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InvestmentHouse Weekend Update:

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

- Employment report confirms economic plunge, Fed & administration remain indifferent, market responds in kind.
- Job creation not negative but it may as well have been.
- Fed is in a tough position, but doing nothing for fear of inflation definitely won't help.
- Positives: valuations are reasonable, fiscal stimulus will eventually pass, global economy will survive, and that equals a shorter economic hiccup.
- Market getting short term oversold as NYSE indices approach natural support at the November low, but a bounce is not likely to change the market's character.

The first three days are in the book and they are way down.

Futures were up ahead of the jobs report as stocks were going to try and build off of Thursdays push and rebound some in relief to the prior selling. Then the jobs report missed big with unemployment jumping to 5%, the futures tanked and so did the market when the bell rang. They were down, fell hard to midmorning, bounced toward lunch, then rolled over again and sold to the close. The action confirmed the market's weak technical positioning that it has built in since Q3.

On top of the jobs report China issues its quarterly statement that it would 'take measures' to 'slow' its economy. INTC received an analyst downgrade and it was clocked on the session, capping a week that saw it decline 18.5%. The ISM services topped expectations (53.9 versus 53.5 expected) but the impact was similar to a lone raindrop hitting hot pavement.

Investors were waiting on what Fed Vice Chairman Kohn and President Bush had to say about the economy and what Bush intended to do about the economy given the string of weaker data summed up by the jobs report. Kohn didn't even mention the unemployment report in his comments. It was classic denial. The WSJ ran a story for the Fed Friday indicating that price increases in food and energy may keep it from cutting rates at its January meeting. Kohn refused to discuss the jobs report as it flew in the face of the Fed's adamant position that inflation was the primary concern. As for Bush, he did not come out with anything with his meeting with Bernanke and Paulson. Most speculate he will do something at his state of the union address on January 28. He did say the economy had a solid foundation and the financial markets were strong. That was a punch in the nose to investors who know the stock and bond markets are signaling major trouble. You know the result: more fuel to the downside fire as investors realized they waited in vain.

Technically the action was crappy to crappier, at least looking at the major indices. They gapped lower and continued selling through the session. The size of the losses and the close at the lows signaled massive weakness.

Internals: Horrid as you would expect, matching the point declines. -4.4:1 breadth on NASDAQ and -3.4:1 on NYSE. NASDAQ foreshadowed this action as breadth was worse than NASDAQ on Wednesday and Thursday; NASDAQ was losing its relative strength. Volume surged to the downside of course, spiking above average on both NYSE and NASDAQ. After cracking the 200 day SMA on Wednesday and Thursday, big institutions were dumping NASDAQ shares as the growth model they need was formally laid to rest by the jobs report.

Charts: Nothing positive here, at least long term. NASDAQ took awhile to start its selling, but when it did it quickly surpassed the NYSE indices. It broke below its November low, the first of the three large cap indices to do that; again, NASDAQ quickly overtook the NYSE large cap indices when the dam broke. SP500 and DJ30 sold hard as well, but they remain above their November lows though barely. They both closed at this same level in August after that big spike lower intraday mid-month. Maybe they can form a double bottom here, but they will have to prove it and no one was ready to buy into that possibility just yet. One thing that this test of the November lows does is set up an oversold bounce after just over a week of selling.

Leadership: As we expected in the Thursday report, a weaker jobs report sent just about all stocks lower. Technology pretty much gave up. Despite the overall selling, energy, agriculture, heavy construction, metals - - the international plays, all held near support. Of course, so did defensive stocks such as JNJ, PG, MO. Nonetheless, if you look at their positioning you would not expect to see the indices tumbling down six straight sessions and crashing through support. With the market getting oversold and these stocks holding near support, a relief bounce should slingshot them back up. If it does not then when the relief bounce ends things are likely to get really ugly.

THE ECONOMY

Jobs report manages to hold positive by a hair.

Given the weekly jobless claims a negative non-farm jobs report was a possibility. Thus the 18K jobs to the upside was almost a moral victory. Well, not almost. It was not really close. It was the weakest showing since August 2003. That was Q3 2003 and you may or may not recall that the economy grew at a 7.3% pace in that quarter. Cool. So this report means nothing, right? Not quite. At that time the economy had been in the toilet for over a year and one-half and was on the rebound. This time it is heading the other way.

