 46.1%, continuing the steady rise since a low of 35.6% in February, the lowest it has been since July 2009. Over the 35% threshold level below which suggests bullishness. 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. 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.

Bears: 20.5%. After bouncing up and down, heading lower steadily, down from 21.3% last week, down sharply falling from 27.8%. 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.


Stats: -2.28 points (-0.1%) to close at 2395.13
Volume: 2.204B (-12.66%)

Up Volume: 1.111B (+150.074M)
Down Volume: 1.112B (-453.139M)

A/D and Hi/Lo: Decliners led 1.04 to 1
Previous Session: Decliners led 1.65 to 1

New Highs: 78 (-132)
New Lows: 16 (+5)





Stats: +0.86 points (+0.07%) to close at 1166.59
NYSE Volume: 1.03B (-10.86%)

Up Volume: 599.59M (+117.313M)
Down Volume: 406.768M (-238.995M)

A/D and Hi/Lo: Advancers led 1.1 to 1
Previous Session: Decliners led 1.44 to 1

New Highs: 221 (-322)
New Lows: 25 (-44)




Stats: +9.15 points (+0.08%) to close at 10850.36
Volume DJ30: 175M shares Friday versus 200M shares Thursday.


Personal income and spending will come out on Monday, and Tuesday will be the Case-Shiller Home Index. That will be important. It is the week of the jobs report, so there is the ADP Employment Report. We also have regional factory news for factory orders and the Chicago PMI. There will also be the weekly jobless claims always important and the ISM index. Manufacturing has been one of the strong points in the recovery. On Friday, there are the non-farm payrolls. It is all a warm up for that. There are expectations that range up to 300K jobs being added for the month. How did they get to those? 100K added because of the census. 100K coming back in because of the weather in other words, the weather got better, so people are being rehired. Then another 100K for good measure, perhaps because of the manufacturing improvement. The official expectations are for 190K, but up to 300K is possible. It will be interesting to see. 200K of those, of course, could be related to the government or just a rebound from no one working in the prior months because of bad weather.

Friday, the payroll report comes out, but the market will not be open for Good Friday. There will be a three-day weekend for the stock market, and that always has some play with respect to stocks as traders in some of the big funds want to get squared away before a long weekend. With news of all the programs that are still being pushed, anything could happen. Of course, you cannot forget that the EU has a plan. As long as they have that plan out there, things should be okay, right? Because nothing can go wrong with this great plan. After all, the IMF is involved and it is such a stalwart of support and calm. Earnings will also affect things next week. They are just two weeks away. We could see some warnings or some positive guidance. Most of what we have seen thus far has been positive guidance, and the market has moved up nicely into the preliminaries of earnings season. It would be very appropriate and helpful to get some sort of consolidation moving into earnings. Otherwise, we are setting ourselves up for a weaker market. There may be good news early that pops it up, but then the market is already high. It would really take something to drive it higher. That leaves it more subject to upset if things are not as great or investors get their fill of good news. The big thing we are looking at, is how the Thursday intraday reversal on high volume plays out this coming week. There are several factors involved. There was the reversal that was the culmination of all the volatility of the prior two weeks. There was a break higher and an attempted test that looked successful because the market broke higher on Monday and Tuesday, but then the volatility came back in. As soon as the market hit a new closing high, it sold off the next session. It rallied sharply to a new high the next day on Thursday, and then it gave it all back and reversed negative on rising volume. There was a lot of day-to-day volatility and big surges intraday.

How will this play out? As noted on Thursday, you have to look and see to the next week; Mondays and Tuesdays are often days where you see the result of a sharp reversal or turn the prior week. We will be looking at those days to see how the market reacts. It may be that nothing transpires during those two days. It may take more of the week to ascertain what is going to happen (and it may be nothing). It may be that as the markets did on Friday they just brush it off, consolidate a bit more, continue the uptrend and start back to the upside. We will see what happens. Since we do not know what the outcome of that Thursday reversal will be, it is time to be patient. If the pullback is going to happen, let it take place. It will not hurt because it will give better buy points on stocks we are looking at. Some great stocks will be pulling back. We protect our positions to the upside, of course, as we have been doing all week. If they get in a bit of trouble near support, we can take some gain off the table. There is no point in taking great risks here because there was a great run to the upside. We have banked a lot of money on a lot of these positions already, and we do not want to see them get turned over on us. If there is a pullback, we will be able to buy back in and make new trades to the upside and make more money off of them. If we get good plays to the downside, we might want to take advantage of those as well. The market has punished the downside plays, but that does not mean it will be the case all the time. When you see setups occurring off highly volatile action, you often get good downside plays you can take advantage of. Look what happened in January. There was a highly volatile action again, and there was the selloff. It was not the end of the rally, but it was a pretty severe selloff. We do not have to get a selloff nearly this steep. There could be one down to the 1151 area and still make great money on downside plays. You could play the SPYders themselves if you wanted down to that level, and pick up some scratch along the way. There are several ways to play this from an index point of view, as well as some of the weak sectors we have seen that have not been able to take out their January peaks or prior peaks and have been struggling. They might pull back and continue to base, and that pullback can give us several points of gain. When you are playing with put options, that gives you plenty of bang for the buck to put into the bank.

