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InvestmentHouse Weekend Update:

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

- Stocks continue the upside reversal on the open, then reverse for a significant loss.
- Investors likely getting too hopeful this bounce is something more than a bounce.
- Big data week ahead as investors look to Fed to see if it is going to continue to 'do what is necessary.'

Stocks get a bit anxious to end the week after the big reversal.

The news was good on the earnings front and foreign markets were surging on the heels of the US gains. MSFT's results and guidance were pleasing; CAT talked of a 'very strong' back order situation, though that was outside of the US that was expected to have 'anemic' growth; HON, JNPR, JAVA, and BRCM all posted results that put investors in a positive mindset. Oil was higher ($90.80, +1.39) and gold was close to $1000 again, but that seemed okay too.

Stocks opened higher, but as anticipated Thursday night, after the big reversal and charge higher, the market hesitated ahead of the weekend, and indeed started to sell back almost immediately after the open. The indices had charged above the 10 day EMA on the open with DJ30 coming within 15 points of 12,500. Then they started to stall. As planned, we used that bounce to take some gain off the table and we also started working into some downside positions. As the session wore on the indices gave up the break above near resistance at the 10 day EMA and closed reversing from that move above that level. The market could still move higher after this pause; it sold hard and had a lot of downside pressure to let off. The action was still worth starting some downside positions, however, particularly with the week ahead chocked full of earnings, economic data, and the FOMC meeting on monetary policy which could likely disappoint the market with a 25BP rate cut given the talk of the Fed panicking over last weekend.

TECHNICALLY the action looked heavy on Friday. After the reversal the indices tested the 10 day EMA on Thursday and struggled. Friday they looked to be making the break on through that initial resistance, but after clearing it, they turned and closed lower. Many stocks showed the same heavy action at resistance after bouncing, i.e. rolling over after a gap higher or showing a doji on the candlestick chart.

INTERNALS: Breadth was negative but not as bad as the 1+% losses on the indices would suggest (-1.3:1 NYSE, -1.1:1 NASDAQ). Volume was lighter; after all of the massive trade on the week it was backing off Thursday on the upside move and Friday on the reversal. That indicates no major selling or dumping, just a loss of interest or buying strength after a wild week that used up a lot of adrenalin and ammunition.

CHARTS: As discussed above, the indices moved through near resistance at the 10 day EMA on the open but could not hold the move and reversed to close negative and below that near resistance. Bearish given the overall market downtrend, but not fatal for this rebound; after such a wild and sharp reversal the market could very well take a pause before continuing higher. It does look heavy, however, and not just the indices.

LEADERSHIP: It was a week that saw a lot of banged up stocks recover some from the blood-letting in the second leg lower in this selloff. While many were calling this a great time to buy some of these stocks, the patterns show a lot of technical damage, and after such huge runs in 2007 leading into the selling, a sharp plunge as we have seen likely won't be all the consolidating they need. Techs tried to make a comeback Friday, but again, they mostly look like oversold bounces. They gave up the gains despite MSFT's earnings. Healthcare stocks took a back seat on the week, struggling as the other sectors rebounded, but their patterns are still solid, and after this rebound they should resume their moves as money moves back their way. Outside of them, the leadership is very scattered, with most former leaders still in downtrends, just bouncing back up after harsh selling.

Quite a bit of positive talk to conclude the week that saw the market bounce.

On Friday we listened to a number of shows recapping the market week. We were frankly surprised by the amount of talk about the 'buying opportunity of a lifetime' or 'the opportunity of the century.' Why? Because if this market is truly factoring in a recession as it tends to do ahead of the actual fact, then we have likely still in the first phase of the market correction.

No doubt there was a sharp and steep decline in the market, and with earnings outlooks we are hearing thus far still positive, P/E ratios are much, much better than they were in 2000 when that market crash started. As we noted three weeks back, this markedly better posture will likely keep this bear market from getting too entrenched. In other words, there is not as much froth this time around to wring out of the market before it can advance again. Have to like that.