November was written up to 115K from 94K. October was revised down to 159K from 170K. The missing link for December was the private service sector. It was 93K, well below the 152K three-month average. Of course it did not help that the usual monthly losers (construction and manufacturing) were lower as well.

Employment is a lagging indicator. The ISM reports, durable goods, retail sales, leading indicators all were heading lower in advance of this report. ECRI's annualized growth rate hit its lowest level since the end of the 2001 recession. Moreover, the market has struggled since the summer. When the jobs report finally caught up with the other indicators the market figured the die was cast. It was already lower and weakening and this data sealed up the package.

Fed is in a tough position but that is what it is there for.

The Fed has to deal with some issues that its predecessors did not, mainly some modest but persistent inflation left over from Greenspan's low, low interest rates that were left too low way too long. Thus we keep seeing some issues with consumer prices, mainly outside of the core, but within the core prices are quite well contained and the inflation pressures, the things that drive prices in the future, have waned. Indeed, ECRI's future inflation gauge fell to a 31-month low. It is very good in predicting inflation and this report indicates inflation just is not the problem.

What we are seeing as inflation is the rise in food and in energy. Of course, it seems everyone but the Fed knows that the ethanol mandate is what is pushing our food prices higher: a food chain based upon corn syrup will rise in price if corn prices rise. As corn is an inefficient feedstock to make ethanol, it takes a lot of corn to produce a gallon of fuel. Thus we are competing with fuel when we go to the store to buy food. This doesn't even account for the massive amounts of water it takes to produce one gallon of ethanol, another cost we are paying.

The irony of this ethanol folly is that it is doing nothing to dent oil or fuel prices. US consumers and businesses are not pushing prices higher; they are part of it, but it is a world effort, along with a lot of worry and speculation that is keeping a premium in oil prices. The Fed cannot change this unless it can bring down all world economies and thus reduce oil demand. It is as if the energy market knows we are not going to produce enough ethanol to make a difference. If we planted every open space in the US we might have enough to impact energy prices, but all of the fertilizer used and water wasted, not to mention the leveling of all open spaces to plant, are much more costly than the price increases in oil. There is already empirical evidence of the fallout of this planting: along the Mississippi river there is so much planting of corn and a corresponding increased use of nitrogen and other fertilizers, the runoff has killed fish in a 175 mile stretch of the river. We go to all of the expense to clean up our water and then pass a scientifically unsupportable government mandate that provides the incentive to pollute again. Nice, well thought out planning. Instead, energy prices keep climbing, almost mocking this effort.

Unfortunately the Fed is being pressed by the gold bugs and other central banks into maintaining a hawkish stance, one that places inflation fears above growth concerns. On Friday that WSJ article was the Fed attempting to prepare the way for a 'no action' meeting in January. Talk about ill-timed. Did they bother to look at the jobs data that they did have ahead of its Friday release? Worse, did they have it and still run that 'let them eat cake' article? The Fed Funds futures contract has basically priced in a 50BP rate cut in January post-jobs report. Does the Fed still maintain its position post-report as well? It cannot change oil prices by raising rates. It cannot lower food prices by raising rates; indeed, you can track the rise in our food prices to the mandate to produce more ethanol. Raising rates is not going to lower food prices.

So we have a Fed that does not want to cut rates needing desperately to do so as well as continue injecting liquidity into the market. Problem is, it can hack rates 50BP in January and again in February and still not make a difference. Not because that would not finally provide an environment of easier money, but simply because the Fed is too late to the game.

Needed: some fiscal policy stimulus.

Monetary policy cannot solve the issues. The Fed has waited too long as it did in 2000. It cut rates from over 6% to 1% and the economy went steadily lower. It was not until the fiscal stimulus, and specifically the second round that provided investment incentives, that the economy recovered. Right now the economy needs fiscal stimulus.

And aren't we lucky. Friday President Bush met with Bernanke and Paulson to discuss options. He commented after the meeting about the strong markets and solid economic foundation, but gave no details of what he has or doesn't have in mind. Speculation is that he will wait until the State of the Union on January 28 to announce any possible stimulus. As with the Fed action, that is too late.

