Sunday, December 11, 2011

A String of Earnings Warnings is Worrisome


- Doesn't take much of a European deal to satisfy investors and traders.
- A string of earnings warnings is worrisome, but not for stocks, at least not yet.
- China industrial output slows further.
- Michigan Sentiment approaching 70.
- Moody's cuts the big French banks.
- Despite the negatives, Europe trumps and stocks rally nicely, pushing the indices up off an important support level.
- The bid returned on Friday. If it is still there Monday the prospects for a further upside push firm considerably

Apparently any deal was good enough on Friday.

Apparently any deal out of Europe was good enough for the U.S. stock market on Friday. Considering that there were rumors from Japan that Germany would veto any kind of deal, the fact that the EU agreed to anything (even if it did just kick the can down the road further) meant a sigh of relief was heard around the world. It was enough to bounce U.S. futures to the upside, and it was enough to send European stocks higher as well.

It really was not that auspicious of a deal. I dare say it was not powerful no offense to the French official who predicted that a powerful deal would be struck. It was an agreement among all of the EU members except the UK. They simply will not go along with anything the EU wants to do. It was an agreement for tighter fiscal controls in order to prevent future debt increases. Think about that. "Future debt increases"? Is that not the same thing we do over here with our budget? That grand super committee was supposed to cut $1.2T, but it could not agree how to do it. They could not agree on what to cut because they were cutting expenditures that had not yet been made. In other words, these were expenditures that would possibly be made in the future. That is not cutting. Cutting is dealing with what you already have earmarked to spend. It means the money is going out the door. It is not cutting a potential expenditure in the future. But that did not deter Europe, and they were able to agree to do just that. This is supposed to provide some kind of fiscal restraint well down the road.

There was another leg to the agreement (with only two legs, maybe it will fall over). It was what they call the ESM. It is another emergency fund. It will be 500B available in July of 2012. You might ask why they would take so long; it is eight months away. But this ESM was already planned, and it was supposed to be put in place in July 2013. They advanced it an entire year, but that still leaves it in July. Obviously, the feeling in Europe is that this is really not a major crisis. If they do feel that, then they simply do not want to address it. In 2013 they were going to put together another fund? There may not be anything left by July 2012, much less in 2013.

It is all rather comical. But what is even more comical is that U.S. markets found it palatable and rallied on the news. Futures started out high and they kept moving higher. This despite some pretty worrisome data from U.S. companies. I am not talking about data that the government is compiling; I am talking about actual information and earnings projections coming from companies. There was a string of warnings. ALTR, TXN, and LSCC in computer chips, TOY in autos and DD chemicals. All kinds of plastics, chemicals, and the stuff that goes into consumer goods. DD specifically cited a consumer electronics slowdown as one area that caused it to reduce its outlook for 2012. We have already had GLW say that it was cutting back on its glass production for flat screen TVs because demand was way off. Now we add to it a series of semiconductors and then more stoic Dow-type stocks such as DD.

That gets a bit worrisome. It is just not something in an obscure area of the chips sector. It is TOY, DD and others. The chips that these companies make are not the kinds of chips that go into phones or tablets, but that does not mean they are worthless. They find their way into auto parts, industrial components, and consumer goods. This is part of what I talked about on Thursday night. They are all over the market, representative of the entire market and the economy. These chips go into everything. If they see demand slowing it is worrisome.

But not to fear. It was not hurting the market on Friday. China was reporting that its industrial output hit its lowest level in two years, but that was not going to matter. Did it matter that Moody's cut the largest banks in France such as Societe Generale and Credit Agricole? No. Stocks were going to rally because there was a deal. It was a "kick the can down the road" deal, but that works for stocks in the near term. If they feel like the banks, financial institutions, and large companies will be able to operate under the facilities that are put in place, then stocks are going to perform well. Maybe they believe that the bid is there again. Maybe they believe that Quantitative Easing European style will be coming. It might or it might not. The meeting was very opaque with respect to giving guidance on further liquidity measures.

