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InvestmentHouse Weekend Update:

http://www.investmenthouse.com/1weekendmarketsummary.htm

- No relief move to end a harsh week
- The economy is fine as long as we don’t let our leaders wreck it.
- Weekend worry likely to lead to more selling to start the week but that will foster the interim rally.
- What to do when the panic sets in

The week that got everyone talking.

There were many signs things were weakening. We talked about the extended run, the distribution that eroded the market foundation and tossed back every NASDAQ rally attempt, and the flattening trendlines. Each time things got the least bit dicey, however, new money flowed back in and propped up the advance. Of course that all ended last week when a confluence of events finally gave the buyers pause. The Greenspan misquote, China’s threat to crack down on speculation, Japan warning the carry trade was going to end, and tanking durable goods orders brought it to a head and brought on the selling. The market was in a nice pullback, but when this news hit the buyers lost their appetite.

Friday started weak, unable to continue the Thursday rebound off of the early session knife lower. No specific news, just more malaise that later turned into some much more aggressive selling into lunch and into the close. Dell was down on its poor earnings but there were some upgrades (LUV, XLNX) and the Fed’s Poole said there was no recession coming. Didn’t help. The market was in a bad mood and was ready to continue its sulking.

Technically a weak week weakened further on Friday with the lower close, but it did not make a new low. It was an inside day on the main indices, and that can be a precursor to change. It all depends upon which way they break from this signal moves; guess that really makes this something of a non-signal.

We were looking to see if the rebound would start with some short covering on Friday. That is typically what happens on the Friday a sell off starts. It didn’t and thus this coming week will likely start lower once more as the indices add to their losses.

As an aside, many market recaps on the talk shows were talking about how far the indices were down for the week. Interesting, but the selling started before this week. DJ30 sold 4 sessions ahead of the Tuesday plunge. As noted Thursday, from the highs in the last couple of weeks in February to the Thursday intraday low, NASDAQ lost 6.8%, SP500 5.5%, DJ30 5.8%. Hefty chunk of change for the initial leg of a sell off.

High volume and massively negative breadth started the move, and though breadth improved as the week closed out the Friday volume and breadth was not light. With this kind of negative action and the commensurate jump in negative sentiment you have to start looking for the relief move to germinate and break bud. We are still looking for a relief move to start in the near future, one that can last anywhere from 1 to 3 or so weeks. It will be choppy as they often are (up a few days then back a couple, then back up, etc.). Nonetheless, when they get going they are typically pretty solid.

Solid enough to give people a false sense of security that they can wade in. You can wade in, but you have to know that you are stepping into faster water and there are potholes in the bottom. Thus you stay light. That said, there are definite cycles in these corrections, and we are just waiting for this initial phase to end and the next cycle to start. Given the indices are close to testing the October and November peaks that held on the Thursday low, this is a great place to start that next phase of the correction. After another blow down to start the week we will look for an intraday reversal once more that likely sets the bottom for this leg.

THE ECONOMY

Everyone is worried about the economy. That is good, except that those wanting to do the most about it don’t have an economic clue or prefer to make political hay to our detriment.

The economic data last week was definitely a mixed bag. More sub-prime mortgage worries, a big revision in Q4 GDP, the tank in durable goods orders, and the second sub-fifty Chicago PMI. That coupled with Greenspan even entertaining a question with the ‘R’ word in it helped cement the view that the economy was much worse off than anyone thought. As the week wore on, however, the national manufacturing report showed an excellent, across the board advance. Spending and income were solid. ECRI continues to show not a decline, but a bottom and more robust growth toward the fall.

What about inflation? The PCE rose to 2.4% year/year and the Fed wants it below 2%. Gold, which had been on a tear and was growing worrisome as an inflation indicator with its gains, reversed and closed at 644, down 21 on Friday alone. Even with all of this worry about the sub-prime mortgage market and supposedly poor economy, credit spreads are narrower now than same time last year. A narrow spread means no worries about weaker times ahead. Indeed, they can widen and still be in solid shape.

Problem is, there are those that never liked the policies of the current administration and have ignored the results and talked down the advances all the way up. As the economic gains kept piling up they had to shift their arguments. From no jobs, to few jobs, to poor jobs to low paying jobs they have changed their tune as the data keeps improving. Friday night we heard one congressman dogmatically state that the current deficits were record deficits. Only if you have absolutely no economic savvy would you say that. In unadjusted dollars they are bigger. Of course, the economy is much larger than it was in the 1980’s, the last time we had big deficits. At 1.7% of GDP, these are BELOW the historic average. To argue the current deficits are more dangerous than those in the past is the same as arguing a $10K per month mortgage for someone making $500K per year (2% of the income) is more burdensome than a $5K per month mortgage for someone making $100K per year (5% of the income). Yes it is twice the other in gross dollars, but it is much smaller as part of the overall financial picture. If this were not the case lenders would not lend more to those making more. Of course that makes no sense, but that is one of the arguments you continue to hear. It is absurd, but it is also politics.

