Jobs Report Disconnect Garners the Headlines

MARKET SUMMARY

- Jobs report disconnect garners the headlines, but the market action is the real story.
- Stocks start higher, continuing the rebound move, but the high to low action returns. Jobs report rethink? Syria/Turkey tensions? Just the weekend?
- Jobs creation weak, but a massive household job increase pushes unemployment to 7.8%. What is the disconnect? It started awhile back . . .
- California gas at $4.49/gallon. Hope this is not a sign of things to come elsewhere.
- Dollar fails to rally on jobs report, a strange outcome, but bonds act 'right' and sell off.
- After this jobs report some say the Fed and its QE3 are already over. Not according to Bernanke.
- Leaders give back some of the Thursday move.
- Perhaps a bit of pre-weekend, some pre-earnings nerves, and now we see if the market can hold and add to what it started this week.

Jobs data dominates the session, but just what was the message of the market?

Is it real or was it trumped up? Only the BLS workers calling the households to get the information know. What we do know (and of course I have my facts and conclusions below) is that the market jumped on the report of 7.8% unemployment (but only 114,000 non-farm jobs), but it could not hold the move. Did investors decide the unemployment number was so far off the reality and trend of the economic data as to be unbelievable? Could the Fed call an end to QE3 given the unemployment number? Are geopolitical issues with Syria and Turkey lobbing shells at one another too high to stay in the market over the weekend? Will the earnings season start next week disappoint?

Regardless of the reason, that high to low move is something seen when the indices were pulling back in the post-QE3 announcement test. Stocks started to move higher Wednesday and Thursday, gapped upside Friday, then faded back to flat or negative. Volume was mixed; you can argue bids dried up after the initial celebration and the market faded or that sellers came in. With the mixed volume that is problematical.

SP500 and DJ30 tapped at the prior highs and recoiled. NASDAQ never really challenged them. The market, as it has been of late, is somewhat split with techs mostly lagging the move, semiconductors for certain.

SP500 -0.47, -0.03%
NASDAQ -13.27, -0.42%
DJ30 34.79, 0.26%
SP600 -0.17%
SOX -0.37%



OTHER MARKETS


Some of the other markets reacted as you would anticipate on a stronger jobs report. Others did not. As with the overriding question regarding the validity or accuracy of the unemployment numbers, are the other markets buying it?

Dollar. 1.3017 versus 1.3016 euro. A virtual dead heat. The dollar did not do what you would anticipate. It closed slightly higher overall, but it was down against the euro. It did rise against the yen and other currencies that make up the DXY0, but it was not a runaway. Note how the dollar sold off intraday, this even after a supposedly very good unemployment report. Why would this about the case? The dollar should rally if the economy is getting stronger.

It looks as if the dollar market was not buying into a growth story based upon these jobs numbers. Looking at the overall chart of the dollar, it is not pretty. It has a big head formed, and it looks like it is making the apex of a right shoulder. Note that back in late 2011 into April 2012 it formed what would be the left shoulder. It was very choppy and volatile. Frankly, this high on the right shoulder just matches some of the interim peaks in that prior possible shoulder, as I will call it. The dollar could bounce all the way back up near 81.50 after closing at 79.50. That is plausible. But overall, even if it does that, all that puts in is the right shoulder, albeit at a bit higher price. Maybe that would give us a better chance to short the dollar. The dollar looks to have a very toppish pattern still. The action on Friday and response to what was supposedly a good jobs number did nothing for it.


Bonds. 1.73% versus 1.67% 10 year US Treasury. Bonds tanked hard. They continued to tumble after showing some intestinal fortitude and rallying through resistance at the May gap point as well as the August low; they were roughly coincident. They rallied through those, and now it finds itself right back down at those levels. This actually makes sense. Bonds should sell (and yields accordingly rise) if the economy is improving because you do not need them as a safe haven to hide your money in. The theory is that money will be in more demand and rates should rise and make bonds less valuable because you can make more money investing in stocks that are levered to the economic performance.

In the end, bonds made sense and they crashed lower. Our TBT play which is an upside play but really a downside play because it is an ultra short that plays a drop in the bond market to the upside. It jumped nicely. Do not freak out or be disappointed. As of Thursday, the TBT was trading around $15-16. Then you woke up this morning and it is at $65, gapping to the upside. That is because it did a 1-for-4 reverse split that was effective today. It just jumped up the price. You still have the same value in it so, as I said, do not freak out about it.

