Sunday, August 26, 2012

Bernanke Says the Fed has Scope

MARKET SUMMARY

- Stocks start lower but ECB, Bernanke pull another Friday rescue.
- Bernanke says the Fed has scope.
- Durable Goods Orders surge on aircraft, dive on everything else.
- Obama-Side Economics: Incomes are now lower in the recovery than they were in the recession.
- Missing the obvious because clinging to hope.
- Indices bounce where they had to but with Jackson Hole on Friday, stocks may just bide time.
- At these levels, despite still overall good technical action, the risk/reward is just not what it was for the upside.

Bernanke sees 'scope for further action,' and the indices use his scope to rally back.

Stocks were lower for the fourth session as the indecision at the prior post-bear market highs continued weighing on investors and traders. Indeed, the sellers took control on Tuesday and continued to push stocks lower Friday. Modest declines but yet another day of red numbers.

Then the ECB said it was outlining a bond buying plan of action, this even after Draghi said the ECB had to wait for a German court ruling on the ESM before it could formulate a bond plan. While the statements from Europe are enough to leave any sane person scratching his or her head (or other body parts of individual preference), they seemed to console the stock markets.

Then the silver bullet was let. Once again the WSJ, via the pen of Mr. Hilsenrath, came to the market's rescue. Third time in just about as many weeks. This time it was from no other than Bernanke himself, speaking in a letter to Daryl Issa, addressing the Fed's use of its monetary policy weapons and perceptions the Fed was a market and political group of hacks (the WSJ published the letter via Hilsenrath). One area of particular concern was the use of further stimulus, if there was anything left for the Fed to use, and the potential impact.

The key line as reported a thousand times Friday: "There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery." Now that statement certainly could have been worded more precisely. I am still not sure I understand whether the chairman was playing a massive joke on us all, referring not to the availability of additional stimulus methods but instead to the mouthwash to at least make the situation smell minty fresh.


Now that's minty fresh!

Whatever the meaning, the market liked it. DJ30 was down 30 points on the low. It finished 100 points higher. The indices all reversed, not to big gains, but considering they traded negative o start and then rallied back, it was not bad action.

SP500 9.05, 0.65%
NASDAQ 16.39, 0.54%
DJ30 100.51, 0.77%
SP600 1.55, 0.34%
SOX 0.58%

Now there is no doubt the economy could use some strengthening. This week revealed more data indicating that the economy, if it is heading in the right direction as we are told, is moving in the slowest pace in history. We already know this is the worst recovery since the Great Depression, and the data is not getting better.

July Durable Goods Orders rose on the strength of Boeing orders. Take them out and it dove negative, 1% from where it was supposed to be. Further, we know that the July figure will be gutted this next month because Qantas cut a huge order for Dreamliners. So much for transports pulling us through.

Durable Orders, July (8:30): 4.2% actual versus 2.5% expected, 1.6% prior (revised from 1.3%)
Durable Orders -ex Transports, July (8:30): -0.4% actual versus 0.6% expected, -2.2% prior (revised from -1.4%)
Business orders: -3.4% versus -0.2% expected, -2.7% prior (revised lower from -1.4%)

Look at the ex-transports number: up from June, but still negative. Business orders diving much more than anticipated and roaring past a downwardly revised June number. Investment has fallen off the table of late as reported last night when discussing the commercial real estate market.

What is equally if not more disturbing: we learned that since the Obama recovery began in 2009 (and I use recovery only as the popular media is using it), incomes are 4.8% lower than they were BEFORE the recovery started. During the recession itself incomes only fell 2.6%! 800,000 more people are classified as long term unemployed than when the recession supposedly ended. 85% of the middle class say it is harder to maintain their standard of living than it was 10 years ago.

That poses the question: if a recovery leaves US citizens worse off in terms of earning power than they had during the recession, is it really a recovery?


Recovery turning over or is it simply that a recovery requires a turning back to free market, limited government principals that made the US great?

Indeed, this absurdly backward outcome from the past 3.5 year's economic policies shows just how flawed the Obama approach was and still is: it put money into the banks (0% interest loans), large corporations (GM, GE) and friends of the Administration (Solyendra, etc.), but the majority of taxpaying citizens who footed that bill got no jobs, and those who did received less money. Ah, that 'job quality' I discussed in the spring, just ahead of this the third summer of recovery.


$900B in the first round of Keynesian stimulus. Still 14M+ unemployed, still negative in terms of net jobs, and those with jobs bring home less money.

The Obama-side economics apologists lambast 'trickle down' economics, but when that was tried under Reagan and Clinton it worked because it was much more than trickle: tens of millions of jobs created, new technologies, higher standard of living across the board. The Obama-side economic plan saw NO flow, trickle, or otherwise to the lower levels. Indeed, based upon the wages numbers, it TOOK money from the workers and put it into the large corporations, the EXACT thing the Administration and the Occupiers supposedly decry.




So, despite the truly idiotic parrots who call themselves analysts on the financial stations currently claiming the economic data is too strong for more stimulus, the facts show that the 'recovery' is hardly that.

INDEED, think about this: the government statistics, as pointed out here the past few months, are so deviant from the reality of low to no job creation, wage declines, negative manufacturing reports, and negative durables orders, does it not make sense that we are ALREADY in recession and the analysts are simply in denial? The data overwhelmingly shows we have slowed and slowed sharply this summer. In denying the obvious and trying to point out the few inconsistent and indeed fabricated positives as proof of economic recovery, these people are showing their lack of basic pragmatism when looking at economic data. I say we are already in recession now.


OTHER MARKETS

Dollar. 1.2511 versus 1.2562 euro. The dollar was up versus the euro but down against everything else. It surged at one point. The ECB news helped it rally to the upside. It goes up when the ECB says it will do something. That makes sense, of course, given that the ECB would be eviscerating its currency for once, and that would make ours stronger. But when Bernanke said there was still scope, the dollar fell right back down. It remains in its rounded top with a potential head and shoulders. A shoulder and a head are in place right now.


Bonds. 1.68% versus 1.67% 10 year US Treasury. Bonds closed flat. They gapped higher, reversed and lost a little bit of ground. It has been a strong run on the week given the economic data and the commentary out of the Fed. A nice, big run to the upside off of a double bottom at the 200 day EMA. It is still a toppish pattern right now, and it is bumping up against resistance and fading. We will see what happens as bonds continue trying to run back and recover some of that lost ground. They have some serious resistance to deal with at this level in terms of gaps and other consolidations.


Gold. 1672.30, -0.50. Gold was flat for a change. Gold has been streaking to the upside, looking very strong. It just had to take a pause after that strong rally this week. A lot of talk from the Fed, a lot of talk from the ECB, and then gold was right back in the game. It has been higher anyway before this talk, and then it made a serious break up through the 200 day EMA on the week. That also took it through some important resistance levels. Now it is bumping up against the other highs. It is a tough job getting out of a hole, but it is doing it with the aid of some inflation worries. Despite what a lot of pundits say, more QE appears to be pricing into the various markets.


Oil. 96.15, -0.12. Oil was down a bit on Friday, but it has had a good last couple of weeks. It broke higher, consolidated this week, and still looks to be in position to continue the move to the upside.


TECHNICAL SUMMARY

Internals.

Volume. NASDAQ -3%, 1.3B; NYSE -13%, 468M. Meager volume, indeed, as the indices bounced back to the upside. Once more we see more downside volume than upside. It is Friday in late summer, so you have to take some of the volume -- or lack thereof -- into account for that reason. Nonetheless, overall volume could not find many supporters on the way back up.


Breadth. NASDAQ +1.5:1; NYSE +1.86:1. This was after -2:1 on Wednesday. The advance/decline line was decent but nothing to write home about.


THE CHARTS

SP500. The charts tell the story. After a selloff below the 10 day EMA and down to the 20 day EMA on Thursday, the SP500 tapped that 20 day EMA on the Friday low and recovered. It closed near the session high. Not bad action at all. That was where it needed to hold and put in a bounce. It was not anything stellar, volume was lower. It is still not out of the woods; it just did what it needed to do. As noted, this is pretty good action if you get rid of these and do not factor them into the picture. I do not know you cannot rely do that, but let's just pretend. This is a pretty solid pattern: higher highs, higher lows, a lateral consolidation, a break, a test of it. It looks pretty good. The only thing is when you peel back this cover and see that it is at these old highs. That gets everyone quaking in their boots. It is not a great time of year. The end of August and into September is typically the worst month for the market. Not great news, but it is still a pretty decent pattern overall.


DJ30. Even the Dow recovered, bouncing up through the 20 day EMA.


NASDAQ. NASDAQ gapped below the 10 day EMA that it has very nicely held, and it reversed right back to the upside and closed with a very solid, credible gain on the session. That keeps it right in line with that late-April peak. It is still below the March post-bear market highs, but it is putting in the right moves to advance and make a try at that former high.


SP600. The small caps managed to rebound off of pullback, holding at the 20 day EMA with something of a doji. Not a great move, but it did what it needed to do right at that former peak. It held where it had to, and on Monday we will see if they can continue the move that was ECB-led and then Bernanke-led on Friday.


SOX. SOX had a nice bounce off of the 20 day EMA. Nice test, nice bounce, and it held the old breakout point. It is looking very solid overall and in great shape to continue to the upside.


NASDAQ, SP600, SP500, and the SOX all look great to continue upside. Why won't they? There are many reasons that they would not and many reasons that they would. A lot of the won'ts have to do with the prior highs and just idea that they have run far enough and cannot make the break. I will not necessarily subscribe to that. I did not like the action on the week, but it did not show me that there was a total breakdown. The Dow broke through and gave back its last breakout and run. That is not a positive by any stretch, but the other indices held and bounced. They still remain positive. There is still a bit of leadership out there to propel the stocks higher as well, even though there are some groups such as energy that continued their troubles on Friday.


LEADERSHIP

Energy. Some energy stocks were breaking down. PTEN broke. It did try to recover off of the lows, and it did manage to recover some ground. A lot of the energy has left the energy sector, at least temporarily. We see some good tests, such as APA. It is showing a doji at the 50 day EMA and trying to turn the corner. Even APC has formed a little pennant or triangle of sorts at the 50 day EMA. It might to be able to make a break to the upside as well. We will have to see. It got a bit heavy last week. Maybe it was just a test and they can continue to the upside. We will see if that is the case.

Financial. Financials are starting to come back around again, helping out the rest of the market. BAC looks good with this nice flag pullback to the 10 day EMA. JPM has a nice pullback to the 200 day EMA. Even WFC is trying to hold at the 20 day EMA and put in a bounce. Although it does not look as good as it has in the past, it is still trending to the upside. This is a jumbled trend, however.

Industrial. CAT is trying to hang on at the 50 day EMA. JOY is trying to do the same, right at the 50 day EMA. These will be important tests come next week if they can make the break to the upside.

