Sunday, January 23, 2011

GE Affirmation of Economic Recovery?

SUMMARY:
- Market continues its bifurcation and still looks 'November-like' even as analysts and financial stations gush over GE's earnings.
- GE the affirmation of economic recovery? Please.
- Money rotates out of techs as fast as it rotated into them, threatening breakdowns in tech leadership.
- If growth sectors are on the wane then the recovery is over before it ever really got started.
- Still expecting more downside, and if the NYSE large caps follow as in November we will get some more downside plays and then some good upside entries as well.

MARKET OVERVIEW

GE is no affirmation of the economic recovery and policy success; or at least we hope it isn't.

Friday started off positive. Futures were up because of GE. The financial stations and pundits were gushing over GE beating earnings for a change. It has been a long time since GE posted positive revenues that is top-line growth that everyone is looking at as well as solid bottom-line growth. There was ebullient talk of GE confirming the economic recovery. They said its earnings were an affirmation of the policies at hand. Please.

I want to look at what has really happened with GE. It did manage to start the market higher on Friday. Futures were up on NASDAQ, SP500, and the DJ30 where GE resides. Those large cap NYSE indices managed to hold gains on the day, but I want to take a deeper look at GE and see if this is really an affirmation of the economic recovery and a harbinger for economic progress in the United States. If that is the case, then we are in for trouble. GE is not a growth company. Before the stimulus bill was passed, GE was struggling and looking for some way to make its model work. All of its divisions were losing. Though a lot of people cannot stand Jeff Immelt and the company was foundering under his leadership, he did find a way to turn it around.

Just as the government uses a crisis to turn things its way, GE's Immelt used the economic crisis. GE Capital made it a financial institution, so it was able to get funds. More than that, it was lobbying the Obama administration directly. It was almost sad to see the CEO of a once proud and great company acting as the lapdog for Obama during the administration's discussions on how to stimulate the economy. Jeff Immelt was everywhere that Obama was. It is like the old joke: If Obama turned the corner too sharply, Immelt's nose might have broken off. There was a lot of kissing going on, and I am not talking about on the lips.

Without getting too vulgar, GE had to have green jobs, and it saw a way in this President and administration with its pie-in-the-sky views on making green energy a reality even though, economically, it is not. Immelt saw that as their salvation, and GE pushed these green programs. It is the contractor and direct beneficiary of billions of stimulus dollars for so-called green projects. These projects could not have made it without government subsidy. GE could not make a go of them it tried and failed. It knew it needed a handout, and it took the money with every hand it had, grabbing fistfuls of dollars (apologies to Clint Eastwood) and using it to build green industries in its company. It is working for GE.

It is similar to the banks making money because the Fed loans it to them for nothing. Then they can put together bond deals for 3-5% guaranteed income. GE was getting its money for free, being subsidized for these projects. That is how it was able to turn things around and actually post profits. Anyone could do that with free money, though. If you do not have to work for it or pay interest on it, that is great seed money.

Is that the kind of harbinger you want for the economy ahead? Will it sustain us if the government provides the money? Of course not. We are already in massive debt, and we cannot sustain this. The economy has to grow on its own. We need businesses that are in business because there is a demand for them, not because the government pays them money to get involved in these endeavors. It cannot last.

If GE is the harbinger of the future, we are in trouble. China will trample us under its hooves because it is in business for business' sake; in other words, profit. It wants to improve its country, and it knows the way to do it is through entrepreneurship and letting the small businesses make their moves. That will create jobs and prosperity. GE has been a net jobs loser for over 15 years. Even with the new green industries taking off, it has been shedding jobs. That is not the model that we want for our country. It has never been the model for success. 75% or more of the jobs come from small business. These companies start up, create new technologies and new ideas, and then they grow like crazy to produce millions of jobs. It happened in the 1980's and 1990's. We had incentives for people to start companies and try new things, and it worked.

Maybe the Obama administration is getting the idea. The talk of lowering the corporate tax rate and the new credits for investment and research may actually help. We will have to see. Regardless, GE is certainly not the example that we want to hold out as the future of our economy. But, as usual, I digress. I am very passionate about this, but there is a very good reason that we do not want to hold GE up as a success story. It really is not, even with the catchy Alan Jackson commercials that show a bunch of GE workers line dancing.

What we saw on Friday was very telling. One of the reasons GE maybe significant (but it would not be significant in itself) is that more rotation is ongoing. There was rotation back into large tech just a few weeks back, but it is turning back around as quickly as it came up. AAPL is heading to the downside. DELL is getting sold back down after rallying. CSCO rallied higher, sold off, and now it has having struggling again. Some stocks are doing well in tech, but they are not the large ones.

What companies are doing better? You have to look at which indices are holding up. SP500 and the DJ30 are holding up. UTX broke to a new rally high on Friday. MMM is breaking to the upside as well. Some of the old, staid stocks of yesteryear that are no longer growth companies are making moves to the upside. We saw this right before the 2007-2008 crash. Those old-economy companies were suddenly driving a lot of the action because of the growth overseas in China, India, and Brazil. They needed the old-style products that these companies produced in order to build the infrastructure and build out their countries. These stocks were acting like growth stocks again.

The economy moved higher, but it was not the growth we normally had that created new technologies. We relied on paper profits and commodity prices rising in order to make our supposed economic growth. It ended poorly. The US is at its best when creating new technologies and new methodologies for making products. We come up with either new products and new technologies or we come up with new ways to do something that has been done one way for decades. We do not do very well when we simply ride the wave of consumption by other nations, and we need to consider that. Our President and his administration want to make our country an exporting country. They want us to be a country that fuels the goods that other countries use as they grow and create new technologies. That is backwards.

We have always been the country that creates the technologies that other countries use. That increases our wealth and standard of living, and we then buy the other products to fuel our standard of living that other countries produce. Do we really want to say that we are no longer a leading country? If we look at the GE model as a success story, then we are indeed going to have serious problems. We may already see it showing up in the dollar.


OTHER MARKETS

Dollar: The dollar was heading lower again on Friday (1.3615 Euro versus 1.3478 Thursday). The dollar has been clobbered the last two weeks. It rallied to the top of its recent trading range, so you might expect a pullback. It tried to hold at the bottom of the range, but the bottom has fallen out. This consolidation has failed. It looks as if the dollar is heading back down and will continue down to test the lows hit in Q4 of 2010.

If GE is so great for the country and is the model we want to follow, the dollar should have been stronger. The dollar should be improving if this is an affirmation that our economic recovery is here to stay. Like I said, if it is an affirmation we are in trouble. Then we are not getting much bang for our buck. We will be peaking at a much lower height than we typically do in our recoveries. The dollar has fallen during our economic recovery. That does not make any sense at all. Our dollar should be rising if we are truly recovering. Instead, we are trying to solve debt problems with more debt and printing money. Our dollar is telling us that will not work.

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Bonds: Bonds rallied on the day. Bonds were hammered on the week, but the 10 year held (3.40% versus 3.43% Thursday). It has held the bottom of this recent range. The key is whether it will break to the upside or break down. Bonds should be selling if our economy is recovering. As they sell, interest rates rise. Interest rates should rise in a recovering economy because you have a little inflation and demand for money down the road. Money will be worth more, so interest rates rise. Interest rates here are trading in a range and are threatening to fall because bonds are threatening to put in a bottom and rally.

Bonds should not be rallying if your economy is continuing to recover. This will be a very important market to watch over the next week or two to see if bonds hold this range and bounce or if they break lower. All the markets have gone back and forth this week, trying to get in line with each other. They refuse to do that. They ultimately will and we will see what happens, but there are some disturbing things going on. A rally in bonds is not a good indication for the economy ahead.

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Gold: Gold is not showing what you would think it would show. It has topped and it is heading lower. It put in a triple top, it broke down below its recent lows, and it will head lower from the looks of it. That would indicate there is no inflation ahead. If there is no inflation ahead, would that mean that the Fed will simply stop printing money? It might, but it said it will not do it right now. Maybe the economy is not going to be as strong as they think it will be, and therefore there will not be the demand for money and goods we have created. Then gold would not be in as much demand as an inflation hedge.

Maybe if things were totally going to collapse, gold might be rallying in fear. It is not doing that, so maybe we will not get a collapse. We may just not get the growth we want. Is that not second-rate status? Will we just have to make do with mediocre growth like Europe has always done? Is that the way we do things in the US? We never settle for that. We are the leaders, but our other markets indicate that may be the way we are going.

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Oil: Oil should have rallied with the dollar falling, but it did not. When the dollar is worth less, it takes more dollars to buy oil, but it faded at the end of the week. Still very much in its uptrend, and at the very top of its range. I do not believe oil is about to fall under any threat of the economies in the world tumbling. I still expect oil the move higher. This is becoming more of a US story in my book, just as everyone thinks things are okay.

Believe me, I wish things are okay. I am really tired of a bad economy, pessimism, and banks not lending money. I am tired of companies being scared to spend money unless it is free from the government. I talk to businesses all the time, and they are having these troubles. You cannot get money as a small business. Banks would rather take the money they get free from the government and put it in bond packages and get guaranteed returns. Why take a risk on some startup company?

Again, this is not the US way. This is not the way we became the greatest economic power on earth. We reward entrepreneurship. We want the little guy out there starting that new business with that new, better idea. We do not want to give the money away to the GEs of the world who push technologies that are not economically viable. We end up losing money on them. Germany loses money on its solar products. France stopped funding its solar projects because it lost money. It may have created jobs because they needed to make the products that were being subsidized, but they lost money on the projects overall. They did not save anything. That is why France is sticking with its nuclear reactors and gave up on solar. Someday it will be viable, but that is not today. We are not going to make it viable by spending money and trying to make it work.

This is not like the space race. We could make a device to get us to the moon and we did it. It did not matter what the costs were because we felt like we needed to beat the Soviets to the moon. Do we have to beat anyone to this technology? They make us think we have to, and they make us think we have to get off of oil. Ultimately we have to, but we need to let the market figure out the best way to do it. France tried to do it with solar and it did not work. The market said that was not the way to do it.

