Sunday, October 21, 2012

Stocks Dive on Expiration


- Key earnings misses augment prior earnings warnings, GOOG surprise, as stocks dive on expiration.
- Earnings reality belies economic data as sales decline and a clear majority of companies miss expectations.
- Tough session but many leaders hold up. Others fell hard to next support and from there they have to try and show Friday was just an expiration thing.
- Existing Home Sales fall as lack of speculative-priced houses show exactly how much the market has healed (or not).
- Hartford Small Business Survey shows more of what we know that does not support the economic report bounces.
- $1+ trillion spent in 2012 on Medicare, Medicaid, and Welfare. More people are on assistance than those working in the private sector.
- Friday just an 'expiration thing' or the start of an October stock market surprise.

Black Monday remembrances, but this was no Black anything.

It was all SP500, DJ30, and somewhat surprisingly, SP400 midcaps, could do to hold their 50 day EMA. They were just at this level to start the week as they had tested and then started what looked to be a solid move off of that support. As techs continued to their acid indigestion over the early Google earnings release and miss, more bile was added as MCD, GE, PH, BHI, CMG, HON and others missed their results.

It is not just a bottom line miss on rising energy and input costs. Oh yes we know there are rising costs as seen in the Philly Fed report on Thursday that mysteriously was positive when all sub-indices were negative, but rising costs the past quarter were expected. The most worrisome aspect is the sales decline leading to revenue misses. Stocks are back in that lousy situation of declining sales experienced as the economy fell into the financial crisis. What is worse, this time they are experiencing rising prices in a nasty profits squeeze. Any wonder they were hoarding money in anticipation of problems to come?

The declining sales underscore the economic decline that started in 2011 and continued into 2012. Sure there was hope that the recovery would continue and indeed the ups were viewed as 'heading in the right direction,' but they were always lower highs followed by slowdowns. Looking back you can see that 2010 was the peak of a weak recovery, and the trend has stumbled lower and lower in action very similar to the 1970's when the US experienced directionless, pathetic, and sporadic ups sandwiched between declines in growth and the stock market.

At this juncture in the earnings season 41% topped expectations while 59% missed. Again, it is the nature of the misses that is the most disturbing: declining sales that comport with what the business surveys and results are showing versus a handful of economic reports of late that have surprised to the upside without any foundation for so doing. The falling unemployment rate? Mostly part-time, lowest pay scale jobs were created, and likely those were 'found' jobs after the change in the definition of work under the 1996 welfare reform act. Weekly jobless claims? Jumped right back up toward 400K after a week when some data from somewhere was missing (that remains the mystery). September retail sales? The unadjusted numbers discussed Thursday show the level of declines seen in September 2007 as the financial crisis unfolded, much worse than expected and requiring a huge adjustment to 'smooth out' the data.

The list goes on, but the idea is simple: earnings expectations that are already lowered are missing their marks on sales, and they show that the economic data is off, or at least the adjustments send it off the true path as the huge decline in September raw sales shows.

Google accidental earnings release epitomized the end of the week.

The question is whether this almost comedy of errors on the week in terms of earnings releases was just a one-time shock exacerbated by the GOOG surprise early release and amplified Friday by expiration, OR is it the start of some hellish 'October Surprise' that sees stocks burn off right before the election as prices correct to make up for the gap between prices near post-bear market highs and the reality of declining sales due to a weakening economy.

Market Action

No doubt this was a tough session. What was a decent fade by NYSE indices on Thursday turned into a Black Monday anniversary blood-letting where it was every stock for itself. Of course this was no black Monday, and I frankly was a bit sick and tired of the analogies all day long. As I said in an alert, I was there at Black Monday, I know Black Monday. Black Monday is not a friend of mine. Friday was no Back Monday. That would take another 2,000 to 3,000 points off the Dow to get into that range.

Every stock for itself on Friday from the opening bell.