In short, bonds were behaving as you would anticipate on stronger news.


Gold. 1780.80, -15.70. Gold did sell off on the session. That makes sense as well. Gold would be less needed if there was a belief that the Fed would withdraw some of its stimulus. QE3 was just launched, but all of a sudden we have unemployment down below 7.8%. Certainly the Fed will withdraw some of its stimulus. I will talk about that in just a minute. Gold sold off, but it still held the 10 day EMA on the close. It is still right at the February and then the November 2011 peak. There is still resistance. It is still bumping around there after breaking through it on Thursday. But it is looking strong, holding the 10 day EMA -- indeed, coming off of the low to do so.


Oil. 89.88, -1.83. Oil closed lower. That makes no sense with a stronger economy. Oil should be rallying, but oil is struggling. Wednesday and Thursday were kind of toss-out days. There was the big drop on Wednesday and the big recovery of what was lost on Thursday. Friday was back down. Oil continues to look weak near term, and it could fall further. There is a lot of oil out there. Not only in the tanks, but Saudi Arabia is promising (or maybe threatening with respect to other OPEC members) to produce more if needed.

Then again, there are the tensions in the Mideast. Iran is in turmoil internally. Syria and Turkey are lobbing shells at each other after Turkey gave itself authority to enter Syria for military incursions if necessary. That is an issue that could pop prices to the upside, but it is not. It seems like a lot of oil is trumping, and it is also trumping a supposedly stronger jobs report. Let's face it, even if you take this jobs report at face value as true -- which would be a somewhat foolish thing to do -- it is still at a terrible level. The nonfarms payroll creation is hideous. That is the situation around the globe. Weak economies, all, and they don't need as much oil. There is an understandable reason for oil to show weakness simply because of the quantity available and the quantity of economic output around the world.



Hmmm. Unemployment at (cough, cough) 7.8%. More QE?

I have to ask a question that was being asked all day long on the financial stations: What is Bernanke going to do? What will the Fed do now that the unemployment rate fell below 7.8%? I have Mr. Bernanke pictured here, pondering whether or not he should continue QE3 or even administer QE. Remember that there is still bond buying that could be done out there in addition to the mortgage-backed security purchases. As noted, some said unemployment is already below 8% (indeed, down to 7.8%), so the Fed has done its job. Employment was improved because that is what the Fed and Bernanke said was its primary focus.

First of all, I do believe the Fed knows that this number was out of step with all other numbers economically speaking. Whether you are looking at the nonfarm payrolls, the private payrolls or any other economic data. That includes the regional manufacturing reports that show employment has been decreasing of late rather than increasing. This is a hard one for the Fed to swallow, and that is why Mr. Bernanke may be coughing a little to clear his throat as he ponders what to do.

What about what the Fed itself has said? It just said it last week, so this is really a nonissue, but I have to report on it because some people saying that the Fed should quit or will quit. And obviously that directly affects the stock market. Bernanke expressly stated -- there is no reading between the lines -- that the Fed would continue its monetary policy, its open-market operations WELL after it saw the improvement it was seeking in the economy. We have one number that is an outlier. It does not match any other economic data, and it is by far and away better than anticipated. By the other numbers, so it should be.

Do you think the Fed will buy into that and say its work is done given what Mr. Bernanke just said last week? Of course not. It is preposterous to think that will be the case. So if any of the pullback on Friday was due to the fear of withdrawing QE, that will quickly dissipate. I guarantee that the Fed speakers -- at least those in the majority who favor QE -- will say we are not where we want to be. They will say we cannot trust one report to accurately show the state of the economy, therefore QE is here to stay, and we are even thinking about other ways in which to stimulate the economy.


TECHNICAL SUMMARY

Internals.


Volume. NASDAQ +3%, 1.59B; NASDAQ -10%, 542M. What does that mean? On the NYSE, stocks rallied early and rallied well. They put themselves up near the high hit in early-September, but volume was not there so it was unable to hold the move. It reversed and sold off to negative. But volume did not spike as it sold. So it was not really a rollover, at least one accompanied with high volume. The picture does not look pretty in terms of the chart, but volume did not suggest that there was any major selling.

NASDAQ did bump higher, so that does suggest there was some selling that topped the buying on Thursday. You can see the gap up and the reversal in the chart. It looks something like an engulfing pattern on slightly higher though still below-average volume. That can suggest more testing. Indeed, NASDAQ has room down to its trendline to do a bit more testing, still hold above the 50 day EMA, and still keep the trend in place.