Retail. Retail continues to perform. RL broke to the upside with a solid gain on the session. KORS broke sharply higher as well. We are seeing these kinds of sharp breaks from apparel. Retail is doing all right. DECK was not screaming higher on Friday, but it held at the 10 day EMA. It has a nifty pullback after a nice initial break of that downtrend that moved through the 50 day EMA and passed that last high.

These stocks are still holding. Retail continues to show that it wants to move higher in anticipation of more sales, even though we learned that citizens just do not have as much money as they used to. The jobs they are working now do not pay as much. Is this the sign of a secular decline in the country? Is it a true change where we no longer advance our standard of living? Where we have to agree to take less money? Why? Because in the government spent it all, so no one else has any money to spend.

It seems like rudimentary economics and finance, but our government has not grasped that. If it spends all the money, we cannot make enough money to repay it because the life is sucked out of the economy and out of our capital investment. But I digress.

There are still areas that can lead the market to the upside. There were some breakdowns on the week, no doubt. Some techs went down, some medical stocks went down. There were some problems, but there are still leaders out there. There are enough to move the market higher; it is just a matter of whether the money comes back in and starts pushing stocks once more.


THE MARKET

SENTIMENT INDICATORS

VIX. The VIX rallied nicely on the week, and a little bit of selling will do that. It bounced back down from the 20 day EMA on Friday given that the market posted a solid recovery. Still, it put in a little double bottom at those prior lows that bounced the VIX higher and the market lower in 2011 and earlier this year. We still have the issue of a potential selloff even though the markets held at near support and bounced on Friday. That was good action to take, but it does not necessarily mean that the indices will continue higher from here. They will need that leadership to come back around and provide, well, more leadership.

VIX: 15.18; -0.78
VXN: 16.6; +1.28
VXO: 14.62; -2.06

Put/Call Ratio (CBOE): 0.85; -0.08

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: 43.6% versus 43.6% versus 39.4%. Wow, talk about lack of care. Bulls, elevate from recent levels mind you, held steady. Makes sense given the lateral move below the prior highs that had so many pundits negative. Undercut 35%, the threshold for bullishness, in early June. You would expect it to rise and it has. Still not at a dangerous level, just working as it should. As noted, hit 34% in early June. It did its job and the market is on the rally. Hard drop to 34 from 39.3% as economic reality and a choppy stock market hit. Off the 55+ level hit in late February. That was the highest level since April and May of 2011, the peak of the post-bear market high. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 26.6% versus 25.5% versus 27.7%. Bounced back up to a level from four weeks back. Also makes sense given the lateral move that had many pundits calling for a market rollover. Never made it to the 35% that can be a bullish indication, but the bulls were weak enough back in June. Over 35% is the threshold to be really be a good upside indicator. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +16.38 points (+0.54%) to close at 3069.79
Volume: 1.321B (-2.97%)

Up Volume: 863.15M (+474.47M)
Down Volume: 453.76M (-525.15M)

A/D and Hi/Lo: Advancers led 1.5 to 1
Previous Session: Decliners led 1.97 to 1

New Highs: 56 (+20)
New Lows: 33 (-2)


SP500/NYSE

Stats: +9.05 points (+0.65%) to close at 1411.13
NYSE Volume: 468M (-13.22%)

A/D and Hi/Lo: Advancers led 1.86 to 1
Previous Session: Decliners led 2.23 to 1

New Highs: 77 (+18)
New Lows: 13 (-1)


DJ30

Stats: +100.51 points (+0.77%) to close at 13157.97
Volume: 88M shares Friday versus 108M shares Thursday.


MONDAY

There is a lot more economic data back on the agenda next week. Tuesday Consumer Confidence is the main read. Wednesday the second reading the GDP on the Q2 is out. It is expected to rise to 1.6%. They are lunatics for thinking that. The numbers may show that, but with inventories and the issues we have with exports and other areas, I don't see how that could be. I think it is all a bunch of hogwash right now. I think we are in negative numbers, and we will have revisions in the future that will show historically that we were in a recession.

Pending Home Sales are out. Thursday we have Initial Claims, as always, and then Personal Income and Spending. Very important, particularly in light of the word we got this week that wages are not rising but are actually down. Friday we have the important Chicago PMI. Michigan Sentiment, and Factory Orders. A trio of fairly important data. Sentiment and Confidence (we get that Tuesday) are tied in when there are very strong, long, negative times in the economy. They tend to be more truthful and leading as to what consumers are actually going to do. Versus good times when they always say they will cut back but never do.

We have quite an agenda for the data, but, of course, we still have to look at the technical picture because it will key much of the action. I am talking about SP500 and its test of the 20 day EMA as well as NASDAQ's test of the 10 day EMA and the SP600 holding at the 20 day EMA as well. All of those are important, and if we get a nice break higher, then they get it at least a shot at the prior bear market highs.

There are many analysts out there every day talking about how things are negative and are going down. That makes sense because the economy is so bad and the market has rallied well in a bad economic period. This has all been in anticipation of the Fed and ECB taking action. It cannot be on the economic data because the market is too smart to be fooled by government tinkering of the data. Yes, on a near-term basis it will react positively to the smoke and mirrors, but ultimately it sees through it. Ultimately more data comes in, and the market is always a leading indicator.

The question is, what is the market seeing that makes it go up or down? If it was just the economy, right now this market has been going down for these past two to three months and not going higher. As it is, it sees more stimulus and more liquidity. Not that it will work or that it will save the economy, but for what it can do near term for the market. That is to push it higher with a flush of liquidity that will not be used by anyone (because there are no jobs). Banks will just borrow for 0% and buy foreign bonds, or even our bonds, and get a return off of those. The money will not be put to work.

As reported earlier in the week, velocity is at an all-time low. It is lower than it was in the Great Depression. Velocity is how many times money turns over. It is the old story about the magic penny: "If you hold it tight you will not have any; but lend it, spend it, and you'll have so many they roll all over the floor." Remember that one? That is the velocity. It is how many times a single dollar moves through the economy as a loan, something that is then used to buy something else, and then it is spent on something else. It keeps turning over hands. There is no velocity right now.

Those who are getting the money -- the banks -- are not lending it. They are putting it into safe returns. The big companies made a bunch of money off of that stimulus, and they are not spending it either. They are hoarding it. Revenues are declining, so they will not be spending money on improving capital investment or their businesses. They are hanging on to see what will happen and who will be elected. There is no real spending of money; there is a hoarding of money. If there is more liquidity put into the market, that means it does not go into the economy and is used that way. Instead it goes into financial instruments from the banks or from companies that use it and put it into commodities or other types of investments other than increasing overhead costs. That is why the market likes it: It goes directly into the financial instruments, and that drives them higher.


Talk about ruining a nice view . . .


That is what this rally is based on. There is also the Jackson Hole Conference in Wyoming next week. Bernanke will be there with his cohorts as well as some others from the ECB and elsewhere. They will be discussing the word's economic future and how they can control it -- I mean, how they can help it along in recovery. That will be a point where the markets will look to Bernanke for some kind of guidance. Friday he gave a bit in the letter to Darrell Issa, and he may be giving some more. The fear is that he will not do anything because of that "strong economic data" we have seen of late. True, Bernanke does not want to do anything if he can avoid it. Thus he might put it off next week and wait until later in September. Remember, they said it would be in August or September, and the implication was that it would be at the August or September meeting and not at some point in between or off the cuff.

The market could be disappointed next week if it does not get any news from Mr. Bernanke on Quantitative Easing. It likely will not. It may get a little bone thrown to it, but it will not get a definitive announcement of any Quantitative Easing. It will want to do so with the ECB, perhaps. It says it still has to wait on Germany. Near term there could be an upset in the market. An upset in the market would send it down a bit given that it is bumping up at those prior highs.

We will just watch how the indices interact at this level. We are not totally comfortable with what we are seeing with some stocks breaking lower, but we continue to see stocks move. When you have a stock like RL breaking sharply to the upside again, it is hard to think that everything is totally negative in our economy. If that is the case, as long as these stocks continue to set up, we like what we see. Despite the old highs right overhead, we will not call the top of the market. We will be darn careful here. We will keep our stops up because we have seen stocks breaking down and good patterns cracking under the stress. It is a stressful time in the market because the buyers and the sellers are fighting it out right here at those old highs.

Right now we have a good move to the upside. On what? Hopes of stimulus. This entire rally, as noted before, is about stimulus. So if Jackson Hole does not come out with anything positive, we will get thrown back. We will be very careful with the upside. It is only prudent to be careful right now. Why? Because the risk/rewards are not as great for the market overall because they are bumping right up against highs. RL has a better risk/reward because it has a nice rounded bottom, it broke higher, tested, and now it is breaking higher. It has room to run. That is a different risk scenario, but the entire market is not there. Much of the market is higher than this. Therefore even plays like RL have more risk associated with them merely because the market overall is higher. In quality stocks such as RL, we will put some money to work to the upside. Overall we have to be cautious next week, however. We have to wait for the Jackson Hole commentary. Then we can see the reaction and move in with more plays at that point, upside or downside. We want to be ready for both.

Bernanke's Jackson Hole speech is not until Friday. There will be movement ahead of that. The question is whether we will get any significant movement or if it will be a choppy, lateral trade? We have had a good pullback to the 20 day EMA on SP500. We had a bounce to the upside on low volume, but driven by Bernanke's statements. It could very well move to the upside and continue the run. If it does, that is fantastic and we will let our plays run. I do not think we will get off that easy this week. I think it will be more of a choppy move, bouncing up and down and not really able to break through those highs before Friday. We will wait and see what Bernanke does. Near term, if he does not come through, he could be setting us up for some downside for a little bit of time.

If we do not get much movement before Friday, we are looking at taking some off the table. If we get movement before Friday, then that market is set up for some potential disappointment or a little sell on the news. We may just be taking some of the table on Friday, regardless of what happens. Bernanke is a wild card, and I have my doubts as to whether he will announce anything significant at Jackson Hole versus waiting until the September Fed meeting.