Stocks started lower after futures were lower. They fell fast and hard at the open. We watched for a rebound to test the move. It finally showed up - - when the last hour of trade began and after a 27 point plunge on SP500, 66 points on NASDAQ, and 233 points on DJ30. That move lower started at the bell and never came up for air the entire session until that last hour started.

So there was a rip-roaring last hour surge on expiration Friday right? No. It bounced indeed, but NASDAQ recovered a whopping 5 points off the low. 3 points on SP500, 30 points on DJ30. A bit less than impressive on the recovery.

SP500 -24.15, -1.66%
NASDAQ -67.25, -2.19%
DJ30 -205.43, -1.52%
SP600 -1.67%
SOX 3.02%
NASDAQ 100 -2.4%

The move left SP500, DJ30, and SP400 at the 50 day EMA as noted, nursing the possibility of a bounce. Many stocks held up as if there was no selling at all, but some big names broke lower. Most managed to hold a lower support range. If this was an 'expiration thing' coupled with confusion and angst that started on Google's premature earnings release, those stocks at the lower support and the NYSE indices are in position to rebound. Of course, they have to do it again after just making that move starting Monday.

The alternative? The start of an earnings decline that the market missed. That seems unusual as the market typically leads declines by months versus reacting to declines. That would tend to mitigate any major market selloff. Of course the Fed's stimulus has masked the market's typical economic prognostications powers with QE funds pushing into financial instruments versus the economy because business surveys clearly show they are cutting investments and hiring plans right now. Thus while the market anticipated weaker earnings, it anticipated them on rising prices, not necessarily sales misses given the rising consumer sentiment. As I said before, it doesn't matter how good you feel about a purchase you want to make if you don't have the funds (8.2% decline in wages, negative disposable income) and cannot get a loan. Sales fell and that appears to have caught the market looking.

October surprise ahead?

An October surprise selloff ahead of the election? Could be. The inability to hold a modest pullback from the solid Monday to Wednesday bounce off support opens the door for a deeper correction as I stated this past week. Indeed NASDAQ is making such a deeper correction as AAPL and GOOG sell hard. Another Black Monday? No, at least not yet. A selloff similar to pre-2008 election? Not likely either. But a week of downside along the lines of another few hundred points on DJ30 and 35 or so points on SP500 will get everyone's attention. Frankly that might not even happen given the Dow, SP500 and SP400 action at the 50 day EMA Friday.


Dollar. 1.3045 versus 1.3089 euro. A second day of upside as the dollar defies weakness in the US data (existing home sales -1.7% on Friday). Bouncing back up for a sharp selloff early in the week. Still in a bearish head and shoulders overall but it is trying to bounce.

Bonds. 1.77% versus 1.82% 10 year US Treasury. After gapping below the 200 day SMA Wednesday and selling further Thursday, bonds rebounded Friday. Worry on the economy, weak stock market and that equals safe haven trade. Follow the bouncing ball of late as the tennis match on the economic data continues and the Fed remains the wildcard as to what days it enters and buys bonds and what days it does not.

Gold. 1724.00, -20.70. Sold to the 50 day EMA as the test deepens, but it is still just a test of that strong run off the July low and the breakout in August.

Oil. 90.05, -2.05. Broke through the 50 day EMA intraday after almost two weeks of lateral trade just below that resistance. After the surge it purged, falling sharply away from the 50 day. Lots of oil out there and any signs of economic weakness is a problem. What signs? GE, MCD, PH, BHI, INTC, FDX, UPS . . .



Stats: -67.24 points (-2.19%) to close at 3005.62

Volume: 2.205B (+9.38%)

Up Volume: 342.76M (-378.86M)
Down Volume: 1.88B (+560M)

A/D and Hi/Lo: Decliners led 3.96 to 1
Previous Session: Decliners led 2.18 to 1

New Highs: 51 (-48)
New Lows: 84 (+48)

Stats: -24.15 points (-1.66%) to close at 1433.19
NYSE Volume: 820M (+26.54%)

Up Volume: 409.62M (-1.8B)
Down Volume: 3.44B (+1.81B)

A/D and Hi/Lo: Decliners led 3.39 to 1
Previous Session: Decliners led 1.04 to 1

New Highs: 127 (-102)
New Lows: 35 (+23)


Stats: -205.43 points (-1.52%) to close at 13343.51

Volume: Burst higher on NYSE by 26% and NASDAQ was not a slouch with a 9+% gain to 2.2B shares. Selling on the downside? Well, yes, but it was also expiration. Hard to separate the two, but it was not a great price session and volume was jumping well above average on both exchanges.