There will be ways to make it work, and private industry will do the job. We just have to make the money available to private industry rather than taxing it away and giving it to companies like GE. We have to let the people keep their money. We need to let the guys with better ideas get the money they need to fund their projects, and then we will solve the problem. Again, I digress, but the idea that GE is a success story shows how clearly our country is pointing in the wrong direction. The powers-that-be do not understand what has made this country a great economic power.

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TECHNICAL SUMMARY

INTERNALS

Volume. Volume declined on Friday. NASDAQ at least sold on volume of 1.92B shares. It was 16% lighter. NYSE (the Dow and the SP500) rallied on 6% stronger volume to 1.2B shares. That was something of a positive. When looking at the action later, however, we will see it may not be that positive.

Breadth. Decliners led 1.4:1 on the NASDAQ, and advancers led 1.2:1 on the NYSE. Not very powerful at all. It was all large caps; the small caps were not participating in the move.


CHARTS

SP500. Futures were up early, and the SP500 started the session higher. It gapped to the upside and rallied nicely. It could not hold the move, however. It came back and managed to hold at the late-Thursday peak. It held there mid-morning, at lunch, and then rallied. It bounced off of that, made a lower high, sold back down, and then managed to hold that level again on the close. It did hold some logical support, but when looking at the daily chart versus the five-minute chart, there was a doji. It was the second doji in a row, and it was rejected at the prior peak. We had a doji that reached lower and bounced off the 18 day EMA, and then one reached higher on Friday and was rejected.

Going back to November and looking at the breakout, you can see the breakout and the lateral move. Then there was the reversal day, a pair of doji, and then a selloff. Here we have the breakout over the 127% Fibonacci extension, the rally, the reversal day, and a pair of doji. This one on Friday was a bearish signal. Stocks started higher and were shoved back down on higher volume. There was some churn at this level. They tried to rally and were unable to do so significantly. They were basically flat and churning.

This entire move over the last week has been on elevated volume. The move eked higher on Tuesday and really went nowhere. Wednesday it reversed on stronger volume. On Thursday it bounced off the low and looked better, and then Friday it showed even stronger volume when it was rejected. That is not good action. It is not terrible, but we have to be cautious given the circumstances. This is a very Novemberesque type of week, and it could set up for some more downside.

That may not be the case because there were those stocks on the NYSE and the Dow moving well. Some of the old industrials are moving higher, and that is part of the rotation. We are seeing money rotate their way as it did in 2007 and into 2008.

NASDAQ. As quick as the money moved into techs, money is moving out of them now. We had the reversal day on Wednesday, a doji on Thursday, and then the Friday selloff a gap and reversal. That is another engulfing pattern right now. We have a quite negative picture of the NASDAQ near term. Techs are losing the money that was being thrown their way, and we are likely to head lower in the near term. No surprise there at all when you look at the leadership action that has been getting beaten about the head and shoulders in technology.

SP600. The small caps are the same picture. The reversal day, the breakout, and the reversal day. It is heading lower and not even trying to move higher. We have a clearly downward bias in SP600 near term.

SOX. The SOX had a similar day. Semiconductors gapped higher, reversed, and closed lower. They are still holding the 18 day EMA and looking solid overall. If there is a leadership out of the technology sector that could stand out, it could be the semiconductors. We will be watching them over the next week to see how they hold near support.

With respect to the charts, this shows that money has been leaving the growth areas. It is the SOX to a certain extent, and definitely the small cap index a very important leadership index. NASDAQ for sure, and NASDAQ 100 as well. Growth areas are being sold. To the contrary, the DJ30 hit a new rally high on volume. Money is rotating into the old, staid stocks. SP500 as well. Money has been moving into them, although not as crisply as on the Dow.

Rallies start in certain ways. Small caps and growth stocks lead the initial moves in a rally because they will grow the most. They will get the money and make the biggest gains. They are growth. People want to invest in growth rather than income when an economy starts to turn. Growth is where all of the money is made.

After a recovery gets underway and has run for quite some time, the growth areas peak. The small caps give way and just will not grow as they did early in the cycle. Then there are the income stocks. These are the big companies with cash cows that do not create anything new; they just make innovations on what they already have. It is the "new and improved" syndrome. They are trying to squeeze more dollars out of products that do not have research and development costs anymore, so they are called the cash cows. They make the money for the company, and they are income companies. They do not have the double-digit growth anymore. They have single-digit growth, but they produce a lot of cash flow because of the products they developed long ago.

MSFT is a classic example, and CSCO is one as well. They no longer innovate, they just use the machines and products they have made to make income. When they are that big, there is no way to grow at a rapid rate. That is why they end up paying dividends after awhile they have to figure out what to do with all the cash. They have a bunch of cash but they are not growing. They give it away to their shareholders, which is what they should do. That is where the money is going right now, and that is an indication that an economic recovery is getting older. That is very sad if that is the case. We have not even pulled out of the housing market meltdown yet, and it looks like our economic recovery has hit its zenith.

These are bold calls to make with the indices just down a few points. I have been very much an advocate of the fact that they broke out from long bases and have plenty of room to continue to move to the upside. I have been an advocate of the base theory. We have a nice base from NASDAQ. It can still rally, no doubt. It has just bumped up against the prior highs, and it will have some trouble right now. The question that we have to answer is, after this nice run we have going, will the economy sustain itself? That question is very much open for debate with our debt and so many of trillions of dollars being printed. It will be difficult trying to get rid of debt with more debt. It has never worked in the history of the world.

Nonetheless, it is not all doom and gloom nearer term. Even the small cap index has bumped up against its prior highs, and that is why it is showing some issues. That could very well be the reason it is selling back. I do not want to get too worried about the future of the world. We can only make do with what we have in front of us. Right now that shows that growth is under pressure. It has been bleeding money, and thus stock prices have been going down. That is why we have been taking them off the table over the past few sessions as they come back and tested support. I would rather save our profits and maybe have to buy back into them versus having them run us over to the downside.


LEADERSHIP

Financial. Some money is definitely going into the financials. JPM was up again. MS was surging to the upside. WFC was moving to the upside. Not all banks were doing as well on Friday, however. BAC reported earnings and had a tougher session, but it still finished in very good shape. Money is still going into financials. It dogged them for a long time, but now it is definitely flowing that way.

Industrial. You would think money would go to industrials given the big push toward exports, but it is not. They have had a good run. Remember I said that CAT's pattern might be showing tiredness? It broke to the upside, so it looked like it was in good shape, but it immediately reversed. Now it is selling, with an engulfing pattern on Friday. It could be in some trouble there. We already sold our last positions in CMI, and it is diving on higher volume. It is not all the growth story of the 2007-2008 period. Worse than that, it is going back into cyclicals.

Metals. FCX gapped lower on Thursday, and continued down on Friday. RS reversed with an engulfing pattern on Wednesday and another one on Friday with a gap higher and a roll over, diving lower.

Retail. Some of the darlings are in trouble. DECK has formed an island reversal and gapped higher. It traded laterally for a month and a half, and now it has gapped lower. LULU looks like it is in trouble. We closed our remaining positions today. What has been doing okay? PG is moving higher. MMM is breaking higher. JNJ is doing all right and trying to base. UTX is breaking to a high in the rally.

These are not dynamic companies, but they are not terrible. UTX and MMM are great companies, but others such as PG and JNJ are your defensive or cyclical stocks. Those do not spell good things for the economy when they start to outperform.

Consumer/Old Economy. If not for IBM and GE, the Dow would not been as strong as it is now. I will not say that the Dow is being propped up just by these two companies, but they are really helping it. It has the financials giving it a boost as well, but it is not growth companies leading the charge. I am sure many of you disagree with me, but you can see that if we have a growth model of funding large companies that do not produce jobs, then we have issues. Especially when the history of our economy is small businesses producing the vast majority of our jobs. Not only jobs in general, but the good jobs the jobs that lead to real wealth.

MSFT did this; there are more millionaires who work for MSFT than probably any other company even DELL. CSCO has a lot. CSCO, DELL, MSFT, INTC it is the who's who of the 1980's and 1990's. They have made so many new jobs and raised our standard of living so high, yet they started out of garages and roach motels. You are telling me we need to put money into companies that have already made it and are no longer growing jobs? That is just wrong. It is the recipe for disaster, and it is Japan's recipe as well. But I digress once more.


THE MARKET

MARKET SENTIMENT

VIX: 18.47; +0.48
VXN: 20.17; +0.54
VXO: 16.11; -0.49

Put/Call Ratio (CBOE): 0.79; -0.14


Bulls versus Bears:

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

Bulls: 56.0% versus 57.3%. The headwinds in NASDAQ and the small caps capped out the bulls for now, but still holding high levels though off the 58.8% high on this leg. Still high in a string of high readings but below the 5 year high at 62.0. Still bearish enough. Closing in on the level considered bearish, i.e. where so many are in the market and believe it is going up that the ammunition to send it higher runs low. This is where you start to be careful and watch for breakdowns, but there is also a lot of liquidity being pushed into the market and that can continue the move despite excess bullishness. The crossover level at 29% bulls is long gone, but it did its job. The high on the last leg was 56.0% after starting at 35.6% on the low in February, the lowest it has been since July 2009 . . . until this last leg. 35% is the threshold level suggesting bullishness. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 20.0% versus 19.1%. Bouncing back up after a down week but still lower than it was just three weeks back (20.5%). Down from 28.3% in September. The 37.7% peak at the height of the crossover is well in the rearview mirror but bears remain well below the 35% level, above which is considered bullish for the market overall. Hit 18.7% on the low in April. Hit a high of 27.8% level on the prior leg in February. For reference, cracking above the 35% threshold considered bullish. Hit a high on the prior run at 47.2%. For more 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: -14.75 points (-0.55%) to close at 2689.54
Volume: 1.924B (-16.41%)

Up Volume: 702.781M (+107.289M)
Down Volume: 1.214B (-513.793M)

A/D and Hi/Lo: Decliners led 1.43 to 1
Previous Session: Decliners led 2.56 to 1

New Highs: 62 (+23)
New Lows: 24 (-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: +3.09 points (+0.24%) to close at 1283.35
NYSE Volume: 1.262B (+6.03%)

Up Volume: 713.139M (+168.293M)
Down Volume: 533.935M (-95.838M)

A/D and Hi/Lo: Advancers led 1.18 to 1
Previous Session: Decliners led 1.82 to 1

New Highs: 198 (+50)
New Lows: 16 (-15)

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

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


DJ30

Stats: +49.04 points (+0.41%) to close at 11871.84
Volume DJ30: 250M shares Friday versus 181M shares Thursday. GE added to IBM high volume.