Of course it will still need to get through a hostile Congress, and with that situation about all that tends to pass, particularly for lame duck President in his last year, is a 'rebate' program such as the first tax cuts in the last recession. They had zero impact. Of course they did. Every time this cheap, politically expedient 'incentive' is used it does nothing. What is needed is a change in corporate tax rates, say down to 0%. Also, some assurance that the dividend treatment will be extended as well as the investment incentives would give certainty and thus capital investment once more. There is some momentum to reduce corporate tax rates and to provide the middle class a tax cut or make those currently in place for the middle class permanent. The latter likely would not have much impact at all, but it is doable. That is a sorry commentary on the current political climate. We hear the democrats are working on a stimulus plan of their own as each party tries to beat the other to the punch in an election year. You can bet that will be targeted at those who don't pay taxes and the dubious benefits that provides the economy. We also hear, however, that a corporate tax cut is another democratic proposal in the offing. Some sow's ears, some pieces of gold.

There is thus potential for some fiscal action, but it has to be the right kind, and unfortunately the parties are philosophically opposed to one another as to what kind of stimulus they will agree to. We all know what works: proposals that incent capital investment. Sadly, what we know works often falls victim to political games, and in an election year where half of the candidates (on both sides) are railing against corporate greed (do they know that most corporations are considered small, i.e. family corporations?), providing the right kind of tax cuts as stimulus is about as likely and the process about as pleasant as passing a quarter-sized kidney stone.

THE MARKET

Well the market made a swan dive Friday, leaping off the cliff after seeing the unemployment report. The selling confirmed the topping action the volatility and quick successive corrections in 2007 foretold. The economy is heading for a significant slowdown whether it reaches recession levels or not. The market has started lower ahead of that and the Friday action spells more economic slowing to come.

There are some positives. There is the continuing strength in the global economy. Sure some of Europe is slowing and China may find out what happens when you try to slow your economy: you get what you wanted and much more. Nonetheless, the strength in the stocks with overseas ties, even with their pullbacks, shows there are some nice upside possibilities still.

Second, valuations remain low, much, much, much lower than in the prior recession. Yes earnings expectations are going to be revised lower and that will hurt valuations, but stocks are also diving lower already, so valuations will hold as the price losses and lowered estimates offset each other. If the selling continues as it looks it will continue to do given the patterns and the economic indications, valuation will only improve.

That means the stock bear market will likely be much less severe than 2000 to 2002. Stocks will not have to shave off massive amounts of points to have very, very appealing valuations. Again, that means the stock bear market will be lighter and the economic slowing should be less severe as well. At this point, much of the cause of the slowdown, i.e. the housing and mortgage issues, are well down the road and much closer to the end than the beginning. The Fed will finally get rates down to the right level, now likely sooner than later, and we will get some kind of fiscal stimulus. If by luck it is the right kind, this whole slowdown could be a year or less. Of course the market sells off ahead of the actual decline and it bottoms and starts to recover ahead of the economic rebound. That means the market should be heading back up before year end.

MARKET SENTIMENT

VIX: 23.94; +1.45. Disappointingly modest bump in VIX as the market dove lower. It will likely surge if the selling continues, but its lack of movement indicates there is more than just a bit of selling to go before it and the other sentiment indicators hit levels that tell us a sustained recovery is ahead.
VXN: 28.62; +2.03
VXO: 26.78; +2.23

Put/Call Ratio (CBOE): 1.12; +0.21. Back above 1.0 on the close. It will take several more of these closes as well as other sentiment indicators to 'get right.'

Bulls: 52.2%. Falling further after breaking back below the 55% threshold last week (54.9%). Down from 56.50% after a jump up from 53.3% and 49.4% the week before. Didn't make it below 45% (it hit 40.6% on the low for the prior round of selling). It spent 5 weeks above the threshold 55% on the last spike higher. You have to go through the process of wringing out the bulls with a decline of significance, a.k.a. a move into the lower 40's. The theory is that when too many investors or advisors are bullish then most of the money is in the market and there is nothing ready to come in off the sidelines to drive prices higher. On a steady climb from a low of 40.6%, the low for this round. Never made the thirties. Hit 56.7% in June and now it has blown past that. The market peaked about a month later. For reference it bottomed in the summer 2006 near 36%, and 35% is considered bullish.