Breadth. Somewhat ugly. No, pretty much downright ugly at -4:1 on NASDAQ and -3.4:1 on NYSE. GOOG, MSFT coattails but also IBM, GE, MCD.


SP500. Back down to the 50 day EMA on a volume surge. Volume surges at key support are not bad as it shows buyers stepping in to hold the level. Of course with expiration you have to somewhat throw out the volume. Somewhat. SP500 finds itself at the support it bounced from starting Monday. Back at the lick log and much too fast. It gave itself a shot, however, to show that Friday was an expiration thing or was at least amplified by expiration. That of course means SP500 has to hold here and then start back upside.

NASDAQ. Gapped lower, undercut last week's low and the support from August consolidation and the late April peak. NASDAQ is at the next potential support at the early May lower gap point, the early August lateral shelf, and the late February peak. This is a possible support point, but it is going to have to prove it. This is the problem when you have a handful of stocks comprising the majority of the market cap on an index.

SP600/SP400. Fell back through the 50 day EMA but it did hold at last week's lows so we see if the small guys can hold once more. Tough to do with such a quick dive back lower. The midcaps held the 50 day EMA along with SP500 and DJ30, so all in all the NYSE indices, though down, left themselves in a position to bounce.

SOX. Pretty much what you would expect as SOX undercut last week's low. Still above a more important support level from May through July prices, but we are not looking for SOX to lead, at least to the upside.

DJ30/DJ20. Flopped to the 50 day EMA as the Dow continued to feel the heat from INTC, IBM, GE, and others that have disappointed. That puts it back at support and it has to try and rally the troops once more.

DJ20 suffered a sharp reversal at the 200 day SMA. Managed to recover and hold above the 10 day EMA on the close. That keeps it above mid-range in the trading range and as with the other NYSE indices, gives it a shot to bounce. Question is whether it takes the shot or acts as if it has been shot.


Big names. Nothing good from AAPL, GOOG, AMZN, IBM, GE, MCD. That is all you can say.

Homebuilders/Materials. Damn solid given the session as KBH, TOL, BZH et al actually added to the gains. We took some big 500% gain on our October KBH options today, letting them run as long as they would. LPX in materials remained solid.

Industrials. Not bad. Joy held the line. GNRC held up well. TEX faded, but held the 10 day EMA. Not bad given the carnage.

Metals. Took some hits but had some room to give above the 10 day EMA.

Retail. Very mixed bag. CONN, PII held up fine. The eateries were hit on the MCD results, but most were holding support such as YUM. DRI, a play from Thursday, did not. LULU sold through the 50 day EMA on an analyst report questioning its clothing mix. BS so we didn't sell into the panic. ULTA is hanging in as is FOSL. Very mixed, under pressure, but the names appear to be holding.

Financial. Just another day at the office as BAC was flat, JPM sold to the 10 day EMA, MS held the 20 day EMA with a doji.

Energy. Held the line as well. BBG, GPOR, DWSN, PBR all went about their own business.

Miscellaneous. AMT, BCRX, MFRM, NEM, SUPN, TASR all went about their business despite the market selling.