Again, that did not matter for stocks. They started to the upside. They tested early and then it was a steady rally for the rest of the day, closing out near the session highs. Stocks did move flat for the last hour, but they did not give up their gains.

SP500, +1.7%; NASDAQ, +1.94%; Dow, +1.55%; SP600, +3.24%; SOX, +1.22%.

Not what you would typically expect from the SOX, but it had to overcome the morning dips, turn back up, and then rally to the upside after stocks such as INTC and TXN helped it to the downside.

It was not just the European deal that was considered good news. There was some economic data out in the U.S. dealing with the Michigan Sentiment reading for December. It was the preliminary reading, but it came in quite nicely at 67.7 when 65.1 was expected. It was 64.1 back in November. It is approaching 70, and that is getting to be a decent level. I say "decent," but it beats the heck out of the 50's and low 60's. We have continued improvement in the economic data as reported in the U.S. While that is very hopeful, again, you should counterbalance that with the problems we are hearing from some well-known big names in the U.S. economy. I am not talking about just one sector. I am talking about GLW, DD, and several semiconductors. That is a wide range, and it represents a wide range of goods in the U.S.


The other markets were up and down, but it was not exactly with you would expect.

Dollar: 1.3373 versus 1.3336 euro. The DXYO did rise against the euro, but it was higher against other currencies around the world, so the DXYO itself rose. The dollar continues to look good in this cup with handle pattern that formed off the initial rally from August.

Bonds: 2.06% versus 1.98% 10 year U.S. Treasury. Bonds sold as you would expect. That thumped the 10 year back down to the 50 day EMA. It is also in a cup with handle right now, trying to hold at the 50 day EMA and to break higher off of that level. Bonds have been range trading over the past week. They are back and forth almost even amounts every day. They have been in a range since the rally flattened out that ended in September. It moved back and forth, and it is carving out this pattern. We will see if there is a break to the upside. What would break it to the upside? Bad news in Europe or bad news in the U.S. economy. People would run to safety, and that would push bonds higher. A cup with handle is a bullish pattern. It suggests that bonds are building in a worry about the future.

Gold: 1,717.40, -4.00. Gold was down on the session modestly, basically banging around in its triangle. It tried to rally on Wednesday and gave it up Thursday. Friday it held the line and bounced modestly. It is right at the point of its triangle. It is time for it to make a break, and we should see a definitive move at some point in this coming week.

Oil: 99.41, +1.07. Oil closed up on the session. Volatile week for oil as well. Earlier in the week it was very flat. On Thursday it sold hard, and then Friday it managed a bounce. Still over the 95 level that is support for it. It is between that and the 103 level that is acting as resistance. We have maybe a double top in here, but I would not write oil off at this point. I would not say it is rolling over. It is just testing right now.



The internals were lackluster in one respect but quite strong in the other.

Breadth. +4.5:1, NASDAQ; +6:1, NYSE. Breadth was very sharply upside.

Volume. -10% NASDAQ, 1.63B; -13% NYSE, 746M. Volume was anemic. Both NASDAQ and NYSE were below average.


SP500. SP500 had faded back to the August-October range. It made a higher low in late November, rallied, and could not make a higher high. It rolled back over, but it has held that prior range for now. It is now in position to try to take on the June low and late-October peak again. Very good to see the bounce. Things were dicey and they still are somewhat. It is not out of the woods. That is why I want to see if the bid returns on Monday. SP500 did itself a big favor on Friday with this solid rebound off of that prior trading range.

NASDAQ. NASDAQ is very similar. It bounced off the 50 day EMA and also bounced off of the August and September peaks. That put it back in the very choppy range spanning October and November. It is doing what it has to do, and that is to hold support and make a new bounce. On the low it held at that June low, and now it is trying to put in a bounce. Again, Monday will tell much more of the story. It will tell whether the bid returns next week that, again, showed up on Friday after it left the building on Thursday with worries about what the ECB Chairman Draghi was saying.