That is the problem: there are political agendas setting the course ahead as democrats try to take the White House and republicans try to hold on. That leads to these absurd statements . . . along with a pathetic understanding of economic cause and effect and how economic cycles work.

One senator on Thursday panned job growth yet again, complaining we lost jobs to foreign countries and that wages were poor. Well, most companies report a dearth of skilled workers to fill positions that desperately need filling. Headhunters confirm this problem. Unemployment is at 4.6%. Over the past few years we have created more jobs than the rest of the world combined. Since 1976 we have created 43M jobs, far outpacing all industrial nations.

Another senator said free trade and the trade deficit are hurting US jobs and crushing the middle class. Well, the jobs speak for themselves. We have run trade deficits every year since the mid-1970’s, importing $6.5T more goods and services than imported, yet we have those 43M jobs. Further, the middle class grows wealthier, not poorer. Wage earnings for the middle class have grown 22% inflation adjusted over the past 27 years. The current economic expansion cycle is in its middle age and is just now starting to show the wage increases many of these senators attribute to the expansion in the 1990’s. They forget it took until the middle of that expansion to really get wages rising. You think with all of the shortages of labor that wages are staying lower? They are not.

Instead, however, we hear calls for tariffs on China and some even starting to champion limiting foreign ownership of our treasuries and other assets. How 1980ish. How absurd. Does Japan own the US 20 years later? No. Its companies are building plants here and putting US citizens to work. That is investing in the US. But who cares about history or reality when you are running for political power or have no grasp of economic cause and effect? These people want to make us pay higher prices for our goods in order to save some jobs that should move offshore to cheaper labor markets. Would we not be better off if those with jobs that followed the lower wages off shore retrain themselves in order to take fill those higher paying jobs begging to be filled right now? We could invest the money we continue to save on cheaper foreign goods into even more technological advances and even further improve our standard of living. That is investing in the future and not clinging to the past; ironic as many who say we must invest in the future actively try to pass legislation that forces diversion of funds from that very investment as they try to keep nineteenth century jobs here in the US.

And more talk about deficits.

At the same time they decry the budget and trade deficits that are somehow going to kill our future and burden our children in the event someone ‘calls’ the debt. We don’t like profligate spending; it takes our hard earned money and squanders it on pet projects or failed programs such as instituted in the 1960’s and have only further entrenched the underclass. Further, that wasted spending takes the lifeblood from the economy and thus holds us back from reaching our true potential.

Those are serious arguments against wasteful spending. The notion that someday we will have to pay the piper for our deficits is absurd as long as we let our system work and produce to its potential. If we do that means others will want to put their money here just as they do now. Countries pay for the privilege to hold US Treasuries and have access to the US consumer market. They are willing to give us this money as the price for selling their goods here. If they ‘call the note’ as some people put it, they would only be slicing their own economic throats because the bulk of their production would dry rot.

Some day the Chinese people will start consuming more than they export and thus reduce their dependence on the US consumer and their willingness to buy our treasuries. It is not because they are going to ‘call the note,’ but instead just less need to buy as much. That, however, is not a reason to adopt protectionist programs and stymie our economic strength by raising taxes, confiscating profits from companies enjoying an upswing (if the oil companies then why not any other sector that has a boom cycle?) and over-regulating industry. As for the last, just look at our telecom industry. It was heavily regulated as a utility until the breakup in the 1970’s. As a result our telecom industry is far behind that of the rest of the world. Sad to say we lag Europe in a technology, but we do. Until very recently you could only use US cell phones in the US. Even now just one service provides extra-US service. The rest of the world could use theirs anywhere but the US. 3G and higher technology? It was in use in the rest of the world well ahead of the US rollout. Pathetic, but that is what you get when our leaders get involved in controlling industries. Without the free market competition, there is no push to come up with something better and to do so fast.

Thus we need to promote investment in the economy even more in order to better compete when that inevitable time comes when some of our big trading partners don’t need us as much. We have seen what restricting trade and regulation does for our ability to compete. The last thing we need is to head back down the road of limiting what we can do with our money, and that starts with how much the feds take from us in the first place. If the fat man known as the federal government doesn’t have as much to eat it will lose weight.

THE MARKET

MARKET SENTIMENT

VIX: 18.61; +2.79. Highest close of the recent run but still well below the 23.81 hit in June 2006, about a month before that sell off bottomed. It is still early in the game for any kind of bottom, but note that just before that first leg low was hit last summer the SP500 sold off and volatility rose to the current levels. That preceded a modest, two-week, 35 point rise in SP500. Then SP500 headed down to put in the first leg of the double bottom.
VXN: 23.66; +2.15
VXO: 19.12; +2.91

Put/Call Ratio (CBOE): 1.3; -0.12. Down again but an eighth day in a row closing above 1.0. As discussed Thursday, some of the other indicators such as VIX are coming into line in terms of an interim bounce. Anything beyond that is a stretch right now.