VIX: 17.06; +2.03. VIX surged off the midrange level where it traded for almost a week. Cleared the recent interim peaks and is heading back up toward the 200 day SMA and the August peak. Meaning? With this kind of move in the market VIX attached itself back to the indices. It suggests a test of the August peak at 19ish up to 20.50ish, and that means more stock market selling of course.
VXN: 20.05; +2.44
VXO: 15.91; +1.61

Put/Call Ratio (CBOE): 1.12; +0.24

Bulls versus Bears

Bulls: 45.7% versus 46.8% versus 51.0% versus 54.2%. Okay, the bulls continue to fall as the market tests back. There is a pretty healthy skepticism. After all those fund flows we saw this week (10+B in a week) show the distrust. That is not bad for the upside: contrary indicator. 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 25.5% versus 24.5% versus 24.5% versus 25.5%. No more bears, no less. 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.


A slow start to the week in terms of scheduled economic data, but earnings will pour in as investors cautiously eye the Friday close and whether there are reverberations in the week ahead. A bit of a Black Friday, Monday, and Tuesday d j vu experience if only in the minds of traders.

Floor traders mesmerized by the continued decline in stocks on Black Monday.

Up to Friday (well Thursday on NASDAQ), the stock market was acting technically solid. Earnings were supposed to be down but stocks rebounded off a 4 week pullback to support. They were not showing indications that earnings would pose a major surprise. Then on Thursday stocks were rallying after a lower open when the Google mistake release occurred. Now it may not have been any different at all if GOOG was released early or at the normal time; after all its miss would have been the same.

That it was another market-related snafu, another unexpected glitch in what by now seems an unending parade of unreliable market mechanisms or downright dishonesty. Knight trading, front-running, best prices for certain 'hidden' customers, the flash crash. Since the financial meltdown, despite the massive number of new rules and regulations put in place the perception of the system has not improved and likely has degenerated.

The flash crash

Thus the manner of the earnings release could very well have added to the reaction. Stocks broke down after the news and NASDAQ never recovered. Friday as more 'name' companies reported top line misses, the selling from Thursday went into crescendo. All the indices sold hard. They managed to land at support, but much lower support than you want to see for a continued move up. Indeed NASDAQ is only holding at modest support and could head down toward the 200 day SMA at 2970.

That could mean a deeper test if SP500, DJ30 and SP400 cannot yet again hold their 50 day EMA this coming week. As noted above, they left themselves a chance to hold and rebound. They will have to prove it, however, after such a quick test back to this support and with NASDAQ so weak.

They have many stocks working in their favor for now as noted in discussing leaders. At the same time longer term rally leaders are in full dives. Perhaps a changing of the guard, but with the big names with big capitalizations falling hard, it is a violent change. It could be that after a bit more downside to start the week a bottom is found, i.e. a reversal Monday after a lower open.

All speculation at this point. SP500, DJ30, SP400 and many leaders are in position to recover as they held support. Until that changes their trends remain in place. Thus we are going to look for stocks we can ride for a rebound if it comes. If they are solid and go about their business even after Thursday and Friday, great. The caveat is to watch for a relief bounce after a hard Thursday and Friday selloff, particularly on NASDAQ. That can be a trap on stocks that rebound from hard selling and then stall below resistance. If that sets up, i.e. a relief bounce, we can look for downside setups as it looks the move is trails off and starts to roll over.

The indices made it hard for themselves, NASDAQ more than others. NASDAQ had lagged anyway and now we see if the NYSE indices can bring drag it back to the upside or if NASDAQ topples them as well.

Support and resistance

NASDAQ: Closed at 3072.87

3076 is the late April 2012 high
The 50 day EMA at 3078
3090 is the mid-March interim high
3037 is the October low
3101 is the August 2012 high
The June up trendline at 3122
3134 is the March 2012 post-bear market peak: broken, not forgotten.
3171 is the October intraday high
3197 is the September 2012 post-bear market high
3227 is the April 2000 intraday low
3401 is the May 2000 closing low

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
The 200 day SMA at 2967
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

S&P 500: Closed at 1457.34

1464 is the June up trendline
1463 is the September closing high
1466 is the September closing high
1471 is the October 2012 intraday high
1475 is the September 2012 high
1499 from January 2008
1539 from June 2007