SP600. SP600 had a very nice move. It bounced off of its August peaks and the 50 day EMA, moving back up close to that late-October peak. Excellent action by the small caps. They have to take out the 200 day EMA and that late-October peak. They look very solid to make a run at that.

DJ30. DJ30 has been the leading index. It held the 200 day EMA and bounced nicely. It has not taken out the late-October peak, but it is looking like it wants to.

SOX. SOX is very important. It was up +1.22%. It was not the best mover of the day. It gapped lower. Recall that it had some bad news from the earnings warnings, but it managed to reverse and close positive just above that trendline. While it was not a stellar move, it keeps itself in the game to move higher. We will see if it can. It has been struggling. As I said on Thursday night, the chips are a leading indicator. Whether they lead to the downside or to the upside, we have to watch that because they are in everything we buy, see, do, and use right now. They play an important role. If they move up, the odds of the market success on a rally improve dramatically.


Semiconductors. It was not a total implosion. Semiconductors were able to come back off the lows. ALTR gapped lower on its warning, but it formed decently. It managed to close out with a gain. LSCC gapped lower and was unable to recover. INTC gapped lower but managed to bounce off of the 20 day EMA. LRCX had a nice test and rebound. KLAC held the 10 day EMA and bounced. SNDK looks nice, holding at the 20 day EMA and looking ready for a bounce to the upside. There are some semiconductors performing just fine. ONNN put in a nice rounded bottom.

Technology. Some tech stocks were performing well. GOOG made a break upside after a nice test of the move through the July peak. It is performing very well. NTGR posted a nice gain. Solid break to the upside on Friday, almost 5.5% on the move.

Industrial. IR is setting up a nice cup with handle base. UTX put in a base, bounced, and it is trying to kick up its heels a bit. AVY has put in a nice consolidation. It is starting to move higher again with a good upside break on Friday. Industrials do not look bad. Seems like a lot of areas are picking up a bit and trying to move higher.

Retail. I have been worried about retail, and we have put some downside plays in the retail sector. Some of them are recovering and some are not. SCSS is starting to move back to the upside. No real volume on Friday, but it is starting to make an upside break. Some of the small business suppliers and office supply companies are looking better. ODP has a rounded bottom and MACD is moving up. It is trying to put in some kind of move. SWSM had a good blast to the upside. RL is trying to make a higher low. A little ABCD pattern, and it bounced off of it. Trying to test that first move and continue to the upside.

We have stocks that are obviously in better shape now after a bit of a pullback on Thursday and the lateral consolidation leading into Thursday. That leaves these stocks in pretty decent position to make bounces to the upside. Indeed, we were picking up some on Friday such as OXM. It is an apparel company making a break to the upside.

They were moving and were in position to move. I suspect that they will try to do that again because we have a lot of good patterns set up. Again, if we get the bid early next week, then this rally could really get some feet under it.



VIX. The VIX dropped considerably on Friday. A straight-line, sharp drop could be suggestive that the market is going to try to rally some. It has been trading in a range. It has had a couple of sharp declines. This would be the third, and this time it may stick. Although it is still above the 200 day EMA. This one was a sharp decline, and it did not bounce. We will see if it rebounds next week. The big difference would be whether the European bids returns or not. It was there on Friday. If it shows up again on Monday, things could look positive for a continued rally.

VIX: 26.38; -4.21
VXN: 25.99; -4.01
VXO: 26.11; -4.88

Put/Call Ratio (CBOE): 1.2; +0.24

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: 47.4% versus 44.2%. Bounced right back up to 47.4%. Interesting pattern, bouncing from 44.2% to 47.4%. Picking up steam to the upside. 35% is the threshold measuring bullish versus bearish action. Six weeks the bulls were below bears. A powerful sentiment signal. Solid move lower from 49.5% in late July. Highs from April and December (60% readings spanning December through early May 2011). The 5 year high is 62.0. The crossover level at 29% bulls from July 2010 is long gone. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 29.5% versus 30.5%. Continuing its decline from above 35%. The index did spend seven weeks over the 35% threshold considered a bullish indicator. 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.