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


Support and resistance

NASDAQ: Closed at 3069.79

Resistance:
3076 is the late April 2012 high
3090 is the mid-March interim high
3101 is the August 2012 high
3134 is the March 2012 post-bear market peak
3227 is the April 2000 intraday low
3401 is the May 2000 closing low

Support:
3042 from 5/2000 low
3026 from 10/2000 low
3024 is the gap point from early May
The 20 day EMA at 3021
3000 is the February 2012 post-bear market high
2999 is the bottom of the August 2012 consolidation
2988 is the July 2012 high
The 50 day EMA at 2970
2962 is the April 2012 low
2950 is the mid-April closing low
2942 is the mid-June 2012 high
2910 is the March 2012 low
2900 is the March 2012 low
2888 is the May 2011 peak and PRIOR post-bear market high
2879 is the July 2011 peak
The 200 day SMA at 2868
2866 is the July 2012 closing low
2862 is the 2007 peak
2841 is the February 2011 peak
2816 is the early April 2011 peak.
2810 is the low in the shoulders
2754 is the October 2011 high
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


S&P 500: Closed at 1411.13

Resistance:
1422.38 is the prior post-bear market high (March 2012)
1427 is the August 2012 peak
1425 from May 2008 closing highs
1433 from August 2007 closing lows
1440 from November 2007 closing lows

Support:
1406 is the early May 2012 peak
1402.22 is the closing low of the August 2012 lateral consolidation
The 20 day EMA at 1399
1378 is the February 2012 peak
The 50 day EMA at 1378
1375 is the early July 2012 peak
1371 is the May 2011 peak, the post-bear market high
1363.46 is June 2012 high
1359 is the April 2012 low
1357 is the July 2011 peak
1344 is the February 2011 peak
1340 is the early April 2011 peak
The 200 day SMA at 1334
1332 is the early March 2011 peak
1325 is the July 2012 intraday low
1309 is the right shoulder low from June 2012
1295 to 1294 is the April 2011 low and the February 2011 consolidation low (bottom of the trading range)
1293 is the October 2011 peak
1275 is the January 2010 low, early January 2011 peak
1267 is the December 2011 peak
1266 is the June 2012 base low


Dow: Closed at 13,157.97
Resistance:
13,297 is the April 2012, prior post bear market high
13,331 is the August 2012 post-bear market high
13,668 from 12-2007 peak
13,692 from 6-2007 peak
14,022 from 7-07 peak

Support:
The 20 day EMA is at 13,111
13,058 from the May 2008 peak on that bounce in the selling
13,056 is the February 2012 high
12,971 is the early July 2012 high
The 50 day EMA at 12,964
12,754 is the July intraday peak
12,716 is the April 2012 closing low
The 200 day SMA at 12,680
12,391 is the February 2011 peak
12,369 is the left shoulder low from May 2012
12,284 is the October 2011 peak
12,258 is the December 2011 peak
12,110 from the March 2007 closing low
12,094 is the April 2011 low
12,035 is the June 2012 base low
The June 2011 low at 11,897 (closing)
11,734 from 11-98 peak
11,717 is the late August 2011 peak


Economic Calendar

August 21 - Tuesday
FOMC Minutes, 7/31 (14:00)

August 22 - Wednesday
MBA Mortgage Index, 08/18 (7:00): -7.4% actual versus -4.5% prior
Existing Home Sales, July (10:00): 4.47M actual versus 4.55M expected, 4.37M prior
Crude Inventories, 08/18 (10:30): -5.412M actual versus -3.699M prior
FOMC Minutes, 7/31 (14:00)

August 23 - Thursday
Initial Claims, 08/18 (8:30): 372K actual versus 365K expected, 368K prior (revised from 366K)
Continuing Claims, 08/11 (8:30): 3317K actual versus 3298K expected, 3313K prior (revised from 3305K)
FHFA Housing Price I, June (10:00): 0.8% prior
New Home Sales, July (10:00): 372K actual versus 368K expected, 359K prior (revised from 350K)
FHFA Housing Price I, June (10:00): 0.7% actual versus 0.6% prior (revised from 0.8%)

August 24 - Friday
Durable Orders, July (8:30): 4.2% actual versus 2.5% expected, 1.6% prior (revised from 1.3%)
Durable Orders -ex Transports, July (8:30): -0.4% actual versus 0.6% expected, -2.2% prior (revised from -1.4%)
Business orders: -3.4% versus -0.2% expected, -2.7% prior (revised lower from -1.4%)


August 28 - Tuesday
Case-Shiller 20-city, June (9:00): -0.3% expected, -0.7% prior
Consumer Confidence, August (10:00): 65.5 expected, 65.9 prior

August 29 - Wednesday
MBA Mortgage Index, 08/25 (7:00): -7.4% prior
GDP - Second Estimate, Q2 (8:30): 1.6% expected, 1.5% prior
GDP Deflator - Second, Q2 (8:30): 1.6% expected, 1.6% prior
Pending Home Sales, July (10:00): 0.0% expected, -1.4% prior
Crude Inventories, 08/25 (10:30): -5.412M prior

August 30 - Thursday
Initial Claims, 08/25 (8:30): 370K expected, 372K prior
Continuing Claims, 08/18 (8:30): 3300K expected, 3317K prior
Personal Income, July (8:30): 0.3% expected, 0.5% prior
Personal Spending, July (8:30): 0.5% expected, 0.0% prior
PCE Prices - Core, July (8:30): 0.1% expected, 0.2% prior

August 31 - Friday
Chicago PMI, August (9:45): 53.8 expected, 53.7 prior
Michigan Sentiment - Final, August (9:55): 73.6 expected, 73.6 prior
Factory Orders, July (10:00): 2.0% expected, -0.5% prior



By: Jon Johnson, Editor
Copyright 2012 | All Rights Reserved

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

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Sunday, August 19, 2012

The Path for QE3 is Clear

MARKET SUMMARY

- Nothing flashy but stocks continue the Thursday upside break with some big techs and small caps leading the way.
- Let's release from the SPRO for no effect other than political posturing. Moreover, demand is so low it would have no impact.
- Michigan Sentiment rises on current conditions, falls hard on expectations as inflation expectations jump.
- LEI rise on stock market gains.
- $500B unused highway funds released for jobs to fix our 'crumbling' roads. I travel a lot but have not seen them. Where are the 'crumbling' roads?
- Eating out less? You are apparently not alone.
- The path for QE3 is clear: Geithner requires Fannie to divest faster. But someone has to buy those MBS. Hmmm. The Fed?
- Stocks set to test the post-bear market highs. We have good positions so plan on going into the week with our eyes wide open as to how the sellers and buyers react.

It was nothing flashy, but stocks continued the Thursday break higher from that lateral consolidation. Of course that put them all the closer to their 2012 post-bear market highs. They did not challenge to break them on the day, but there were some good indications from leadership as NASDAQ and the small caps were in the lead to the upside.

When growth is leading, it is a positive for the market. Indeed, futures were somewhat flat to down premarket, but then they started to rally into the open. Stocks held up decently as the data was released. There was the Michigan Sentiment survey, which was a bit better than expected, but some of the internal numbers were not that good. The Leading Economic Indicators for July were better than expected, but it relies so heavily on the stock market, and no one believes in the rally, and no retail investors are in it. The reasons for its inclusion in the LEI are dubious right now, but the market enjoyed the news and continued to the upside. Indeed, it rallied into the afternoon after trading back and forth all morning. The market closed near session highs, putting in a very respectable move.

SP500 +0.19%
NASDAQ +0.46%
Dow +0.19%
SP600 +0.8%
SOX -0.76%

The SOX was down thanks to MRVL and its warning about the future. Its chips go into a lot of devices such as phones and tablets. It was not a big move to the upside for the market. It was not a big move at all, but it was a solid affirmation of sorts to the Thursday break higher. It is important that the indices did not immediately turn back over but instead continued their push to the upside.

Anything can happen over the weekend. There is so much geopolitical tension ongoing here as well as in the Middle East. It could be that Israel launches an attack this weekend. It seems strange, but it could happen. Of course oil was higher and many other commodities were higher on that kind of news. The indices are just below those prior highs but, as noted noticed on Thursday, they are showing very good technical action along with many stocks.

It was not a perfect day necessarily. There were some issues to overcome, but there was some help as well. Early in the day German Chancellor Merkel said they will do whatever it takes to save the euro. She also agreed to at least mull over reducing the requirements on Greece in terms of austerity.


Okay, we will do [hard swallow] whatever it takes to save the euro.
Alright, alright. We will also agree to ease up on the Greeks. Happy?

Reminds me of 'Blazing Saddles' where the townspeople were going to give land to certain groups but not the Irish. After the deal was turned down, the Irish were reluctantly included.


'Aw prairie s**t, everybody.'

It was enough to overcome some Fed pushback regarding further stimulus.

Plosser (Philly Fed President): 'Very dubious' about whether additional bond purchases would have a positive impact. "There are diminishing returns to these actions" he told Hilsenrath at the WSJ. "The evidence is not strong that somehow [bond purchases] are going to help the unemployment rate move faster to where we'd like it to be. I don't see that there is much benefit."

Plosser underscores the Fed's focus on employment over any other indication right now.

But . . . Geithner sets the stage for QE3

Still pis - - er, angry over FHFA head DeMarco telling him socialism was not the way to go in response to Geithner's proposal for mortgage principal reductions that would force responsible mortgage payers to pay for those perhaps less responsible, Treasury Secretary Geithner now requires Fannie and Freddie to pay not 10% but 100% of their income directly to the Treasury and to speed up the wind down of their portfolios to 15% a year versus 10%. This means the portfolios will be drawn down four years earlier.

What is the effect? Well, these GSA's are now fully nationalized given they have to turn over 100% of their incomes and totally answer to the Treasury.

Problem 1: Who or what will buy the excess investment portfolio as it comes up? Who indeed? Perhaps the . . . Fed? Geithner just mapped out the plan for QE3 whether the Fed likes it or not.

Problem 2: Fannie and Freddie had about $6T in debt. Does that mean this debt is now to be added onto the existing $15.9T in debt now on the books? It won't be but it is there nonetheless.



But Apple rescues the day.


AAPL continues its run, hits a new high ahead of product announcements.

AAPL has been on a run for almost a month now after a gap lower on earnings. Very nice, indeed. It tends to run ahead of the product announcements, and that is exactly what it has been doing and was continuing to do on Friday.

With AAPL being such a large market cap, that is why we saw the NASDAQ and the SP500 move higher. But it was not limited to AAPL; many stocks performed well on the day. ATHN made a good comeback, rising 2.75%. EBAY posted a nice gain as well, gapping up out of a month-long lateral consolidation, rising over 2%. CAT did not have a huge move, but it was a nice 1.5% gap to the upside to a new closing high on this break higher. BABY put in a good two-day run after reversing on Wednesday, rising 3.25%.

Looking at manufacturing equipment, FAST was up over 2%. Retail was not left out. PII reversed off of some Wednesday selling and put in a strong Thursday and Friday. It was up 2.4% on Friday. RL is another retailer showing strength. It broke above the 200 day EMA after something of a cup with handle base. Strong volume on that breakout. SSYS, another tech, had a nice lateral consolidation similar to the market after it ran to a new high. It had a strong 4.5% break to the upside on Friday.

It was not just AAPL doing the pulling, although it did do its share. A lot of other stocks contributed to the move, and they were not just drifting higher. Solid breaks to the upside, posting 2% to 5%+ gains on the session.


OTHER MARKETS

Some were resting and some were moving.