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


MONDAY

Economic data is starting back up. Case-Shiller and Consumer Confidence on Tuesday. Wednesday we will actually have a two-day FOMC rate decision. I do not expect many changes there. The interesting part will be how many dissenters there are with the economic improvement that appears to be here. There is economic improvement, it is a question of how strong it will be. It has probably been the weakest recovery we have ever had outside of the Great Depression. Given the action of the small caps and the market indices, there is a question as to where we are exactly with respect to the recovery.

Everyone is so excited on ALL the financial stations. I have guys who are always bears who are talking about things being beautiful right now. They say we will only go up, up, up, in 2011. It sounds just like the home builders did in May of 2005 when that market topped. It does give me pause when everyone is so confident about the future.

New home sales are out and initial claims. There are durable orders, pending home sales, and the GDP for Q4 on Friday as well as the Michigan Sentiment. That is a lot of good stuff, but it all comes down to earnings right now and technical action. A lot more earnings are coming out. The problem is SP600 and NASDAQ have rolled over on the earnings while the SP500 and the Dow continue to move higher on earnings. Houses divided do not stand for very long, and it will be interesting to see where they go.

You know where I stand. I think this is Novemberesque action. That does not mean the market will crash, but it means that it will likely correct. Ultimately when this thing winds down, it might not end up very well. That is down the road, however, and I do not want to talk about down the road right now. I want to talk about what to expect in the near term.

We have been taking money off the table. It looks like SP500 is having some issues; it is churning, and showing the same action it did in November. We will look for downside plays if we can find any decent ones on the SP500 stocks. The financials look too strong, but there are other areas that we might be able to mine for some downside, including some of the indices. If the SP500 is actually showing what it did in November, then it is going to come back more toward the 50 day EMA. We can make money on index plays using that theory.

There will also be upside because the semiconductors are still holding up quite well. We started putting some of them on the report on Thursday as they were coming back to near support and holding. We will continue to look for those. This will be a situation where you look for stocks that are holding up well. You buy into those that do when they bounce and the market comes back. Those are your leaders. Those have the money and are holding up because no one wants to sell them. That means there will be good demand for them and the prices are going to rise when things improve.

We have some possibilities to the downside. We will also be looking for possibilities and opportunities to the upside just as we saw in November. This is still just an early-stage run in the breakout of a longer-term base. That means there will be money flowing back into these stocks, and we want to be there when it does. We have been protecting our downside and taking the position that it is better to save the profit now in case things get uglier than anticipated. We can always buy back in. You just have to keep that mantra going. Protect what you have made and take advantage of opportunity when it arises. You stay ahead of the market that way. You keep building those brokerage accounts, and that is the name of the game. Get that risk/reward right, and then ride it for all its worth. That is another way of saying "let our winners run." If it doesn't work, kill it.

We have had some great runs in 2010 and into 2011 and some new plays as well. Some of those are flagging now because there is rotation. We will look to where the money is rotating. We will look for a pullback possibly from some NYSE large caps if they follow NASDAQ and the SP600 lower in a temporary correction. Then we will seek opportunity back to the upside because I feel this run will continue. There is still money coming into the economy, and the Fed is still willing to push it into the economy.

Have a great weekend!


Support and Resistance

NASDAQ: Closed at 2689.54

Resistance:
The 10 day EMA at 2716
2725 from July 2007 interim peak
2729 is the 127% Fibonacci extension of the August 2010 run
2735 from late 2007 interim peak
2825 is the 2007 closing peak.
2862 is the 2007 peak

Support:
The 50 day EMA at 2631
2593 is the November 2010 high
2580 is the November 2010 closing high
2569 is the November gap up point through the April 2010 peak
2550 from May and June 2008 peaks
2540 is the gap up point from early November
2535.28 is the April 2010 intraday peak
2530 is the April 2010 closing peak
2518 is interim peak from April 2010
2511 is the lower range of the November gap up point
2482 is the recent October peak
2460 is the November 2010 low.
2434 is the May interim peak and the 78% Fibonacci retracement of the April selloff.
2425 is an interim peak from May 2010
2382-2395 from 2008
The 200 day SMA at 2395


S&P 500: Closed at 1283.35
Resistance:
1313 from the August 2008 interim peak
1325-27 is the March 2008 closing low and the May 2006 peak
1364 is the March 2007 low
1370 is the August 2007 low

Support:
The 10 day EMA at 1281
1278 is the 127% Fibonacci extension of the August 2010 run
The 18 day EMA at 1274
The 50 day EMA at 1242
1227 is the November 2010 peak
1220 is the April 2010 peak
1185 from late September 2008
1174 is the May 2010 high, 78% Fibonacci retracement of April peak
1173 is the November 2010 low
1170 is the prior March 2010 high
1156 is the Sept 2008 low
The 200 day SM A at 1153
1151 is the January 2010 peak
1133 from a September 2008 intraday low
Bottom of the January 2010 consolidation 1131 to 1136
1129 to 1131 is the June and August 2010 peaks


Dow: Closed at 11,871.84
Resistance:
11,893, from March 2008 closing low
12,110 from the March 2007 closing low
13,058 from the May 2008 peak on that bounce in the selling

Support:
11,867 from the August 2009 high and peak on that bounce in the selling.
11,734 from 11-98 peak
The 18 day EMA at 11,711
The 50 day EMA at 11,491
11,452 is the November 2010 peak
11,258 is the April 2010 peak
11,205 is the April closing high
11,100 from the 7-08 low
10,963 is the July 2008 low
10,920 is the recent May high
The 200 day SMA at 10,798
10,730 is the January 2010 peak


Economic Calendar

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

January 25 - Tuesday
Case-Shiller 20-city Home Price Index, November (09:00): -1.3% expected, -0.80% prior
Consumer Confidence, January (10:00): 53.5 expected, 52.5 prior
FHFA Housing Price Index, November (10:00): 0.7% prior

January 26 - Wednesday
MBA Mortgage Purchases, 01/21 (07:00): +5% prior
New Home Sales, December (10:00): 300K expected, 290K prior
Crude Inventories, 01/22 (10:30): 2.62M prior
FOMC Rate Decision, January (14:15): 0.25% expected, 0.25% prior

January 27 - Thursday
Initial Claims, 01/22 (08:30): 408K expected, 404K prior
Continuing Claims, 01/22 (08:30): 3835K expected, 3861K prior
Durable Orders, December (08:30): 1.5% expected, -0.3% prior (revised from -1.3%)
Durable Orders ex-Transportation, December (08:30): 0.6% expected, 3.6% prior (revised from 2.4%)
Pending Home Sales, November (10:00): -0.5% expected, 3.5% prior

January 28 - Friday
GDP-Adv., Q4 (08:30): 3.8% expected, 2.6% prior
Chain Deflator-Adv., Q4 (08:30): 1.6% expected, 2.1% prior
Employment Cost Index, Q4 (08:30): 0.4% expected, 0.4% prior
Michigan Sentiment -, January (09:55): 73.2 expected, 72.7 prior

By: Jon Johnson, Editor
Copyright 2011 | All Rights Reserved

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

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Monday, January 17, 2011

Market Jumps with Chips Leading the Way

SUMMARY:
- China clouds once again form over the market, but buyers use the dip to buy on volume.
- Economic data not as good as hoped, better than thought on Friday, but the movement still points to improvement.
- Michigan Preliminary Sentiment disappoints but Capacity and Production are solid.
- Leadership across the market jumps with chips leading the way.
- Market shows every intention to continue to rally to next resistance. Perfect. Just be skeptical.

MARKET OVERVIEW

Friday provides plenty of follow through to the new SP500 resistance break.

The stock market had a sluggish start. It was sluggish well into the night primarily because China raised its bank reserve lending requirements by 50BP. That is the fourth time in the last two months. Every time China takes a step to slow down its economy, it has deleterious effects on the rest of the markets in the world because of China's voracious growth appetite. It wants commodities, industrial equipment, and everything it can get its hands on.

Governments are typically not that successful in their ability to manage a slowdown. When they try, it worries investors and prices come out of the market. Even with the sluggishness, US futures were improving in the wee hours toward the open. This even though there were some not-too-great numbers with respect to retail sales and the CPI. That did not slow the market down; it continued its improvement into the open.

It tested down initially but then continued the rally unabated, although there was a hitch in the get-along half an hour into the session. The Michigan Sentiment preliminary for January came in at 72.7, well off the 75.5 anticipated. Note how the market sold back just as it hit the closing price from Thursday, at a technical resistance point. There was reason to stall with the news, but it overcame it. It rallied higher throughout the session. Nice action, indeed. Looking at the SP500 shows the sprint up to the close a bit clearer. Not bad action at all. No inclination to sell, and investors bought the entire day. NASDAQ, +0.75%; SP500, +0.75%; Dow, +0.5%; SP600, +1%; SOX, +2.7%; NASDAQ 100, +0.78%.

This was a fairly important move for the indices. The SP500 bumped up against the 127% Fibonacci extension and moved laterally for a week, but it did not stall out or roll back over. A lot of pundits thought it might do that. We kept an open mind about it. It was a perfect opportunity for a correction, but it didn't do it. It broke higher Wednesday, stalled a little on Thursday, and then continued to the upside on Friday. That has all the feel of a breakout, particularly when you look at the percentage gains as well as the increasing volume.