Breadth. NASDAQ -1.2:1; NYSE +1.3:1. Breadth was pretty good to the upside on Thursday, but it was down on NASDAQ. It was hardly anything ugly, but it was a reversal day. Often the market does not catch up by the closing bell on a reversal day, so it does not look as bad as it might have been. NYSE was still positive, so that suggests that the damage or any selling was not that widespread. Indeed, it seems most of it was centered in the technology area.


THE CHARTS

SP500. SP500 rallied nicely. It hit 1471 on the high. It early September, the intraday high was 1474.50. It rallied and that led to the two-week pullback. The SP500 held the trendline over the past week and started to rally back to the upside. This could suggest a reversal. It could. We will have to see how it plays out. Overall the trend remains nicely in place. On the last high, MACD put in a higher high, so the momentum it still there. We may get a pullback early next week. We will have to see how it reacts, but it still looks solid. Earnings will play a role because the season gets underway next week, at least a little bit. The serious, earnest earnings come out the following week, however.


NASDAQ. The NASDAQ gapped to the upside, and it even ran a little bit higher but then reversed. It closed negative, down -0.4%. It was not a huge loss. But look at the low on Thursday at 3132.56 and then the low on Friday at 3130.76. Intraday it took out the low, but on the close it did not. That means it is not a true engulfing day, but it is clear that the sellers came in. They came in with a little more force than the buyers as volume bumped higher. It was still below-average volume, but they won the day for sure. It was a modest rally to the upside, and the NASDAQ was following along. AAPL was not participating on Thursday, and it still rallied. AAPL was downside on Friday, and that brought the NASDAQ down with it. But it is still in an uptrend. It is still holdings that uptrend, and it has room to give before it is in trouble. Indeed, where it closed on Friday still keeps it above the March peaks. It does not look all that impressive near term, but I think it will work through these issues. A lot of it depends on AAPL. It has a market cap that is just too big for the index. It is like the "too big to fail" stock of the NASDAQ. When it does not perform well, NASDAQ catches cold. If GOOG has a little bit of trouble, you know there will be some weakness on the NASDAQ.


SP600/SP400. Small caps were down slightly. Pretty impressive, although they did give back a nice, impressive gain. They were trading near 477 and closed at just over 470. That is a big giveback and is disappointing. But it is holding the up trendline and is still in position to continue higher. Why are we not wringing our hands over this? Because it was a crazy day. There were different interpretations of that jobs report. Some were buying on that low unemployment number early, but others came back later and said that it was bogus and were selling on that. Obviously we had some weekend issues involved with Turkey and Syria shooting at each other. You get the picture. Yes, it pulled back. No, you cannot like that action, but it is still holding the trendline. It still has not made a serious break to the upside yet to try a new move. It leaves itself in position to rally with QE3 still in place. People are going to come around and realize that QE3 is not going anywhere. That will make a difference, we think, in a continued market move.


SOX. Of course SOX was down, but it was down just 0.1%. As with others, it rallied nicely right up to resistance -- those old twin peaks from June and July -- but then it gave up the ship and closed flat on the day. It is working laterally, still a dog. Maybe a market leader to the downside. You always have to watch SOX for that because it can be trouble that way.


DJ30/DJ20. We have to look at the DJ30 industrials and the DJ20 transports relationship because it has been so divergent. As the DJ30 hits new highs, you need to see the transports buck up a bit. The DJ30 had the best gain on the day, up 0.25%. But it, too, gave back a pretty good chunk off of its high. It was bumping up against the highs hit over the past month. It fades back each time it has bumped this level around 13650ish (as a matter of fact today it hit 13645). It has not been able to punch through. It still looks good in a nice uptrend, but it just has not been able to move through. If it cannot, that bodes a fall back in the trend.

That is not devastating for the Dow because it has been in such good shape. But why would it not punch through? Perhaps, drum roll please, it is because the DJ20 transports is not confirming its move higher. As noted on Thursday and many days prior, it is nowhere near a high. It is trading in a nice range, and we do have a good position that we entered on Wednesday. But on Friday it suffered the same problem. It moved through the 50 day EMA, looked super, and then it fell below it. At the end of the day, it managed to recover and hold just over the 50 day EMA. That is a good indication. That puts it almost midway up in the roll. It was there earlier in the day when it crossed 5075. But it is mid-level. It has had three good moves with five up days in a row. It may want to walk laterally a bit before it continues toward the top of the trading range. Remember, we are still looking for it to make a move to challenge that peak near 5200. It may run into some resistance at the 200 day EMA at 5139-5140ish. We can give it that. It is looking good still and is moving well. I also think this was just a response to the weird day of a great unemployment report and then, wait, not that great of a jobless report. Up early and down late.