Dollar. 1.2321 versus 1.2364 euro. The dollar was resting. A modest gain after working laterally all week. It is still in a tightening something of a pennant pattern, holding near the 50 day EMA and trying to set up for a new break to the upside. It seems torn between the Fed potentially acting with more stimulus, the Fed potentially NOT acting with more stimulus, and mixed economic data. That data sometimes looks good in the headlines, but when you look at the guts of each report, it pretty much stinks. We are getting a flatline from the dollar right now.


Bonds. 1.81% versus 1.84% 10 year US Treasury. A modest gain in treasuries, bouncing off of the 200 day EMA after a week of selling. This selling has been ongoing for three weeks as it stair-stepped to the downside. This past week was a severe drop, plucking it right down on the 200 day EMA. But, as noted, it was a modest bounce, and it closed off of its high for the session. Not a lot of strength. Perhaps it got a little bit of energy from Treasury Secretary Giethner's actions with respect to Fannie Mae. But this is not a big move; it is more of a relief bounce off of the selling to the 200 day EMA.


Gold. 1619.40, +1.20. Gold rose modestly. Not a bad week overall. It sold early and then rebounded on Thursday. Still moving laterally, slowly rising in something of a cup base. We will see what happens. Commodities are showing a bit more of an inflation bent of late, and gold is no exception.


Oil. 96.01, +0.41. I will spend a little more time talking about oil. It rallied up close to the 200 day EMA. Will it be repulsed here? There are many factors affecting oil right now. One that I already talked about is the tensions between Israel and Iran and whether there will be some kind of attack this weekend or in the near term. The window is closing were Israel can actually do something.

There were other stories impacting oil on the day. There was the talk of the administration ready to use the Strategic Petroleum Oil Reserve to release oil and hopefully hold off rising oil prices. Why is that important? Consider that for every $10 rise in Brent, you get a $0.22 rise in US domestic gasoline prices. In July there was a $10 rise in Brent and, yes, gasoline prices rose $0.22 on average in the US. Now it is up another $10 since then, so we can expect another $0.22 rise in gasoline prices in what is possibly the worst time for the President. Everything seems to be piling up negative right now: the unemployment rate is rising, and now energy prices are moving back up when they thought they were getting under control.

Their release from the SPRO will not likely help. Remember that they did this last year. There was a short release. Brent fell $4, but then it bounced right back up. History shows that when we do this, it often goes down but then bounces back up even higher than it was before. That in itself makes it a dubious course to pursue. Also it is obvious pandering for votes. The Obama administration has been clear that it wants gasoline prices higher than they are now so it can push more of its "clean energy" programs. It wants it higher, but it will bow to what it thinks is public pressure every once in awhile and release a little from the SPRO to tamp down prices.

It is so hypocritical to do that since they want prices higher. Their policies have been geared to drive prices higher just like electricity prices. Yet they will pander when necessary. That is nothing new; most other administrations do the same things. It is just so obvious, and when things are already so negative, it makes you shake your head. I am sick of it. But whether we are all sick of it or not, it is what it is. And the market does what it will do.

Here is the kicker: We are seeing oil rise, yet demand is very weak. Deliveries for petroleum fell 2.7% in July year-over-year. That is the lowest level for any month since September 2008. The API reports that US oil demand was just over 18M barrels in July, and that was the weakest for any July since 1995. It fell 2.3% year-over-year. The deliveries for oil are down because obviously our demand is down. You can talk to any supplier and hear that there is plenty of oil out there. It is just trading at a higher price, but demand is way down. Is it because prices are so high? No. We were this high last year. The problem is just less economic activity right now. That is why we are getting such low demand and low need for oil.

Obviously it is the speculators driving it higher, correct? This is the same market that brought is lower a few months ago. We can see the downtrend from late April into early July. Now we have some more geopolitical tensions on top of everything else, so we have a build back to the upside in a rather bullish, something of a cup-with-handle pattern that looks like it could break out to the upside.


TECHNICAL SUMMARY

Internals. The internals were mixed.

Volume. NASDAQ -16%, 1.6B; NYSE +13%, 614M. Still very low trade, but it looks like NYSE indices got a bit of the expiration trade on Friday.


Breadth. NASDAQ +1.7:1; NYSE +1.6:1. Breadth was ho-hum.


THE CHARTS

SP500. SP500 did move higher to that post-bear market high at about 1423. It is not far away at all, basically five points away. It is right in the zone of "We better sell because a market top is coming," or that it has shown a good lateral consolidation, great technical action, a good pattern, and it is breaking higher on Thursday. It might just blow through this level. Well have to see how it plays out. Technically things still look solid. Good stocks are coming to the fore. SP500 is putting in higher highs and higher lows. Volume is low, but it has been low for many, many, many months. That has been a complaint for the past couple of years on the stock market, so take that for what it's worth.


NASDAQ. NASDAQ continued higher as well. It is below its peaks, but it is moving in on the May intraday high. The overall high on the move was 3134. It is not far away either, just about 60 points. It has room to move before it hits the top. As with SP500, it is looking strong. We will have to see how much strength it has when it gets there.


SP600. SP600 is looking very good. It was up +0.8%, moving up through the lower resistance on Thursday and continuing up to the February and April shoulders to the head and shoulders pattern that led to the May to June selloff. It is coming up to interim resistance. It is there, and now we see if it will fade a little bit back to the lower support in this range and then break higher or if it is just repelled or, frankly, if it just keeps moving higher.

It just so happens that the indices are moving well. The stocks are moving well, and they just so happen to be at the prior highs. If those highs were not there, we would all be saying, "What a great move. What strength it is showing. What great technical action." If those highs were down here or way up higher, we would be saying it was great technical action higher. Higher high, higher lows, testing, holding the gain, and breaking out. You see the point. That is why we just have to see how it plays out. I note that we have good leadership as stocks move higher.


SOX. SOX was down on the day thanks to MRVL, but it is still performing very well for the week. It broke through resistance a week and a half ago, testing and then bouncing to the upside.


LEADERSHIP

I will not go into a lot of specifics, but I will note that the stocks we have been following all week from various sectors, after that Tuesday hiccup that saw stocks such as FFIV sell pretty aggressively on Tuesday, there was an immediate reversal. Not only that, but there was a breakout. So we had a shakeout, effectively, and then a reversal and a move higher. It happened in technology as we see in FFIV. It happened in retail in many circumstances. I am looking at RL's chart. It happened across the board in retail. We saw the same thing in energy with good continued moves to the upside on stocks that have turned the corner. We even got some industrials moving better. CAT broke to the upside. It is hard to complain when old CAT gets moving and looks solid even in the face of some weaker DE earnings.

Not every stock in every sector is performing, but we are seeing quality stocks in many sectors performing well, and that is what makes a market move higher. Stocks coming from bases to emerge as leaders. We have seen it with many stocks across the board in different sectors. We have been picking them up as well. That is a sign of health in the market. The indices broke a good lateral consolidation on the week. They were driven by stocks that have had money put their way. They were not necessarily the original market leaders on the rally, but they are now trying to place themselves in the ranks of leadership or at least help the move higher.

With that, the market still has a good foundation to move to the upside despite the overriding gloom like we saw all week on the financial stations. They had the "get out now" mentality based upon the indices being at those prior highs. That is not a bad reason. Last night I went through the list and said I could not argue with them at all. But it is about what the market does rather than what we think it will do. Thus we kept seeing this good technical action and this lateral consolidation as still a positive. And it made the break higher.

It will have to prove itself again next week when they challenge those old highs, but that is what you do when you move up or move down.


THE ECONOMY

TO VIEW THE ECONOMY VIDEO CLICK THE FOLLOWING LINK:
Flash: http://investmenthouse1.com/ihmedia/f/eco/eco.html














Michigan preliminary August rises but expectations fall and inflation expectations rise.

Michigan Sentiment, Preliminary August (9:55): 73.6 actual versus 72.2 expected, 72.3 prior

Usually not that important. In prosperous times consumers always say they are going to save but they don't. They feel good about the future and they spend.

But . . . sentiment is important when the economy and future are so uncertain. If people are down and don't think things will improve, they do not consume.



Current expectations: 87.8 versus 82.7 in July.
Tied to the jobs report and weekly claims: but they are less than reliable.

Expectations: lowest since 12/2011


LEI is up on the stock market. But how relevant is the stock market in terms of wealth with so few participating?

Leading Indicators, July (10:00): 0.4% actual versus 0.2% expected, -0.4% prior (revised from -0.3%)


Look at where the gains are: Initial claims, Building Permits, Stock prices, Interest rate spreads.

Look at where the losses or no growth sectors are: ISM new orders, Consumer expectations, goods orders, workweek, business investment.

Gains are in areas where the data is dubious or controlled by the government/Fed.

Thus as usual, the LEI is a report that is best ignored in favor of ECRI that has a perfect record and has called the recession we are likely in right now.


President to use $500M for infrastructure jobs on our 'crumbling' roads. Seen this before; it didn't work. But when you can buy votes from the uniformed . . . $473M is cheap.


Crumbling roads in the US? Not on most I travel on as well as our contacts in various industries . . .

President announced releasing $473M in unspent highway funds for infrastructure work and new jobs. As you recall, this is what the original 'stimulus' bill, a.k.a. spending bill, did, only on a grander scale. How much recovery did we get from that? None. Money shot down the hole on projects that were not, 'ha, ha' as the President joked, not as shove-ready as they thought.

Indeed, recent studies from several government agencies and independent agencies concluded the infrastructure spending from the 'stimulus' bill had absolutely ZERO impact on job creation.

Why is the President ready to spend again? Because this past week, DESPITE higher non-farm payroll gains and lower weekly jobless claims, 44 states reported HIGHER unemployment levels. Do you need any more evidence that the data the government produces is obviously inaccurate? Do you need any more evidence that the so-called infrastructure spending job creation doesn't work? Apparently those in charge do. Either that or they are in simple denial, blinded by their agendas versus results. Hell, they are not stupid. They likely KNOW it has no impact but want to pander for votes. Ah, now it all makes sense.

News headlines talked of using the funds to rebuild our 'crumbling' infrastructure. I hear that a lot. I travel a lot. I travel by road and air. Texas, Louisiana, Mississippi, Alabama, Georgia, Tennessee, Pennsylvania, Colorado, New Mexico, Utah California are a few states I have been in recently. I talk with a lot of business owners who travel and truckers as well.

I observe some issues with our transit system. Some states do not have roads up to par with all of the funding they receive. A couple are terrible. Some are bad. Most, however, have great roads.

When I travel I always see states working on their roads, using their funds and the federal tax dollars earmarked for their roads wisely. The businessmen and truckers I talk with say most roadways are fine.