There were a lot of positive attributes to this move, and there is still room to the upside before SP500 hits the resistance from 2006, 2007, and 2008. There are peaks and valleys waiting for SP500 to hit them but they are still waiting. That gives SP500 extra room to move higher into earnings just as it is doing now. It may not last. It may not make the move stick, but it is having a great run. It is enjoying the first rounds of earnings and even overcoming some selling on Friday.

There was news contributing to the early depression in the market other than the Chinese data. The CPI for December came out hotter than expected. It rose 0.5% versus the 0.4% expected. The core was right in line at 0.1%. Food and energy is where most of the price increases are coming from, but we are told not to worry about that because they are stripped out and not part of the core. The problem is that the core consists of things that are not food and energy, such as flat-panel TVs and personal computers. These types of things declining in price, but we do not need to purchase them every day to survive. We do have to eat, and we do need gasoline and heating oil. We have to make it to work and heat our homes particularly given the weather of late.

We need to buy those things every day, but we are told by the economists in the government not to worry about it. They say we need to worry about PCs and flat panel TVs and whether those prices are going down. They don't put it exactly that way, but that is the sum total of it. Do you trust the economists and the government, or do you trust the numbers? I am not going to make any judgment calls, but I think you know what hits and really hurts in this struggling economy. Right now, it is food and energy, but it will bleed into other items. It takes energy to create steel and other items that go into the products we consume. Cotton is hitting all-time highs. Corn is surging. The clothes we wear, food we eat, and the petroleum we burn are all going up in price. There is no inflation, mind you.

The market was not buying into that, which is why there was some sluggishness on the day. Michigan Sentiment was also a problem. Industrial production was much better than expected at 0.8%, doubling the 0.4% anticipated. Capacity rose to 76%, up from 75.5%. That put it at its highest level since August of 2008. Remember, August of 2008 was right before it hit the fan. The SP500 was trading around 1260 on the first of August, before everything hit. Now we are closing at 1293. There are at least some parallels with the same SP500 price. It is the highest level on the capacity utilization since the market finally fell off in that big tumble right before all of the "stuff" hit the fan with the financial crisis. It was an ugly downdraft. It is nice to see things are coming back, but they are not coming back that fast. Hardly an inspiring recovery.

Business inventories turned out to be quite interesting at 0.2% when 0.8% were expected. Very similar to wholesale inventories. Companies are not excited to build up inventory, but sales are good. Sales are depleting inventory, and in theory that means there will ultimately be production to refill the coffers. We still have to go through an ugly 2011, most likely. The housing crisis slide that began in the summer of 2005 will probably crescendo in 2011 with foreclosures at the worst they have been. As is often the case, when the negatives hit their peaks (or what appear to be horrible numbers that will not get better), that is when the bottoms are put in. There is anticipation of a bottom in houses in 2011. That may just be a forecast where it cannot get any worse, so it is about time a bottom is hit. Sometimes those can be your most accurate forecasts.


OTHER MARKETS

Dollar: 1.3378 versus 1.3350 euro. The dollar appears to have set up a new short range from 79 to 81-82. Friday it looked ready to hold and turn back up once more.

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


Bonds: 3.32% versus 3.29% 10 year. Down on the session but still working laterally the past month, putting in a floor to rally from. That is in line with what gold is suggesting, that it is going to sell. Lower gold means lower interest rates (no inflation) and if bonds rally that means lower rates as well. That is the opposite of what Bernanke is saying about rising rates because of a rising economy. Bonds have not broken out yet, but they certainly look to be ready to do so.

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


Gold: 1359.00, -28.00. Doesn't look like any bounce for gold as it broke below its recent lows. Triple topped, tried to make a higher low once more, but failed. Better economic data may be read as requiring less government money printing, but with the fake Euro bond offerings that seems unlikely. Nonetheless, the markets typically do not lie.

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


Oil: 91.53, +0.13. Still very strong after another good week, and it held even with the China story.

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


TECHNICAL SUMMARY

INTERNALS

Volume. Volume rose 3.5% on NASDAQ to slightly over 2B shares. Volume rose on a solid upside session. It was up 14% on the NYSE to 1.05B. Excellent volume trade.

Breadth. The advance/decline line was lackluster. The NASDAQ 100 topped the NASDAQ overall and shows up in the advance/declines at 1.75:1. The NYSE is not any better at 1.4:1. Even though the small caps are in the lead, it was not an overall broad move. That is worrisome, but a lot of financials were moving upside along with some big energy stocks, if it does not fan out a little more next week, it could be an issue, but I would not worry much about it now.


CHARTS

SP500. I am looking at the inverted head and shoulders of the summer. The rally from August into November, the consolidation through November, the new breakout and rally up through now. It is still moving higher and showing the right kind of action. Higher volume on the upside day. It broke out, it tested, and it rallied again. SP500 moved through the November peak and then came back and tested it. Then it rallied slowly, made it to the 127% extension. It moved laterally, broke higher, tested, and is continuing to the upside.

There is still room to the upside right now. It can go into the 1300's easily, and that carries it into the meat of earnings season. That would be normal. It may hit resistance at that point and then back off in the last half of earnings season. That is typical action I almost hate to talk about it because it seems too pat. It does look that way, however. Then again, the market can go further than you think. While we anticipate that might happen, we will just go with what the market tells us. We are ready for everything that could happen. We have many avenues, and we take it the way the market goes.

NASDAQ. NASDAQ is the same story. It stalled out, broke over the November peak, and tested. Then it stalled out below the 127% Fibonacci extension, gapped through it, and was up running again on Friday on rising volume. Great volume here, all that accumulation is now popping it to the upside as well.

SP600. SP600 rose to a new closing high on the rally. That was good to see as it gained almost a whole percent. It continues rallying up this trendline. Nice to see the small caps making that new high in the rally and following the large-cap indices.

SOX. SOX has been the true leader of late, and it added another 2.7% on Friday. It is surging to the upside. INTC's earnings did not help INTC that much, but it sure helped the chip equipment companies such as AMAT and NVLS. NVLS was moving really well and we banked some gain on it. The semiconductors are performing very well.

Indeed, all of the indices are doing well right now. They entered this new leg a little tentatively, but now they have made up their mind. They are really moving after breaking the 127% Fibonacci range. There will still be some resistance ahead, no doubt. It cannot be avoided, but it has been able to shoot down all resistance to this point. NASDAQ has broken through the two shoulders of its 2007-2008 head and shoulders pattern. Now it is taking aim at the head. Very strong action. It does not mean it will take that out, but it means it has a good run to it.

If we get to that level, we will probably have some more resistance. It would be a good point to take some gain off the table, or at least be a little lighter when you got there, having taken gain on the way. There will be a pullback before too long. We want to be light going into it, and we have been taking positions all the way up. With earnings, we may get to a point where we run out of good will to the upside.


LEADERSHIP

Financial. JPM announced its earnings on the day and shot higher, but it could not hold all the gain. It was a nice move. It closed off the high oh, well. GS was up on the day. Very nice move. If you look at GS longer term, you can see an inverted head and shoulders that runs from mid-2009 to present. It looks like it will make a break from there, and that could propel it higher. If you go further back, you can see a bigger type of inverted head and shoulders. It is askew, but you can see the pattern. It looks very good for GS, and I am happy we are in it. We picked up some new positions this week. There are good things happening in financials. When good things happen in financials, good things happen to the SP500.

Energy. SP500 and energy go hand in hand. HAL was bouncing up off the 50 day EMA. We can handle that. XEC is moving up well yet again. What a week for that company. We have some XOM, too, and it is rallying on volume. It is hard to complain about the moves of these big guys.

Retail. PNRA is trying to make a bounce to the upside. It looked interesting, but it did not make the move. SKX is coming off of a long sell off. It looks decent for a rally to the upside. DECK looks like it may turn the tide and actually go to the upside. LULU has reported great earnings this week. It gapped to the upside, but it is at that December peak. It will be interesting to see what it can do at that level.

Industrial. Industrials are interesting. CAT has been moving four weeks in a lateral, flat range. Maybe this is just a good consolidation like it put together in September and October and rallied higher off of that. Sometimes after long runs these can be bearish. Just before the rollover in 2000-2001, a lot of stocks had rallied well, formed this pattern, and then rolled over. The market was done at that point, however, and it was ready to come back. I am not saying that is the case here. It should be an expanding market given the improving economy. Therefore, I will view CAT as maybe taking a breather for a new break higher. TERX had a nice break to the upside. A good week for it, but we missed it. Sometimes that happens.

Technology. AAPL had a big week. It was up, leading the large cap indices higher. AAPL has earnings next week, I believe on Tuesday after the close. We got a nice rally into earnings. If it continues higher, I think a lot of the VZ news will be built in. You might want to take more gain off the table if you have any options out there. You have good gain in them after the last two weeks. BMC started higher on Friday. It is looking pretty tasty. As noted yesterday, SNIC is also moving up quite well. There are several business software stocks making the move to the upside.

Semiconductors. Semiconductors are moving well. NVLS was screaming to the upside thanks to INTC and its anticipated expansion. It will need more chip equipment. TQNT is breaking to the upside as well. Very solid. AMAT was up almost 8% on the day. It was a very strong day for the semiconductors. No wonder SOX the rallying sharply to the upside.

Miscellaneous. EZPW surged to the upside on volume. It is still going strong in an economy that is supposed to be improving. These do improve as the economy starts to improve, however. Believe it or not, pawnshops are not the bad places they are made out to be. They handle a lot of business in neighborhoods and are performing quite well.

Along that line, look at the pattern in URI. It shows that people may not be buying a lot of equipment, but they are renting it for a job here and there. They may not want to invest in that big piece of equipment right now, but in 2011 they will be able to take credits on a lot of these purchases. It is not just expensing them, but taking credits; that is a big difference.

A credit is almost as good as money because it comes off the bottom line of your tax return. If you owe $10,000 in taxes and can buy something that costs $3000, you can get a credit for the entire amount. You will have saved almost a third of your tax bill for buying a piece of equipment. Then you actually have something. You are not giving the money to the government and getting nothing back. Let's face it: with our debt, it ain't coming back to you.