LEADERSHIP

I won't need to dive into leadership in great detail. We had good moves on Thursday. In financials we have BAC and its brethren. In home builders, KBH was moving well. Looking at retail, there was LULU and ULTA. ULTA actually posted a pretty decent move on Friday, by the way. CONN was up almost 3%. Retail was good. Some were up, some were down. Some were up in the home builders but most of them were down.

Leaders on Wednesday and Thursday were kicked back somewhat on Friday. Was it a major reversal? You can read it that way if you want to. It was the high-to-low. It could lead to a rollover. Again, I just think it was a strange day ahead of a weekend. There were a lot of issues on the table, not to mention earnings coming up. Investors rallied it early, had second thoughts about the jobs report, and also saw what was going in Syria and Turkey. They also saw that there will be earnings, and it was the weekend. They just wanted to take some gains, get out of there, and see what happens next week.

Am I rattled about what happened? Not really. Look at LPX in materials; it posted a nice gain, rising over 3%. That was our buy on the day. While stocks took a little hit on Friday, it did not damage most of them. Of course if they continue to sell, that is never good. But that is always the case. We may just simply see some better positions to enter when this market turns back after a realization that the Fed is here to stay and that the jobs report was not the end of the world for any particular campaign.

That is leadership in a nutshell. Retail, home builders, and financials all look solid on the week. We saw leaders start to head out on Wednesday, and we were buying into those. ULTA, LULU, you know the names. So we will let them show us if they will hold or not. If they give us a nice little pullback, we can take advantage of it because QE3 is still there.


THE ECONOMY

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

The Jobs Report.

Nonfarm Payrolls, September (8:30): 114K actual versus 120K expected, 142K prior (revised from 96K)
Nonfarm Private Payrolls, September (8:30): 104K actual versus 130K expected, 97K prior (revised from 103K)

Government workers revised upward the past three months: 18K, 45K, 10K.

Year/Year: less jobs this September than September 2011.

Non-Farm Jobs Pace: 2012 is on track to product LESS jobs than 2011.

At this pace it will take until AFTER the 2016 election to recover to the 2007 level.

Another piece of data shows up hugely outside of historical standards.
A favorite tactic of the BLS in tweaking the jobs data is to take a statistic that is ALWAYS one way for a month and then flip it the opposite direction. With seasonal adjustments and how that work, that has the effect of DRASTICALLY impacting the figures because the 'inverse multiplier' effect of seasonal adjustments when the data does not fit the season so to speak.

In September this happened with the age 20 to 24 workers whose unemployment rate has run at 15%, well above the overall unemployment number.



For the first time in the decades this data has been kept the unadjusted numbers were positive at 101,000. This age group is dominated by those in the last years of college. That is why it drops in September: back to school. Are we to believe they are not going to school as much for the FIRST time in history? To the contrary, as we just learned from the government, student loans are rocketing back up as students seek to STAY in school because there are no jobs (up $14B per the Friday Consumer Credit report). If they leave school, they have to pay. If they stay, they can get loans, stay out of the private sector, something Dan Aykroyd in Ghost Busters told us scholarly types like to do. This is what ALWAYS happens in recessions.


You've never been out of college . . . I've worked in the private sector, they expect results.

The positive read shot the adjust numbers to the highest in decades. No surprise. And of course, that impacted the non-farm payrolls, pushing them higher than they actually were, even at a measly 114,000.


Household Survey:

Unemployment Rate, September (8:30): 7.8% actual versus 8.1% expected, 8.1% prior
Hourly Earnings, September (8:30): 0.3% actual versus 0.2% expected, 0.0% prior
Average Workweek, September (8:30): 34.5 actual versus 34.4 expected, 34.4 prior

873,000 jobs added, the highest since June 1983 when Regan was President and GDP grew 9.4% that quarter (see below).

Unemployed: -456,000 to 12.1M

U6 (total of unemployed, underemployed): STEADY at 14.7%

JOLT (US Job Turnover Level): 4.2M per month. That is the SAME as it was 4 years ago.