Bulls versus Bears:

Bulls: 50.5%, up modestly from 50.0%. Ticking higher after falling from 51.1% two weeks back and 53.3% just over a month ago. Not a lot of movement, but we can make book on it being lower next week. Still quite a bit of bullishness though backing down from the 55% threshold hit to end 2006 and considered bearish as it signals pretty much everyone is in the market.

Bears: 24.2%. Definitely more angst as bears rose from 22.2% and 21.1% before that. Held in the low twenties for 2 months but starting to come to life and will surge next week. Hit a post-2002 high in that late June 2006 move, eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).

NASDAQ

Stats: -36.21 points (-1.51%) to close at 2368
Volume: 2.445B (-13.27%). Volume was significantly lower Friday but still well above average as NASDAQ continued lower. Hard to argue there was any improvement given the continued high volume but infinitely better than higher volume on the selling.

Up Volume: 420M (-298.137M)
Down Volume: 2.008B (+101.208M). Still impressive at -4.7:1.

A/D and Hi/Lo: Decliners led 2.99 to 1. Ouch. Not as bad as the -10:1 on Tuesday. Suffice it to say there were very few NASDAQ stocks anyone wanted on Friday.
Previous Session: Decliners led 1.91 to 1

New Highs: 58 (+19)
New Lows: 95 (-13)

NASDAQ CHART: http://www.themarketbeat.com/videonewslettercharts/NASDAQ.jpeg
If the link does not open, cut and paste the link into your browser.

NASDAQ gapped lower, made a couple of token runs higher mid-morning, but found resistance at 2400. Turned lower with a big downside move through lunch, and an afternoon rebound attempt failed woefully with a 12 point drop in the last half hour of trade. That kept NASDAQ just over the Thursday low (2359) and at the October and April 2006 highs. That is pretty solid support and enough to send NASDAQ back up on the interim rebound. As noted Thursday, we would anticipate a rebound in the range of 2450 (the 50 day EMA at 2450) to 2470 (the November and December highs). Then another run lower, this one taking it toward the 200 day SMA. You can see the prior uptrend channel on the attached chart.

SOX (-1.77%) fell through the 50 day EMA, landing at some support at 460ish. That last move looked promising but took it to 490 where the November and December highs were. It rolled over and has a suspicious looking double top here. Next support is the 200 day SMA (454) or price support at 450.

SP500/NYSE

Stats: -16 points (-1.14%) to close at 1387.17
NYSE Volume: 1.864B (-13.07%). Volume fell sharply, falling below 2B but still well above average. Not as many sellers but still an above average number.

Up Volume: 229.842M (-537.849M)
Down Volume: 1.626B (+198.788M). -7:1 downside volume. That is pretty nasty.

A/D and Hi/Lo: Decliners led 3.11 to 1. Not the -5:1 from Tuesday, but as with NASDAQ, very respectable, in a negative sort of way. These high readings are an indication that things are getting to more extreme, sold out levels. Previous Session: Decliners led 1.57 to 1

New Highs: 74 (+47)
New Lows: 45 (+34)

SP500 CHART: http://www.themarketbeat.com/videonewslettercharts/SP500.jpeg
If the link does not open, cut and paste the link into your browser.

Similar to NASDAQ, the large caps faded from the 90 day MA and closed in on the Thursday low (1380) on lower but still strong volume. It is just below the October peak (1389) but there is support as well at 1375. Likely to blow lower once more and move at 1375 and then start the interim bounce. You can see the prior uptrend channel on the attached chart.

SP600 (-1.80%), after holding up decently, has imploded, falling all the way back into the bottom half of its December to January saucer that made up the handle to its larger cup with handle base. It closed 2 points above its October peak. That level at 395 on down to 390 is game for the next dip, but on Thursday it tapped and held the July/August up trendline at 396.50.

DJ30

An inside day as well on the blue chips as they too tested toward the Thursday low (12,059). It has slipped past the October peak at 12,167. There is some minor support at 12,075 to 12,070. Some additional support at 12,000. Looks as if it will test near that level and then try to rebound. You can see the prior uptrend channel on the attached chart.

Stats: -120.24 points (-0.98%) to close at 12114.1
Volume: 315M shares Friday versus 372M shares Thursday. Similar fade in volume but still strong.

DJ30 CHART: http://www.themarketbeat.com/videonewslettercharts/DJ30.jpeg
If the link does not open, cut and paste the link into your browser.

THIS WEEK

Negative sentiment and hype likely to grow over the weekend.