A credit allows you to take that money, reduce your tax bill by the very amount, and you get something that you need. Hard to argue with that. I love credits use them if you have them. Things like URI are going up now, but we may see actual buying thanks to programs that can help people buy what they need.

I have to go to the black-and-blue bottom stock of the week: CMG. We looked at it when it had no follow-through on the reversal, and it came back up. Then it reversed back into its support range and looked great, but then it faded down. Once again, it showed no follow-through to the downside and bounced higher on Thursday, so we did it again. Sometimes you just have to forget it and just do it. Sometimes it takes two or three times to get it right and get in, or at least have the patience to get in and stay in.

We jumped in CMG early on Friday, and it is starting to pay off. We got it at $2.30, so we have a little gain going in. This is a classic case of just having to stick with it. It does not matter how many times you try and do not succeed on something as long as you keep your losses small. When the opportunity comes back, be ready to make the move. Hopefully we will see some great returns from CMG on this run.


THE MARKET

MARKET SENTIMENT

VIX. The VIX has dropped back down to the start of the Q2 2010 lows. That matches up with the lows of summer 2008 before the financial crisis sent volatility exploding higher. It is back to these levels, and that has people calling for corrections. When it is was down to this level before the summer of 2010 and that selloff, it led to a big spurt higher. It can lead to selling. The market is at a point where it has rallied nicely for two strong legs in a row. It is approaching next resistance. The problem is, it is not showing any signs that it wants to slow down right now. Volatility indicates that there could be a correction in an ongoing rally. It is not indicating there is a long-term major turn to the downside in the market. If volatility was rising higher as the stock market rallied higher, that would be a danger sign. I do not see danger now; I see a level that could indicate an interim correction coming. There is still room for SP500 to run to the upside before it hits next resistance.

VIX: 15.46; -0.93
VXN: 16.49; -0.96
VXO: 14.36; -1.11

Put/Call Ratio (CBOE): 0.57; -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 does not have the cash to drive it higher.

Bulls: 57.3% versus 54.5%. Back on the upside after a couple weeks of fade, but still below the 58.8% high on this leg. Dipped at year end as many anticipate a first of the year correction. Again you have to as if this is self-fulfilling given the market is still trending higher. Still high in a string of high readings but below the 5 year high at 62.0. Still bearish enough. Closing in on the level considered bearish, i.e. where so many are in the market and believe it is going up that the ammunition to send it higher runs low. This is where you start to be careful and watch for breakdowns, but there is also a lot of liquidity being pushed into the market and that can continue the move despite excess bullishness. The crossover level at 29% bulls is long gone, but it did its job. The high on the last leg was 56.0% after starting at 35.6% on the low in February, the lowest it has been since July 2009 . . . until this last leg. 35% is the threshold level suggesting bullishness. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 19.1% versus 20.5%. Breaking lower after hanging around in the 20% for a few weeks. Down from 28.3% in September. The 37.7% peak at the height of the crossover is well in the rearview mirror but bears remain well below the 35% level, above which is considered bullish for the market overall. Hit 18.7% on the low in April. Hit a high of 27.8% level on the prior leg in February. For reference, cracking above the 35% threshold considered bullish. Hit a high on the prior run at 47.2%. For more 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: +20.01 points (+0.73%) to close at 2755.3
Volume: 1.952B (+3.58%)

Up Volume: 1.363B (+384.366M)
Down Volume: 656.207M (-287.003M)

A/D and Hi/Lo: Advancers led 1.76 to 1
Previous Session: Decliners led 1.27 to 1

New Highs: 233 (+26)
New Lows: 11 (0)

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: +9.48 points (+0.74%) to close at 1293.24
NYSE Volume: 1.058B (+13.98%)

Up Volume: 759.955M (+399.018M)
Down Volume: 288.564M (-268.368M)

A/D and Hi/Lo: Advancers led 1.43 to 1
Previous Session: Decliners led 1.17 to 1

New Highs: 487 (+4)
New Lows: 211 (+52)

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

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


DJ30

Stats: +55.48 points (+0.47%) to close at 11787.38
Volume DJ30: 200M shares Friday versus 162M shares Thursday.

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


TUESDAY

The market is closed on Monday for the Martin Luther King holiday. Tuesday will open with the Empire Manufacturing Index out of New York. We will have some housing market sentiment. On Wednesday we will see the usual stories about mortgage purchases, but then it will kick into building permits and housing starts. While they are important, they really do not mean anything at this stage.

We do not want to see them higher right now. They have been volatile, and volatility is a sign of change. We will have to see. We do not want the builders building a lot of new homes. If they get that confidence, that is always worrisome. If they are confident enough to build right now, however, more power to them. I guess I have to say that simply because someone has to be doing something in this economy.

People I know are trying to get loans for their small businesses, and it is incredible. You can get the loans if you can put up collateral such as money, but if you had the money maybe you would not be seeking a loan. I will not get caught up in that, but small businesses are still having a hell of a time out there getting the funding to move forward. Credits will help, but still you still need the money to buy something.

On Thursday we go back to the usual initial claims, but there are also existing home sales, leading indicators, and the Philly Fed. Remember, that was just revised to 20.8 from 24.3. The expectations have dropped considerably.

That is the news that will hit, but there could be other stories out of China. Remember, it always comes in threes. There is definitely more economic data ahead, some possible news out of China and other growth areas, and we have more earnings. The flood gates will open, as they say on the financial stations. Thus far, the reception has been favorable overall. It has helped break SP500 out of this consolidation below the 127% Fibonacci extension. It is picking up steam. The indices and the market are gathering momentum overall as they make the break. Volume is up, pricing is strong, and leadership is breaking to the upside.

Many believe that a correction is imminent. This even as the SP600 hits a new rally high and as the SOX blasts off, leading the market upside. We may get a sudden reversal that takes the gains out of the system, but it typically does not happen that way. It can if there are bad things out there and there could be. Europe could be a problem, and it was this week. There could be implosions that the market does not see coming. That is always detrimental. It can take a quick 5% out of the market if something unexpected hits. Right now, nothing nefarious seems to be in the weeds.

The market is running higher and we have been taking positions on the upside. We have also been taking gain as stocks rally higher. At some point there is a turn in earnings. The good news (if it is a good-news season) saturates the market and individual stocks. They get all the gains they can handle and just cannot go any higher. What goes up starts to slide back down even on good news. We are very impressed with this move without a doubt. We are in the group anticipating a top. The thing is, while we anticipate it, we cannot call exactly where it is. There are areas where it looks like it may occur. With SP500 it could have been at the 127% extension, but it was not.

What you can do is prepare. The market has the final say, but we have to prepare for what may happen. We have some downside plays and some upside plays. We take gains partial or whole were necessary. We do not go in blind. We do not try to pick the tops and bottoms, but we have to be ready. You have to prepare for whatever comes your way.

The market remains strong. It is continuing its rally on volume, defying a lot of the pundits. As I said in the market close alert, I am more than fine with that. Our positions continue to increase in value, making us very good money. It is a very good start to 2011, adding onto an outstanding 2010. Again, we are in that area where we see another strong run to the upside and the indices are approaching resistance. 1313 is SP500, and that gives another 20 points to the upside. The next is 1325 to 1327. That gives even more possibility to the upside, and we will be more than happy to let our positions run toward those resistance levels.

Do not get too excited, however. Do not think it can only go up. The indices look strong. There is no reason to believe they will roll over anytime soon based on the technical action: Higher volume, strong price moves, breakouts, and leadership. Although General Patton said that there was no reason to assume the Germans would launch a major winter offensive, and therefore he expected that is exactly what Germany would do. We cannot let down our guard and believe everything is going to continue to rally.

Expect the unexpected. More than that, be ready for the unexpected. Stay skeptical. Be critical with respect to the market and your plays. As soon as you think you have it licked, that is when you get licked. For now, the market and stocks are acting right and looking good. All is right in the world, but do not forget that this is earnings season. There has been a rally into earnings season. They are just getting cranked up, and the initial response has been favorable. A lot of euphoria on the early earnings announcements often leads to the back half of the season getting profits taken. The saturation point is hit, as noted earlier, and the good news simply cannot drive stocks further. That does not mean a crash, but it means a pullback.

We will do what we have been doing. As stocks rally and they hit initial targets in logical places (127% extension, 161% extension), you take gain. Not all of it. You take partial profits because you will let some run, and they do keep running. As we get closer and you have good gains built up into stock positions, take some money off the table. NKE was running well into earnings. We took some money off the table, and then it gapped and was never was able to recover. We had to take the rest of them off. We did not lose much because we had a huge gain built into it.

We will be taking some more gain. A lot of our positions do not have earnings reported until late January or early February. I know we can get more out of this run. We do not want to get greedy and try to squeeze the last nickel out of it, though, because we might get the squeeze put on us. If you have good gains in a position going into earnings, take some profit. We have already taken profits on AAPL, but it has had a great run this week. We can look at taking some more.

Have a great long weekend!


