InvestmentHouse.com

Oil falls or the stock market falls?

noreply@blogger.com (Eric Aafedt, Publisher) — Sun, 08 Jun 2008 18:48:00 +0000

SUMMARY:
- Worst case scenario unfolds: breakout reverses sharply on oil price blowout.
- Oil blowout is its own worst enemy as world economies, government intervention will work to bring about lower prices, but not without pain.
- The irony of it all: household unemployment survey dismissed in each month's jobs report, but when the market needs an excuse its hypocrisy knows no bounds.
- Wholesale inventories jump, but only because of huge stores of crude.
- Volatility spikes: Bernanke put in a floor with the BSC take under, and Bernanke started to address oil with the dollar, but the French used him and oil got the draw on him.
- Oil falls or the market falls? Been here before.

Thursday breakout washed away by oil price flood.

The jobs report had investors in a sour mood on the jump in the unemployment rate (commonly called the household survey) and futures were lower, but it really didn't rattle the market. After all bond yields fell right after the jobs announcement, but then recovered those losses quickly; a quick flight to safety and then rational heads prevailed. There were reasons the report was not as bad as the headline number and the resulting gloomy headlines made it out to be, but nonetheless the market got off to a modestly slower start.

What did not recover from early gains was oil (recover, that is, to lower levels). It rose through the pre-market, continued through the morning, and then simply exploded in the afternoon. It closed at a new high at $138.48, up $10.69. It was the biggest single day percentage move since 1991. Why did it move? Some said Israeli threats to attack Iran's nuclear facilities added to the spike. Morgan Stanley issued a prediction oil would be at $150 by July 4, and oil got a head start on that move Friday. Now where is that Iraqi oil that was supposed to be a boon?

Oil's charge sent waves through the financial markets, swamping all of those areas that turned positive of late. The dollar turned lower helped to the downside also by comments from Trichet, the head of the ECB. After begging the US to do something about the dollar and getting Bernanke to broach the subject Tuesday, Trichet slapped Bernanke in the face with the announcement the ECB will hike rates next month. Interest rates, after shrugging off the distorted unemployment number, could not overcome the oil spike as investors ran to safety in treasuries (2.38% two year, 3.92% 10 year). Gold surged back over 900 (905.20, +29.80). Growth stocks and their Thursday breakout were undercut.

Indeed, the oil spike reversed the Thursday growth sector breakouts and destroyed the NYSE large caps as transports reversed and financials were murdered yet again. The Thursday gains were returned unopened with things really getting out of hand late in the session when a last hour bounce failed and the indices slumped to new session lows. There was some panic selling late as even the energy stocks reversed their strong early gains. Some profit taking on those after the spike, but also the concern that the oil spike was overdone and calmer heads may prevail over the weekend (or some discussions about opening the SPRO). We sold some positions that were breaking below support, but given the panic move we were not just bailing out of everything. If it was holding support nicely we let it ride to Monday even though there may be more weakness Monday. If they hold up they are in position to bounce. Being in position and actually bouncing are of course completely different things, particularly after this kind of nasty reversal.

TECHNICAL. Low start to a low finish with only a couple of hour to hour and one-half attempts at rebounding. All things considered, that is not bad; have definitely seen a lot worse on downside sessions. The best attempt to move higher was from midmorning through lunch, but that was before oil just blew past anyone's comprehension. That rally failed. Low to lower, giving back the breakouts. Obviously poor intraday action.

INTERNALS: Breadth was impressively negative at -4.4:1 on NYSE and -4.3:1 on NASDAQ. There were a swath of new highs on NYSE as energy, ag and metals stocks made early gains but then reversed. Thus you have the odd condition of a surge in new highs as well as a crush of negative breadth. Safe to say that you can toss the new highs data in favor of the negative breadth. Volume was surprisingly mixed. NYSE volume jumped to its highest level in 2.5 months. Clear dumping, and with the financials getting a serious helping of the licking, easy to see why volume jumped. NASDAQ trade lightened a bit. It was still above average but was in the ballpark of the recent trade and was lower than the Wednesday and Thursday upside sessions. Tech stocks were sold, but not with any additional vigor; investors still see them as the place to put some money and they were not out and out getting rid of them.

CHARTS: The Thursday breakouts over the May highs by SP400, SP600, NASDAQ and NASDAQ 100 were dumped. The small and mid-caps are still in decent shape given they basically just gave back the Wednesday and Thursday moves, but that does not mean they are unharmed. The reason for the breakout was undercut and now they have to prove they can hang onto the prior gains and set up once more. SP500 made a new low on the selling, confirming its downtrend. DJ30 made another new low in its downtrend, reconfirming its weakness. NASDAQ turned back below the 200 day SMA and 2500, falling the March 2008 up trendline. It has not made a new low on this move. It did not suffer distribution. It is at a point where it could form a double top a la DJ30, and we see what that did for the Dow. Different index, different investors, and many are still talking as if tech is the place to put money. They will have to put that money where their mouth is and prove it.

LEADERSHIP: There were stocks that held gains to the close. Coal stocks. Some energy stocks, but as noted, a lot of energy gapped higher and rallied only to turn negative by the close. Profit taking perhaps; worry the spike may be too much and some of the drivers (Israeli threats) may soften over the weekend. Energy is still strong, but at some point it eats itself as it prices itself out of widespread usage. Most of the leaders before Friday are still in good shape; they just gave back the Thursday move. How they respond from here will tell the real story.

THE ECONOMY

A new leg in oil or a continuing blow off?

Last time oil hit this region (all of two weeks ago) it quickly reversed as data showed even before the spike occurred that gasoline usage was down. With Indonesia, Malaysia and others lifting or in the process of lifting government subsidies on gasoline, this spike is going to destroy more demand. It will also curtail other economic activity as travel, air, ground, or otherwise, is truncated. Of course, here in the US we want to pile a carbon tax onto everyone in business right when times are bad. Hmmm.

This after thirty years of neglect during good economic times with no energy plan forthcoming. Oh as we noted a couple of weeks back we do have an energy plan: every time energy prices rise Congress holds hearings to point the finger but no one is guilty; prices just rise when events (weather, geopolitical, etc.) cause them to rise. This time there is no storm, no ongoing international intrigue driving prices temporarily higher. This time there are two huge countries with huge populations coming to the industrial table and taking what is theirs. If the US catches cold they just suck up more oil because our demand declines.

No, we have sat back after the 1970's warning, preferring to set ourselves up once more for a shock that won't go away outside of a significant economic decline on a global scale. Even then, once the economies recover, the problem will arise again. A likely response, despite the Bush administration's adamant stance, is to open the SPRO to try and take some of the speculation out of price. There is a lot of supply, it is just fear of a cutoff of the supply that is driving price. Opening the SPRO would help . . . but just a bit.

This is what the SPRO is for, i.e. a debilitating rise in prices such that the economic vitality and thus the security of the US is threatened. With an $11 spike in oil during an election year, Congress will want to do something, and the SPRO is ready-made, quick, and easy. It won't solve the problem of course. We have yet to address the problem. We have raised our food prices and denuded millions more acres of our country for corn production with an ethanol program with dubious potential results in the best case scenario. We won't drill for oil, we won't use goal gas, we won't build nuclear plants, Ted Kennedy (whom our prayers go out to) doesn't want wind turbines off his beloved Massachusetts coastline.

Thus we are going to pay the price of debilitating fuel costs AND the costs associated with getting our land-based vehicle fleet off internal combustion of fossil fuels. We are already paying a hefty price in the greatest transfer of wealth in the world's history with our monthly purchases of foreign oil. Worse yet, we get nothing from it. It is like renting; you have a place to live and survive, but after the lease is over you have no place to live. With these price spikes taking more of our wealth away and our ultimate need to shift to an alternate fuel source (and at a time when we are struggling economically), we will be lucky to come out of this still an economic superpower.

That is, unless we do it right. Some want to use the old stick method: tax those that are viewed as benefitting from the spike or having 'more' and dolling it out to those who are in need and also using some of the money (tax money, that is) to 'attack' the problem, basically redistributing the money to where our leaders feel is best. History demonstrates that doesn't work, or you tend to get a preordained solution, and that may not be the best solution. The carrot has proved to be the best method: provide incentives to do the research and come up with a viable solution. Give tax credits for R&D and manufacturing. Give better patent protection to further incent innovation and creativity. In this way we spend the money (or more accurately, allow those who make the money to spend it) and get something in return: a solution, the technological advantage that solution gives us (new technologies arising similar to after the space race, just what we need to get the world to come to us to buy as we grow old), the associated economic advantage (no longer shipping 25% of our wealth overseas), improved health and thus lower medical costs. The list of positives is simply tremendous. You don't even have to juxtapose it to the negatives if we don't, but they only make the decision more imperative. Why spend money and get nothing? Let's unleash our ingenuity and entrepreneurship and get our financial independence and technological lead just as we have always done. In short, let's allow ourselves to be great once more.

Jobs report is not the stinker the headlines make it out to be.

It is indeed ironic how the household survey (the unemployment number) is month in and month out ridiculed as a poor indicator of the true jobs picture. Just last week there was an argument on a financial station about it, and one pundit very self-assuredly commented that 'everyone' knows the household survey is a poor indicator of the jobs condition. Heck even Alan Greenspan said so to Congress.

Of course, he was wrong. In the recovery from the 2000/2001 recession it was the household survey that showed people were indeed working. They just were not working at traditional 9 to 5 jobs because there were not any. They created their own businesses in the explosion of LLC's and other small companies at that time. Thus the non-farms payroll report simply did not pick them up because hundreds of thousands of people started their own companies and were no longer employees.

Then when it posts a really bad and anomalous result such as the 5.5% reading in May versus 5.0% in April, suddenly the household survey is telling the true economic story. Give me a break.

First, it depends upon what kind of recession you are in and what kind of recovery. This one is not like the 2000 recession where there was massive consolidation of the tech and internet industries with millions laid off. Those jobs were not coming back because the industries underwent fundamental change. That is not the case here. Second, there were reasons the reading was off. April posted a surprise drop from 5.2% to 5.0%; no real reason for it and it was viewed as aberrant. In May there was an influx of job seekers into the market from the teen and young adult demographic. The government adjusts for these in the June report. This year due to a lot of changes in school attendance schedules they hit the market early and were not adjusted for. If you make the adjustment you get . . . 5.2%. This is exactly where the number has run of late.

Thus the jobs report that showed a 49K decline versus the 60K decline expected and a properly adjusted unemployment rate of 5.2%. That is not bad. That is not a 'recessionary' number as the more hysterical were calling the erroneous 5.5% reading. The market saw this and was rather calm in the reaction. As noted, it was the oil spike that set the pace for the session.

SUM: The Friday data did nothing to change the economic data trend.

There was other economic data for the day. Wholesale inventories jumped 1.3% versus the 0.4% expected and the 0.1% gain prior. That was viewed as a negative as well given higher inventories can indicate slower economic activity, causing goods to pile up. Plausible argument, until you look at what the cause for the rise is. In April the largest contributor to the rise was a massive build in, of all things, crude oil stockpiles. The economic reports Friday were just dripping with irony.