Where then, are the roads crumbling? MORE IMPORTANTLY, WHERE DID THE MONEY GO IN THOSE STATES where the roads and bridges are not up to par? THAT is the question. Do you ever notice when driving how sometimes when you go from state to state and even COUNTY to COUNTY in a state that the road quality changes? Throwing more money at a bad SYSTEM is NOT the answer. If a state uses highway funds for other projects or for good old graft and fraud, more money only lines the pockets of those abusing the system.

The state of the roads in many states is a pretty good barometer of the efficiency and management ability of any state's government. If it cannot keep the roads up, one of its primary functions, then you know the other programs are terrible as well.


Feeding the fat man as Ronald Reagan used to say.

But you know what? That is how it works here. If a state cannot get it together and satisfy its citizens, the citizens can make changes with who is elected or they can leave for better states. THAT is the great equalizer, not a federal government that takes money from the well-run and prosperous states and gives it to poorly run, poorly managed states. Ronald Reagan called that 'feeding the fat man,' i.e. contributing to the bad habits and poor health of entities that don't have the willpower to do what is right.


Eating Out less and less.

In June and July the amount US citizens spent on eating out plunged dramatically. The July drop was so steep it started hitting levels from 2008 during the height of the economic meltdown.


Source: Boomberg

This is a hard evidence response to the weak sentiment expectations regarding the future. People spend less when the future is in doubt. Eating out is a key barometer of views about the future because it is so easy to cut back in this area. It is a clear physical manifestation of those views.




THE MARKET

SENTIMENT INDICATORS

VIX. Volatility fell again. It bounced on Tuesday when there was something of a hiccup in the market, but it immediately turned back down and undercut the lows for the week. It also undercut the lows from March. Those are important because in April 2011 and March 2012, when volatility hit this level, the market sold off. Not immediately, but within a few weeks to a couple of months the market sold off. Everyone is watching this now and thinking that it could do the same thing here. It is breaking lower. It has been very low and hardly moved at all.

An interesting note is that on Monday when the market was lower, volatility was lower that day as well. That is unusual. I think that shows something of what is going on with volatility right now. In other words, it is not trading necessarily in parallel with the market. There are so few traders right now in late summer that the relationship is not exactly as it should be. It will probably change once we get back into September, people get back from their vacations, and everyone is ready to get back to business. I am just noting that bit of an aberration. Overall it is low. It is where it has been on the prior two occasions when the market did sell. It is worth noting as the indices themselves bump up against the post-bear market highs.

VIX: 13.45; -0.84
VXN: 13.79; -1.02
VXO: 13.42; -0.7

Put/Call Ratio (CBOE): 0.75; -0.09

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: 43.6% versus 43.6% versus 39.4%. Wow, talk about lack of care. Bulls, elevate from recent levels mind you, held steady. Makes sense given the lateral move below the prior highs that had so many pundits negative. Undercut 35%, the threshold for bullishness, in early June. You would expect it to rise and it has. Still not at a dangerous level, just working as it should. As noted, hit 34% in early June. It did its job and the market is on the rally. Hard drop to 34 from 39.3% as economic reality and a choppy stock market hit. Off the 55+ level hit in late February. That was the highest level since April and May of 2011, the peak of the post-bear market high. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 26.6% versus 25.5% versus 27.7%. Bounced back up to a level from four weeks back. Also makes sense given the lateral move that had many pundits calling for a market rollover. Never made it to the 35% that can be a bullish indication, but the bulls were weak enough back in June. Over 35% is the threshold to be really be a good upside indicator. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +14.2 points (+0.46%) to close at 3076.59
Volume: 1.612B (-16.04%)

Up Volume: 824.93M (-485.07M)
Down Volume: 788.7M (+190.9M)

A/D and Hi/Lo: Advancers led 1.68 to 1
Previous Session: Advancers led 2.09 to 1

New Highs: 93 (+6)
New Lows: 28 (+6)


SP500/NYSE

Stats: +2.65 points (+0.19%) to close at 1418.16
NYSE Volume: 614M (+12.87%)

A/D and Hi/Lo: Advancers led 1.63 to 1
Previous Session: Advancers led 2.59 to 1

New Highs: 188 (+31)
New Lows: 12 (+1)


DJ30

Stats: +25.09 points (+0.19%) to close at 13275.2
Volume: 138M shares Friday versus 114M shares Thursday.


MONDAY

Earnings are winding down, and there will not be much economic data on the table. On Tuesday we have the FOMC minutes. It will be interesting to see who said what, but we all know who the dissenters and the proponents are for more Quantitative Easing or some form of stimulus.

Existing home sales are on Wednesday. We always watch home sales, of course. New home sales are on Thursday along with initial claims. Then on Friday we get the volatile durable goods orders. It will not be a heavy week in terms of the kind of economics that will impact the election. Home sales are important, but it is going to take a lot to get that moving. We have already shown earlier in the week that there are still issues with that huge shadow inventory -- around 13.5M units --hanging out there that could impact it. It would send things reeling if the economy does not improve, if there is a fiscal cliff issue and those people become stressed even further and have to default on their mortgages.

I have already covered a lot of this, but here we go. A lot of next week will focus on those old highs. No surprise. The indices are tickling them right now. They have shown great resolve and technical fortitude on the rise. Thursday was a very nice break to the upside, and it was continued on Friday. Not spectacular but it continued the move. The sellers did not immediately jump in.

It is a new week. It will not be September yet, so not everyone will be back, but that does not mean we can just ride this momentum higher. You have to pay attention to these highs. It is the facts of the market that you have to watch important levels. And, let's face it, recovery highs are important levels. It has taken awhile to get back. It was a lot of work to get up here, longer than it took to fall from April to June. That warrants care to be taken next week.

We did not buy much on Friday. We got a good move on Thursday, and we picked up some positions then. We already had many in the bank, so we are just letting them run. We have to be a little careful, though. There are a lot of people who think that the market will fall from this level. Sometimes there is a self-fulfilling prophecy that helps bring these predictions about. There are not that many people playing in the market right now, so a few groups can take control and send things down. It has not happened yet.

Good, solid technical action, and more solid action on Thursday and Friday. If other stocks that are supporting this move continue to have money put into them, those stocks that are "turning the corner" and rallying, then these indices can break on through and perhaps test from above the old highs or from new post-bear market highs. Just looking at the stocks, the indices, and those that are emerging as leaders, it certainly seems that the market wants to break these highs or at least run up to them. We will continue to look for plays that will make that play if it continues.

Early next week there will be some testing. We will have to see how it plays out. By testing I mean bumping up against these highs, most likely. It may want to come back and test to the downside, and that gives us entry points. Are we going to jump into a lot of new positions? Not necessarily. We will look at some, but we will also be adjusting the buy points to the downside for the plays we have where we have been following the move to the upside. If the markets want to reverse, this is a darn good place for it to do that. We could make some really good risk/reward plays to the downside if it does want to reverse.

We go into the early week not planning on buying a lot of new positions until we see how those old highs are handled. We have been riding a nice move to the upside. Now that we are bumping up against these old highs, it may not about the time to be the most aggressive. We will see how it plays out as we let our stocks continue to run. If they do run, great. If they pull back a little bit, hold, and bounce off of that, that is great. Then we can pick up some more. But we just want to see how it plays out. We will not just run into the room before looking around a bit. As one of my first bosses said, "You don't want to go into the room with a big light on your head that's flashing 'dumb ass.'" In other words, he is saying walk in, keep your eyes open, and keep your powder dry. Then when you see how things are going, you can react. That is what we need to do at these prior highs.

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






Support and resistance

NASDAQ: Closed at 3062.39

Resistance:
3076 is the late April 2012 high
3090 is the mid-March interim high
3134 is the March 2012 post-bear market peak
3227 is the April 2000 intraday low
3401 is the May 2000 closing low

Support:
3042 from 5/2000 low
3026 from 10/2000 low
3024 is the gap point from early May
3000 is the February 2012 post-bear market high
2988 is the July 2012 high
2962 is the April 2012 low
2950 is the mid-April closing low
The 50 day EMA at 2943
2942 is the mid-June 2012 high
2910 is the March 2012 low
2900 is the March 2012 low
2888 is the May 2011 peak and PRIOR post-bear market high
2879 is the July 2011 peak
2866 is the July 2012 closing low
2862 is the 2007 peak
The 200 day SMA at 2856
2841 is the February 2011 peak
2816 is the early April 2011 peak.
2810 is the low in the shoulders
2754 is the October 2011 high
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
2686 is the January 2011 closing low
2676 is the January 2010 low and the December 2011 peak
2645-2650ish from December 2010 consolidation
2643 is the September 2011 high
2612 is the late August 2011 peak
2603 is the March 2011 intraday low (post-Japan low)
2599 is the June 2011 low and NASDAQ


S&P 500: Closed at 1415.51

Resistance:
1422.38 is the Post-bear market high (March 2012)
1425 from May 2008 closing highs
1433 from August 2007 closing lows
1440 from November 2007 closing lows

Support:
1406 is the early May 2012 peak
1378 is the February 2012 peak
1375 is the early July 2012 peak
1371 is the May 2011 peak, the post-bear market high
The 50 day EMA at 1369
1363.46 is June 2012 high
1359 is the April 2012 low
1357 is the July 2011 peak
1344 is the February 2011 peak
1340 is the early April 2011 peak
1332 is the early March 2011 peak
The 200 day SMA at 1329
1325 is the July 2012 intraday low
1309 is the right shoulder low from June 2012
1295 to 1294 is the April 2011 low and the February 2011 consolidation low (bottom of the trading range)
1293 is the October 2011 peak
1275 is the January 2010 low, early January 2011 peak
1267 is the December 2011 peak
1258 is June 2011 intraday low
1255 is the late December 2010 consolidation range
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
1220 is the April 2010 peak
1209 is the mid-August 2011 high


Dow: Closed at 13,250.11
Resistance:
13,297 is the April 2012, post bear market high
13,668 from 12-2007 peak
13,692 from 6-2007 peak
14,022 from 7-07 peak

Support:
13,058 from the May 2008 peak on that bounce in the selling
13,056 is the February 2012 high
12,971 is the early July 2012 high
The 50 day EMA at 12,904
12,754 is the July intraday peak
12,716 is the April 2012 closing low
The 200 day SMA at 12,643
12,391 is the February 2011 peak
12,369 is the left shoulder low from May 2012
12,284 is the October 2011 peak
12,258 is the December 2011 peak
12,110 from the March 2007 closing low
12,094 is the April 2011 low
The June low at 11,897 (closing)
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


Economic Calendar

August 14 - Tuesday
Retail Sales, July (8:30): 0.8% actual versus 0.2% expected, -0.7% prior (revised from -0.5%)
Retail Sales ex-auto, July (8:30): 0.8% actual versus 0.3% expected, -0.8% prior (revised from -0.4%)
PPI, July (8:30): 0.3% actual versus 0.2% expected, 0.1% prior
Core PPI, July (8:30): 0.4% actual versus 0.2% expected, 0.2% prior
Business Inventories, June (10:00): 0.1% actual versus 0.2% expected, 0.3% prior