Support and Resistance

NASDAQ: Closed at 2755.30

Resistance:
2825 is the 2007 closing peak.
2862 is the 2007 peak

Support:
2735 from late 2007 interim peak
2729 is the 127% Fibonacci extension of the August 2010 run
2725 from July 2007 interim peak
The 10 day EMA at 2716
The 18 day EMA at 2693
The 50 day EMA at 2615
2593 is the November 2010 high
2580 is the November 2010 closing high
2569 is the November gap up point through the April 2010 peak
2550 from May and June 2008 peaks
2540 is the gap up point from early November
2535.28 is the April 2010 intraday peak
2530 is the April 2010 closing peak
2518 is interim peak from April 2010
2511 is the lower range of the November gap up point
2482 is the recent October peak
2460 is the November 2010 low.
2434 is the May interim peak and the 78% Fibonacci retracement of the April selloff.
2425 is an interim peak from May 2010
2382-2395 from 2008
The 200 day SMA at 2388


S&P 500: Closed at 1293.24
Resistance:
1313 from the August 2008 interim peak
1325-27 is the March 2008 closing low and the May 2006 peak
1364 is the March 2007 low
1370 is the August 2007 low

Support:
1278 is the 127% Fibonacci extension of the August 2010 run
The 10 day EMA at 1277
The 18 day EMA at 1268
The 50 day EMA at 1236
1227 is the November 2010 peak
1220 is the April 2010 peak
1185 from late September 2008
1174 is the May 2010 high, 78% Fibonacci retracement of April peak
1173 is the November 2010 low
1170 is the prior March 2010 high
1156 is the Sept 2008 low
The 200 day SM A at 1152
1151 is the January 2010 peak
1133 from a September 2008 intraday low
Bottom of the January 2010 consolidation 1131 to 1136
1129 to 1131 is the June and August 2010 peaks


Dow: Closed at 11,787.38
Resistance:
11,867 from the August 2009 high and peak on that bounce in the selling.
11,893, from March 2008 closing low
12,110 from the March 2007 closing low
13,058 from the May 2008 peak on that bounce in the selling

Support:
11,734 from 11-98 peak
The 18 day EMA at 11,638
11,452 is the November 2010 peak
The 50 day EMA at 11,430
11,258 is the April 2010 peak
11,205 is the April closing high
11,100 from the 7-08 low
10,963 is the July 2008 low
10,920 is the recent May high
The 200 day SMA at 10,780
10,730 is the January 2010 peak


Economic Calendar

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

January 14 - Friday
CPI, December (08:30): 0.5% actual versus 0.4% expected, 0.1% prior
Core CPI, December (08:30): 0.1% actual versus 0.1% expected, 0.1% prior
Retail Sales, December (08:30): 0.6% actual versus 0.7% expected, 0.8% prior
Retail Sales ex-auto, December (08:30): 0.5% actual versus 0.6% expected, 1.0% prior (revised from 1.2%)
Industrial Production, December (09:15): 0.8% actual versus 0.4% expected, 0.3% prior (revised from 0.4%)
Capacity Utilization, December (09:15): 76.0% actual versus 75.5% expected, 75.4% prior (revised from 75.2%)
Michigan Sentiment, January (09:55): 72.7 actual versus 75.5 expected, 74.5 prior
Business Inventories, November (10:00): 0.2% actual versus 0.8% expected, 0.7% prior

January 18 - Tuesday
Empire Manufacturing, January (08:30): 12.0 expected, 10.57 prior
Net Long-Term TIC Fl, November (09:00): $27.6B prior
NAHB Housing Market Sentiment, January (10:00): 16 expected, 16 prior

January 19 - Wednesday
MBA Mortgage Purchases, 01/14 (07:00): +2.2% prior
Housing Starts, December (08:30): 550K expected, 555K prior
Building Permits, December (08:30): 560K expected, 530K prior

January 20 - Thursday
Initial Claims, 01/15 (08:30): 425K expected, 445K prior
Continuing Claims, 01/08 (08:30): 3900K expected, 3879K prior
Existing Home Sales, December (10:00): 4.80M expected, 4.68M prior
Leading Indicators, December (10:00): 0.6% expected, 1.1% prior
Philadelphia Fed, January (10:00): 20.5 expected, 20.8 prior (revised from 24.3)
Crude Inventories, 01/15 (11:00): -2.15M prior

By: Jon Johnson, Editor
Copyright 2011 | All Rights Reserved

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

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Sunday, January 09, 2011

Unemployment Rate Plunges

SUMMARY:
- Strangely mixed jobs report taken as a glass half full, half empty by the market.
- Non-farm payrolls miss, but unemployment rate plunges: which do you trust?
- After all the analysis, jobs remain crappy, private small business creation is improving thanks to US entrepreneurship, and the Fed remains with its foot on the gas.
- Choppy but upside week avoids a correction overall, but some sectors are in private corrections.
- Trend remains in place, but the rally into earnings and the lagging small caps remain the worries for a market that is a bit overbought.

MARKET OVERVIEW

Market takes some solace from the unemployment rate, but not enough to rally.

Investors were scratching their heads on Friday morning. With more government data, you can understand why people would be confused, but there was even more reason for confusion this time around. Nonfarm payrolls for December came in well below expectations at 103K versus 150K expected officially. The whisper number was up to 200K or more not even close. Revisions to October and November did help bring the December number closer to expectations. There were 70K more jobs. Adding that back to the 103K, that put it easily over 150K and more in the line with the 175-200K whisper number on the street.

That was not bad, but futures tumbled on the news. They were able to rebound because of the unemployment rate. It was expected to come in at 9.7% after 9.8% in November, but it tumbled to 9.4%. Hallelujah, we are in nirvana. We had the largest, most rapid decline in the unemployment rate since April of 1998. Certainly President Obama was pleased about it, but does it really mean what they say it means? Numbers can be deceiving and they typically are. The workforce contracted, falling by 260K. Those are people who just gave up. If jobs are so plentiful, why could they not find work? When you have a drop in the size of the workforce, the unemployment rate goes down even without any more jobs.

That is part of the equation, but the 260K does not account for such a large decline. Former Fed officials on the financial stations said the nonfarm payroll number is the one that makes the difference. They were saying that back in the recession of 2000-2001. The household survey was improving, but the Fed said not to look at that. Greenspan was even in front of Congress saying you cannot look at that. He kept saying the nonfarms is the key, but the economy was recovering. Jobs were being created even when the nonfarm payroll and the supposedly jobless recovery raged on. That is the old entrepreneurial American spirit. If you cannot find a job after a while, you make your own damn job. People are starting their own businesses. They cannot find work at those companies that laid them off, especially the big corporations that are still net job losers.

Enough people told the BLS that they were finding jobs to help bring the unemployment rate to the downside. If you are working at your own business, you are working at a job. The government may not seem to think that, but that is the case. The nonfarm payrolls data failed to pick that up. They do not pick up on new jobs and new businesses being created. It is not the greatest environment for business creation. The tax levels are not favorable, although they were extended and that may have helped. We still do not have a good economic environment to start a small business, although they say a recession is a great time to start a small business. We may have some good, powerful companies coming up in the works. Maybe some more AAPL or CSCO who knows? It could be very interesting several years down the road.

The combination of factors lowered the unemployment rate. Number one, the jobs pool fell so the unemployment rate fell as well. Fewer people seeking jobs makes it look better than it really is. Number two, there are businesses where people are going to work. They are not the ones that the government lavished the stimulus funds on. These are people who are just fed up with waiting around while the government keeps picking at their wallets; they are going out to make money. As Ronald Reagan said, the best thing you can do for yourself is make a lot of money, keep as much of it as you can, and not send it to the government. That is what they are try trying to do, and that is about as American as you can get. That is part of the reason for improvement in the unemployment rate while the nonfarm payroll number still reeks.

It is interesting to note that the average workweek held steady at 34.3. After clicking up a couple of tenths over the past six months, it is stalled out again. That is an indication that the big companies the government looks to for providing jobs growth (although we know they do not) are going nowhere in a hurry. When the average hourly workweek does not improve, the companies are not in position to hire. They have to start working the current workers very hard before they will hire new people. The workweek tells us that is simply not happening.

The market was somewhat confused. Looking at the SPY, the futures were up moving into the jobs report, though not up very much. They then tumbled to negative, recovered to positive, and then bounced up and down through a choppy morning and sold off through the early afternoon. They did post a decent recovery to end the week, and that left the market in decent position overall. The indices were up for the week. It was not a massive move, but they did a good job. This was the week that everyone came back to work, and the market had rallied from the late-November test. It put in a strong move. That is its second good move off of the August low, and it was due a correction.

I thought there could be some profit taking, and the market managed to shake it off. There was profit taking, no doubt. Some of the sectors that led the move higher some commodities, energy, and retail all suffered at the hands of sellers last week. They were not total collapses, but there are sharp pullbacks in these areas. At the same time, other groups were moving higher. Tech and semiconductors got new life. Healthcare and medical got new life with money flowing their way on volume. The market saw rotation. It was not able to rally sharply. It did move higher, but it was not rallying because there were leadership sectors struggling and fading back. At the same time, it did not collapse; it consolidated its moves in place. There is a transition going on. Money is moving around the market, but it is moving around rapidly enough and in enough key areas to keep the indices higher.

There are questions heading into next week. There is the start of earnings and what the market will do given the good rally into earnings, and the SP600 is lagging. It did not collapse, but it was flat on the week. It was not able to post that rally or make the early-week surge stick as the small caps lag. That is not good news for the economy because the recovery is still very early, very tender, and has a long way to go. It is too early for the small caps to give up the leadership mantle unless this is a really pathetic economic recovery that will not last long. If it is a short one, maybe the small caps should start to peel back. I do not think that is the case, however. Looking at the SP500, it was in a big base, and it broke out and tested. It should have a lot more upside. I am somewhat concerned if the market can continue to rally moving into the next two to three weeks. There are good reasons for it to have issues. It has rallied into earnings and the small caps continue to lag.


OTHER MARKETS

Dollar: The dollar found a lot of strength this week, and it broke over the last December peak with another decent move (1.2907 versus 1.3014 Thursday). A very strong week for the greenback as the economic data improved and the likelihood of the Fed continuing to print money decreased. That naturally bolsters the currency. It now has to deal with the late-November peak, and that will be important. This range from the August low up to the November peak is a resistance level. There are areas of consolidation that it has to punch through. It may not make it in one continuing move to the upside. It may stop, pause, regroup, and then try to make the break. It looks like the dollar has turned over a new leaf. After rallying, it looked like it was topping out and ready to fall, but it found a lot of strength courtesy of improving economic data.

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


Bonds: Bonds managed to gain some strength (10 year 3.32% versus 3.41% Thursday). Bonds were kicked around early in the week. On Friday they held support and were trying to bounce again. This is the same support they held last week. It looked like they would bounce and did, but they could not keep it moving. They are trying to resume the upside, however, once again holding. It looks like they may pull it off. It is a market in transition now, and there are some trends being tested, bumped, and maybe even broken. Again, you have to look at the small caps. All of this is on the doorstep of earnings season.