To the point, Friday none of the economic reports did anything to change the improvement in the economic data registered the past couple of months. The jobs report failed to make an adjustment. Wholesale inventories surged because the main problem Friday, oil, jumped in supplies. The data is improving. The big issue confronting the economy, however, is oil and its second surge over 130. That is what threatens the modestly improving economic data. It is our judgment based upon what we saw in the reaction to oil hitting this price level with respect to demand destruction and alterations in consumer and business habits that this level is the choke point, the Roberto Duran 'no mas' point.

THE MARKET

MARKET SENTIMENT

You are hearing the talk, the 'Black Monday' talk. Every time there is a nasty Friday selloff in weaker economic times you get the 'you know, this reminds me of the Friday before Black Monday' reminiscence. That is fine. Actually that is good. Go ahead and ratchet up the anxiety and let's see if we can get this over quickly. Sentiment is hard to get a handle on. It has to get really bleak. It is not candy and roses out there now, but a few remembrances of Black Monday is not quite there.

Big bounce in volatility, the largest single session move since the March selling just before the market put in the bottom at that point. That was on the crescendo of the credit issues with BSC take out. Now VIX is not in the same league that would register a bottom. The January and March lows found 35 to 37 as the sweet spot; at 23.56 VIX is not there.

The Fed changed the game when it attacked the credit issue in new and creative ways in March. It worked. Problem is, now there is a completely different issue that is out of control, and that is the surging oil prices. After quelling the credit issues Bernanke turned to inflation, and he includes oil in the inflation equation (remember the Fed shifted to looking at overall inflation versus just the core?). Tuesday he made the seminal address of the Bush administration on dollar protection. Sad that it has to come from the Fed in the last year of an 8 year presidency, but at least it came.

It helped pump up the dollar and oil and gold started down. Trichet, the head of the ECB congratulated Bernanke Wednesday, then cut his legs off Thursday by announcing the ECB would hike rates a quarter point next month. The dollar fell, gold shot higher, oil exploded. Bernanke must want to slap Trichet, challenge him to a duel, or something similar. Certainly this was not coordinated; it could have been handled so much more subtly. We know the French don't like Bush, but don't take it out on the rest of us.

You know what is going to happen? We are hearing from across the Atlantic that many businesses in Europe are experiencing sudden slowing. Oil is really hurting them as well even though they are more efficient with their nuclear plants, more efficient autos, etc. Trichet is so focused on inflation (he has to be; that is his only mandate), he will not back off to give the economies some breathing room. The irony is, if they slow down, there will be inflation.

That is the way it works. When economies slow supply falls off because businesses pull in and demand can easily run past supply, especially when things turn back up. Trichet has to walk the tightrope with his single mandate and that means if he smells inflation he hikes. It builds on itself as further hikes slow things further bumping up inflation. Then things go slack altogether. There are a lot of proud traditions in France and all of Europe. One of their traditions is thwarting economic expansion before it risks getting really healthy and entrenched. Vive la France!

VIX: 23.56; +4.93
VXN: 26.04; +3.19
VXO: 24.8; +5.39

Put/Call Ratio (CBOE): 1.15; +0.17. Back over 1.0 on the close. That makes it 4 of 5 closes over 1.0 and that is getting to a healthy level. Ten or eleven would be a better indication of wanton speculation on further selling and fear from the big money managers that the downside will continue (and their buying of protective puts).

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 doesn't have the cash to drive it higher.

Bulls: 44.8%. Despite the prior week's selling and the weak rebound, bulls surged higher from 37.9%. that quick drop lower from 47.3% the prior week seems to have evaporated. Did its job, however, as the market broke sharply higher. That quick decline occurred after a string of steady gains: 44.4%, 40.9%, 39.1% and 37.8% where it held for a few weeks. Fell to 30.9% in mid-March as the low. The indicator did its job with the dive below 35% and the crossover with the bears. The bulls and bears were eye to eye in mid-February and have crossed. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 31.1%. Bears fell but not nearly as dramatically as bulls (32.2% the prior week). This after a couple of weeks of surprising gains as the market bounced. Up from 30.8% the week before and 29.9% the prior week. During that strong three of four weeks saw bears rise. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March that was up from an already freakishly strong 43.3% the week before. That was a surge from an already high 36.6% the prior week. Up sharply from a low of 19.6% on the last rally. It is over 30% and indeed over 35% the prior week, meaning it has blown past the range that means business. Big move after falling to a low of 19.6% on this round. 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). This is a huge turn, unlike any seen in recent history.

NASDAQ

Stats: -75.38 points (-2.96%) to close at 2474.56
Volume: 2.136B (-4.8%). Lower volume on an ugly downside session. With this kind of point loss you don't get too worked up over a bit lower and still above average volume on the selling, but there is an important aspect to this and that is despite the wrecking ball hitting the market, the sellers were not stronger than the buyers on the upside. May be nothing at all given the severity of the selling, but we will continue to look for tech opportunity if it turns back up after they hold near support.

Up Volume: 238.169M (-1.615B)
Down Volume: 1.945B (+1.568B)

A/D and Hi/Lo: Decliners led 4.33 to 1. Ouch. That is all: ouch.
Previous Session: Advancers led 2.88 to 1

New Highs: 64 (-33)
New Lows: 149 (+60)

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

Thursday night I talked of NASDAQ missing the May intraday high by a gnat's b*tt. Might as well been an elephant's, huh? It gapped lower, ripped through the 200 day SMA for a 3% single session decline. Damn. But . . . there is that lower volume. NASDAQ still held above the rising lows in its uptrend (on an intraday basis). It held the March up trendline on the Friday close. It was one day of sharp point losses, and that left it at an important point all in one session. How it responds from here is the key, but I want to point out that techs were not the whipping boys on Friday. They got whipped, they just were not the focus of the flogging. That said, you also have to worry about a potential double top formation similar to the one that took out DJ30. A pair of highs at 2525 stalled it out.

NASDAQ 100 (-3.15%) fared a bit worse but it too held the March trendline, the steeper one formed second. It too has that potential double top in place.

SOX (-2.89%) turned in a lower high and fell back below the 200 day SMA. It also made a slightly lower low. Very dicey here after looking quite solid with its break back up through the 200 day SMA.

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

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

SP500/NYSE

Stats: -43.37 points (-3.09%) to close at 1360.68
NYSE Volume: 1.484B (+12.92%). Volume jumped to its highest level in over two months as the NYSE indices turned over. Sellers took control, especially on the large cap indices in the NYSE.

Up Volume: 115.001M (-988.023M)
Down Volume: 1.366B (+1.185B)

A/D and Hi/Lo: Decliners led 4.46 to 1. Ugly. Coyote ugly.
Previous Session: Advancers led 4 to 1

New Highs: 138 (+32). New highs aplenty as the energy sector jumped higher early on.
New Lows: 145 (+63)

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

Gapped lower, unusual for SP500. It sold off 43 points. Also unusual for SP500. It undercut the recent lows, broke the neck in its head and shoulders. Makes it a logical short here; a bounce higher to test the neckline at 1375 would make it even better. Support down at 1325. Not very pretty. Failed at the 200 day SMA on the high, sold to the neckline, bounced back up but failed at 1406, a familiar level, and fell again immediately after trying to break up the pattern. Without the financials participating and the small and mid-caps selling, SP500 was doomed.

SP600 (-2.95%) reversed a beautiful breakout and gave up the 200 day SMA all in one session. It held the 18 day EMA, and that keeps it in decent position, but it now has to prove it can still hold and continue the move. With oil over $130 again, however, the economic outlook is cloudy at best, and that should continue to negatively impact SP600.

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

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg

DJ30

Broke below its neckline at 12,250 where it bottomed in April as it completed the left shoulder to the 9 week head and shoulders. As with SP500 that makes DJ30 a logical short even with a 400 point drop. It would be better to get a bounce out of it given that drop, and if DJ30 sells off on Monday then you look for a rebound first before shorting the next drop from this pattern.

Stats: -394.64 points (-3.13%) to close at 12209.81
Volume: 307M shares Friday versus 236M shares Thursday. As with NYSE, the biggest trade in 2.5 months and on a massive drop lower.

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

MONDAY

Black Monday? Give me a break. It will be what it will be, and you can bet oil will play the key role. We will watch this weekend to see what the geopolitical climate holds (Israel/Iran and whatever else arises) and what our fearless leaders in Congress, the administration, and the Fed say. Maybe some mitigation of the tensions that helped trigger the spike on Friday and the late panic selling in stocks. Maybe not.

Whatever the case, oil will have to drop a long way to make a difference. It has to get below 120, over 18 clicks from the Friday close. Not counting on that right away. We said two weeks back that either oil would go lower or the market. Oil started but it was just a feint, at least on this move. After a duck lower and the market's jump higher, they did their version of trading spaces and reversed roles. Now it looks as if the market is going to head lower. The economy is already weak, and this is piling on. It simply cannot withstand this kind of surge in prices. Filled up all my fuel tanks after the close (vehicles, four wheelers, boat, Gator, all fuel tanks) and had to loan a neighbor $66 and change for 14 gallons of diesel (she forgot her purse). Prices are projected to rise 15 cents/gallon or so this weekend as a result of the Friday spike. More of that $150B in stimulus will be burned in the fuel tank. That is not going to create any jobs or jumpstart us out of recession.

Near term even a drop in price won't forestall near term pain. Oil was making the drop you wanted to see, but it held the trendline and surged with a vengeance. Now we can say this: as a trend ages, the moves become more volatile. Teach this all the time in my seminars. The first bounces after a breakout are nice and even and nice and orderly. As the run ages and starts to peak, however, the up and down moves get more volatile. That is a sign the move needs to correct back, rest, and try to reload. This last move would certainly qualify as volatile. Violently so I would say. Still in a classic uptrend, but with the massive volume (and we thought the volume a week ago was massive) and ballistic trajectory of the move you have to be thinking about a blowoff top. The beauty of that is the fall can occur quite rapidly, and that is what the economy needs: rapid rise, then a stomach dropping plunge. Blow off tops, by the way, can result in a 50% reduction in price. Wouldn't that be sweet? Too good to be true, but while exploring a possibility let's take one to the extreme and smile for a minute. A blow off could produce that fall below 120, however, and that would put oil looking at a test of 100. That would be nirvana compared to where it is now.

The weekend could make a bit of difference as noted. The SPRO could be opened, providing a temporary respite, a bit of a rah-rah, B-12 injection to confidence. If there is no change to how things were left Friday, then Monday could very likely start downside once more as more try to get out of positions given that there was no weekend change. Unless there is a reversal and relatively quick collapse in oil prices, however, we fear there is a lot more downside driven by oil prices that finally hit the choke point for the economy.