August 15 - Wednesday
MBA Mortgage Index, 08/11 (7:00): -4.5% actual versus -1.8% prior
CPI, July (8:30): 0.0% actual versus 0.2% expected, 0.0% prior
Core CPI, July (8:30): 0.1% actual versus 0.2% expected, 0.2% prior
Empire Manufacturing, August (8:30): -5.9 actual versus 5.0 expected, 7.4 prior
Net Long-Term TIC Fl, June (9:00): $9.3B actual versus $55.9B prior (revised from $55.0B)
Industrial Production, July (9:15): 0.6% actual versus 0.6% expected, 0.1% prior (revised from 0.4%)
Capacity Utilization, July (9:15): 79.3% actual versus 79.3% expected, 78.9% prior
NAHB Housing Market , August (10:00): 37 actual versus 35 expected, 35 prior
Crude Inventories, 08/11 (10:30): -3.699M actual versus -3.729M prior

August 16 - Thursday
Initial Claims, 08/11 (8:30): 368K expected, 361K prior
Continuing Claims, 08/04 (8:30): 3300K expected, 3332K prior
Housing Starts, July (8:30): 763K expected, 760K prior
Building Permits, July (8:30): 770K expected, 755K prior
Philadelphia Fed, August (10:00): -5.0 expected, -12.9 prior

August 17 - Friday
Michigan Sentiment, Preliminary August (9:55): 73.6 actual versus 72.2 expected, 72.3 prior
Leading Indicators, July (10:00): 0.4% actual versus 0.2% expected, -0.4% prior (revised from -0.3%)


August 21 - Tuesday
FOMC Minutes, 7/31 (14:00)

August 22 - Wednesday
MBA Mortgage Index, 08/18 (7:00): -4.5% prior
Existing Home Sales, July (10:00): 4.55M expected, 4.37M prior
Crude Inventories, 08/18 (10:30): -3.699M prior

August 23 - Thursday
Initial Claims, 08/18 (8:30): 365K expected, 366K prior
Continuing Claims, 08/11 (8:30): 3298K expected, 3305K prior
FHFA Housing Price I, June (10:00): 0.8% prior
New Home Sales, July (10:00): 368K expected, 350K prior

August 24 - Friday
Durable Orders, July (8:30): 2.5% expected, 1.3% prior (revised from 1.6%)
Durable Orders -ex T, July (8:30): 0.5% expected, -1.4% prior (revised from -1.1%)



By: Jon Johnson, Editor
Copyright 2012 | All Rights Reserved

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

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Sunday, August 05, 2012

So This Was a 'Strong' Jobs Report?

MARKET SUMMARY

- It's Friday so another triple digit Dow 30 gain.
- Stocks up early on more Draghi comments (the audacity of bluster?), juiced even more by jobs report.
- So this was a 'strong' jobs report? Conflicting 'support' as to just what this report means.
- Jobs report headline shows more service jobs, higher unemployment, much manipulation.
- Service ISM holds above 50 but employment drops sharply. How does employment then lead jobs higher in the jobs report?
- The Friday/Monday dance: 6 consecutive Fridays of triple digit gains, 9 consecutive Mondays of losses.



Draghi shows vorace.

Courage? Guts? Foolhardiness? All were used (at least by us) to describe Mr. Draghi on Friday. Yes, yes I know that all of the mass media focused on the jobs report as 'the' news of the day. But long before the jobs report was released, futures were sharply higher; sharply higher. The jobs report added some hot sauce to the morning omelet, but pre-market it was the condiment because Mr. Draghi was back at it, promising it all.

ECB officials "are ready to do whatever it takes to preserve the euro" Mr. Draghi reiterated. Futures were up sharply on this news. The lion's share of the pre-market gains were in place by the time the jobs report was announced. Indeed they backed off just ahead of the jobs report on a bit of nervousness. Futures gained 4% pre-market from the Thursday close ahead of the jobs report. At the market open futures added 0.8% to that prior gain. Some salsa, but it was definitely mild versus hot.

Back to Draghi. If Germany wants him to pipe down Merkel et al are not as typically vocal and rapier-like in the response. If they are privately telling Draghi to put a lid on it, Draghi is not listening. If so, he has what the Greeks call thrausos, or guts.




Mr. Bond you have what the Greeks call thrausos - - guts. So does he.










The market took it as Draghi having his way. Instead of sitting by himself scribbling out 'plans' for saving the euro that have no hope of implementation, the lack of forceful rebukes or denials sure makes it look as if Draghi has some substance to his dramatic comments. So maybe he won't come out of the toilet with his . . . well, we went there Thursday night.



'I don't want my brother coming out of that toilet with just his **** in his hand.'

Maybe he is bringing a gun to a gunfight as Nitty did after his assassin was run off with just a knife.



Jobs played their role, or did they? Strong maybe for Europe, but for the US?

Don't get me wrong, jobs played their role. The 'beat' was good enough to gin up futures even more and give the morning rally staying power through the session. One wonders, however, what the result would have been without Draghi priming the pump.

Was the jobs number strong enough to push the market? 163,000 jobs topped expectations, but it is hardly a 'strong' report as some forgetful commentators stated. Maybe for Europe, but not the US. And the gains? They were gratis huge, unprecedented seasonal adjustments that swung jobs from negative to positive.

Moreover, the unemployment rate rose to 8.3%. Could a Department of Labor assist leading to a rising jobs number have offset an increasing unemployment rate on its own, or would it have taken a non-farms jobs stumble to put the Fed back on the table and rally stocks? Friday the outward appearances suggested the data was strong enough to keep the Fed off the QE button and that was okay with the market, though the European stimulus picture looked markedly more likely with the unopposed Draghi comments.

Stocks started higher, already deep in the black thanks to Draghi and the additional jobs report topping. They gapped and added to the gains all session. In so doing the DJ30 logged its sixth consecutive triple digit Friday, and while it could not put in a higher rally high, SP500 did so.

SP500 1.90%; NASDAQ 2.00%; DJ30 1.69%; SP600 2.57%; SOX 2.26%

A nice surge across the board no doubt, but with only SP500 making a higher high thus far, Monday becomes all the more interesting. While the Dow has logged six consecutive triple digit Fridays it has also logged 9 consecutive down Mondays, some of them pretty severe. Will DJ30, NASDAQ, and SP600 follow this coming week with higher highs of their own or will they stumble? Thus far the indications are solid for the upside, and even if there is a Monday stumble, those stumbles have provided upside opportunity for the past two months.



OTHER MARKETS.

This proves very interesting, particularly the commentary on the day.

Dollar. 1.2375 versus 1.2172 euro. The dollar was down sharply. It broke down to the lower part of the range of the last week. It broke below the 50 day EMA and closed near the session low. Why? It seems strange. The dollar should be up against the euro if the ECB is going into stimulus and the US is not. It would be stronger because it would not be devalued. Perhaps there is less of a need for a safe haven, but if the data really means that the US is stronger, the dollar should be rising.


Bonds. 1.56% versus 1.48% 10 year US Treasury. A big decline. It gapped lower to the 50 day EMA. While this is not a breakdown, it is certainly not a move higher in its uptrend. That would make some sense if Europe will recover. If that is the theory under ECB doing something, then there would be less need of a safe haven. There is less chance of the Fed buying bonds because it would be unneeded if the Europeans will actually act. The bonds made a little bit of sense.


Gold. 1,609.30, +18.60. Gold closed higher. It was up premarket, and then it was down premarket after the US jobs report. Then it reversed sharply. There were some strange things happening. Below there is a pair of headlines on Bloomberg for both the move in gold and for oil's move on Friday.


Oil. 91.40, +4.27. It was without a doubt a surge higher on oil.







Looking at the charts, there is a nice surge back up through the 50 day EMA by gold. Oil is surging up off of the apparent break lower on Thursday. Nice, strong reversals. But let's get back to these headlines: "Oil surges the most in a month as the US adds jobs, services expand." That implies that, because the US data is so strong, there will be more need for oil. Look what they say in the subheading: "The service industry expansion and the payrolls climb bolsters optimism about economic strength in the world's biggest crude-consuming country."

Now look at gold: "Gold climbs the most in a week as US unemployment rate increases. Gold futures jump most in more than a week after reports showed that the US jobless rate unexpectedly increased to a five-month high." That suggests that the economy is not so good, that the jobs report caused gold to rally and therefore the Fed must be back on the table and ready to issue Quantitative Easing. But oil surged because the US economy is growing so fast that we do not need any Quantitative Easing. This is from the same financial news service on the same page discussing commodities. Could it be that oil surged simply because there might be a hurricane in the Gulf and because the dollar was heading lower? It then takes more dollars to buy a barrel. That is very likely so. Maybe there was something in there with respect to the economic data in the US as well, but there are other factors at work.

What about gold? If the US economy is so strong, as the oil article indicates, there would be no need for Quantitative Easing from the Fed and then no pressure to bring gold higher. Maybe the ECB's actions have something to do with that. Maybe that would help with the inflation worries, but gold would not necessarily be a safe haven if the economies were going to come up roses.

The point is, this shows you that the news media does not even have a consistent story as to why these markets are moving as they do. They fail the "follow your own logic" test that some of our politicians fail. It is okay for gays to speak out about their rights and their ability to marry -- and that is fine. They are free to talk. At the same time, you have those like the Chick-Fil-A CEO who are opposed to that and also voice their opinion. It is just as much his right as it is anyone else's, and a politician cannot come out and say, "They can speak, but you cannot." You need consistent logic and you need to apply it evenly across the board or else you lose credibility.

I see the gold and oil rise this way: The jobs report was not strong, no matter how you want to spin it. Even if you take the 163K jobs as the gospel and true read of how many jobs were produced, that is a terrible jobs report for an economy that is supposedly -- as told by our leaders --so far into the recovery. If you look further into the numbers, they are basically an arbitrary revision (seasonal adjustments, as it were) that took a negative number and flipped it positive above expectations. Some people in the BLS decided to use statistically aberrant judgment to make a better report.

With the jobs report still in the tank, with the ISM negative for the second month, and with factory orders negative now, I think gold and oil (and commodities in general) see that there will be extra stimulus from the ECB and ultimately from the Fed. Of course the Fed will not do it now. But as the data comes out -- it may not be in September -- but some said that they have already taken it off for 2012. It may not be the case. Things may get so slow in the fall that the Fed has to do something right after the election.


TECHNICAL SUMMARY

Internals.

Volume. NASDAQ, -5.5%, 1.7B; NYSE -9.4%, 686M. Friday we saw volume back off. You never like to see volume decline on a move up. But this move is showing good technical action otherwise, and volumes have been low all along. Plus it is a Friday in the summer, so there is always lower trade. We have to discount the lower volume somewhat, but it is something to note and log in the back of your mind. We are having a bit weaker rise, and just so happens that it is coming as the SP500 breaks to a new rally high and is closing in on those prior peaks. That is an important level to watch because volume is tailing off, and the internals are weakening. It can find resistance there.