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


Gold: Gold was down on the day, but it recovered nicely off its lows ($1,368.70, -3.00). Gold had rallied up to its prior peaks and was looking good, but then it was body slammed this week. It started on Tuesday with a real hammering, and it was off to the downside again on Friday. It was looking really weak but managed to reverse. There is a bit of buying ongoing, but gold suddenly looks shaky. It has to prove something. Dare I say it? It has to show its mettle.

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


Oil: Oil had a great run. It ran well from early November into late December, and then it just had to come back. It did this week, but it was not a total breakdown. There were some impressive daily losses no doubt, but it did give up the ghost. It happened at the 50 day EMA on Friday, reversed and bounced, and it was looking decent. It closed lower, and after hours it moved higher ($88.03,
-0.60). There was no damage done. It consolidated a good move to the upside and held a logical support level, i.e., the 50 day EMA, the early December consolidation, and the mid-November peak. It held a logical place to find support, and now I bet we will see it bounce higher from here. Oh, joy. That will certainly make all other petroleum-based products rise in price yet again because the move is sustained. It is not one of those that jacked right up and then turned over and fell back down. It is showing it can hold its moves and hold its gain. Prices of all petroleum-based products are being increased even as we speak.

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


TECHNICAL SUMMARY

INTERNALS

Volume. Volume was lower, down 7% on NASDAQ to 1.9B. Volume on the NYSE fell 0.5%, basically flat at 1.08B.

Breadth. Breadth was negative at -1.7:1 on the NASDAQ and -1.4:1 on the NYSE. The small caps lagged. It is interesting to see that breadth was not atrocious again on the NYSE even though there was trouble in the small caps. The internals were not that negative. There was good volume on the week, and there was positive volume with upside days on upside volume. There was some distribution as well with downside days on rising volume.


CHARTS

SP500. SP500 is flat to end the week. It rallied Monday-Wednesday and then tapered off Thursday and Friday. Note it is holding its near support easily. It rallied back from the lows on Friday. The buyers stepped right back in and bought it up when it looked like it might be the trouble. Remember, this is a big base that started in late April. The market rallied up, tried to break out of it, and just cracked it in early November. It faded back, formed a handle, and then broke out. This is really the first breakout move for SP500. It has put in two good moves off the August low now, but this is only the first breakout low.

I expect a test. Not that this recent run is as long as the August-November run. It does not necessarily have to be because this is a breakout move. The small caps are lagging and earnings are right around the corner after a nice run. Often you get the news built in, and comparisons will be tougher this year than last year. There is room for disappointment. The market is hemming and hawing but holding its gain. It is consolidating in place as some of the energy stocks struggle and lose money while others in tech land gain money. The trend is staying in place, but I am cautious given the proximity to earnings and the move thus far.

NASDAQ. NASDAQ is the same story, although it put in a bit more upside. It had a nice week, gapping higher on Monday and then moving higher through Friday. It did lose some ground, however. As with the SP500, it tested near support and recovered nicely into the close, holding its trend above near support. NASDAQ had a nice breakout, rallied from the August lows, and had its test. It has rallied nicely, moving up ahead of earnings. That leaves it vulnerable if earnings are not super. Even if earnings are super, sometimes it is not enough to support the stock or index further as the news is built in.

SP600. SP600 is the worry. There is a nice run here as well, but there is not the gain on the week. There is a big struggle. There was the engulfing pattern on Tuesday, and there was the inside day on Wednesday that did not change anything. Thursday and Friday did not alter the pattern at all. There is still an engulfing pattern more or less in control near term, and it is trying to direct the SP600 lower. The overall trendline remains in effect, but SP600 is showing signs of wear and tear. We will see if it has the ability to hold and continue to the upside next week.

SOX. The semiconductors were the only index up on the session, rising a powerful 0.23%. After three weeks of a lateral move over the 18 day EMA, they showed power on Thursday with a great move. I expect the semiconductors to show additional power in the future. They have set up a good pattern and are not really overextended. They have consolidated for three weeks, and they are ready to move if they get good results from some semiconductors companies. It did not happen on Friday as NVLS was downgraded. That set the tone, but it did not take the sector down. That is important, of course.


LEADERSHIP

Financial. Financials had a good week. They got a bit choppy on Friday with JPM reaching lower, but what a nice comeback intraday. GS had a tap at the 18 day EMA and a nice comeback as well. EWBC was up on the day, gave it up, and it finished down slightly. It is still in excellent shape as it continues to the upside. SP500 still has the support of the financials, and they helped it move. In the summer, we were waiting and waiting for the financials to move. They finally got a fire lit under them and are moving for a change. No complaints.

Energy. HAL thumped lower on Thursday. It held the 50 day EMA on Friday, and maybe it can bounce. BTU sold off hard on Thursday and bounced a bit on Friday. Volume was better. We will see. It is not a rollover, selloff, and massive plunge by these stocks; it is more like a needed correction. These engulfing patterns came in and started taking the stocks lower.

Semiconductors. Semiconductors had a good week, finally making the break on Thursday. NVDA was a leader, surging to the upside. It looked like it was getting weak on the day and may be running out on its move, so we took the rest of the January options off the table (for a 350% gain in this case). It turned out we probably could have squeezed a bit more out of them, but I said we would move out and take the rest off when it started to fall. It did not collapse but still shows it is moving well, and semiconductors are moving well in general. ALTR did not finish that well, but overall I liked the pattern. The semiconductors are getting money thrown their way, and of course we will be more than happy to participate as they do.

Healthcare/Drugs. Healthcare had a good week. ZOLL made us great money, surging higher and continuing to the upside on Friday. UTHR is still moving to the upside. It showed great volume this week. It is really starting to move out of a six-week, lateral, very tight consolidation. We took gain on it, following our plan as it hit this target. Not huge. Almost 12% on the stock and 70% or so on the options. That is not bad for an initial target. Things are moving somewhat decently to the upside.

Technology. Technology gained some ground. AAPL was a nice leader on the week, moving up quite well. FFIV broke higher. It could not finish strong, but we may get a pre-earnings run out of it. If not we will bag it, but there is money moving into semiconductors and techs in general. Software stocks seem to do pretty well. BCSI is a case in point, putting in a nice move on the week. We had January options in it as well. We were trying to get more out of it and were able to take 200% on some positions and 150% on other options. We banked a little more gain on stock positions 46% on one and almost 30% on another. A nice mover getting new life once more.

Industrial. Industrials were a leader on the way up, but they took the week off. CAT has been moving laterally for a couple of weeks. CMI is moving laterally. It tried to make the break higher, but it was thrust back down. CAT has rallied nicely. It may be a little overbought, but it is not coming back. It could be setting up for a new move. I say that because there was another flat consolidation in September and October, and it made the break to the upside and produced another good run. We ought to be looking for that now even though a lot of people say the market is overvalued and the stocks are way too high. They may be, but we do not know for sure; they could always break higher.

One man's high is another man's low, and both of them could be rich. One guy could have ridden the stock from lower, thought it was too high, and was ready to sell out. The other could have bought into it on this pattern and then it rallies again. They would both make money. People get too critical of other opinions in the market. If there was only one way to make money in the market, then your opinion might mean something. There are so many ways to make money in the market and so many different strategies and methodologies. One person's high could very well be another person's low.

In summary, there was some rotation this week. There were stocks getting beat up badly in the market. A lot of that had to do with the energy sector. They were getting knocked around, and the retail sectors were getting knocked around. Both of them were decent leaders on the way up. If they are not going to get the money, it has to go somewhere. It was moving into software, technology, semiconductors, and healthcare and medical. It will likely move into other areas shortly. We will have to keep our eyes open and see where it heads. That is the beauty of a market that has a lot of liquidity: It continues to move higher, but sometimes it will change horses and pick a new lead team to move the market to the upside.


THE MARKET

MARKET SENTIMENT

VIX. The VIX is basically going nowhere. This has been the fear for many television pundits over the past couple of months. They are concerned that the VIX is at historically low levels and that can cause trouble. Well, the earth can open up and swallow us all tomorrow as well. No, that is not really a problem for us. Looking back, the VIX can stay at very low levels for very long periods of time while the market is moving higher. During 2004-2007 the market moved up. You have a problem when the volatility rises while the market rises. That happened in 2007. That is when you have a correction coming, and that is not the case here. Volatility can stay low for a long, long time while the market rallies, and it is not even down to those levels now. It is not showing a correlation of up and down with the market. It does sometimes, but it is not doing it now. I am not going to get bent out of shape about it.

VIX: 17.14; -0.26
VXN: 18.72; +0.31
VXO: 16.05; -0.17

Put/Call Ratio (CBOE): 0.91; +0.16

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 does not have the cash to drive it higher.