That means if we do get a respite to start the week we will look at using that to lighten some upside positions and prepare to play some downside as SP500 and DJ30 reach up toward the breakdown point in a relief bounce. Many of our positions held up quite well Friday considering the bloodletting in the market, though in one day they are down to testing support, not the kind of orderly pullback you like to see. Nonetheless, if they were holding support we left them alone for the most part as there was some fear selling in the afternoon. If they were breaking support we sold them; may rebound but with the floor broken out and a lot of downside momentum we did not want to ride them lower.

The character with respect to the growth indices that were performing well started to change Friday. They did not break down but a breakout was derailed and they are now in position of needing to prove once more they can rally. With oil spiking that is going to be a heavy burden and thus we have to protect positions that are unable to hold support. If there is a gap lower Monday it is best to let the initial drop run its course and see if there is a concerted effort to buy the dip. If so, those stocks that held near support and remain in solid patterns are potential upside buys for the bounce move. Those that break down are potential downside plays as they bounce and stall at resistance.

By: Jon Johnson, Editor

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

NASDAQ Leads Market to Weekly Gains

noreply@blogger.com (Eric Aafedt, Publisher) — Sun, 01 Jun 2008 23:44:00 +0000

SUMMARY:
- NASDAQ leads market to weekly gains, but still no new breakout.
- Economic data in line to better, and while no great endorsement of economic activity, things are not as bad as made out.
- Market advance since March forecast modest economic improvement, but is there more to come?
- Some money comes out of commodities stocks on NYSE, but has yet to move elsewhere.
- New month, some new money, but also the dog days cometh.

A week of gains leave market still seeking a more definitive move.

The shortened week was one of gains, and Friday was no exception, though the gains once again were not felt throughout the market. Spending and income were in line with modest gains (0.2%) though if you adjust for inflation both were big goose eggs. With PCE inflation at 0.1% on the core and 2.1% annually, however, investors found some reason to push stocks higher at the open. When the Chicago PMI and the Michigan sentiment reported better than expected results, the market added to its early gains with all indices in positive territory.

The market survived a midmorning test of the early move, and then went into a slow, steady climb into the afternoon. It was the end of the month, however, and that meant money was going to get moved around. It was. In the last hour the indices dropped sharply in the fist half of the hour, then recovered just about up to session highs. A literal last minute decline shaved 6 points off NASDAQ and 40 points off DJ30, leaving the Dow negative on the day. With the overall narrow range for the session and the end of month shuffle, it is somewhat pointless to play 'pin the tail on the meaning of the session.' Best to look at the entire week to get the flavor.

The week showed gains on all of the indices as they rebounded from the sharper selling in the week before the Memorial Day of honor. Those gains, however, were modest and left the indices, overall, shy of significant moves that reverse that downside move. Of all the indices only SP600 and Russell 2000 broke new closing high ground for the rally off the March lows. That the small caps led to new high ground in the rally is significant given their close ties to a stronger domestic economy (hurray!), but the fact that the majority of the other indices did not really even scare new highs leaves the continuation of the rally somewhat problematical.

Again, there were solid moves in individual stocks, and we bought into quite a few of those in anticipation of the small and mid-caps continuing to lead higher, but as is often the case, we tend to buy in when things are unsettled because emerging leaders tend to tell you to buy them when the outcome appears still problematical. Many pronounced the rally dead two Fridays back after that reversal at the 200 day SMA by the large cap indices. You have to like that pessimistic view from a contrarian standpoint, but it sure would have been nice to see some of the other indices come along with the leading stocks and SP600.

TECHNICAL. Low to high action intraday Friday was again a positive for the session, but it was a volatile day inside an intraday trend higher. The action in the last hour showed how fragile the move was as end of month shuffling easily shoved the indices down then up then back down as some window dressing and positioning for the coming month took place. Hey, that is normal; we participated in that as well as we picked up several positions in solid stocks that broke higher and then held their gains into the close with modest pullbacks that gave us some good entry points.

INTERNALS: The advance/decline line was nothing special with 1.2:1 readings on the indices. Volume advanced, moving to above average levels on both NYSE and NASDAQ. That suggests some accumulation on the session, and given some of the moves in leaders that was the case, but it also is simply a characteristic of some end of month portfolio adjusting and positioning both for window dressing in some monthly reports as well as getting ready for the next month. The new high/new low ratio lagged a bit on this move over the prior 7 weeks, suggesting this last rebound is not as strong as the previous upside legs in this rally. New lows were a bit more prominent on this dip than in the April decline that more or less matched the last decline. A bit of deterioration in the quality of the move based upon this indicator, and frankly, the other indicators paint a similar picture.

CHARTS: As noted, the indices rose on the week but with the exception of the small cap indices and a new closing high on NASDAQ 100, there were no new rally highs. The large cap NYSE were again the laggards, coming nowhere near the prior rally high before the latest significant downside leg in the rally. Note that in the week following the April downside leg (the leg that the last pullback most closely matched in points) the indices bounced right back up to new rally highs. Not nearly the case on the large cap NYSE indices, and NASDAQ, even with its move back over the 200 day SMA on Friday, did not move past those prior rally highs. That leaves a major challenge for the week ahead for the rally to survive. Either new leadership in the small to mid-caps takes over and drives the rally further or the large cap laggards will drag it down.

LEADERSHIP: Speaking of leadership, there was a continuation of the same theme from later in the week as some new areas asserted or reasserted themselves. Technology both large and small put up some decent gains. Growth areas in medical areas (biotechs, medical appliances and equipment) posted gains. Industrial stocks (and this does not mean large industrials) led all week. Small foreign financials were up once more. It did not hurt that some commodities and energy stocks scored gains to end the week even with the declines in the underlying commodity prices on the week. There are many smaller issues and overlooked large cap issues that are setting up nice patterns and moving higher, flying under the radar. Thus despite the sluggish upside last week, there is good promise ahead for the coming week.

THE ECONOMY

Things are not great, but they aren't as bad as they are made out to be: welcome to the politics of economics.

Remember back in 1992 when the recession from 1991 (the economy was already pulling out of recession in 1992) was described by some as the worst since the Great Depression? Please. Classic election year hyperbole. It was in fact one of the shallowest, but everything is magnified and distorted in election years. It is similar to a court case where both sides highlight and argue the points they view as the most important to the case. They are often arguing about the same facts but the presentation based upon perspective is truly different. You can take any angle, any data point, and build an argument. As we always try to do here, however, you have to take it all into account and not cherry pick an indicator or data point and build a case around it.

Right now the economic data is not that great. It shouldn't be, however, given that the economy is still in a slowdown and is not even a year out from the credit issues that put economic activity in a deep freeze for several months in 2007. To think they should be roaring ahead so quickly is rather absurd simply because it takes time for that freeze to ripple on through the economy.

At the same time, the economic condition is nowhere near as bad as it is made out to be each night on the news. There are indeed serious problems with oil over $120/bbl (closed at 127.71 Friday) and food prices surging given we have opted to tie our food prices to energy prices, but the data also tell you that the economic times, while down, are not the typical stuff of major slowdowns.

The Friday data underscore that. Consumer spending and income rose 0.2% for April, down from 0.4% in March and stood at 0% when you factor in inflation. Since the start of 2008 and the mediocre GDP growth exhibited, however, consumer spending is still flat to trending slightly higher and NOT declining as the media would have you believe. Those big energy price increases and the declines in home prices are not sending consumption negative, but have only slowed the growth in spending. Not bad given spending will only increase over the summer into September as the stimulus checks fans out across the nation.

The key takeaway from this data is that while spending and income point to sluggish economic conditions, there are not those negative readings that are so pernicious and are associated with serious declines in economic activity.

Michigan sentiment stays in the 50's.

But what about consumer confidence and its impact on spending? Both the Conference Board's reading and the University of Michigan show confidence levels in the fifties, and that is historically associated with recessions. What about a recession now?

By our measure of a recession, we have been in one. We said that back in Q4 when the market peaked and rolled back down given all of the volatility we were seeing. To us a recession is not the textbook two quarters of negative GDP growth but the relative decline in economic activity from the growth trend. After humming along at 3.5% to 4.5% growth rates, a decline to 1% or less GDP is a recession. All of the market volatility and the pullback in economic indicators showed a significant change in the growth trend that would be more than just a normal pause in a continuing uptrend.

The consumer sentiment indicates that as the case even as GDP has held positive though well off its prior established growth trend. Is this lower sentiment predicting a recession to come? Conventional wisdom would say that if the consumer is worried spending will contract and that will translate into slowed consumption in the future and thus even slower economic activity than seen to this point. Indeed that is what you hear right now on the financial stations with respect to the housing shoes still to fall.

Historically, however, sentiment is lagging because it is an emotional indicator. It remains suppressed or declines further even as the economy begins to improve. Levels in the fifties are associated with recessions, but they hit those levels after the damage is done. Just as corporate CEO's remain pessimistic even as the economy recovers and their own numbers improve, the consumer remains emotionally battered even as things recover simply because you are not where you were before the economy hit the skids. Thus, while sentiment continues to slide and this is a cycle low for Michigan sentiment (78.4 in January and a constant slide since basically the start of 2007), it does not presage further economic weakness in itself.

Improvement in the economic foundation has been priced in. Is there more?

As discussed Thursday, the foundation in the economy is improving as certain pieces fall into place, e.g. a top in gold, a higher low in the dollar, a breakout in real interest rates (i.e. not inflation), some serious distribution in oil. Those are all positive set ups for further economic improvement.

The market has priced in this economic improvement, or should we say, the lack of a serious further economic slowdown as GDP skirts negative and the Fed's innovative actions taken last year and early this year (in particular this year) thawed the credit market and put that part of the economy on the road to healing. Hence the March bottom in stocks coincided almost perfectly with the Fed action re BSC and its broader use of facilities to get the liquidity to where it was needed by letting just about anyone bring their junk collateral to the discount window, get a 28 day swap for money, and thus conduct business as necessary. The inability to do this is what killed BSC; the Fed took the steps to ensure none others would fall in that manner.

Is this economic set up going to lead to more growth or has the stock market priced this in already and this last leg higher and the failure to make a new rally high indicates that there is no more? After all, oil sold hard and was under distribution, but it did not break its trend. It closed at 127.71, bouncing back 1.09 Friday after some nasty downside sessions the past week. It is under duress, but unless it falls near 100 the economy, and thus the market rally, are in jeopardy. When oil spiked to 135 we found the choke point. It needs to back off sharply from that for the economy to really benefit.

ECRI, the best human index for predicting economic cycles, was up the past week, hitting a 22 week high. That, however, left it at -6%, still indicating the same kind of recession-like sluggishness the economy is feeling right now. Not a nasty tank lower but not much of a recovery there either.

Indeed, the slowdown, as noted above, was not this massive turn to negative GDP growth or the same kind of 10% GDP to negative GDP growth rates seen in the last Greenspan recession from 2000 (though you could call the current one his as well given the sorry state he left things in). No big slowdown means no big backlog of pent up demand that is typically the catalyst for a strong recovery. Modest slowdown, modest recovery. Equal and opposite reaction.