Seems hard to believe, but when investors have a chance to recap the week, see the headlines and hear the talk show commentary the negative sentiment is likely to climb. If the usual punditry were not enough, the political yapping dogs will try to make some more hay out of the decline. It is rather pathetic how you take a week’s worth of correction (or in some case two days) after a 7 month run and within an ongoing 4.5 year recovery and try to style it as a failure of all prior policies. Yes, the small sliver of time that is a correction somehow becomes the rule. Right. As if there were no nasty corrections in the 1990s (remember 1996, 1997, 1998: sharp corrections and then a resumption of the moves. 1998 was even a short bear market). Pretty shameless, but as we have seen, it is a shameless business.

In any event, the negativity that is generated is likely to be useful in the bigger picture. After the severe blow off the past week it won’t take much to get fear and selling to the point of a near term washout. Individuals will sell some more and some of those newer hedge funds will have to sell either through their risk managers’ orders or out of fear, panic, or some primal yet to be revealed emotion. A run lower on this fear and you likely get a reversal to start the interim relief bounce.

We will take some downside profit on that move, particularly if the indices hit those next support levels and hold. Then we look at what held up well during the selling and see what is leading the way higher. At this juncture you don’t know which ones will take the point, but we will cast our net and put those on that look good and see which ones the big money moves to.

A final thought on the selling last week. All of the downside and the negative news have many worried. The fires of 2000 to 2002 are still glowing in many minds. When they see this kind of virulence they think things are over and they worry about a downward spiral ahead, panicking in the selling and making poor decisions. Resist. Don’t get caught up in the heat of battle trying to map out a new game plan. That is called a losing game plan.

You know the cycles; we have discussed them. Don’t lose site of them as the events unfold. They may not tick off like clockwork, but historically there is a pattern even in corrections. Even when your stomach is queasy and your gut is screaming, if you go with your gut you typically make the wrong decision. Stomach pain and market selling are definitely tied; the point at which your stomach cannot take it anymore, the moment you feel if you were just out everything would be so much better, the moment you hit that sell button, that is the moment the market changes direction. In our seminars we teach that when you just cannot take it anymore and the sell command appears in your mind as some kind of miracle drug for your pain, get up and take a jog, stroll through the neighborhood, change that hard to reach light bulb, call your mother in-law, clean the grease trap, kick the dog. Do something that pulls you back from the edge. Nine times out of ten in that situation there is a better exit point to come than at the point you feel life would be grand if you were only out of the market.

Support and Resistance

NASDAQ: Closed at 2368.0
Resistance:
The July/August trendline at 2422.
The 90 day MA at 2434
The 50 day EMA at 2450
2468.42 is the November 2006 high
2471 is the December 2006 high
2509 is the January 2007 high
2523 is price resistance November 2000

Support:
2412 from June 1999 low
2400ish from the late November and late December 2006 lows.
2384 is an interim peak from January 1999
2379 is the October high.
2376 is the April high, the former post-2002 high
2368 is the early October handle high.

S&P 500: Closed at 1387.17
Resistance:
1408 is the November high
The 90 day MA at 1414
1425 is an interim high from November 1999
The 50 day EMA at 1426
1432 is the December 2006 high
1440 is the mid-January high
1444 from February 2000
1445 is the late November to February up trendline
1468 is the upper band of the current channel
1475 from peaks in December 1999 and January 2000

Support:
1400 is some price support trying to hold.
1389 is the October peak.
1353 is the early October consolidation range

Dow: Closed at 12,114.10
Resistance:
12,361 is the November 2006 high
The 90 day MA at 12,387
12,499 is the December intraday high.
The 50 day EMA at 12,483
12,672 is the up trendline connecting the November and January intraday lows.
12,820 is the upper channel line marking the November to date uptrend channel.

Support:
October high is 12,167. Giving way.
11,986 is price support from mid-October and the early November low.
11,865 from the early October consolidation
11,750.28 is the pre-2000 all-time high

Economic Calendar

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

March 5
- ISM Services, February (10:00): 57.5 expected, 59.0 prior

March 6
- Q4 Productivity, revised (8:30): 1.7% expected, 3.0% prior
- Factory orders, January (10:00): -4.0% expected, 2.4% prior

March 7
- Crude oil inventories (10:30): 1.4M prior
- Federal Reserve Beige Book (2:00)
- Consumer Credit, January (3:00): $7.0B expected, $6.0B prior

March 8
- Initial jobless claims (8:30): 335K expected, 338K prior

March 9
- Non-farm payrolls, February (8:30): 100K expected, 111K prior
- Unemployment rate (8:30): 4.6% expected, 4.6% prior
- Average hourly earnings (8:30): 0.3% expected, 0.2% prior
- Trade balance, January (8:30): -$60.0B actual, -$61.2B prior
- Wholesale inventories, January (10:00): -0.1% expected, -0.5% prior.