Bulls: 54.5% versus 55.6%. Second week of fade after hitting 58.8% on this run's high (thus far). Dipped at year end as many anticipate a first of the year correction. Again you have to as if this is self-fulfilling given the market is still trending higher. Still high in a string of high readings but below the 5 year high at 62.0. Still bearish enough. Closing in on the level considered bearish, i.e. where so many are in the market and believe it is going up that the ammunition to send it higher runs low. This is where you start to be careful and watch for breakdowns, but there is also a lot of liquidity being pushed into the market and that can continue the move despite excess bullishness. The crossover level at 29% bulls is long gone, but it did its job. The high on the last leg was 56.0% after starting at 35.6% on the low in February, the lowest it has been since July 2009 . . . until this last leg. 35% is the threshold level suggesting bullishness. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 20.5% versus 20.0%. Hanging around in the 20% range as the bears are not growing as the bulls weaken slightly. That suggests overall that investors believe the market will continue to advance after a pullback. Down from 28.3% in September. The 37.7% peak at the height of the crossover is well in the rearview mirror but bears remain well below the 35% level, above which is considered bullish for the market overall. Hit 18.7% on the low in April. Hit a high of 27.8% level on the prior leg in February. For reference, cracking above the 35% threshold considered bullish. Hit a high on the prior run at 47.2%. For more 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: -6.72 points (-0.25%) to close at 2703.17
Volume: 1.925B (-7.29%)

Up Volume: 775.296M (-443.34M)
Down Volume: 1.193B (+337.784M)

A/D and Hi/Lo: Decliners led 1.69 to 1
Previous Session: Decliners led 1.28 to 1

New Highs: 150 (-39)
New Lows: 7 (-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: -2.35 points (-0.18%) to close at 1271.5
NYSE Volume: 1.086B (-0.57%)

Up Volume: 433.68M (+79.698M)
Down Volume: 639.055M (-83.862M)

A/D and Hi/Lo: Decliners led 1.37 to 1
Previous Session: Decliners led 1.64 to 1

New Highs: 256 (-102)
New Lows: 18 (-11)

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

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


DJ30

Stats: -22.55 points (-0.19%) to close at 11674.76
Volume DJ30: 189M shares Friday versus 193M shares Thursday.

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


MONDAY

Inventories, PPI, CPI, retail sales, industrial production, Michigan Sentiment there is a lot of data coming. It is somewhat anticlimactic after the jobs report, but given the mixed picture in the jobs report, it makes it all the more important. We have to keep an eye on that. Earnings are coming up. As seen on Friday, there are already warnings out there. VLTR warned about the quarter, and it was all over the map. It finished up, but I did not have enough Pepto-Bismol to get into that on Friday. LIZ was having trouble, too. They joined stocks from the Thursday same store sales that were not great, and they got slaughtered.

We are still going to look for more plays to the upside. We have had a great run to this point. We are into earnings, and even if earnings are blowout we have seen stocks pull back. MOS reported some super earnings this week, but look what happened. It tried to move up a bit, but it had all of its move on the triangle break. It is having a hard time getting up and going again.

That is instructive. We have a lot of stocks that are up, moving into their earnings. They may be a little overripe and ready to be picked or fall to the ground. That does not mean they will collapse, but look what happens if you warn. LIZ has already pulled back for a week and a half going into its earnings. When it pre-announced some bad news, it gapped below the 200 day EMA. My friends, this is what you call a breakaway gap to the downside. It is worth trying to play this.

Breakaway gaps tend to continue in the direction of the gap. The only problem is that it is a $6.00 stock and it will probably be difficult to make a lot of money on the downside. It does not mean you cannot, but there is a lot of support around the $5.00 level and it is already at $6.00. It is tougher to make money on, but look for things like this. If you get the right stock, you can make money off of it.

We have a mixed jobs report, and earnings could be a problem as well. You still have the Fed coming in with a lot of liquidity and there is an improving economy. The comps on the earnings might be more difficult. The market has moved up for a few weeks, and we could be ripe for some selling on stocks. We do not just pick any stock, however. There are stocks out there showing those engulfing patterns; they move higher one day and then are swallowed up the next day with a big downside move.

We have a test of those late in the week. They could provide downside opportunity, particularly going into a market that has rallied up into earnings. We could have some downside there, but we do not want to just pick the best stocks and say it has gone up a long way and short it. That is a suicide pact. It is like stepping in front of a train hoping it will derail. Strong stocks can come back in selling, but it is a tough game to play, particularly with the liquidity still in the market. As soon as it breaks lower one day, it turns around and bounces back in your face. We saw this with so many stocks today. They were selling and then reversed and finished well off their lows. We want to pick stocks that are weakening anyway. We will look at those engulfing patterns.

We will also look at the upside. There are stocks that will not report until the end of February. They could be very strong. The market is trending higher overall. If they have a great pattern and good set up, we will not ignore those even though we are in earnings and the market is a bit overbought. It could turn around and hit us on the head with a hammer. I am willing to take a couple of lumps on the head, but not a lot of them. We will be careful with what we buy as always. We will pick up stocks that say "buy me," and are in position and have the great risk/reward. If they go against us, they are not going to hurt that much, but we have potential for plenty of upside.

There is money rotating through the market. If it continues rotating, that means it will find new places to go. If earnings cause a pullback, they could still pull back. If the money is moving into those in anticipation of earnings, there is less likelihood that they fall significantly. We will start putting money to work slowly. Not the whole position a piece at a time when we get the opportunity. We may lose out on some big moves, but it is worth it to be cautious at this point. The market has run well and we are going into earnings. Warnings are not being treated very kindly, and even some good earnings results are not being treated well. The risk/reward there is not as great, so we will not put as much money at risk on new positions. It does not mean we will not take them. If they say "buy me," We will buy them.

I do not want to be accused of being a raging bull, throwing caution to the wind, and ignoring the possibilities that there could be a fall. I am acknowledging that all the way. I am also acknowledging, however, that the liquidity is staying in the market for now (thanks to Ben Bernanke and Co.) and the economic data continues to improve. With that combination, I am still willing to play the upside when the opportunity presents itself.

As always, we will take what the market gives. We are heading into earnings with a nice gain under the belt, and earnings are not necessarily being treated well. If we see stocks that are weakening, they make good setups for the downside plays. I will be more than happy to take advantage of those. At the same time, take care of your other positions. The money is rotating, and once it starts to leave, it can get a bit hairy for those stocks. Continue to take care of positions and button them up if they get in trouble. That is how we keep our gains from last year and the early part of this year. We will keep them flowing with the new positions.

Have a great weekend!


Support and Resistance

NASDAQ: Closed at 2703.17

Resistance:
2725 from July 2007 interim peak
2729 is the 127% Fibonacci extension of the August 2010 run
2735 from late 2007 interim peak
2862 is the 2007 peak

Support:
The 10 day EMA at 2683
The 18 day EMA at 2664
2593 is the November 2010 high
The 50 day EMA at 2589
2580 is the November 2010 closing high
2569 is the November gap up point through the April 2010 peak
2550 from May and June 2008 peaks
2540 is the gap up point from early November
2535.28 is the April 2010 intraday peak
2530 is the April 2010 closing peak
2518 is interim peak from April 2010
2511 is the lower range of the November gap up point
2482 is the recent October peak
2460 is the November 2010 low.
2434 is the May interim peak and the 78% Fibonacci retracement of the April selloff.
2425 is an interim peak from May 2010
2382-2395 from 2008
The 200 day SMA at 2381


S&P 500: Closed at 1271.50
Resistance:
1278 is the 127% Fibonacci extension of the August 2010 run
1313 from the August 2008 interim peak

Support:
The 10 day EMA at 1266
The 18 day EMA at 1257
1227 is the November 2010 peak
The 50 day EMA at 1226
1220 is the April 2010 peak
1185 from late September 2008
1174 is the May 2010 high, 78% Fibonacci retracement of April peak
1173 is the November 2010 low
1170 is the prior March 2010 high
1156 is the Sept 2008 low
1151 is the January 2010 peak
The 200 day SM A at 1149
1133 from a September 2008 intraday low
Bottom of the January 2010 consolidation 1131 to 1136
1129 to 1131 is the June and August 2010 peaks


Dow: Closed at 11,674.76
Resistance:
11,734 from 11-98 peak
11,867 from the August 2009 high and peak on that bounce in the selling.
11,893, from March 2008 closing low
12,110 from the March 2007 closing low
13,058 from the May 2008 peak on that bounce in the selling

Support:
The 18 day EMA at 11,574
11,452 is the November 2010 peak
The 50 day EMA at 11,367
11,258 is the April 2010 peak
11,205 is the April closing high
11,100 from the 7-08 low
10,963 is the July 2008 low
10,920 is the recent May high
The 200 day SMA at 10,759
10,730 is the January 2010 peak


Economic Calendar

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

January 07 - Friday
Nonfarm Payrolls, December (08:30): 103 actual versus 150K expected, 71K prior (revised from 39K)
Nonfarm Private Payrolls, December (08:30): 113K actual versus 162K expected, 79K prior (revised from 50K)
Unemployment Rate, December (08:30): 9.4 actual versus 9.7% expected, 9.8 prior (no revisions)
Hourly Earnings, December (08:30): 0.1% actual versus 0.1% expected, 0.0% prior (no revisions)
Average Workweek, December (08:30): 34.3 actual versus 34.3 expected, 34.3 prior (no revisions)
Consumer Credit, November (15:00): $1.3B actual versus -$2.5B expected, $7.0B prior (revised from $3.4B)

January 11 - Tuesday
Wholesale Inventories, November (10:00): 1.3 expected, 1.9% prior

January 12 - Wednesday
MBA Mortgage Purchas, 01/07 (07:00): +2.3% prior
Export Prices ex-ag., December (08:30): 0.8% prior
Import Prices ex-oil, December (08:30): 0.8% prior
Crude Inventories, 01/08 (10:30): -4.16M prior
Treasury Budget, December (14:00): -$91.4B prior

January 13 - Thursday
Initial Claims, 01/08 (08:30): 420K expected, 409K prior
Continuing Claims, 01/01 (08:30): 4070K expected, 4103K prior
PPI, December (08:30): 0.7% expected, 0.8% prior
Core PPI, December (08:30): 0.2% expected, 0.3% prior
Trade Balance, November (08:30): -$40.6B expected, -$38.7B prior

January 14 - Friday
CPI, December (08:30): 0.4% expected, 0.1% prior
Core CPI, December (08:30): 0.1% expected, 0.1% prior
Retail Sales, December (08:30): 0.7% expected, 0.8% prior
Retail Sales ex-auto, December (08:30): 0.6% expected, 1.2% prior
Industrial Production, December (09:15): 0.4% expected, 0.4% prior
Capacity Utilization, December (09:15): 75.5% expected, 75.2% prior
Michigan Sentiment, January (09:55): 75.0 expected, 74.5 prior
Business Inventories, November (10:00): 0.7% expected, 0.7% prior

By: Jon Johnson, Editor
Copyright 2011 | All Rights Reserved

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

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