The point: On first look, at BEST everything is the same as it was 4 years ago, i.e. no improvement. But, as you likely suspect, it goes beyond that.

And now, the REST of the story (sorry Paul Harvey).

For the past 9 months I have written that the administration would get unemployment below 8% by the election. If not by growth then by distortion. I am not the only one who postulated this; it is a strategy that seemed logical and when you look into the details of the data as we have done, you see a series of abnormal adjustments to the actual data that has, in total, effectively created more workers than there are. In the September jobs report, mission accomplished.

As is the case for this administration, it did not take any chances reaching its goal and started the distortions early this year in order to get to its goal over time. Even so, the big drop in September was too much to be believable and raised red flags everywhere given the media coverage.



Even Jack Walsh, former CEO of GE, tweeted "jobs numbers . . . these Chicago guys will do anything . . . can't debate so change numbers."

The Process.

An early favorite was massive distortion of the birth/death rate, telling us people simply retired (1M people in one month disappeared from the workforce in January). As we reported, however, the FASTEST growing demographic in the workforce is those OVER 55 years of age as they re-enter the workforce to replace devastated savings and retirement accounts.

This move shrank the labor pool so quickly many questioned it. So, the feds then moved in other ways to shrink the labor pool. The reason you shrink the overall work force? By decreasing the denominator in the unemployment equation you divide by a smaller number, thus raising the percentage of the employed even if the number of jobs remains steady or even falls.

So, the BLS then moved into wildly aberrant seasonal adjustments out of step with decades of historical adjustment levels for the months at issue. How wild? In July the seasonal adjustments turned a negative number of non-farm jobs to a positive 163K even as the workforce fell.

The rise of the part-time worker (or is that the conjure of part-time workers?).

Of late the focus is on using part-time jobs for those who want to work full-time but cannot find full time jobs as the 'growth' area in jobs. In acquiring the data for the so-called Household survey where houses are literally called and those answering are asked if they have a job, got a job, what kind of job, etc. These are not hard numbers reported by companies hiring. A worker makes a call, enters the data. No reported record. Get the picture of how loose this data is?

Now consider that the DEFINITION OF WORK UNDER THE WELFARE STATUTE WAS CHANGED BY THE ADMINISTRATION by unilaterally waiving work requirements under 2005 congressional amendments to the 1996 welfare reform (TANF). By waiving those requirements states can now once again consider items such as bed rest, journaling, weight loss promotion, parent-teacher meetings, reading the want ads, and house sitting as work. Why would they do this? To get more federal welfare dollars when those 'jobs' were lost. At the time I said we would see a surge in welfare claims by people who supposedly lost these 'jobs.'

Is this the first step, i.e. calling up people and asking if they started reading the want ads or were trying to lose weight in September and then including them in the jobs report? Did that just create a VAST number of 'new' part-time jobs? 582,000 of the 837,000 jobs said to be created in the household report were part-time. 66%! It looks as if that is so.


Remember this chart? Now in September it shows, even with a shrinking unemployment rate, those unemployed and underemployed is RISING.

The strange unemployment path in this recovery.

The path of unemployment versus jobs in this recovery is not the traditional path. Indeed, unemployment has never done what it has done this time, i.e. a big decline in unemployment during stubbornly tepid jobs growth. Typically in a recovery unemployment rises as people feel things are better (confidence moves up as we have actually seen of late), they move back into the job pool looking for work, but they cannot all find jobs because not that many are being created (and yes, not many jobs have been created this time around as well).

According to the September data, however, it is as if everyone who had left the workforce was notified a job was available and they transitioned from outside the labor pool directly to working at a job without having to search at all for a job. We may like to believe we are efficient, but we are not that efficient. Otherwise there would be no need for headhunters, Monster Jobs, etc.

How big is this distortion? In September it was reported that households responded that 873,000 jobs were added, the highest jump since Reagan. THAT SIMPLY DOES NOT ADD UP: Reagan's recovery was huge. It was real growth (9+% GDP growth at that time) with real, full-time jobs. We are now told that people in September jumped from OUTSIDE the workforce to back to the pool and found a job IMMEDIATELY without looking. This simply does not happen and right there you know there is an error in the numbers.


Huge surge in GDP as the tax cuts took hold. The 1985 'pullback' was to well above trend levels.

Even if you BUY the numbers, they show a terrible problem.