Stats: +50.47 points (+1.94%) to close at 2646.85
Volume: 1.63B (-9.75%)

Up Volume: 1.47B (+1.229B)
Down Volume: 186.72M (-1.403B)

A/D and Hi/Lo: Advancers led 4.49 to 1
Previous Session: Decliners led 5.99 to 1

New Highs: 45 (+28)
New Lows: 49 (-23)


Stats: +20.84 points (+1.69%) to close at 1255.19
NYSE Volume: 746M (-13.05%)

Up Volume: 3.38B (+3.252B)
Down Volume: 368.5M (-3.742B)

A/D and Hi/Lo: Advancers led 5.93 to 1
Previous Session: Decliners led 6.38 to 1

New Highs: 91 (-4)
New Lows: 17 (-2)


Stats: +186.56 points (+1.55%) to close at 12184.26
Volume DJ30: 154M shares Friday versus 166M shares Thursday.


There is a big week ahead, and it will be important for a lot of economic data. We have Retail Sales on Tuesday. That will be very important. By the way, the FOMC meets on Tuesday. No one is expecting much from them. Wow, if Quantitative Easing came it would be crazy. But it will not. The economic data is improving enough to thwart any desires Ben Bernanke might have to do that.

On Thursday there is a lot of information. PPI, Initial Jobless Claims, Empire Manufacturing, Production and Capacity, and the Philly Fed. A huge day followed by the CPI on Friday. We have a lot of data, and it is also coming up to earnings season. We are already seeing warnings, and we may see more warnings coming. That could be the counterbalance to the European the deal that was struck on Friday. Maybe investors will wake up and say that the European deal has no clothes again. Maybe we will have trouble and struggle back down into that range as we have every time the European crisis has been perceived as a crisis again by U.S. investors and traders.

We are trying to get a bid. It is trying to buck up as it did on Friday. Looks good. We will see if it can do it. It is not out of the woods by any stretch. It bounced where it had to; all of the indices did, but they have not put in a breakaway move off of this level. That is why I think we have to see that bid come back in early next week in order to confirm Friday was not just a fluke a relief bounce on a deal that really was not that great of a deal. It REALLY was not that great of a deal. It was not a powerful deal, but it may be enough with the U.S. data to keep U.S. stocks moving higher.

Now I have to throw in the added wild card of warnings. That is something that has to be watched. It is also expiration. We have a triple witch coming on Friday. That could add to a bit of volatility as the market tries to move off of this support level. There are many stocks in decent position to move higher. Some are extended, pulling back. Others have formed rounded bottoms and are ready to move higher. Others are kind of in no man's land. They have started a move, and they are in between. They are somewhere in their range. You do not want to buy them because they do not have far to go before they hit resistance. Others are right up near resistance. While they may look enticing, some of them are not that great because they have overhead at hand. Others who have a similar pattern do not have that same overhead. That is where we come in, picking those that have less overhead resistance to move through. Those are the ones that can make the quick, solid moves for you in a rally that resumes and may be moving up to the end of the year.

We will focus on those stocks we think can make us good trades to the upside during this period. That does not mean we will try to get a dollar or two on a $50 stock. We will still have plays with very reasonable rewards to them, but that is just part of having a good risk/reward in your plays overall. You want the probabilities in your favor. Then you tend to win even if you get some clinkers. And you invariably get some clinkers that just do not go the way you want them to. It is a game of probabilities in the market. Probabilities of what stocks will do and then allocating your money accordingly. It is not about putting all of your money at risk on just one or two plays. Being smart about how you put your funds to work is just as important as getting good plays.