Again, we do not have to get fancy. We just have to see the volatility and realize there is a potential change in the market. We need to be patient, we need to be cautious with our upside positions that could be thrown back at us. The market has rallied upside, and this type of volatility would typically presage some downside. Always take advantage of what the market is giving you. If it gives us downside play, we will go that way. We picked up a little PBR late in the session as it rebounded off the lows. We are anticipating more of a selloff off of this head and shoulders pattern. Maybe we get it, and maybe we do not, but it was well worth the risk/reward for it. We will look for other plays that give good risk/reward. If it works, we get a great reward. If it does not work, we do not risk much. At the same time, we look for those upside plays on those great stocks, watching them set up to give us new plays to the upside. We can turn what many would see as a disadvantage into our own advantage, and as always take what the market gives. Have an excellent weekend.

Support and Resistance

NASDAQ: Closed at 2395.13
2412-2415 represents a series of peaks and lows in 2007, 2008
2453 is the August 2008 peak

2382-2395 from 2008
The 10 day EMA at 2385
2324-2370 is a range of resistance from early 2008
2320 to 2326.28 is the January high
2319 from the September 2008 peak
2292 is a low from January 2008
The 50 day EMA at 2296
2273 to 2282 marks bottom of January 2010 lateral peak
2275 - 2278 from the February 2008 and April 2008 lows
2245 from July 2008 through 2260 from late 2005.
2210 (from September 2008) to 2212 (the July 2009 closing low)
2205 is the November 2009 peak
2191 is the October 2009 peak
2177 is a low from March 2008
2169 is the March 2008 closing low (double bottom)
2168 is the September 2009, intraday peak
2167 from the July 2008 intraday low
2155 is the March 2008 intraday low
2143 is the October 2009 range low
The 200 day SMA at 2113

S&P 500: Closed at 1166.59
1170 is the prior March 2010 high
1185 from late September 2008
1200 from the July 2008 low

The 10 day EMA at 1162
1156 is the Sept 2008 low
1151 is the January 2010 peak
1133 from a September 2008 intraday low
Bottom of the January 2010 consolidation 1131 to 1136
The 50 day EMA at 1129
1119 is the early December intraday high
1114 is the November 2009 peak is breaking
1106 is the September 2008 low
1101 is the October 2009 high
1084 to 1080 (September 2009 peak)
1078 is the October range low
1070 is the late September 2009 peak
The 200 day SMA at 1056
1044 is the October 2008 intraday high
The August peak at 1040
The early October 2009 closing low at 1025
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low

Dow: Closed at 10,850.36
10,963 is the July 2008 low

10,730 is the January 2010 peak
10,609 from the Mid-September 2008 interim low
The 50 day EMA at 10,505
10,496 is the November 2009 high
10,365 is the late September 2008 low
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
The 200 day SMA at 9831
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
9430 is the early October low
9387 is the mid-October peak

Economic Calendar

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

March 26 - Friday
GDP - Third Estimate, Q4 (08:30): 5.6% actual versus 5.9% expected, 5.9% prior
GDP Deflator - Third, Q4 (08:30): 0.5% actual versus 0.4% expected, 0.4% prior
Michigan Sentiment -, March (09:55): 73.6 actual versus 73.0 expected, 72.5 prior

March 29 - Monday
Personal Income, February (08:30): 0.1% expected, 0.1% prior
Personal Spending, February (08:30): 0.3% expected, 0.5% prior
PCE Prices - Core, February (08:30): 0.1% expected, 0.0% prior

March 30 - Tuesday
Case-Shiller 20-city, January (09:00): -0.6% expected, -3.1% prior
Consumer Confidence, March (10:00): 50.0 expected, 46.0 prior

March 31 - Wednesday
ADP Employment Chang, March (08:15): 40K expected, -20K prior
Chicago PMI, March (09:45): 61.0 expected, 62.6 prior
Factory Orders, February (10:00): 0.5% expected, 1.7% prior
Crude Inventories, 03/27 (10:30): 7.25M prior

April 01 - Thursday
Continuing Claims, 03/20 (08:30): 4600K expected, 4648K prior
Initial Claims, 03/27 (08:30): 440K expected, 442K prior
Construction Spending, February (10:00): -1.0% expected, -0.6% prior
ISM Index, March (10:00): 57.0 expected, 56.5 prior
Auto Sales, March (14:00): 3.7M prior
Truck Sales, March (14:00): 4.2M prior

April 02 - Friday
Nonfarm Payrolls, March (08:30): 190K expected, -36K prior
Unemployment Rate, March (08:30): 9.7% expected, 9.7% prior
Average Workweek, March (08:30): 33.9 expected, 33.8 prior
Hourly Earnings, March (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

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