The BIG number in the September household survey is the number of workers who are working but only part-time due to economic conditions. They want a fulltime job but the economy cannot produce them. As noted, that segment rose to 582,000 in September or 66.6% (weird; exactly two-thirds) of the 873,000 household jobs increase.

Let's say we buy that they all got part-time jobs without having to look for them. Okay, so what has the jobs creation range been as I showed two weeks back? Two-thirds at the lowest pay scale end, the burger flippers so to speak. These people want to work but cannot find the jobs they desire. This is survival living, taking whatever job you can. You have to do it to survive, but it is not a job you want.




Notably, I also pointed out the past month after the August jobs report that the total number of people unemployed for all reasons, including those who cannot get full time work because of economic reasons, was growing. In August it was 25.8M. In September when the unemployment rate supposedly fell 0.3 basis points the total number of unemployed and under employed GREW to 26.2M. This is backed up by the U6 number, the government's version of the total unemployment figure: it held steady at 14.7%.

So, if we just assume the 7.8% reading is an indicator of economic health, is it equally economically healthy to create mostly part-time, low pay jobs versus full-time, standard of living increasing jobs through innovation and technology creation? In other words are part-time, low pay-scale jobs with unemployment at 7.8% as good as full-time, higher paying jobs and 7.8% unemployment?


The upshot:

We have spent $1T in stimulus, have put in place multitudinous programs for homeowners, workers, etc. We have altered what qualifies as work under the welfare statutes (new jobs created?). We have accumulated another $6T in debt and learned Friday this year's debt has already topped $1T!

With all of this we still have 26.2M people who either have no job at all and are not looking, trying but cannot find one, or managed to land a low paying part-time job just to survive. And I am not even going into those over 50 losing their jobs; they simply disappear from the workforce forever whether they want to or not as it is extremely difficult to find employment at the high end and low end of our demographics (age 20 to 24 unemployment is 15%).

As a result, this systematic, purposeful, anomalous, and extreme distortion of the underlying employment data the past year has worked to create an 'acceptable' unemployment rate just in time for the election. Our media and the majority of the US citizenry are too complacent, despite the hardships, to understand how this has happened and thus cannot obviously take the next step and ask the question 'why?'


THE MARKET

VIX. The VIX gapped lower and then recovered as the stock market sold off. But look where it held. Lo and behold, it is right at the September and August lows that led to bounces in the market. Not only that, but it was March of 2012 and all the way back to July, April, and May of 2011. It is at an important point again, and it could make a break higher again. That will have many people over the weekend saying that this bounce in the market has run out of steam. If very well could have. There is a correlation between this landing on this support level and bouncing higher, that meaning the market sells lower.

We will have to see how that plays out because the VIX is not the primary indicator. The primary indicator would be the technical picture of the indices, the leadership, and volume versus price. We also have to factor in one of the other "technical" pictures: QE3. It is not really a technical picture, but it is an overlay to all of the action. The Fed will continue with QE3. Maybe on Friday there was a feeling that it would not based on the jobless number, but I think we have debunked that. I think the market will come to that realization as well because Bernanke will keep it going. He will not let what appears to be a single outrider month stall or turn back his promise to deliver a new economy. After all, he answered Senator Schumer's challenge of "Get to work, Mr. Chairman."

VIX: 14.33; -0.22
VXN: 16.48; -0.17
VXO: 13.58; -0.18

Put/Call Ratio (CBOE): 0.94; +0.13



Bulls versus Bears

Bulls: 46.8% versus 51.0% versus 54.2%. Not many believers in the staying power of the move ahead of the past week as stocks tested after QE3's announcement. Now lower than pre-QE3 levels. A little consternation is good. Well below the 60% to 65% bullish levels that flash a warning sign. Back to the level from a couple of months back. Undercut 35%, the threshold for bullishness, in early June. 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: 25.5% versus 24.5% versus 24.5% versus 25.5%. A bit more skeptical as well, rising to levels from a month back, but still not at a high level. March and April saw lower lows in the 21% range. On the last run 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: -13.27 points (-0.42%) to close at 3136.19
Volume: 1.59B (+2.98%)

Up Volume: 594.04M (-415.96M)
Down Volume: 990.87M (+411.3M)

A/D and Hi/Lo: Decliners led 1.19 to 1
Previous Session: Advancers led 2.05 to 1

New Highs: 156 (+31)
New Lows: 36 (-2)


SP500/NYSE

Stats: -0.47 points (-0.03%) to close at 1460.93
NYSE Volume: 542M (-10.12%)

A/D and Hi/Lo: Advancers led 1.33 to 1
Previous Session: Advancers led 2.68 to 1

New Highs: 306 (+84)
New Lows: 8 (-4)


DJ30

Stats: +34.79 points (+0.26%) to close at 13610.15
Volume: 106M shares Thursday versus 104M shares Wednesday.