Breadth. NASDAQ 3.33:1; NYSE 4.75:1. Aided by that tremendous move in the small cap index. No new high on this rally, but a strong move nonetheless. Breadth was solid.


THE CHARTS

SP500. SP500 broke to a new higher high in this rally. It was number five. Higher lows and higher highs as it moves on toward that 1400 level, striking 1394 on the high. It is close. 1391 is the close, and that puts it 24 or 25 points from this intraday high in early May. That is your initial target. Perhaps it can do more. Everything suggests that it wants to ruin higher at this point.


DJ30. DJ30 was unable to make a new high -- or at least hold one. It is close, knocking at the door. It has its higher lows in place, so it is ready to make the move. Maybe it will put in a bit lower Monday and use that to bounce to the upside.


NASDAQ. NASDAQ did not put in a higher high either, but it is right at the top of its range. It gapped to the upside. With a gap we could not do a lot with our QID. We decide to leave it because Fridays have been big up and Mondays have been big down. We will see in the coming week if NASDAQ can make the break to that new high. That will be one of the important moves. We saw some money moving into tech last week. We said they were shaping up better, and it looked like there was accumulation. Now we will see if that accumulation turns into actual upside movement.


SP600. The small caps were stellar. Big blast off of the 200 day EMA, and they held most of the gain. They moved back up into an important range that it traded in from February into May before it broke down into that June low. It is making its comeback, and it is putting in a higher low. But it has a series of two lower highs, and it has not even busted over the last lowest high in this move. But you could say it is trying to form a pennant or a triangle. No doubt the bounce off of the 200 day EMA and putting in a higher low is a positive.


SOX. The SOX was on the move. It gapped higher, but it tapped the 200 day EMA and stalled there. It faded back modestly into the close. It, too, is right at the June and early July highs. Top of its range, my friends. We will see if it holds on. We may adjust our buy point on the SMH downside play to be ready in case there is a rollover. It does not like there is going to be a rollover at this point. The strength is solid for whatever reason. The market is showing good technical action with higher highs and higher lows, and we are not the ones to argue with the wisdom of the market. It is the market; it is the aggregate of all the thoughts, fears, hopes and dreams put into the future. So we go with what the market shows. We do not want to chase the bus, which we were not going to do on Friday. We want to pick our shots. When they are available, then we can step in, but we do not want to get caught in a move that has already run a long way and then wants to reverse.


LEADERSHIP

Technology. AAPL was up again. It seems to be the leader in the market. Techs overall enjoyed a decent day. JNPR was up. CRUS has enjoyed great strength . It gapped higher on earnings, and it was up again on Friday. Technology continues to attract dollars. We just want to pick those stocks that are in position to move that we can make money off of versus chasing the bus. RVBD is another that could put in a good move to the upside.

Manufacturing. There were some industrial stocks that looked pretty sharp on the day. UTX is trying to turn the corner and make a move higher. JOYG is still moving laterally. It has not made the defining move yet, but it continues to stretch laterally. We will see if it can make a break higher. We are getting some activity and interest in these stocks, and they are moving to the upside. MMM was moving laterally. A good gap on the day. It may try to make a new break to the upside as well. There is some life, no question.

Financial. Financials were kind of a letdown. Not all across the board, but they just did not support great moves. JPM was up 2.6%, but it still has work to do. MS was up 5%, but the pattern still has to finish shaping up. There are other regional banks that were moving well. TCBI was one. It was not a washout by any means, but it just was not as great a move for financials as you would think, perhaps with what the market was showing overall.

Drugs/Medical. As strong as the day was, there was not an abandonment of the drugs or medical devices. MDCO bounced nicely to the upside. BRLI gapped and ran. It was a juggernaut from the open, and it never really gave us a chance. We did not want to chase buses on Friday, so we will see if we get a bit of a comeback on Monday that gives us an opening.

This was a strong day even for what have been defensive stocks in the market. That was a bit worrisome. Why are these stocks doing well? Maybe everyone is just throwing money at everything out there, so the rising tide just lifted all boats. We will see. The defensive stocks were getting money when they have been losing money as the growth areas of the market were gaining.

In any event, we do have areas that show money coming their way. We will see if we can use them in the coming week -- maybe on a test early in the week -- to pick up good upside positions for a continued move.


THE ECONOMY

TO VIEW THE ECONOMY VIDEO CLICK THE FOLLOWING LINK:
Flash: http://investmenthouse1.com/ihmedia/f/eco/eco.html



July payrolls 'surge' to 163K. Do they? Do they really?


Do they Emily. Do they really? Robert Hartley from 'The Bob Newhart' show

More but still weak payrolls, 42 months of 8+% unemployment, but that does not tell the story.

Nonfarm Payrolls, July (8:30): 163K actual versus 100K expected, 64K prior (revised from 80K)
Nonfarm Private Payrolls, July (8:30): 172K actual versus 105K expected, 73K prior (revised from 84K)
Unemployment Rate, July (8:30): 8.3% actual versus 8.2% expected, 8.2% prior
Hourly Earnings, July (8:30): 0.1% actual versus 0.2% expected, 0.3% prior
Average Workweek, July (8:30): 34.5 actual versus 34.5 expected, 34.5 prior



Non-Farm: Non-adjusted jobs added actually declined from June to July (133,082 June versus 132,868 July), and overall jobs fell by 1.248M. So how do you get a 163,000 number? You adjust by adding 377,000 as a seasonal adjustment, the largest seasonal adjustment that we can find for the month of July.

Then the BLS factored in, as it always does, the birth/death adjustment to the number to account for the change in population. In July 2011 this added 5K, very similar to the 6K in July 2010. This July in a hotly contested Presidential election? The BLS added 52K, a factor of 10, a 1000% increase year over year.

Total jobs plucked out of the air that were statistical aberrations solely at the discretion of unelected government officials with a vested interest in election outcomes: +429,000.

Full time jobs lost to part-time: Those underemployed, wanting more work along with those wanting any work rose to 15%. U6.


Unemployment rate rises even as worker pool falls: Jobs lost overrun workers lost.

Participation Rate: 63.7% versus 63.8% June
Labor force fell by 150,000.
Hiring declined by 195,000.

What does this mean? Think of the Olympics and the boxing events. Unlike gymnastics that totally revamped its scoring mechanism to deductions from the maximum allowable points for the difficulty of an event due to massive 'hometowning' by eastern European countries against basically all other countries, boxing maintains the same scoring system where judges award points for legal blows landed. That leaves a massive grey area as to what was a legitimate punch versus a glancing blow that should not be scored.

In other words, if a judge doesn't want a boxer to win, he or she can basically award points for technically non-punches. Saw this happen, again, today to a US fighter who beat up the opponent in the last round so bad, that when the results were read the referee, based upon the fight he just saw, raised the US fighter's hand first, had to do a double take at the 'officials,' and then raised the other fighter's hand.

This is what happened with the July jobs report. A pre-determined outcome was sought, seasonal adjustments WELL OUTSIDE of the standard deviations (10x for the birth/death) were made, and the DESIRED result was reached.

This is UNDERSCORED by the household survey the unemployment rate is calculated upon showed the opposite direction of the numbers AND the large downward revision in June's number. Remember, revisions are more important and they are showing a continuing slowdown.

With the weaker overall economic data, how can a LAGGING indicator be moving higher first?



ISM Services, July (10:00): 52.6 actual versus 52.3 expected, 52.1 prior



Key point: July services EMPLOYMENT CONTRACTS at 49.3 versus 52.3.

Reconcile this with the Non-Farm payrolls report where SERVICES added the most jobs (91%)!



The private report shows services jobs contracting in July. The government report revised a jobs loss to a jobs gain, and picked services to do it. Looks as if it picked the wrong area to add the jobs as the private sector report released the same day says services lost jobs in the month.

Conclusion:

'Remember Jerry, it's not a lie if you believe it.' - - George Costanza


Referee raises US fighter's hands in victory, then takes a double take at the judges.
Later, however, officials overturned the judges' ruling. Unfortunately, there is no one but the US voter to overturn this government's fast and loose play with data and the truth.



THE MARKET

SENTIMENT INDICATORS

VIX. The VIX gapped lower on Friday, and sharply so. That brings it down to just below a level where the SP500 peaked in late April. Watch this late-April level. You can see where volatility has just beaten at this point. Now look at the SP500. That is when it peaked its move of late April and sold off in the run down to the June low that started the current rally. A very important point, wouldn't you say? As SP500 breaks to a new rally high, it is now the fifth higher high on this move. It is indeed approaching that 1400-1415 level that I have talked about as our target for this move. It is our non-Fed-stimulus target. If there is stimulus, it would likely blow through it. But without Fed stimulus, this is our target. Look where it peaked last time and sold, and look where it is now.

Flipping back to the VIX, it is right down at the level in late April where the market peaked and sold off and VIX rallied. That makes it an interesting point to watch. It is not dispositive in and of itself; it never is. It has hit these levels before. It undercut these levels in March. The market can still rally from here without selling. Of course, if it would rally it would not be selling, would it? But you get the point. Just because VIX is here, the market can still rally. The VIX can go lower down to these March levels, which are another good point and a half. If it does that, the market can rally right up probably to 1415 or maybe even the prior high. Without anything else from the US, it may just run into trouble.


VIX: 15.64; -1.93
VXN: 17.46; -1.62
VXO: 14.77; -2.08

Put/Call Ratio (CBOE): 0.83; -0.1

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: 39.4% versus 40.4% versus 43.6%. Bulls fade further though at a slower pace. The irony is the market continues putting in higher lows and higher highs, showing good technical action, as the upside faithful thin. The market volatility has taken a toll on investors who don't watch or understand the trends, and as the case often is, just as the market turned they are turning bearish. Undercut 35%, the threshold for bullishness, in early June. You would expect it to rise and it has. Still not at a dangerous level, just working as it should. As noted, hit 34% in early June. It did its job and the market is on the rally. Hard drop to 34 from 39.3% as economic reality and a choppy stock market hit. Off the 55+ level hit in late February. That was the highest level since April and May of 2011, the peak of the post-bear market high. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 27.7% versus 26.6% versus 24.5% before that. After being locked at 24.5% for more than a month, bears are rising, feeling their oats a bit with the frustration some are feeling from the volatility even if SP500 is trending higher. Starting back toward the 35% level after falling short on the last run higher. Still quite a way to go before bearishness gets bullish for the market, but it is rising even as the market rises, still a good contrary indication. Over 35% is the threshold to be really be a good upside indicator. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +58.13 points (+2%) to close at 2967.9
Volume: 1.712B (-5.52%)

Up Volume: 1.42B (+824.27M)
Down Volume: 304.48M (-895.52M)

A/D and Hi/Lo: Advancers led 3.33 to 1
Previous Session: Decliners led 1.32 to 1

New Highs: 69 (+44)
New Lows: 49 (-42)


SP500/NYSE

Stats: +25.99 points (+1.9%) to close at 1390.99
NYSE Volume: 686M (-9.38%)

A/D and Hi/Lo: Advancers led 4.75 to 1
Previous Session: Decliners led 1.68 to 1

New Highs: 209 (+105)
New Lows: 18 (-46)


DJ30

Stats: +217.29 points (+1.69%) to close at 13096.17
Volume: 112M shares Friday versus 112M shares Thursday.