That could very well be one of the probable paths ahead, particularly with the type of stimulus the federal government decided to bestow upon us. This is the same kind of rebate methodology that failed to stimulate the economy in 2001 and 2002; it took the business side stimulus to unlock the economic potential once more. A bit more of the same would not hurt, particularly given the continuing pundit angst over housing. Will a few hundred dollars change consumer buying habits if their home values continue to fall as they need to do? Of course not. Better to give businesses, small and large, incentive to invest to create new jobs and hire more workers. That is how you get a recovery ramped up.

Thus the current market rally needs that something extra to get it going. We noted that Thursday when we said that a break in oil's uptrend would be the goose the market needed. That did not come last week despite some ugly downside sessions in oil. Thus the market is holding back as it needs something new to price in. Some might even say its failure to make new rally highs even as oil struggled suggest oil is not going to break its trend. That means we just have to wait and see if that occurs, watching how leaders perform in the interim.

By: Jon Johnson, Editor

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

China rebuild trade spurs tremendous Friday gains in oil, energy, metals, materials

noreply@blogger.com (Eric Aafedt, Publisher) — Sun, 18 May 2008 22:10:00 +0000

SUMMARY:
- Mixed session ends a constructive week, manages to hold gains, but not all questions answered
- Techs step up to leadership once more, but the China rebuild trade spurs tremendous Friday gains in oil, energy, metals, materials.
- Housing starts post a surprise gain as housing, other economic indications show firming . . . outside of sentiment
- $4/gallon gas just in time for Memorial Day
- Trying to add to the breakouts against what seem impossible odds.

Market sluggish after Thursday NASDAQ breakout, but it holds the gains as we wanted.

As questions surfaced daily (and on some financial stations, hourly) about how the SP500 was failing at 1400 yet again, we wrote about strong stocks continuing to set up and move higher on good volume, a good sign for the market overall. The indices were question marks after that last test of resistance in early May failed, but they did not roll over on rising trade. Threatened it Wednesday with some higher volume selling, but answered right back Thursday was a higher volume NASDAQ breakout over the 200 day SMA with SOX doing the same as the techs, large cap and not so large cap, rejoined leadership.

Friday the market did what we said it had to do after that NASDAQ breakout: hold the gains. Yes the indices closed mixed but all ended Friday bracketing the flat line. It was not all flowers and roses, however. SP500 and DJ30 moved up as well, but NYSE volume remained tepid overall and while SP500 knocked out the early May high, neither it nor DJ30 could move past the 200 day SMA. Financials remain an albatross around SP500's neck and they are not being all that kind to the Dow. The inability to clear the key 200 day SMA leaves a couple of question marks in the market even as NASDAQ, the mid-cap SP400, and SOX breakout.

China disaster trade spurs all things material.

Through history catastrophes or major events have often marked bottoms in markets. It is typically not THE event that makes the turn; the recovery has already sown its seeds and the event is the final straw that triggers action. The beginnings of economic recovery started in late 2002 and the market bottomed ahead of that, but the move that convinced most the bottom was truly in was the move just as the Iraq war began. The market faded after that October bottom and ahead of the war then shot higher with stocks breaking out of solid bases that formed AHEAD of the event, that is, in anticipation.

The tragic earthquake in China is having something of a similar impact. It is not the same type of event, but the ramifications for many sectors of markets across the world may be the same. We made mention of this the past week and in some of the alerts as to the impact on commodities, materials, engineering services and similar sectors that deal with massive construction projects. A huge area of China was impacted by the quake with over 300,000 major structures demolished and more heavily damaged. Dams are cracked and threatening rupture and you can bet that many bridges, roads, pipelines, etc. will need inspection and repair.

The impact is clear and impressively strong. Oil surged. Metals leapt higher again. Those have already been high. What about other areas that rallied in 2006 and part of last year but had slumped into exhaustion bases, e.g. engineering services and materials? Last week they took off. Cement hardened. Lumber grew tall and strong. Engineering services vectored sharply higher. All related to the basics of rebuilding, all up sharply.

The irony is, the higher oil and other necessary commodities rise, the more pressure on businesses and consumers, threatening the very demand the catastrophe created or enhanced. For now these areas are surging higher without showing a lot of fear of pricing themselves out of the demand curve.

TECHNICAL. Friday the market started decently, trying to continue the Thursday upside momentum even with surging oil prices (126.68, +2.56) right out of the box. The pullback started pretty quickly as we feared in the pre-market alert, and when Michigan sentiment came out at 59.5 versus the 62.0 expected, the selling picked up steam. As has been the case many times, midmorning was the fulcrum and the indices found bottom at 10:30CT; you can just about set your watch on it. A steady recovery to the close left the indices basically flat, half on the positive side, half on the negative. Decent recovery after blowing the early gains, basically a push for the session. That is, however, just what we said the market needed in the Thursday report following NASDAQ's breakout over the 200 day SMA, i.e. hang onto those gains.

INTERNALS: Really mushy as far as breadth with NYSE a little to the positive and NASDAQ a little to the negative. Volume was stronger on both NASDAQ and NYSE, moving further above average on NASDAQ as the techs struggled but managed to rebound 24 points off the session low; a bit of buying off the test lower. SP500 posted a modest gain on its rising though still below average volume (though the best trade since early in the month). You could call that a positive, but with the index below the 200 day SMA and going basically nowhere on the session, there was a bit of churn (high volume turnover) as investors played some hot potato. Ahead of the weekend you can understand that, but with the 200 day SMA and the trendline still there, it deserves as much attention as NASDAQ's higher volume break over the 200 day on Thursday.

CHARTS: As noted, SP500 could not move past its 200 day SMA. It moved closer to it but it did not even try to get through. NASDAQ solid below it intraday but it recovered. While the internals raised some caution indications, the indices did just what we needed, i.e. hanging onto the Thursday breaks higher. NASDAQ joined NASDAQ 100 and SP400 over that key level and it held it ahead of the weekend uncertainty. SP500 and DJ30 did not back down from that level. They still have to prove something next week, but they did what was needed during the week with the move higher and then they held it to close it out. Steps 1 and 2 completed.

LEADERSHIP: Little question as to where the leaders were Friday. The China rebuild trade sent materials, metals, energy (with an oil assist), construction services flying. With the money surging in their direction there was little left to spread elsewhere. That doesn't mean that was the only game in town; techs jumped back into the mix during the week along with transports and of all things retail. Indeed the transports exploded again Friday. Plenty of leadership in the market and money continues to move around, an ongoing healthy characteristic of this rally (needs it given the low NYSE volume!).

THE ECONOMY

Housing starts rise in April as economic data again show the hint of a promise with the potential to someday mount a recovery.

We have talked about the firming in the economic data the past two months from the regional manufacturing reports to retail sales to lower inventories (thanks to higher sales). Jobs remain crappy, but they should as they are lagging and the economic data is just hinting at a recovery. Hinting indeed; thanks to the market recovering it is cluing you in to some of the economic firming.

We also discussed the housing market potentially bottoming for several months starting back with the housing stocks in January. Rising mortgage applications starting even back in February and March. Existing and new home sales showing upside surprises; not surges by any means, just better than expected, showing that same kind of firming. It helps that prices are dropping finally. Inventories are still high, but hey, it isn't a blastoff back upside, just signs of firming the same as with a lot of the other economic data.

The April housing starts announced Friday added some to the story (myth?) of the housing recovery as they rose an unexpected 8.2% to 1.032M when a decline to 940K was expected (954K prior). Permits rose as well, up 4.9% to 978K versus the 912K expected and March's 5% decline. While the market hardly needs more houses built right now as inventories remain in the 9.5 to 10 month range, there is someone acting as if he or she thinks there is some firmer footing right now.

What about the consumer? Michigan sentiment stinks.

May consumer sentiment missed expectations, falling to 59.5 versus 62.0 expected and 62.6 in April. You would say if the consumer misses then surly a recession is still to come as consumer spending makes up, as we all know from every stinking article you read about consumer sentiment, two-thirds of economic activity. Low sixties and into the fifties are definitely recession level numbers for sentiment.

So how can there be any firming if the consumer mindset continues to flag? What do we know about sentiment of all types whether consumer, corporate, investor? Take your pick: it is always lagging. CEO's, CFO's, CIO's (basically any 'O') is negative until things are very positive. Then they are very positive when things are topping out. Investors are negative at the bottom, giddy with delight at the top. The consumer tracks the same path because jobs mean so much and jobs are very much a lagging indicator.

Thus even though the consumer sentiment continues to slow that does not mean the economy cannot recover. Indeed it can mean that the economy is ripe to recover when all look upon the economic outlook and despair. Okay, that is more than a bit melodramatic (had to drag a quote in from 'Fellowship of the Ring'), but you get the point. When the consumer is very negative that usually occurs when things are overdone and ready to swing the other way.

THE MARKET

MARKET SENTIMENT

Now that the Fed has entered the game with its credit facilities that actually work, the correlation with VIX that set up during the correction is broken. Volatility and hence VIX can decline and hold at low levels for a very long time and have no bearing on any continued rally.

VIX: 16.47; +0.17
VXN: 20; -0.13
VXO: 17.26; -0.11

Put/Call Ratio (CBOE): 0.85; +0.07

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 doesn't have the cash to drive it higher.

Bulls: 46.0%. Continuing the rise, up from 44.4%, slowing a bit as the week prior they jumped from 40.9%. The rally is having its impact, pushing bulls higher, up from 39.1% and 37.8% where it held for a few weeks. Fell to 30.9% in mid-March as the low. The indicator did its job with the dive below 35% and the crossover with the bears. The bulls and bears were eye to eye in mid-February and have crossed. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 29.9%. After rising the prior week the bears turned south, falling from 32.3%. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March that was up from an already freakishly strong 43.3% the week before. That was a surge from an already high 36.6% the prior week. Up sharply from a low of 19.6% on the last rally. It is over 30% and indeed over 35% the prior week, meaning it has blown past the range that means business. Big move after falling to a low of 19.6% on this round. 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). This is a huge turn, unlike any seen in recent history.

NASDAQ

Stats: -4.88 points (-0.19%) to close at 2528.85
Volume: 2.273B (+3%). Volume was up again, still above average for the third straight session. Though on a loss note that NASDAQ rebounded 24 points off the low; there were some buyers coming in to push it back up after that early selloff.

Up Volume: 1.136B (-660.055M)
Down Volume: 1.107B (+674.459M). Dead heat even though NASDAQ closed lower for the session.

A/D and Hi/Lo: Decliners led 1.34 to 1
Previous Session: Advancers led 1.57 to 1

New Highs: 78 (+4)
New Lows: 96 (+24)

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

Gapped higher at the open, gave up the 200 day SMA (2516) but held support at 2500 and that sent it back up to just miss a positive close. Volume was up and that can be read two ways: some churn as NASDAQ could not move higher or some buying as it dipped early then recovered into the close. Looking at it as the latter. Good break over the 200 day SMA on solid volume, then a test, hold and recovery Friday.