Still, the likelihood the Fed with its late stage aggressive rate action and the economic 'stimulus' package that has yet to be even submitted to Congress has already stemmed the tide of the economic slowdown is low. Proposed remedies and fixes are popping up faster this time around versus in 2000 when the Fed hiked right into the recession, and the faster the better as far as length of the economic slowdown. Nonetheless, what we saw last week was not the end of the selling that set up with those massive topping patterns on the indices, particularly the Dow. Three and one-half months of selling are not likely the full consolidation stocks require. For example, many agriculture stocks doubled or tripled on their runs. Two weeks of downside is hardly enough to set up a run to another double.

Even if for argument's sake Tuesday was the low (though as noted earlier in the week, the indicators, e.g. VIX, suggest it was just an interim bottom), the market is still going to have to at least consolidate some more and ultimately make a successful test of the Tuesday and Wednesday intraday lows.

Perhaps foreign economies will still move higher despite the fears that gripped the market early in the week that the US' troubles were the rest of the world's as well. Gold and oil recovered late in the week and as the earnings results and guidance are showing, companies with foreign markets to sell to are still churning and burning.

Back to reality, DJ30 did get close to consummating the selling portion of its big 7 month head and shoulders top. A month ago we discussed the Dow selling down to 11,250 or so in response to the size of the top. DJ30 hit 11,634 on the Tuesday intraday low; that is getting close and could have been enough to do the trick. More likely, however, it will test down to 11,300ish on the third leg lower after this bounce, and that finally may be the start of the bottom to the selling. It will still take time to rebuild a strong foundation after such a beating, but that does not mean that cannot be the bottom, particularly given the positives of good P/E ratios heading into this selling. Of course, that still means there will be more selling, and thus we will likely get the 'opportunity of a lifetime' or of the century once again before this is over and a bottom is set.

THE MARKET

MARKET SENTIMENT

VIX: 29.08; +1.3. Hit 37.57 on the intraday high Tuesday, and that was good enough along with the other indicators (new lows, put/call ratio, falling bullish advisors, etc.) to foster the rebound.
VXN: 33.81; +1.59
VXO: 32.56; +3.3

Put/Call Ratio (CBOE): 1.06; +0.17. Right back above 1.0 on the close after a 1-day dip lower Thursday.

Bulls: 41.6%. Sharp decline from 45.6% as it continues its plunge from 56.50 on the high (48.4%, 52.2%, 54.9% and 56.50%). Very close to the 40.6% hit on the last significant round of selling. A move into the lower 40's is a decline of significance. A bigger move is to 35% which is a big bullish indication. If bulls and bears kiss or better yet cross, that is very bullish. 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: 31.5%. Massive jump higher from 26.7% as it finally kicked into gear. It has made it over 30%, meaning it is getting into 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). Still a bit more work to do to really set a bottom, and that means more selling before it gets there.

NASDAQ

Stats: -34.72 points (-1.47%) to close at 2326.2
Volume: 2.637B (-11.96%). Volume fell as NASDAQ gapped then rolled over. If you have to have that kind of price action, then lower volume is at least decent.

Up Volume: 734.336M (-1.45B)
Down Volume: 1.873B (+1.14B)

A/D and Hi/Lo: Decliners led 1.14 to 1. Negative, but did not match the ferocity of a 1.5% loss in the index. As NASDAQ 100 was down 2.07%, that shows the declines were in the big techs and thus the narrow breadth. A fast change from the large cap techs leading higher on Thursday.
Previous Session: Advancers led 1.34 to 1

New Highs: 42 (-1)
New Lows: 114 (-16)

NASDAQ CHART: Click to view the chart

NASDAQ gapped through the 10 day EMA and above the August intraday low, just clearing 2400 on the high (2408). That put NASDAQ at better than a 2% gain, led by those large cap tech stocks and MSFT's earnings. It did not take long for the selling to enter, and a steady, session long decline set in. It sold to the session low on the close. Not great action on a rebound in a very weak market.