MONDAY

There is some more economic data next week. We cannot get away from it. As seen on Friday, you have to deal with it and all of its imperfections. The big news does not come out until later in the week. Actually, none of it really starts until later in the week. Wednesday will just be a throwaway. No one will care about wholesale inventories and the Treasury budget, although they are important. We have the initial claims on Thursday, and then on Friday we have PPI for September. What are the producers paying? Of course we hear there is no inflation. It was up 1.7% in August, and it is expected to halve that in September. We will see. Then there is the preliminary Michigan Sentiment for October. It was up before, and they expect it to rev even more with this great jobs report. We will see how that goes.

Earnings season will be one of the primary drivers. Not a lot of our plays are reporting next week, so we do not have to worry about specific earnings that much for our specific plays. But it is always important overall. It starts next week, but it does not really get revved up until the following week when the really big names start to report. But we will see some good names out next week, and it will start to influence the trade. Frankly, that was one of the factors on Friday impacting what the market did. We had earnings coming up. We had whether the Fed would remain with its QE3. I think we have answered that. We also had the geopolitical issues with Syria and Turkey lobbing shells at each other on Friday. There was the issue with the jobs and whether it was a true statement and if they were good or bad. In the end, I think everyone dropped back and punted. You have one that was good, and it was an outlier. Another was still cruddy, still in the same old no-growth/modest-growth mode that it has been in. That seems to be more reliable, wouldn't you think? All that added together meant that investors just wanted to drop back, punt, and go home for the weekend. That is exactly what they did.

Next week we will see whether the leaders want to hold up and continue. QE3 is still here. We have had a pullback, we have had a rally, and we are challenging these old levels. It is an important week, no doubt. Will it be able to punch through on SP500 or will it be knocked back? And if it is knocked back, does it just go to the trendline? There are still a lot of good-looking stocks out there moving well, but there is skepticism as well. Remember, when this move started everyone said it would not last. We will have to see if the 1470-1475 level is sold indiscriminately regardless of QE3. Ultimately I do not think that will happen. Ultimately QE3 is here, and it will have more of an impact. The question near term is whether or not there needs to be more of a pullback before a further QE3 run. That is what we will find out next week.

I still see patterns I like. There are a few people nodding in the office and some people are giving me glares as I say that. But there are good patterns out there. We will see if we can find more of them that could give us buys. We will see if everyone finds out after the weekend that there were no major blowups and no bogeyman appeared in the data or from overseas. Frankly, this market has rallied on pathetic economic numbers because it has QE3 in place.

On Friday there was another round of pathetic economic data. You can take that 7.8 or not, but I guarantee you that it was an outrider. It was fabricated, and it was just another way of crunching down the unemployment numbers ahead of the election. People might want to stick pins in there Jon dolls after that statement (or maybe they don't care), but that just seems to be the case. If nothing else, it was a gross outrider that is totally aberrant from all of the data. I think the market will figure that. They will see that the Fed will not pull QE3, and the overlay of QE3 will continue. I have had this on the SP500 chart the entire time I have talked about this, and that makes a lot of sense because it has been the leader to the upside along with the Dow. I could have put it on NASDAQ. It is following along, but it still has room in its uptrend even if it wants to pull back.

We will find out more next week. It will be more interesting with earnings coming. If we get a good move, a few days up, we will probably want to take some gain off the table before the earnings really start to impact the market and impact our stocks. That is just good practice. I am not saying that earnings will stink the place up, although they are not supposed to be great. We have seen a lot of warnings: BBBY, FDX, UPS, NSC, INTC, CAT. The list is lengthy and impressive in the quality of the names.

There will be some issues out there. The question is, will the market forgive them? It is tough out there, but the Fed has our back with QE3.