1440 from November 2007 closing lows
1433 from August 2007 closing lows
The 50 day EMA at 1430
1427 is the August 2012 peak
1425 from May 2008 closing highs and the October 2012 low
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
The 200 day SMA at 1373
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
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 13,548.94
13,653 is the September 2012 high
13662 is the October 2012 intraday high
13,668 from 12-2007 peak
13,692 from 6-2007 peak
14,022 from 7-07 peak

13,331 is the August 2012 post-bear market high
The 50 day EMA at 13,339
13,297 is the April 2012, prior post bear market high
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 12,953
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 15 - Monday
Retail Sales, September (8:30): 1.1% actual versus 0.7% expected, 1.2% prior (revised from 0.9%)
Retail Sales ex-auto, September (8:30): 1.1% actual versus 0.6% expected, 1.0% prior (revised from 0.8%)
Empire Manufacturing, October (8:30): -6.2 actual versus -2.8 expected, -10.4 prior
Business Inventories, August (10:00): 0.6% actual versus 0.5% expected, 0.8% prior

October 16 - Tuesday
CPI, September (8:30): 0.6% actual versus 0.5% expected, 0.6% prior
Core CPI, September (8:30): 0.1% actual versus 0.2% expected, 0.1% prior
Net Long-Term TIC Fl, August (9:00): $90.0B actual versus $67.2B prior (revised from $67.0B)
Industrial Production, September (9:15): 0.4% actual versus 0.3% expected, -1.4% prior (revised from -1.2%)
Capacity Utilization, September (9:15): 78.3% actual versus 78.3% expected, 78.0% prior (revised from 78.2%)
NAHB Housing Market , October (10:00): 41 actual versus 42 expected, 40 prior

October 17 - Wednesday
MBA Mortgage Index, 10/13 (7:00): -4.2% actual versus -1.2% prior
Housing Starts, September (8:30): 15.0% (872K actual) versus 768K expected, 4.1% prior (758K, revised from 750K)
Building Permits, September (8:30): 894K actual versus 815K expected, 801K prior (revised from 803K)
Crude Inventories, 10/13 (10:30): 2.860M actual versus 1.672M prior

October 18 - Thursday
Initial Claims, 10/13 (8:30): 388K actual versus 360K expected, 342K prior (revised from 339K)
Continuing Claims, 10/6 (8:30): 3252K actual versus 3275K expected, 3281K prior (revised from 3273K)
Philadelphia Fed, October (10:00): 5.7 actual versus -0.1 expected, -1.9 prior
Leading Indicators, September (10:00): 0.6% actual versus 0.2% expected, -0.4% prior (revised from -0.1%)

October 19 - Friday
Existing Home Sales, September (10:00): 4.75M actual versus 4.70M expected, 4.83M prior (revised from 4.82M)

October 24 - Wednesday
MBA Mortgage Index, 10/20 (7:00): -4.2% prior
New Home Sales, September (10:00): 385K expected, 373K prior
FHFA Housing Price Index, August (10:00): 0.2% prior
Crude Inventories, 10/20 (10:30): 2.860M prior
FOMC Rate Decision, October (24:30): 0.25% prior
FOMC Rate Decision, October (14:15): 0.25% expected, 0.25% prior

October 25 - Thursday
Initial Claims, 10/20 (8:30): 375K expected, 388K prior
Continuing Claims, 10/13 (8:30): 3237K expected, 3252K prior
Durable Orders, September (8:30): 7.4% expected, -13.2% prior
Durable Orders -ex Transports, September (8:30): 1.0% expected, -1.6% prior
Pending Home Sales, September (10:00): 2.4% expected, -2.6% prior

October 26 - Friday
GDP-Adv., Q3 (8:30): 1.9% expected, 1.3% prior
Chain Deflator-Adv., Q3 (8:30): 2.0% expected, 1.6% prior
Michigan Sentiment - Final, October (9:55): 83.1 expected, 83.1 prior

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

Jon Johnson is the Editor of The Daily at

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