NASDAQ 100 (flat) sold off as well but then recovered to close flat. Good week for the large cap techs as they stepped back into leadership with a rally off the test of the 200 day SMA after it broke over that level to start the month. Very solid uptrend is in place.

SOX (+0.46%) cleared the 200 day SMA Thursday as well, tested Friday, and then moved higher on the close. Great week for the chips as the recovery continues.

SP500/NYSE

Stats: +1.78 points (+0.13%) to close at 1425.35
NYSE Volume: 1.315B (+10.06%). Volume was up to the best level in two weeks as the NYSE indices tested the 200 day SMA further. Some churning here, but we not they reached lower as well and recovered, suggesting a modicum of buying on the pullback.

Up Volume: 614.21M (-318.102M)
Down Volume: 663.743M (+420.417M)

A/D and Hi/Lo: Advancers led 1.12 to 1
Previous Session: Advancers led 2.41 to 1

New Highs: 174 (+80)
New Lows: 65 (+38)

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

SP500 edged closer to the 200 day SMA (1428) but did not challenge it. Intraday it tested lower but easily held above the 10 day EMA and the 1400 level. It also managed to close over the early May interim peak, a good indication even as it struggles with the 200 day. Did what it had to do to end the week, i.e. holding the gains after bouncing off the 18 day EMA and putting in a nice week.

SP600 (-0.12%) cleared the 200 day SMA intraday but could not hold it. Bounced off the 10 day EMA intraday with that selling into midmorning, recovering to close just below that key level. Sure would be nice to see the economically sensitive small caps make the breakout over the 200 day to join SP400 mid-caps in their run higher. That would be a tremendous shot in the arm to the market.

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

SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg

DJ30

Bumping up against the 200 day SMA once again (13,015) on rising, almost average volume. As with the other indices, the Dow tested lower intraday, holding the 10 day EMA and rebounding into the close for a flat day. Unlike the other indices, the blue chips have not made a higher high yet as they are still below the descending 200 day SMA. Kind of ironic given the Dow led the market off of the March lows. That is part of the rotation taking place in the market. The Dow got things started, and as it rallied the other indices and stocks worked on their bases, getting ready to move.

Stats: -5.86 points (-0.05%) to close at 12986.8
Volume: 249M shares Friday versus 217M shares Thursday. As with SP500, some churn or high volume turnover just below the key 200 day SMA. Did make a higher low, however, and after a pause we will see if the Dow can make the break over the 200 day on some more of the good volume.

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

MONDAY

The market did what we wanted, making it out of the week holding its gains. That the Dow and SP500 didn't even make it over the 200 day SMA means little; it wouldn't have meant much if they did unless they powered on through it.

That leaves the market still looking for a break through resistance by SP500 and DJ30 and for NASDAQ to continue holding its move over the 200 day. Despite all of the bad news relating to surging oil, continuing worries about credit and housing issues, and more talk about inflation (at least by the FOMC), stocks are performing decently overall and exceedingly well in the right sectors and in the right stocks in other sectors. Our plays are for the most part either flying or are in steady upside trends. Nice thing is, the remaining ones are mostly ready to make the break higher as well.

It could all be a bear market rally that will ultimately fail, but the firming economic data is quietly suggesting the market is not full of beans, at least not all of it. NYSE remains the enigma with its chronic low volume on the rally. That is typically a bad omen, but with so many sectors moving higher on good volume and many of them economically sensitive, it doesn't pay to ignore the action and fail take advantage of the good moves. That is why we have been so active.

We will continue to do the same this week if the market presents the opportunity. With SP500 and DJ30 testing the 200 day SMA from down below that will be a main focus along with how NASDAQ holds its 200 day SMA. Stocks such as AAPL and RIMM likely need a bit more testing before they try another move higher, but as we have seen, other stocks keep stepping up in new bases, e.g. the materials stocks last week. Once again, as if I didn't say that enough last week, that shows money rotating through the market, not leaving, and that is very healthy action.

The dollar will need to pick back up; after a healthy consolidation the past two weeks it broke hard lower Friday as gold surged higher, moving back over $900 with a $20+ move. It was close to $800 just a week back. Part of that commodities surge last week, but with the dollar lower that raises a caution flag. Thus far the market has held well in spite of oil, but the dollar was helping. Need to see it step it up again in the coming week as we look for new buys if SP500 and DJ30 can follow the other indices with the breakout over the 200 day SMA.

Support and Resistance

NASDAQ: Closed at 2528.85
Resistance:
2540 from November 2007 low
2576 represents a range of interim peaks and troughs from May 2007 into December 2007. At least 8 in that period.
2615 is an old trendline from summer 2004/summer 2005
2618 from a June 2207 peak. As it is coincident with the above trendline it grows in significance.
2668 to 2673 from November/December 2007 interim peaks
2720 (July 2007 peak), 2724 (December 2007 peak) are key resistance points

Support:
The 200 day SMA at 2517
2500 from interim August lows.
The 10 day EMA at 2488
2451 is the August closing low
The 18 day EMA at 2460
2419 is the January 2008 peak and the early February peak
The 50 day EMA at 2404
2392 is the April 2008 peak
2386 is the August intraday low
2378 is the mid-February peak; 2379 from the October 2006 peak
2370 from the April 2006 peak
The 90 day SMA at 2351
2340 from the March 2007 low
2305 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation

S&P 500: Closed at 1425.35
Resistance:
The 200 day SMA at 1428
1429 is a longer term trendline from the August 2003/September 2004 lows
1433 from a pair of August 2007 lows and December mid-month intraday low
1446 from the December low
1460 is the February 2007 peak
1481 represents several peaks and lows ranging from April 2007

Support:
1406 is the August and November 2007 closing low
The 10 day EMA at 1408
The 18 day EMA at 1400
1396 is the February 2008 peak
1387 is the April 2008 intraday high
The 50 day EMA at 1380
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
The 90 day SMA at 1359
1338 is an ancient trendline

Dow: Closed at 12,986.80
Resistance:
The 200 day SMA at 13,015
13,092 is the December 2007 intraday low
13,133 is the May 2008 high
13,250 from price points in second half of 2007
13,563 is the late December peak
13,780 is the early December 2007 peak

Support:
12,845 is the August closing low
The 18 day EMA at 12,858
12,786 is the February 2007 peak
12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 2007
12,743 is the November low
The 50 day EMA at 12,702
12,573 is the mid-February high
12,518 is the August intraday low
The 90 day SMA at 12,497
12,250 from late March 2007 lows
12,070 from the early February 2008 lows
12,050 from the March 2007
11,731 is the March 2008 low
11,670 is the May 2006 intraday high; 11,642 closing
11,634 is the January intraday low

Economic Calendar

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

May 19
Leading Economic Indicators, April (10:00): 0.0% expected, 0.1% prior

May 20
PPI, April (8:30): 0.4% expected, 1.1% prior
Core PPI, April (8:30): 0.2% expected, versus 0.2% prior

May 21
Crude oil inventories (10:30): 176K prior
FOMC Minutes, April 30 (2:00)

May 22
Initial jobless claims (8:30): 371K prior

May 23
Existing home sales, April (10:00): 4.85M expected, 4.93M prior

By: Jon Johnson, Editor

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Commodities Continue Their Recovery

noreply@blogger.com (Eric Aafedt, Publisher) — Mon, 05 May 2008 13:57:00 +0000

SUMMARY:
- Jobs report, additional Fed action rev up stocks, but the stronger start doesn't last.
- Stock market still looking for some power in its move higher.
- Commodities continue their recovery despite that rising dollar.
- Jobs report provides encouragement, and economic data improved, but with energy and food prices surging, can robins be on the economy's yard.
- Watching the commodities, tech, financials, and transportation as indicators of the rally's health.

Stocks sprint out of the gate, but it was Friday, and that was used to sell.

The jobs report was better than expected with a 20K loss (-75K expected) and a lower unemployment rate (5.0%, 5.2% expected) was a nice bonus. The Fed was active as well, showing it meant what it said about using its facilities to continue adding liquidity as needed. It increased its auction amount to $150B from the $100B it bumped it to in March, it included triple A asset back securities as acceptable collateral, it jumped its ECB swap volume to $50B from $20B, and it doubled the swap amount with Switzerland to $12B.

The combination had futures bouncing, the dollar running, and bond yields rising. Basically the same action seen in the several markets of late as the understanding of the Fed's liquidity steps grows. Of course, after a good move Thursday, a strong open on a Friday begged some sellers to come in, and indeed the stock market was already peeling back in the first hour. First half-hour for that matter.

A better than expected factory orders report (1.4% versus 0.2%) reinvigorated stocks with a caffeine injection and they rallied higher, moving to new session highs after that quick pullback. The caffeine high did not last long; less than an hour into the session stocks were turning over again.

We used the move higher to take some gain off the table. We were not buying on the move. As noted in Thursdays report, it was Friday after a pretty good week, and that left the market vulnerable to some profit taking. We noted that any decent jobs report would be a head fake as we know that report lags other economic data, and despite some modest improvement in some reports (e.g. the ISM, factory orders) it would be a head fake as we know jobs lag all other economic data and the other data has not indicated any economic bottom.

The surprise on the day was the strength in commodities. They rallied back sharply Thursday afternoon post-FOMC even as the dollar ran higher. Same on Friday: dollar up, so were commodities. Is it a situation where there is such demand that a rising dollar won't blunt the commodity advance? Could be. We will know more about that this coming week when the end of month/beginning of month trade is over and things 'settle down' into a more normal routine.

TECHNICAL. Well, it was the old high/low routine: high at the start, lower at the close. A little too much excitement that we lost 20K jobs, and when you factor in that the numbers likely don't reflect reality, it didn't take too long for the early surge to start to purge. Within in an hour as it turned out. Not great action, but when you see futures that strong on data that conflicts with reality, you typically get this response.

INTERNALS: Modest. That is about it: modest. Breadth was slightly positive on NYSE (1.3:1), slightly negative on NASDAQ (-1.3:1). Volume faded on both exchanges, remaining below average on NYSE while remaining above average on NASDAQ. Now NYSE volume never did break above average on this move other than back in mid-March when it was putting together the bottom. That means it hasn't been there through a month and one-half of gains. Not the best price/volume action though volume was mostly up on upside sessions and lower on downside sessions, which is what you want to see. As discussed Thursday, however, you want to see some power in the moves and that means volume. Below average volume means that not everyone is participating, and if things turn it doesn't take much for the sellers to send a rally packing. As SP500 is heavy into financials and investors remain pensive about them, even though they are rallying there is not much support.

On the other hand, NASDAQ is showing above average trade on key sessions, i.e. when it breaks higher. That shows significant accumulation and the market needs growth stocks to grow in price if it is going to continue rallying. Financials are also key and they have low volume; definitely a tension here as the market really needs financials to be successful. NASDAQ's increased trade is very good. It needs to spill over into the financials, however, for a rally to be really successful.