NASDAQ 100 (-2.07%) was leading higher early on with a 2+% gain and then rolled over at resistance for a 2% loss. Those are not just benign ups and downs as an index consolidates a run higher. Even though volume was lower, sellers used the gap to sell. The key is whether the sellers come out in more numbers to start the week.

NASDAQ 100 CHART: Click to view the chart

SOX CHART: Click to view the chart

SP500/NYSE

Stats: -21.46 points (-1.59%) to close at 1330.61
NYSE Volume: 1.885B (-12.15%). Volume was down on NYSE as well though still above average. Would be hard to top the volume earlier in the week in any case.

Up Volume: 501.38M (-877.696M)
Down Volume: 1.365B (+575.878M)

A/D and Hi/Lo: Decliners led 1.33 to 1. Modest declining breadth as well, meaning it was the large caps again doing the damage.
Previous Session: Advancers led 1.78 to 1

New Highs: 21 (+5)
New Lows: 84 (+5)

SP500 CHART: Click to view the chart

SP500 rallied up through the 10 day EMA on the high, hitting the August intraday low (or damn close to it) on the high (1371 is August; 1368 on the high). That also came within a whisker of the March 2007 lows at 1374. It did indeed find some issues at those points as we expected. The reversal was a bit more virulent than expected, however, and that casts some question on whether it can make it to 1400 as we were looking for. Indeed it was enough for us to take the SPY upside trade off the table and start picking up some on the downside.

SP600 (-0.63%) tapped at the 18 day EMA for the second straight session and then turned lower to again close below the 10 day EMA. Certainly has the look it is running out of gas and we took some downside positions on the move.

SP600 CHART: Click to view the chart

DJ30

Same kind of action, rallying through the 10 day EMA and coming within 15 points of the 12,500 resistance (the August intraday low is at 12,518) before reversing for a triple digit loss. Just another 285 point swing on the Dow. Volume was up, but that was MSFT, HON, and CAT as a result of their earnings. Still, it shows some distribution as it reversed at near resistance, not the best indication the rally will continue.

Stats: -171.44 points (-1.38%) to close at 12207.17
Volume: 393M shares Friday versus 387M shares Thursday. Goosed by the earnings noted above, indicating some distribution.

DJ30 CHART: Click to view the chart

MONDAY

After a quiet week of at least scheduled economic data (outside the Fed's intermeeting rate cut, worries of a European slowdown, massive fraud in European markets), this coming week is laden with reports and decisions. The FOMC decision on Tuesday is tops, but Q4 GDP, income and spending, PCE inflation, Chicago PMI, jobs, and the national manufacturing report are just some of the highlights. And of course, lots and lots of earnings. Lots of earnings.

If the earnings continue to come out with strong guidance, perhaps the market can reverse the Friday reversal and selloff and continue the relief rally. It didn't work to end last week as sellers used the good news to sell into. As noted, at least volume was lower on the reversal so there was no out and out dumping.

The marquee event will be the Fed decision. There was a certainty of another 50BP coming, but as the market recovered, a stimulus package agreement was announced, and the Fed was chided for overreacting to Europe's early week woes, that certainty slipped closer to even money.

Problem is, this market rebound was not the end of anything other than the second leg of selling in this initial selloff. As usual it bolstered some false hope about the market recovering and moving into a new bull phase ('buy of the century,' right?), but even if Tuesday and Wednesday were the bottom, there will still be a test of that down the road. Deep down the market knows there is still trouble out there despite the better feelings to end the week and talk of a bottom on Wednesday. Thus if the Fed does what the Fed Funds Futures contract is suggesting, i.e. a 25BP rate cut, the market is likely to be disappointed, and any bounce that may resurrect itself after the Friday reversal will likely get sold off. Even if the market does not bounce, 25BP is a disappointment and won't lead to any new upside.

Thus the market is or at least the psychology could be setting itself up for disappointment. This rebound looked very strong in itself and with the sentiment and secondary indicators to just fizzle out after a couple of sessions. If it does, that is a testament to how pernicious the market sees the economic slowing despite Fed rate cuts and a promised stimulus package (of course the market may not view this as very stimulating).