Bears: 24.5%. Bears are rising with the market's inability to hold a rally, up from 23.1% last week. Improving from 22.4% before that. Fell like a stone from 25.6% the prior week and 27.6% the week before. Down from 29.0% after one week at a higher level, jumping from 26.6% the week prior. Up from 22.2% after bouncing up and down over 20 for several weeks. It is still significantly above the threshold 20% considered bearish. Fell to a low of 19.6% on this round. Bearishness peaked at 37.4% on this move and it fell to 18% in August. It topped the June 2006 peak (36%) on this 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).

NASDAQ

Stats: -98.03 points (-3.77%) to close at 2504.65
Volume: 2.525B (+30.27%). Volume surged as NASDAQ dove. All of the low volume in December as NASDAQ rallied and faded resolved in a big downside surge. Volume has jumped as it did in early November when this last round of selling really got underway.

Up Volume: 191.19M (-694.778M)
Down Volume: 2.322B (+1.295B)

A/D and Hi/Lo: Decliners led 4.37 to 1. Heavy downside breadth as techs were finally dumped. NASDAQ 100 led the selling with a 4.3% decline.
Previous Session: Decliners led 1.76 to 1

New Highs: 49 (-14)
New Lows: 475 (+211). With this drop the lows are already reaching levels that can indicate a bottom, but the other indicators are not there yet.

NASDAQ CHART: Click to view the chart

Gapped lower and sold to the close, breaking the summer 2004/summer 2005 up trendline that held in the August selling. That is a serious breach. The August closing low at 2450 looks like a sure thing and the March 2350ish lows are not out of the question. It is down 12.3% from the late October high. That is the longer term picture. Nearer term the NASDAQ is 6 days straight down with an 8.25% loss just on this move. It is a might oversold and with that gap lower it will be trying to fill that gap. It may take another downside session to turn it back up, but with this kind of rapid decline a snapback is in the works.

NASDAQ 100 (-4.30%) broke down as well, breaking both the 200 day SMA and the November consolidation in its plunge. When it broke it broke hard.

NASDAQ 100 CHART: Click to view the chart

SOX CHART: Click to view the chart

SP500/NYSE

Stats: -35.53 points (-2.46%) to close at 1411.63
NYSE Volume: 1.649B (+24.57%). Volume was above average for the first time in two weeks. More dumping of the large caps.

Up Volume: 106.61M (-416.088M)
Down Volume: 1.537B (+758.483M)

A/D and Hi/Lo: Decliners led 3.44 to 1. Not as bad as NASDAQ but hardly great.
Previous Session: Advancers led 1.13 to 1

New Highs: 35 (-26)
New Lows: 561 (+252). Jumping quickly to levels that indicate an oversold condition.

SP500 CHART: Click to view the chart

SP500 rode the financials lower toward the November low (1406). A week of hard selling and approaching the November low. That starts to spell a rebound to test this selling. As noted above, a bounce suggests (though very quietly) an attempted double bottom. It has to prove a character change at this point, however, i.e. a strong surge on with solid volume, and . . . financials recovering. Nothing suggests that at this point, just a relief bounce.

SP600 (-3.24%) screamed lower, undercutting the November and December double bottoms. This is the lowest it has been since October 2006 when it was three months into a year long run to a new high. After this 8.8% drop in six days the small caps are primed for a rebound to test the prior bottoms at 380. That will set up another downside play.

SP600 CHART: Click to view the chart

DJ30

Similar to SP500, the blue chips were in emergency dive mode Thursday, dumping toward the November low (12,724) and the February peak on high, above average volume. That level, either with a slight undercut or not, will likely lead to a relief bounce before the Dow continues its selling.

Stats: -256.54 points (-1.96%) to close at 12800.18
Volume: 304M shares Friday versus 200M shares Thursday.

DJ30 CHART: Click to view the chart

MONDAY

A fairly light week of economic data by comparison though now earnings season gets underway. With a slowing economy the big question facing investors is how much will earnings estimates and guidance fall. Stock prices are already factoring in that decline based upon a slowing economy. As noted above, with valuations starting this correction much lower than in the last correction, how guidance holds up will give us insight into how deep prices will fall.