We have to see if the market bid returns gratis Europe to start the week. There are stocks in position to move higher that can carry this rally forward even as some stocks are extended. We need a healthy market to have waves of stocks that move higher. Thus we look at stocks such as AVY that have put in a good bottom but have not rallied sharply yet. These stocks can be the next wave to the upside. They are ready. It is just whether or not investors are ready to push the market higher overall. I may sound like a broken record, but that is what we are going to find out this coming week. We will see whether the European bid that showed up again on Friday although it may just have been a relief move can stick and push stocks higher and thus make their moves stick as well.

We will find some good plays, and we will be ready. If the market wants to run, we will take it. If it was a head fake on Friday, we have got some downside that we already purchased so we can take advantage of it. It is still a range trade right now. It is frustrating and can make you kind of crazy, but you can see overall improvement. Higher low, coming back. If the bid comes in, the indices are in good shape to bounce off of that August-October peak and continue on toward the April, June, and July peaks. That may be all we get out of the rally, but that would be a nice rally indeed.

I will see you on Monday. Have a great weekend!

Support and Resistance

NASDAQ: Closed at 2646.85

2645-2650ish from December 2010 consolidation
The 200 day SMA at 2671
2676 is the January 2010 low
2686 is the January 2011 closing low
2706 to 2705 is the April 2011 low and the February 2011 and consolidation low (bottom of the trading range) 2723 to 2705 is the range of support at the bottom of the January to May trading range
2754 is the recent October 2011 high
2759 is the mid-May low
2762 is the February low
2796 is the February gap down point
2816 is the early April peak.
2825 is the 2007 closing peak.
2841 is the February 2011 peak
2862 is the 2007 peak
2879 is the July 2011 peak
2888 is the May 2011 peak

2643 is the September 2011 high
2612 is the late August 2011 peak
2603 is the March 2011 intraday low (post-Japan low)
The 50 day EMA at 2602
2599 is the June 2011 low
2593 is the November intraday high
2580 is the November 2010 closing high
2572 is the November 2-11 gap down point
2555 is the mid-August 2011 peak
2546 is the early September 2011 gap down point
2535 is the November gap down point
2532 is the early August gap down point
2512 is last weewynnk's gap down point
2469 is the November 2010 low
2331 from October 2010 low and the August 2011 intraday low
2305 from the August 2010 peak (summertime base)
2139 is the May and June 2010 low
2123 is the August 2010 gap down point
2100 from the August 2010 lows

S&P 500: Closed at 1255.19
1255 is the late December 2010 consolidation range
1258 is June 2011 intraday low
The 200 day SMA at 1263
1275 is the January 2010 low, early January 2011 peak
1295 to 1294 is the April 2011 low and the February 2011 consolidation low (bottom of the trading range)
1313 from the August 2008 interim peak
1318.51 is the May low
1325-27 is the March 2008 closing low and the May 2006 peak.
1332 is the early March peak
1340 is the early April 2011 peak
1344 is the February 2011 peak is being challenged again
1357 is the July 2011 peak
1364 is the March 2007 low
1370 is the August 2007 low
1371 is the recent May 2011 peak

1249 is the March 2011 low (post-Japan)
1235 is the mid-December 2010 consolidation low
1231 is the late August 2011 peak
1227 is the November 2010 peak
The 50 day EMA at 1224
1220 is the April 2010 peak
1209 is the mid-August 2011 high
1196 is the November 2010 consolidation peak
1178-1180 is the October 2010/November 2010 consolidation low
1131 - 1127 from August 2010 base peak.
1119 is the early August closing low
1109 is the mid-September 2010 gap up point
1101 is the August 2011 low
1075 is the October 2011 intraday low
1099 from the mid-July interim peak
1090 is the early September 2010 gap up point
1040 from the August 2010 lows and May/June 2010 lows
1011 is the summer 2010 low