CHARTS: Great moves . . . intraday. DJ30 cleared the 200 day SMA, its next resistance, but gave it up on the close. NASDAQ gapped to next resistance at 2500, and that was the high for the day. SP500 hit its longer term trendline and faded back as well. Great starts, mediocre finishes. Good breakouts Thursday, particularly on NASDAQ with its volume, then an unfulfilled promise at the close. They likely have a bit more upside to put in despite the Friday reversal before they rest again given the breakout was just on Thursday. Not a lot of upside, but a bit more.

LEADERSHIP: The Thursday leadership surged but then purged, though not a total reversal as stocks such as RIMM held their gains. Overall there was a definite industrial and commodities bias as the latter continued their bounce back from some harsh selling. Some were quite successful with their bounces and held their trends. Others look as if they are simply in a relief bounce after breaking their trends. Still looks as if tech is in good shape after maybe taking a breather here. Transports remain in excellent shape, and even retail continues to improve. The financials are still moving up; if they had volume they would be serious contenders for new leaders of the new year.

In sum, the market is still looking for power. NASDAQ is showing some strength though not clear power. NYSE is simply not showing power. Financials are the clear example: rising but no volume. If they get power then this rally will be a clearer indication of real market strength and thus a better indication of a rising economy not too far down the road. The light volume for NYSE and the financials makes the move suspect in the longer run, but for now the rally is working.

THE ECONOMY

Economic data shows nascent signs of bottoming. Good but don't light up just yet.

Jobs were better than expected though still negative. Factory orders for March were definitely much better than expectations at 1.4% versus the 0.2% expected and the -0.9% in February. That February number was revised higher from -1.3%; revisions are where the truth lies because it is like having more than just one good data point. Definite improvement there. The ISM as not as bad as expected either but it was still below 50.

Maybe all of this is telling us the economic dip is bottoming. If that is the case that is truly amazing given the housing bubble popping and the credit freeze from last summer. Yes the Fed has found what appears to be the magic potion and even strengthened the dosage on Friday. With a financial crisis restoring confidence is typically all it takes to get things greased and back to normal. If too much time passes, however, and damage is done as a result of the freeze up, then it can take more than just a Fed appearing in command of the situation. This recovery, or more accurately, attempted bottoming, is suggesting there was not a lot of structural damage.

Okay, maybe not. Maybe the Fed's actions were enough to sooth the savage beast of the financial markets AND soften the blow of housing burning down. What about gasoline heading to $4+/gallon this summer and food costs jumping, despite the President's protests otherwise, in large part because of added demand created by a social planning mandate courtesy of a philosophically confused administration (is it a free-market president or just a free-market until some emotional issues comes up president?), can any attempted economic bottom hold?

Food and energy (now referred to as Foodergy because their prices are now joined at the hip) are taking a larger and larger share of disposable income. It is thus no longer disposable income but monthly overhead: you have to eat and drive to work (remember, jobs are improving, right?) and it is taking more scratch to do it. Thus less for the other things in life that make our standard of living nice. We are not going to get wealthier as a nation spending our money on fuel and food, the former going to fund the anti-American activities of those selling us the fuel. This higher and higher cost of living is only going to drag the economy more just as some of the numbers are showing signs of bottoming.

The questions about the impact of surging fuel and food prices on an already weak economy remains. A look to the market shows an improvement and thus something of a confirmation of the attempts at bottoming in the economic numbers (actually it is the other way around: market bottoms, then the data improves, just as it is trying to do here).

So, bear market rally or a new bull market starting out of a very, very modest correction? As I said before, the correction sure seems too little to account for the mortgage and credit issues, and now you add surging energy and food costs on top. Robins on the yard indicating springtime for the economy and thus a new bull market? It is enough to leave you nervous and cautious about the prospects, but with growth stocks showing solid patterns and runs higher with tech gaining more strength you have to go with the market moves. You don't only play straight up bull market runs. You can play bear market rallies as well. You just have to keep alert and assume that, given the weak data and lack of NYSE volume on the rally, it is like a bear market rally. It could be very much the opposite, but if it is, it will just keep telling up to buy in and thus we miss out on nothing.

By: Jon Johnson, Editor

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Bulk of Earnings Season Behind Us

noreply@blogger.com (Eric Aafedt, Publisher) — Sun, 27 Apr 2008 15:24:00 +0000

SUMMARY:
- MSFT hangover cools techs, but SP500 clears resistance.
- Oil blitzes back up toward 120 after what looked like a crack in the oil pan
- Bonds continue their breakout . . . along with the dollar.
- Historic Fed action: stock, bond, dollar market bottomed on one day of action.
- Bulk of earnings season behind us, but economic calendar is jam-packed.
- Will techs and the Big 3 return to lead the week.

Market has to deal with issues but perseveres.

Microsoft sandbagged its current quarter in a 'what is good enough for Apple that is beating us about the head and shoulders is good enough for us' move. Unlike Apple that rebounded nicely and posted an almost 4% gain after its 'disappointing' earnings, MSFT didn't rebound, unless you call finishing $0.23 off its session low during a 6.19% loss a rebound. Thus, unlike Thursday where NASDAQ bounced and broke out over its February high in a key breakout, NASDAQ had to drag MSFT around all session and it lagged rather than led.

It didn't help that RIMM reportedly is having problems with its 3-G BlackBerry for AT&T and it may be delayed. RIMM lost 3% on the session but it was down quite a bit more than that before a nice rebound. In addition, oil surged back up even as the dollar climbed, tapping at $119 once more (118.93, +2.87). Interest rates jumped again as they continued their second breakout in the past two weeks.

There was enough in the mix to sink stocks early in the session and on through midmorning, taking some of the nice glow off of NASDAQ's Thursday breakout. Even with that, the indices held at near support at the 10 day EMA and put in what is becoming a typical midmorning bottom. The indices rebounded after lunch in a straight upside shot that took the indices back up to the opening prices, and in the case of the NYSE indices, to session highs. Enough so that SP500 broke over the key early February high.

It was not a powerful session; we know powerful sessions and are willing to suck up to them at any time, but this was not one. It was, however, a solid session. Volume backed off and breadth was mushy, but the market overcame disappointing news, held near support at the 10 day EMA, and rebounded with leaders bouncing back, and as noted, a new breakout by SP500. The volume was great on the breakout, but it the breakouts are piling up, and that is an excellent development for the market.

TECHNICALLY the action remained, despite the tech losses, in a positive build. The indices were under some pressure on the tech side, but then all slid lower as the session moved from the opening bell. Once more, however, it overcame some disappointing news as it has over the past few weeks (GE, TXN, etc.) and bounced back to squelch the losses. Always like it when the market can look at the bigger picture down the road and overcome near term setbacks.

INTERNALS: Breadth was modest and volume was light. Good to see volume back off on the selling on NASDAQ, but it is always nice to see it jump back up on a rebound move. The lack shows no real buying as stocks rebounded and SP500 broke over the February highs, but it was a non-expiration Friday after a good upside week, and in that situation getting out with a flat to slightly higher session is fine, low volume or not.

CHARTS: SP500 joined NASDAQ and DJ30 in their breakouts over the early February peak making it an official uptrend now for all three of the large cap indices. In other words, they have all made new highs since bottoming on the selloff, surpassing the prior peaks in the 3.5 month base. That is an important technical move for the individual indices and the market overall. As noted above there was no big volume on the SP500's move and that was somewhat disappointing, but you take what you can get when you can get it when recovering form a serious correction.

LEADERSHIP: Well we were not expecting it this week after they broke lower to correct given the dollar's sudden popularity, but the Big 3 (energy, ag, and metals) came right back on Friday DESPITE a stronger peso . . . er. . . dollar. Bonus. That was all the more a positive given tech lagged thanks to the MSFT and RIMM issues. Even then, however, RIMM rebounded to hold near support and thus remains in great shape. Moreover, plenty of leaders continue to form up good bases and are set to breakout while others are testing or starting to bounce back up after testing near support following a breakout move. Very nice. Others simply moved higher, showing no sign of wear and tear (e.g. the transports whether trucking, rails, or shipping). Money continues to move into new areas and also old areas when the opportunity presents itself. Healthy action.

THE ECONOMY

Oil reinvigorated after a brief respite.

Oil tapped at $120/bbl just over a week ago, surging higher in what looked to be something of a near term climax run. It was, but it was very near term. After a quick dip to the 114 level it held and without much of a push it was back up to $119 Friday, jumping $2.87 on the session to $118.93. The dollar moved up during the week and so did oil, defying the 'weaker the dollar, the stronger the oil' relationship. Oil took on a bit more independence to end the week as it went it alone without the dollar falling.

Last week we discussed the tie between oil and food, or more accurately, how our government has made an artificial tie between the two with the anti-free enterprise anointing of ethanol as the solution to our energy problems. Besides the many arguments about how it cannot be the solution or even a small part of it, the fact that oil rose despite a stronger dollar to end the week is even more reason we need to disassociate food from oil by scrapping the ethanol mandate. Why? Because if a rising dollar is not going to break the pressure on food prices because oil is still rising in price regardless of the dollar, then we are going to be stuck with high food prices as long as the tie is there despite reversing one of the major drags on the economy, i.e. the weak dollar.

Food and fuel are two of the primary cost items for any household. It is bad enough that higher energy prices make feed grain and food prices rise simply by raising the price of operating the machinery to grow our food. When you link food costs directly to fuel, however, by making food an ingredient for fuel, you uncork the bottle and the unintended consequences spew out. Ask the ranchers slaughtering cattle right now before they are ready to sell because they cannot make enough money on them at the current prices given the cost of feed. Ask the poultry farmers doing the same. They have to slaughter because they won't make any money now but hope if the herd or flock is thinned prices will rise enough to make it worthwhile to buy the feed to fatten the herd. As one rancher friend put it, get ready for $8/lb ground meat.

Great. Not only is gasoline going to top $4/gallon this summer, but meat and chicken are going to go through the rough. The government tried to pick winners with its ethanol policy and as is always the case, when the market is manipulated by clamping down on one part, it squirts out in other places. This situation has to be rectified immediately to hopefully avert a real disaster ahead that will kill off any attempted economic recovery. The housing issues are bad enough and credit has done its damage. Now government policies are ready to finish off the consumer. We have to buy gas to get to work and we have to eat. Federal policies (or the lack thereof in the case of energy) are making both more expensive and if unchecked that is going to cause the deep recession that it looks like housing and credit could not bring about.

The days of the weak dollar may be over: bond yields rising, gold fall.

Without any help from the administration the dollar is staging its best move against the euro in months. Of course it is coming off the mat to do so given the long and deep slide, but at least it is making the effort. The dollar has not broken its downtrend, not by any stretch. It has not even broken its 50 day EMA having just reached that level Friday and failing to hold a move through it. That leaves it down in the cellar, but trying to find the stairs to climb out.