In our book it is not a matter of whether this past week was the bottom. It wasn't any bottom that marked no more selling. The question near term is whether the market continues lower from the Friday reversal or regroups and continues the relief move higher before stalling. Either way we are going to continue to look for more downside to set up as the market moves higher or continues the selling. If it continues then we can jump on additional downside. If it bounces some more we will look for the stall and then buy in at that point. In our view nothing has changed the downtrend at this juncture, and thus even if the relief bounce continues there is not a lot of room left before it peaks out given the size of the gains on the reversal.

Support and Resistance

NASDAQ: Closed at 2326.20
Resistance:
2340 from the March 2007 low
2370 from the April 2006 peak
The 10 day EMA at 2375
2379 from the October 2006 peak
2386 is the August intraday low
The 18 day EMA at 2430
2451 is the August closing low
Some modest resistance at 2500 from interim August lows.
The 50 day EMA at 2544
2545 is the August 2004/April 2005/October 2005/March 2007 up trendline
2550 to 2540 from May/June consolidation and the November lows

Support:
2315 to 2300 is a range of support from old peaks
2275 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2216 from August 2005 peak
2175 from the December 2004 peak

S&P 500: Closed at 1330.61
Resistance:
1356 is the 10 day EMA
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1380 is the 18 day EMA
1406 is the August and November 2007 closing low
1408 is a longer term trendline from the August 2003/September 2004 lows
The 50 day EMA at 1429
1430 from the August interim lows
1440 - 1437 from January and March peaks
1459 is the February peak
1463 is the June/July 2006 up trendline
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1487

Support:
1325 from May 2006 peak prior to the summer 2006 correction
1311 is an ancient trendline
1305 to 1302 from an August 2006 peak and matches a range of support from March and April 2006.
1294 from the January 2006 peak
1288 from June 2006
1280 from June and August 2006
1255 from June 2006 lows

Dow: Closed at 12,207.17
Resistance:
The 10 day EMA at 12,364
12,518 is the August intraday low
The 18 day EMA at 12,554
12,743 is the November low
12,786 is the February 2007 peak
12,845 is the August closing low
The 50 day EMA at 12,955
13,050 to 13,000 range
13,092 is the December low

Support:
12,250 from late March 2007 lows
12,050 from the March 2007 low
11,670 is the May 2006 intraday high; 11,642 closing
11,317 is the March 2006 peak
11,228 from a July 2006 peak

Economic Calendar

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

January 28
- New home sales, December (10:00): 645K expected, 647K prior

January 29
- Durable goods orders, December (8:30): 2.0% expected, -0.1% prior
- Consumer confidence, January (10:00): 87.0 expected, 88.6 prior

January 30
- ADP employment, January (8:15): 40K prior
- GDP advanced, Q4 (8:30): 1.2% expected, 4.9% prior
- Deflator (8:30): 2.6% expected, 1.0% prior
- FOMC policy statement (2:15)

January 31
- Employment cost index, Q4 (8:30): 0.8% expected, 0.8% prior
- Personal income, December (8:30): 0.4% expected, 0.4% prior
- Personal spending, December (8:30): 0.1% expected, 1.1% prior
- Core PCE, December (8:30): 0.2% expected, 0.2% prior
- Initial jobless claims (8:30): 315K expected, 301K prior
- Crude oil inventories (10:30): 2.29M prior

February 1
- Non-farm payrolls, January (8:30): 55k expected, 18K prior
- Unemployment rate, January (8:30): 5.0% expected, 5.0% prior
- Hourly earnings (8:30): 0.3% expected, 0.4% prior
- Average workweek, January (8:30): 33.8 expected, 33.8 prior
- Construction spending, December (10:00): -0.5% expected, 0.1% prior
- ISM Index, January (10:00): 47.5 expected, 47.7 prior
- Michigan sentiment, January revised (10:00): 79.0 expected, 80.5 prior