Support and resistance

NASDAQ: Closed at 3136.19

Resistance:
3197 is the September 2012 post-bear market high
3227 is the April 2000 intraday low
3401 is the May 2000 closing low

Support:
3134 is the March 2012 post-bear market peak: broken, not forgotten.
The 20 day EMA at 3128
3101 is the August 2012 high
3090 is the mid-March interim high
The June up trendline at 3089
The 50 day EMA at 3080
3076 is the late April 2012 high
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
2999 is the bottom of the August 2012 consolidation
2988 is the July 2012 high
2962 is the April 2012 low
2950 is the mid-April closing low
The 200 day SMA at 2946
2942 is the mid-June 2012 high
2910 is the March 2012 low
2900 is the March 2012 low


S&P 500: Closed at 1460.93

Resistance:
1475 is the September 2012 high
1499 from January 2008
1539 from June 2007

Support:
The 20 day EMA at 1445
1440 from November 2007 closing lows
1440 is the June up trendline
1433 from August 2007 closing lows
1425 from May 2008 closing highs
1427 is the August 2012 peak
The 50 day EMA at 1423
1422.38 is the prior post-bear market high (March 2012)
1406 is the early May 2012 peak
1402.22 is the closing low of the August 2012 lateral consolidation
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 200 day SMA at 1365
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
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 13,610.15
Resistance:
13,668 from 12-2007 peak
13,692 from 6-2007 peak
14,022 from 7-07 peak

Support:
The 20 day EMA at 13,462
13,331 is the August 2012 post-bear market high
13,297 is the April 2012, prior post bear market high
The 50 day EMA at 13,285
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 200 day SMA at 12,899
12,754 is the July intraday peak
12,716 is the April 2012 closing low
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

October 1 - Monday
ISM Index, September (10:00): 51.5 actual versus 49.7 expected, 49.6 prior
Construction Spending, August (10:00): -0.6% actual versus 0.4% expected, -0.4% prior (revised from -0.9%)

October 2 - Tuesday
Auto Sales, September (14:00): 5.3M prior
Truck Sales, September (14:00): 6.3M prior

October 3 - Wednesday
MBA Mortgage Index, 09/29 (7:00): 16.6% actual versus +2.8% prior
ADP Employment Chang, September (8:15): 162K actual versus 133K expected, 189K prior (revised from 201K)
ISM Services, September (10:00): 55.1 actual versus 53.0 expected, 53.7 prior
Crude Inventories, 09/29 (10:30): -0.482M actual versus -2.446M prior

October 4 - Thursday
Challenger Job Cuts, September (7:30): -70.8% actual versus -36.9% prior
Initial Claims, 09/29 (8:30): 367K actual versus 365K expected, 363K prior (revised from 359K)
Continuing Claims, 09/22 (8:30): 3281K actual versus 3273K expected, 3281K prior (revised from 3271K)
Factory Orders, August (10:00): -5.2% actual versus -6.0% expected, 2.6% prior (revised from 2.8%)
FOMC Minutes, 09/12 (14:00): Nothing new. One dissenter, but most of the dissenters are not on the panel right now.

October 5 - Friday
Nonfarm Payrolls, September (8:30): 114K actual versus 120K expected, 142K prior (revised from 96K)
Nonfarm Private Payrolls, September (8:30): 104K actual versus 130K expected, 97K prior (revised from 103K)
Unemployment Rate, September (8:30): 7.8% actual versus 8.1% expected, 8.1% prior
Hourly Earnings, September (8:30): 0.3% actual versus 0.2% expected, 0.0% prior
Average Workweek, September (8:30): 34.5 actual versus 34.4 expected, 34.4 prior
Consumer Credit, August (15:00): $18.1B actual versus $5.0B expected, -$2.5B prior (revised from -3.3B)


October 10 - Wednesday
MBA Mortgage Index, 10/06 (7:00): 16.6% prior
Wholesale Inventories, August (10:00): 0.6% expected, 0.7% prior
Treasury Budget, September (14:00): -$62.8B prior

October 11 - Thursday
Initial Claims, 10/06 (8:30): 370K expected, 367K prior
Continuing Claims, 09/29 (8:30): 3275K expected, 3281K prior
Trade Balance, August (8:30): -$43.8B expected, -$42.0B prior
Export Prices ex-ag., September (8:30): 0.4% prior
Import Prices ex-oil, September (8:30): -0.2% prior
Crude Inventories, 10/06 (11:00): -0.482M prior

October 12 - Friday
PPI, September (8:30): 0.8% expected, 1.7% prior
Core PPI, September (8:30): 0.2% expected, 0.2% prior
Michigan Sentiment, Preliminary October (9:55): 78.5 expected, 78.3 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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