Bond yields are up sharply the past two weeks with the 2 year yield breaking out over 1.8% to over 2% as its first move. It stalled near 2.2%, and then toward the end of last week it broke out with another key move again, jumping to 2.44% on Friday. Even the 10 year broke higher up to 3.86% though its moves remain modest compared to the short end's surge.

Bonds are telling the same story of the stronger dollar, i.e. there is a recovery taking shape. Some say it is inflation. As discussed a week ago, rising interest rates are not inflation or caused by inflation. Inflation can be part of a rise, but bond yields move higher more for economic recovery reasons than inflation reasons.

Just look at gold. While oil is moving back up in a clear breakout and uptrend run, Gold has formed a head and shoulders top and is getting ready to really tank. It ran to 1000 last month and that was the top. It sold off sharply, rebounded, but made a lower high, rolling back over the pat week. It closed below $900 for the week in a rather amazing reversal from the highs just a month back. It is ready to crash much lower and that is not a sign of inflation. Thus the rising interest rates we see ARE NOT related to inflation, but instead an economic recovery to come.

Creative Fed action turned the tide and is a landmark in central bank history.

The dollar still has a long way to go, but the interest rates are showing it is going to continue higher unless the administration does something really stupid such as attempting to undermine it seeing its recent rise sustain itself.

The roots of the recovery go back, to the day, to the Fed's series of actions of opening the discount window to non-primary dealers, taking other forms of collateral as swaps, hugely jumping the amount of funds available to swap, and stepping in to quickly rectify the BSC run on the bank. This showed the markets this was not your Greenspan's Fed, i.e. one that would just cut rates again and again and again as the cure to any ailment. Indeed, it showed the Fed could fight the problem, successfully, without having to cut rates any further.

With that realization the bleeding stopped that day. It was not an immediate upside rocket shot, but the floor was built, and the dollar has spent the past 6 weeks setting up a bottom, breaking higher to end the week.

That makes the Bernanke Fed's action some of the most significant and important moves in Fed history. It affected liquidity without endless rate cuts. Sure it slashed rates, but that was part of the process of figuring out what worked. At first the swaps were ridiculed. We said at the time they did what was needed, i.e. get money where it was needed. On balding blow hard bloviated nightly that the government had to step in and buy all of the mortgages as the only way to stop the bleeding. No, that bailout blathering was wrong. There was simply not enough money and the window was too discriminatory in the first attempts so as to let those really hurting take advantage of it. Once that was fixed by opening the window, the fix was in. The Fed was seen as able to affect liquidity and solve serious problems without an indiscriminate flooding of liquidity across the world via rate cuts.

The results were immediate. The dollar stopped its slide. Bond yields firmed. The stock market bottomed on that day. Those who called Bernanke an amateur were half-right and half-wrong. Sure he did not get the politics, but the reason he was installed as Fed chairman, i.e. his brains and ability to think outside the box, became apparent when he did finally get the politics. Once he realized how the system works with the political overlays he crafted a policy that solved the problem. That makes this historic. It is one of the extremely rare occasions a government agency solved a problem without burning down the house in order to save it. Kudos to Chairman Bernanke.

We can lament the Fed did not do this quickly enough without gutting the dollar with those initial rate cuts, but it was in uncharted waters and it took a bit of time to figure out what the right fix was. When it decided and acted, however, the impact was immediate.

By: Jon Johnson, Editor

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Talk of Bigger Bailout in the Works

noreply@blogger.com (Eric Aafedt, Publisher) — Sun, 13 Apr 2008 15:51:00 +0000

SUMMARY:
- GE shocks the market as its financial services division runs aground.
- Import prices surge as the US is in fact importing inflation.
- Sentiment falls to 1982 levels in the great north.
- Talk of a bigger bailout in the works.
- Volatility not budging with the Fed and the feds acting as the backstop.
- Low volume Friday holds out possibility market can heal itself, but more than ever it needs good guidance, a lot of good guidance, to pull things back together.

Market gets tired of swallowing bad news.

The market was looking for a catalyst and it got one, just not the right kind. The indices were set up well and Thursday showed indications an upside breakout was close. Then a big name issues a big surprise. You expect disappointments from AMD and AA, and they didn't disappoint by disappointing for yet another quarter earlier last week. But GE?

GE missed earnings by 7 cents and lowered its 2008 guidance. Just three weeks ago it said earnings would be in the 50 to 53 cent range with analysts expecting 51. 44 cents hurt. How was GE so wrong so late in the quarter? The financial services business hit the reef when BSC blew up. It is apparent that the entire financial sector came to a standstill at that point, and that left everyone wondering if one part of GE's business could drag earnings down so much when its other business units are in excellent shape, what is going to come out of the financial stocks whose sole means of income is form the financial sector.

Indeed, GE's revenues, while down from the financial unit, were up 8% overall. The overseas revenues rose 23%. Goodness gracious. Yet . . . GE warned for the year. Does it see things as that bad? Probably not. What it sees is that three weeks ago things looked super and then one business unit imploded with almost unprecedented speed. It simply does not know what lies ahead for that part of the company and thus it pulled in its guidance as a matter of prudence. Of course that doesn't mean everyone can let out a big 'whew' that all is clear. While it has been bad in the financial sector, GE is showing it could be a lot worse than everyone expects even with all of the write-downs at this point.

Maybe. While GE's results were hurt in the finance sector there are signs the credit crunch just in the past few weeks is better. The amount bid at the Fed auctions is on a rapid decline. Primary dealers bid only $39.5B last week of the $50B available. People who watch these say that is showing the dealers have liquidity again. Investment bank borrowing fell to $26.5B last week from $34.4B the prior week and $37B two weeks ago. Slowing at the discount window means improved liquidity. Seems opening the discount window was just in time. GS says there is a light at the end of the tunnel and that the credit crisis is in the beginning of the fourth quarter in sporting terms. MS CEO kept the sports analogy saying the crisis was in the final innings.

GE was bad and then there was piling on. Import prices surged with China jumping 148% year/year. Michigan sentiment for April flopped to a 26 year low. We wanted China to stop controlling its currency as much and it is doing so. As we said would happen over a year ago, when that happened the yuan would rise against the dollar and our imports from China would increase in price, basically importing inflation to the US. As discussed Thursday, we are doing this elsewhere as well with oil, metals, and other commodities priced in dollars. As the dollar falls foreign producers require more dollars to remain whole. We may export more but we pay more for just about everything. To top it off we are on this kick of burning food for fuel, driving world prices higher and helping cause food riots around the globe. That makes you really take a hard look at this ethanol issue and ask 'is this really the best solution to the problem given all the troubles in the world?' Sure doesn't look like it.

This was more than enough bad news to undercut the nice rally set up. Industrials were hammered but the weakness was market wide though not as intense as in the GE wannabes. Indeed many quality stocks held up well even as other big names (e.g. AAPL) took hits. It is definitely trouble when a big name that never misses, or at least has not missed in a decade, is blindsided because things turned so fast you have to wonder, and the market is, what is next? There was widespread downside but it was not an across the board wipeout. Volume was actually lower; there was no dumping overall and a lot of recent leaders held up well. There was some culling, and of course, GE was moving into leadership.

TECHNICALLY the action was weak as you would expect. The indices started low and moved lower, never able to put together a recovery as a midmorning attempt rolled over into a steady afternoon slide lower and lower. The market was overcoming bad news time and again, but there is a point where you are so full of bad food that you just cannot swallow another bite. If you are lucky it doesn't all come back up. It didn't Friday, but next week with all of the earnings reports is now even more important given the GE miss.

INTERNALS: Breadth jumped back to those levels seen during the selling and the up and down gyrations as the indices tried to put in that double bottom in January through March. Not surprising given the import of GE and the magnitude of its miss. -3.6:1 NYSE, -3.7:1 NASDAQ; it was not just GE and the industrials though many stocks were just weaker and were not selling off hard. Volume was the quite interesting technical aspect. It was lower on both NASDAQ (-11%) and NYSE (-1.6%), the latter even with GE trading 36M shares, 7 times its average volume. All of the heavy selling was in GE.

CHARTS: SP500, burdened by GE, had a bad day, blowing out the bottom of its lateral consolidation. It managed to hold some support at 1330. DJ30 also had to bear the yoke of GE, and it caved in its lateral consolidation a the 10 day EMA. It managed to hold its support at 12,250, not even getting there. NASDAQ did the same, making a new low on this pullback, but it did hold its long term trendline on the close and on very low volume. There is hope but it has to find the bottom here.

LEADERSHIP: There were definitely some implosions; you cannot have that kind of news and not see some stocks that were building nicely get plowed under. Overall, however, leadership held up well and our stocks mirrored that action. That is always good to see in a negative environment. Still, they cannot hold up if the market is not able to shake off GE and look to brighter futures elsewhere. Translated that means with all of these earnings coming out this week there need to be some big names with strong reports and upside guidance that is enough to wash GE right out of investors' hair. The market has no chance if other stocks don't show that GE was truly related to the March financial issues related to BSC financial decline.

THE ECONOMY

Import prices confirm what the trade deficit told.

Prices for foreign products rose 2.8% in March, surging back from the 0.2% February gain, and back on path more with the trend that saw January rise 1.6%, December fall 0.2%, but November surge 3.2%. A lot of that has to do with oil imports, but even if you take out oil foreign goods rose 1.1%, the strongest in the last five months.

A lot of that was due to rising Chinese prices, up 4% for the month and 148% year over year. Oil imports were not cheap, however, rising 9.1% in March. Volatile number that was down in February, up 4.8% in January, down again in December, and up 12.4% in November. Follow the bouncing ball, but that ball is still bouncing uphill.

Some say the falling dollar is just a normal correction after years and years of a rising dollar that took it out of a normal relationship to other economies. Is that a bad thing? We had a strong dollar and we could buy goods from all over the world and do so cheaply. That is called raising your standard of living, and that is not a bad thing in just about everyone's book. You don't suffer inflation because of your strength. Now we have to spend more for oil and gasoline leaving less money to go elsewhere for things we typically enjoy in our standard of living. We have to spend more for everything. Our economy is in recession, helped along by hugely surging oil prices, surging metals prices, food prices and goods in general gratis a weaker and weaker dollar. Again, this is a good thing? Used to be we just complained about the cost of medical care and education. Now you wonder whether you want two-ply or single-ply. THAT is the definition of a lower standard of living.

Michigan Sentiment is . . . how do you say it? . . . crappy.

At 63.2 sentiment was bad. Well off the 69.0 expected, the 69.5 in March, etc. Steady downtrend and still heading lower. A combination of high gas prices, higher food prices, rising unemployment, politics, and general gloom in the media. Feeds off itself.

Sentiment is at recession levels in an absolute number sense, but the decline from 78 to 69 in just two months shows the rate of change indicative of a recession even without hitting historical recession ranges. That is a moot point now; it is there.