MONDAY

Next week there is more economic data, but it is more on the light side and not as intense as this past week. The big stuff is Consumer Credit. That will be important. Initial Claims on Thursday will be important because that will be the next week where we do not have the seasonal adjustments coming into the play. That put a lot more jobs apparently out there -- or at least not lost -- versus what was actually the case. Other than that, it is pretty light. Plenty of earnings still, so we will get more influence from that, but it will be one of those times where we just have the good old market technicals starting to take over the action as the news and earnings leave something of void after the onslaught of the past couple of weeks.

As noted, the market has been down for nine consecutive Mondays. It has been up the prior six consecutive Fridays. The old "Buy on Monday and sell on Friday" adage is still in play. You buy low on Monday when things sell off, and then you can sell higher on Friday. Of course that is really simplistic. Some days, like this week, we have sold off through Thursday before it decides to rally, and then it just barely made positive on the week. We will see if we can get a little bit better than just the very vague adage. Maybe we get a pullback on Monday where SP500 tests the break to the new high. Maybe it wants to spend all Monday down. Maybe wants to rebound afterward. We think we are going to get that opportunity. While it may not be as big as it has been on other weeks with the drops, we may get a little pullback that lets us get into some positions that gapped and ran on Friday. We really did not want to chase those, particularly given the Friday and Monday action of the past couple of months. We have very good technical market action with higher lows and higher highs. It is number five on the higher highs on the SP500 right now.

The question is whether it will be able to drag the NASDAQ and the Dow, and not to mention the SP600, to higher highs. The Dow is right there, and the NASDAQ is not far away. With the SP500 looking so solid, the off-the-cuff answer is: Sure. It will be able to at least drag the Dow, and most likely the NASDAQ, to the upside. But how much after that? Without Fed stimulus, is it going to be able to move to a new post bear market high, or will the 1415 intraday high from early May that we have been using as our rough target for this move -- sans Fed action -- will it be enough to carry it over that, or will it fade?

I still think that we have to plan on it running out of steam. We have had a good rally to the upside. There is nothing new added. The economic data is really not better, even though it appeared to be better in some reports. Here and there we saw a bit better data. The weekly jobs reports were bogus. It was all auto adjustments that really did not occur, so it gave false higher readings. The jobs report was really a jobs decline. There is just monkeying around with the data, and that is horrible. It gives a skewed view in an election year, but that is nothing new. The government always plays with the data, and only fools believe what the government is telling them rather than looking at what the actual, factual data says and then drawing the real conclusions versus the fiction that the government wants you to draw.

In sum, while the market remains technically positive, it is getting closer to our initial target. I am not going to say that this level at 1415 on SP500 is definitively the top. I cannot too that. We just want to be aware of it and make our plays with that knowledge in the background. Then if we do see trouble, we will know to take some gain off of the table. Technically the market looks good. It is moving higher. We have upside positions that are taking advantage of it. We could very easily get a pullback on Monday that sets up new buy points. If we get it, we will be trying to take advantage of that. If it rolls over, obviously we will let some of our downside run. We have some others that we are looking at, maybe the SMH, that we can play to the downside.

We have to be ready, although I think there is less likelihood of an immediate downturn of substance versus just a test of the break by SP500 to the new rally high on Friday. Often we get that Monday-morning test that turns into a Tuesday and Wednesday test. But this time I do not think it will be that severe. We think we will get a test, and we will just use that as an opportunity to pick up some upside positions for a resumption of the move to the upside.

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


Support and resistance

NASDAQ: Closed at 2967.90

Resistance:
2988 is the July 2012 high
3000 is the February 2012 post-bear market high
3024 is the gap point from early May
3026 from 10/2000 low
3042 from 5/2000 low
3076 is the late April 2012 high
3090 is the mid-March interim high
3134 is the March 2012 post-bear market peak
3227 is the April 2000 intraday low
3401 is the May 2000 closing low

Support:
2962 is the April 2012 low
2950 is the mid-April closing low
2942 is the mid-June 2012 high
2910 is the March 2012 low
The 50 day EMA at 2909
2900 is the March 2012 low
2888 is the May 2011 peak and PRIOR post-bear market high
2879 is the July 2011 peak
2866 is the July 2012 closing low
2862 is the 2007 peak
2841 is the February 2011 peak
The 200 day SMA at 2840
2816 is the early April 2011 peak.
2810 is the low in the shoulders
2754 is the October 2011 high
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
2686 is the January 2011 closing low
2676 is the January 2010 low and the December 2011 peak
2645-2650ish from December 2010 consolidation
2643 is the September 2011 high
2612 is the late August 2011 peak
2603 is the March 2011 intraday low (post-Japan low)
2599 is the June 2011 low and NASDAQ


S&P 500: Closed at 1390.99

Resistance:
1406 is the early May 2012 peak
1422.38 is the Post-bear market high (March 2012)
1425 from May 2008 closing highs
1433 from August 2007 closing lows
1440 from November 2007 closing lows

Support:
1378 is the February 2012 peak
1375 is the early July 2012 peak
1371 is the May 2011 peak, the post-bear market high
1363.46 is June 2012 high
1359 is the April 2012 low
1357 is the July 2011 peak
The 50 day EMA at 1354
1344 is the February 2011 peak
1340 is the early April 2011 peak
1332 is the early March 2011 peak
1325 is the July 2012 intraday low
The 200 day SMA at 1322
1309 is the right shoulder low from June 2012
1295 to 1294 is the April 2011 low and the February 2011 consolidation low (bottom of the trading range)
1293 is the October 2011 peak
1275 is the January 2010 low, early January 2011 peak
1267 is the December 2011 peak
1258 is June 2011 intraday low
1255 is the late December 2010 consolidation range
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
1220 is the April 2010 peak
1209 is the mid-August 2011 high


Dow: Closed at 13,096.17
Resistance:
13,297 is the April 2012, post bear market high
13,668 from 12-2007 peak
13,692 from 6-2007 peak
14,022 from 7-07 peak

Support:
13,058 from the May 2008 peak on that bounce in the selling
13,056 is the February 2012 high
The 50 day EMA at 12,785
12,754 is the July intraday peak
12,716 is the April 2012 closing low
The 200 day SMA at 12,584
12,391 is the February 2011 peak
12,369 is the left shoulder low from May 2012
12,284 is the October 2011 peak
12,258 is the December 2011 peak
12,110 from the March 2007 closing low
12,094 is the April 2011 low
The June low at 11,897 (closing)
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


Economic Calendar

Personal Income, June (8:30): 0.5% actual versus 0.4% expected, 0.3% prior (revised from 0.2%)
Personal Spending, June (8:30): 0.0% actual versus 0.1% expected, -0.1% prior (revised from 0.0%)
PCE Prices - Core, June (8:30): 0.2% actual versus 0.2% expected, 0.1% prior
Employment Cost Index, Q2 (8:30): 0.5% actual versus 0.5% expected, 0.4% prior
Case-Shiller 20-city, May (9:00): -0.7% actual versus -1.8% expected, -1.9% prior
Chicago PMI, July (9:45): 53.7 actual versus 52.5 expected, 52.9 prior
Consumer Confidence, July (10:00): 65.9 actual versus 61.0 expected, 62.7 prior (revised from 62.0)

August 1 - Wednesday
MBA Mortgage Index, 07/28 (7:00): 0.2% actual versus 0.9% prior
ADP Employment Change, July (8:15): 163K actual versus 125K expected, 172K prior (revised from 179K)
ISM Index, July (10:00): 49.8 actual versus 50.1 expected, 49.7 prior
Construction Spending, June (10:00): 0.4% actual versus 0.5% expected, 1.6% prior (revised from 0.9%)
Crude Inventories, 07/28 (10:30): -6.522M actual versus 2.717M prior
Auto Sales, July (14:00): 4.9M prior
Truck Sales, July (14:00): 6.1M prior
FOMC Rate Decision, July (14:15): 0.25% actual versus 0.25% expected, 0.25% prior

August 2 - Thursday
Challenger Job Cuts, July (7:30): -44.5% actual versus -9.5% prior
Initial Claims, 07/28 (8:30): 365K actual versus 365K expected, 357K prior (revised from 353K)
Continuing Claims, 07/21 (8:30): 3272K actual versus 3298K expected, 3291K prior (revised from 3287K)
Factory Orders, June (10:00): -0.5% actual versus 0.6% expected, 0.5% prior (revised from 0.7%)

August 3 - Friday
Nonfarm Payrolls, July (8:30): 163K actual versus 100K expected, 64K prior (revised from 80K)
Nonfarm Private Payrolls, July (8:30): 172K actual versus 105K expected, 73K prior (revised from 84K)
Unemployment Rate, July (8:30): 8.3% actual versus 8.2% expected, 8.2% prior
Hourly Earnings, July (8:30): 0.1% actual versus 0.2% expected, 0.3% prior
Average Workweek, July (8:30): 34.5 actual versus 34.5 expected, 34.5 prior
ISM Services, July (10:00): 52.6 actual versus 52.3 expected, 52.1 prior


August 7 - Tuesday
Consumer Credit, June (15:00): $10.0B expected, $17.1B prior

August 8 - Wednesday
MBA Mortgage Index, 08/04 (7:00): 0.2% prior
Productivity-Preliminary, Q2 (8:30): 1.5% expected, -0.9% prior
Unit Labor Costs -Pr, Q2 (8:30): 0.4% expected, 1.3% prior
Crude Inventories, 08/04 (10:30): -6.522M prior

August 9 - Thursday
Initial Claims, 08/04 (8:30): 375k expected, 365K prior
Continuing Claims, 07/28 (8:30): 3290K expected, 3272K prior
Trade Balance, June (8:30): -$47.5B expected, -$48.7B prior
Wholesale Inventories, June (10:00): 0.3% expected, 0.3% prior

August 10 - Friday
Export Prices ex-ag., July (8:30): -1.4% prior
Import Prices ex-oil, July (8:30): -0.3% prior
Treasury Budget, July (14:00): -$129.4B prior


By: Jon Johnson, Editor
Copyright 2012 | All Rights Reserved

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

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