Near term the momentum is down, but an impressive oversold condition is building. With the NYSE large cap indices just over the November lows and over a week of selling, a rebound move is in the works. The odds are it won't change the character of the market, i.e. turn this hard selling into a new rally. There is that possibility, but the upside, at least for US-tied stocks and the major indices, has to be proven. It is true that a recovery starts when things look bleak, but this is still pretty early in the game for the downturn. After all, the economic data is still mixed and will likely all turn to the downside before this episode is over.

A relief bounce will tell us whether the upside means business by the strength it shows. More than likely it will result in a lower high and the selling will resume. It will also allow us to gauge the strength of some leaders that broke lower as well as those that held up. We anticipate energy and the other groups of leaders, though fewer in number what with tech caving in, will continue to advance as they ride the rest of the global economic story outside the US. The moves may not be as dramatic, but again, how they recover off the past week's selling will tell us more with respect to them as well. Finally, it will allow us to reload some downside plays on SPY, IWM, etc. and ride the next leg lower if the rebound fails (as is the likely scenario).

Thus there could be a bit more near term downside as last week's selling carries over to start the week, then a relief move. It won't change anything and the downside will in all probability continue as the US markets have to find bottom still. That will take quite a bit more work as the indicators, sentiment and otherwise, are not all lined up as you would see at a bottom. We have the wrinkles of having the stronger world economy and the stocks benefitting from that even as the US indices dive, and the overall reasonable P/E levels unlike past bear markets. With that understanding of the lay of the land we will take advantage of the near term and longer term upside opportunities offered as well as the downside as the US markets struggle to find their lows during this economic slowdown.

Support and Resistance

NASDAQ: Closed at 2504.65
Resistance:
2539 is the August 2004/April 2005/October 2005/March 2007 up trendline
2550 to 2540 from May/June consolidation and the November lows
The 200 day SMA at 2615
2634.60 is the June peak
The 50 day EMA at 2658
2725 is the July high
The March up trendline at 2729
2735 is the December intraday high
2765 is the November/December/February up trendline
2778 from a July 1999 peak
2834 is the October interim peak
2861.51 is the October peak

Support:
2451 is the August closing low
2386 is the August intraday low
2379 from the October 2006 peak
2370 from the April 2006 peak
2340 from the March 2007 low

S&P 500: Closed at 1411.63
Resistance:
1430 from the August interim lows
1440 - 1437 from January and March peaks
1452 is the June/July 2006 up trendline
1459 is the February peak
1475 from peaks in December 1999 and January 2000
The 50 day EMA at 1476
The 200 day SMA at 1491
1490.72 is the early June closing low and early August peak.
1524 is the December high
1530 to 1535 are the June twin peaks
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high
1566 is the July 2006/March 2007 up trendline

Support:
1406 is the August and November 2007 closing low
1403 is a longer term trendline from the August 2003 and September 2004 lows
1374 is the March 2007 closing low
1370 is the August 2007 intraday low
1325 from May 2006 peak prior to the summer 2006 correction

Dow: Closed at 12,800.16
Resistance:
12,845 is the August closing low
13,050 to 13,000 range
13,092 is the December low
The 200 day SMA at 13,366
The 50 day EMA at 13,352
The 90 day SMA at 13,495
The early July peak at 13,671
The early June high at 13,676 (closing), 13,692 (intraday)
The mid-June high at 13,689
The August high at 13,696
13,740 is the July 2006/March 2007 up trendline
13,750 is where it stalled in early December
13,930 is the late October peak
The July high at 14,022
14,088 is the early October closing high
14,198 is the October intraday high.

Support:
12,786 is the February 2007 peak
12,743 is the November low
12,518 is the August intraday low
12,250 from late March 2007 lows
12,050 from the March 2007 low

Economic Calendar

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

January 8
- Pending home sales, November (10:00): 0.6% prior
- Consumer Credit, November (3:00): $8.5B expected, $4.7B prior

January 10
- Initial jobless claims (8:30): 336K prior
- Wholesale inventories, November (10:00): 0.5% expected, 0.0% prior
- Crude oil inventories (10:30): -4.05M prior

January 11
- Export prices, December (8:30): 0.8%
- Import prices ex-oil, December (8:30): 0.7%
- Trade balance, November (8:30): -$59.5B expected, $-$57.8B prior
- Treasury budget, December (2:00): $52.0B expected, $42.0B prior