Dow: Closed at 12,184.26
12,284 is the October 2011 peak
12,391 is the February 2011 peak
12,754 is the July intraday peak
12,876 is the May high
13,058 from the May 2008 peak on that bounce in the selling

12,110 from the March 2007 closing low
12,094 is the April 2011 low
The 200 day SMA at 11,945
The June low at 11,897 (closing)
11,893 from March 2008 closing low
11,867 from the August 2009 high and peak on that bounce in the selling.
The 50 day EMA at 11,767
11,734 from 11-98 peak
11,717 is the late August 2011 peak
The August low at 11,702
11,555 is the March low
11,452 is the November 2010 peak
11,178 from November 2010
10,978 is the bottom of the November 2010 consolidation
10,750 from September 2010
10,720 is the August closing low
10,705-710 from January 2010 peak
10,694-700 from August 2010 peak
9938 is the August 2010 low

Economic Calendar

December 5 - Monday
Factory Orders, October (10:00): -0.4% actual versus -0.4% expected, -0.1% prior (revised from 0.3%)
ISM Services, November (10:00): 52.0 actual versus 53.4 expected, 52.9 prior

December 7 - Wednesday
MBA Mortgage Index, 12/03 (7:00): 12.8% actual versus -11.7% prior
Crude Inventories, 12/03 (10:30): 1.336M actual versus 3.932M prior
Consumer Credit, October (15:00): $7.6B actual versus $7.0B expected, $6.9B prior (revised from $7.4B)

December 8 - Thursday
Initial Claims, 12/03 (8:30): 381K actual versus 395K expected, 404K prior (revised from 402K)
Continuing Claims, 11/26 (8:30): 3583K actual versus 3700K expected, 3757K prior (revised from 3740K)
Wholesale Inventories, October (10:00): 1.6% actual versus 0.2% expected, 0.0% prior (revised from -0.1%)

December 9 - Friday
Trade Balance, October (8:30): -$43.5B actual versus -$44.0B expected, -$44.2B prior (revised from -$43.1B)
Michigan Sentiment, Preliminary December (9:55): 67.7 actual versus 65.1 expected, 64.1 prior

December 12 - Monday
Treasury Budget, November (14:00): -$139.5B expected, -$150.4B prior

December 13 - Tuesday
Retail Sales, November (8:30): 0.6% expected, 0.5% prior
Retail Sales ex-auto, November (8:30): 0.5% expected, 0.6% prior
Business Inventories, October (10:00): 0.9% expected, 0.0% prior
FOMC Rate Decision, December (14:15): 0.25% expected, 0.25% prior

December 14 - Wednesday
MBA Mortgage Index, 12/10 (7:00): 12.8% prior
Export Prices ex-ag., November (8:30): -1.5% prior
Import Prices ex-oil, November (8:30): -0.2% prior
Crude Inventories, 12/10 (10:30): 1.336M prior

December 15 - Thursday
Initial Claims, 12/10 (8:30): 390K expected, 381K prior
Continuing Claims, 12/03 (8:30): 3625K expected, 3583K prior
PPI, November (8:30): 0.2% expected, -0.3% prior
Core PPI, November (8:30): 0.1% expected, 0.0% prior
Empire Manufacturing, December (8:30): 3.0 expected, 0.61 prior
Current Account Balance, Q3 (8:30): -$110.0B expected, -$118.0B prior
Net Long-Term TIC Fl, October (9:00): $68.6B prior
Industrial Production, November (9:15): 0.2% expected, 0.7% prior
Capacity Utilization, November (9:15): 77.8% expected, 77.8% prior
Philadelphia Fed, December (10:00): 4.3 expected, 3.60 prior

December 16 - Friday
CPI, November (8:30): 0.1% expected, -0.1% prior
Core CPI, November (8:30): 0.1% expected, 0.1% prior

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

Jon Johnson is the Editor of The Daily at

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