Present conditions were the stalwart at 78.4. The outlook is a pathetic 53.4, truly a recession level.

Comparisons to the past are of course widespread and somewhat appropriate. The big one thrown out was the worst showing in 26 years. Back in March 1982 the US was suffering through a horrible recession after the 1970's, the worst period in economic history since the Great Depression. In 1982 the economy was starting to emerge from that truly disastrous period after the Reagan Emergency Economic Recovery Tax Act of 1981 was passed and in place.

While the economy is likely in recession right now, it is hard to argue it is emerging from it. If it is, it is a shallow one. If it is we will see the stock market emerge ahead of it as it was trying to do before Friday and the GE miss. May still do it, but as noted above, it will take other widely followed stocks to put up some good guidance. If not then there is likely more downside for stocks and the economy.

Resolution Trust Fund Part 2?

It was only a matter of time. The Feds are talking about a bill to bailout those mortgagors who cannot pay their mortgage and the builders and lenders who became overextended and are now in trouble. Once more our government, in order to ensure domestic tranquility and the pursuit of financial irresponsibility, is preparing to bail out those that knew better but didn't act accordingly.

Today we heard it: the feds need to form an entity similar to the Resolution Trust Corporation back in the early 1990's to clean up the mortgage mess. In the early nineties the RTC was in charge of the Resolution Trust Fund that was basically a mechanism to throw money at the savings and loan collapse that occurred after the real estate market fell to pieces all across the south and other parts of the country. An entire branch of case law developed in the courts to assist in expediting the clean up by limiting claims of borrowers against lenders to keep the hundreds of billions in losses from growing into trillions. At the same time the 'trust fund' (a.k.a. a tax dollar fund) was used to pay off both sides in order to keep the nation's financial sector from collapsing altogether (it was not only S&L's that failed but bank after bank was taken over by other banks to avoid outright failures).

It worked but it cost a lot of taxpayer dollars that went to the wrongdoers. Basically it was a decision to grease the system and get through the mess even if it meant assisting those that were major players in the problem in order to avoid a larger economic collapse. The feds meant business. The Federal courts were given jurisdiction (no invasion into state's rights there) and the judges knew what the legislation was enacted for: to clean up the mess and limit the losses, and that meant harsh rulings. I was a newbie lawyer at the time and the case law that developed in favor of the lending institutions was so strong I had no trouble starting off my career with several summary judgment victories for defendant financial institutions. I liked to think I was smart and resourceful, but I knew better: the deck was stacked in the lender's favor as long as the bank hadn't done something like promise to place gold coins in the borrower's account every Monday. Even then you could probably get them off.

Anyway, after GE's sudden and unexpected miss, many Friday were saying the mess is going to be much larger than expected, even with the billions already written off. Who can sweep billions of dollars lost due to inappropriate actions under the rug? The federal government, a.k.a. the candy man. Of course it would mean more if the dollar had some weight behind it, but why quibble. With talk of a second stimulus package already you can bet that an offshoot of that will be some sort of federal creation to deal with the issue if earnings guidance does not improve drastically in the near term.

By: Jon Johnson, Editor

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Michigan sentiment lowest since 1992. Some very interesting comparisons to that recession.

noreply@blogger.com (Eric Aafedt, Publisher) — Sun, 30 Mar 2008 13:30:00 +0000

SUMMARY:
- Market slides lower on no volume as no shorts rush to cover.
- Income up, spending lower: so what's new when the consumer is worried?
- Core annual PCE falls to 2%
- Michigan sentiment lowest since 1992. Some very interesting comparisons to that recession.
- The stage is set. Time to step up and rally.

Week ends down as buyers are on vacation and shorts see no reason to cover.

The economic data was not bad with income higher than expected and the PCE inflation indicator in line. Throw in an LEH upgrade and investors were feeling pretty good even with JCP (department store) warning on its Q1, providing more evidence of a pensive consumer (along with the 17 month low in spending). Stocks opened higher and rallied into the Michigan sentiment number that was also a low, the lowest since 1992.

After Michigan the market peaked and headed south, starting a long, steady descent through the close without any attempt to rally. The buyers were out for the weekend, and with no bids the shorts had no compulsion to cover. So much for getting the short covering pre-weekend bounce we wanted.

Financials were once more the hardest sellers. Oil (104.95, -2.63) and gold (930.60, -18.20) sold rather sharply, but there was no solace taken; even the transports slumped on lower prices for fuel feedstock. The market sagged to the close and the indices undercut the 18 day EMA. Not great action, but it was no implosion, no dive back into the chasm.

TECHNICALLY the intraday action was modestly higher to losses in the 0.6% to 1% range. High to low action is not great, but you have to look at the other indicators to see if the action has any fire inside.

INTERNALS: Breadth ran modest all session before falling off right at the close to -2:1 on both NYSE and NASDAQ as they again matched each other. It was modest enough to indicate there was no widespread exit. Volume told the same story, i.e. no sellers dumping shares in any quantity, just a lack of bids to end the session.

CHARTS: The indices did not hold the 18 day EMA, did not bounce. The move through that level is disappointing, but it was no breakdown. All of the indices are still in a range they can hold, make a higher low, and continue the rally attempt. SP500 and NASDAQ turned back at the 50 day EMA where SP500 failed in late February, just a month back. As noted Thursday, this is the point where they need to put up.

LEADERSHIP: This remains the most interesting aspect of the market. It was bifurcated on the week, but not a bad bifurcation where some leaders hold up and others break down. Some of the early runners are pulling back after good surges such as in transports and retailers. They are coming back but still holding support. At the same time, other solid companies see their stocks forming up nicely despite the overall market pullback. Tech is an example. These are really a positive as it shows money is still moving into these stocks despite the market pullback. Groovy.

IN SUM: This is the kind of drop that gets most everyone assuming another selloff is coming. People are not that comfortable with the market action given no signs of upside life after Monday. Friday we heard some old hands on the floor fearing another collapse lower for a number of reasons, e.g. a low volume rise off the lows. There were no less than six commentators Friday who said this was the toughest market, the scariest market, the most unpredictable market they had ever witnessed or had encountered over the past thirty years.

We have to admit that you always have doubts about a move that sells and then sells some more when the market is trying to recover. This pullback still seems too short and too shallow to account for all of the problems with housing and credit. Just doesn't seem to be enough of a flush out even with the Fed in the game. What you have to look at, however, is what the market is telling you. Is there anything more than just the sag back (yet again) that has everyone glum?

In this case, yes. The last rise off of the March lows was not on lighter volume. NYSE volume moved above average on that run, showing there was real buying off of that low. NASDAQ volume was spotty, but NASDAQ stocks are still setting up for leadership; NYSE stocks were definitely leading and that is where the money was going. Leadership as noted is not caving in, just pulling back to test while at the same time other leaders are developing for a break higher. Breadth shows no widespread selling, just parts of the market pulling back, some to test, others (such as financials) to try and find themselves again.

This is one of those times it is hard to be positive given the selling preceding the current pullback, but the market is not distributing after the bounce off the last March low. There is the big positive of leadership; even as the market pulls back the early leaders and the newly minted ones are holding up well as other stocks set up for upside moves. That completes the picture: higher volume on the move off the March low, lower volume on this pullback, and leadership holding the line, still setting up nicely. That means we are looking for the market will to soon turn from this pullback and continue the break higher . . . barring some big extraneous news story. With the credit issues still out there, that is always possible.

THE ECONOMY

Spending continues to slow but is not off the cliff.

Income beat growth expectations at 0.5%, pushing annual income to 4.6% year/year. Spending was up the 0.1% expected. Even with that more modest rise, annual spending growth rose 5.1%. The PCE rose 3.4% annually overall, and the core 2.0% year over year, back at the top of the Fed's target range.

With oil surging out of control still and food prices still rising, there is little solace from the lower annual core PCE. Those are of course beyond the Fed's control and its monetary policy reach, and with the Fed in full 'prime the pump' mode there is no concern about the Fed using those as a wedge to get back into the tightening game.

What is a sign of the times and worrisome is inflation adjusted spending (70% of the GDP) that was flat in February and indeed flat for the last three months. That high energy cost, weakening home prices, and general worries about jobs are wearing on consumers. When it costs $60 for 20 gallons of gas that is hard on consumers. I hire college students to help do some of the office work and to train them and groom them for later on, and to a man (or woman as the case may be) they are complaining how the rising gasoline costs are eating away their earnings. It is a real hardship, and on top of that, with more money going into the tank, less money goes elsewhere.

Michigan sentiment at recession levels. Well, at least one recession level.

Even with that, spending is still remarkable, holding flat even as prices climb and confidence falls. The latest read on the consumer mindset was Friday with the March revised Michigan report. Sentiment fell to 69.5 from 70.8 in February, less than the 70.0 expected. Still stronger than the Conference Board's read but it is at a level not seen since the 1992 recession.

Interestingly, when confidence was at this low level the economy was pulling out of the recession. Indeed, in the spring of 1992 the economy was on the comeback from a quite light recession even though, during a political year, it was characterized as the worst recession since the Great Depression. A lot of manure is thrown in a presidential campaign year, and that was one of the biggest buckets ever. Of course, the electorate bought it even as there were robins on the yard as far as the economy is concerned.

Interesting Recession Comparisons.

The similarities to past financial-based recessions are intriguing. Of course sentiment is heading lower still, but it doesn't take much to turn it if things improve. The stock market shows building leadership as it tries to build off of a nascent double bottom after five months of selling. There are hardly robins on the yard in terms of the economy, but the Fed is in full inflation gear and the Feds have already passed a stimulus package. There are also some tall tales being told with respect to how to handle the mortgage issues (e.g. 5 year moratoriums), trade protectionism, etc.

If the market can continue higher and leaders continue to build, it is a leading economic indicator, and perhaps this recession will be as shallow as in 1992 and the bear market of 1998. I noted at the end of 2007 and in January 2008 that this could be a shallow recession. P/E ratios were pretty tame heading into this recession, the Fed and the Feds were in quickly as noted, and financial crises can end quickly as seen in 1998 with the Russian meltdown that saw the SP500 plunge 22% in 4 months, making a double bottom and rallying higher. The current decline that is trying to double bottom is 5 months long and sports a 20% decline. DJ30 lost 21% in the 1998 recession; the decline on this low was 18%. NASDAQ is not as close; it collapse 33% in 1998, but is down 'just' 24.7% on this drop. P/E ratios, as noted however, were already in a reasonable range heading in, and thus the losses are plenty to support a recovery.

Financial crisis helped trigger this decline as in 1998. There is more here what with housing, so it is not a one to one comparison. The percentages are a bit off, but they are close. The Fed was a big actor back in 1998, and it is a big actor right now, and, despite the complaints, it acted in rather short order. Leadership fell hard, but it recovered with good bases in 1998, and we are seeing similar action here. There are parallels, there are some differences. There are enough of the former to make this very interesting, and this attempt to double bottom will tell the tale as to just how similar.

By: Jon Johnson, Editor

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com