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InvestmentHouse Weekend Update:

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

- MSFT ignites enthusiasm, jobs report tamps it out, but new money to start the month wins out.
- January jobs slide negative as January weekly claims apparently way off.
- ISM comes right back above 50 after a one-month hiatus.
- Impressive rebound pushed by Fed rate cuts and new money at turn of the month, but the next test is still coming.

Market once again pulls its chestnuts out of the fire.

Once again it looked as if the techs were going to rein in the market's advance. GOOG earnings were a miss and it was looking down 10% in the pre-market. Then MSFT, already interested in YHOO as evident a year ago when they tried to reach a mutually agreeable deal, tried a different tactic, mounting a tender offer boasting a 61% premium for YHOO shares.

Microsoft tender for Yahoo! not a sign of a new wave of deals . . . yet.

That got a lot of folks lathered up, believing that M&A driven by value buying was back and that waves of deals would start to emerge. In every economic breakdown there are sectors and companies therein that get hit and that become consolidation or takeover targets. In this economic slowdown it is the mortgage insurers and bond insurers as well as other financial institutions that got caught naked when the tide went out. Tech is lower, but it is not in the toilet, i.e. not the problem in this slowdown as it was in 2000. No, it is the financials, particularly those deep in the housing slump that are collapsing and in real danger of disappearing as did so many techs and internets in the early 2000's. At this juncture, however, there are no deals, no rescues, bailouts, buyouts or even failed attempts in the financial sector. There are rumors to be sure; each week we hear that Wilbur Ross and/or Warren Buffett are ready to swing in like vultures to feed on the carrion. Each week nothing happens. Even as bad as it is in the sector, they are waiting because with some S&P credit downgrades it is going to get a lot worse.

With things that bad in the financials but still no buyouts, the Yahoo! hostile offer doesn't represent the start of a new wave of tech takeovers. What it represents is a defensive (and somewhat offensive) move by MSFT to compete with GOOG, trying to take the fight to GOOG on search before GOOG starts giving away free operating software as has been discussed for a few months all around the tech world. MSFT is making a pre-emptive move to take the fight to GOOG versus getting further flanked by it. Kudos. Frankly I still don't know why GOOG just didn't go out and buy YHOO! and take it off the market before MSFT could get it. What a coup that would have been, effectively shutting MSFT off from search and allowing GOOG to go with a full out assault against MSFT's only real business, its operating system and Office suite.

Not that the financial sector is not close to deals. Friday there were reports that a consortium of banks in New York were working together to bail out the mortgage and bond insurers. More talk like that and Ross and Buffett will have to make their moves. When that happens the ball is rolling and there really will be a wave of buyouts and takeouts, and that really will mark a bottom in the financial slump, at least from the market's view.

Jobs take back market's Yahoo!

Whatever the MSFT/YHOO bid really means, the market liked it and futures were sharply higher. Then the jobs report came out as we anticipated, with a net loss (-17K). That popped the early euphoria bubble as the futures came back to flat and then modestly negative from up over 100 on DJIA. The bulls were lucky the market had the MSFT deal in the hopper; it boosted futures and acted as a buffer, giving the market some safety margin to absorb the weak jobs report.

Stocks started flat as a three day old Coke and moved slightly lower, but then, just as in the prior sessions the market started a comeback. New money moved in for the new month and stocks surged to positive with DJ30 hitting next resistance at 12,750. The ISM came out better than expected, moving back over 50 (50.7). Instead of furthering its gains the market rolled over and sold back past the opening prices, once again negative on the session. Looked as if the weak jobs report was winning out. But once more a slow steady rebound began, and it continued right on into the close, moving back to the early morning highs as the small caps, large cap financials, and retailers led the way. By the close the market was solidly higher, capping the best weekly gain since 2003. Ironic, isn't it. This strong week follows the worst month for NASDAQ in 17 years. The definition of volatility. 125BP in rate cuts in just 9 days can indeed have an impact.

TECHNICALLY the market continued to show inner strength after appearing gutted following the FOMC meeting. It fought off bad news the last two sessions of the week to close higher. It showed dogged determination to move higher in the face of bad news (AMZN earnings, GOOG earnings, jobless claims, jobs). As noted earlier in the week, a couple of weeks back the market would have soiled itself then curled up in the fetal position and whimpered at this kind of news. Instead it is overcoming the issues and moving higher to the close. Much more bullish though there were other factors at work such as month end positioning and covering on Thursday, and new money going to work Friday. The Fed brought some new money in no doubt, but this coming week, after 1200 points upside in the Dow, we see how much conviction there is in that new buying.

INTERNALS: Mostly strong but there were some mixed signals. Breadth was great on both NASDAQ (2:1) and NYSE (4:1) as the move upside Friday and for the week was broad, telling you there was more than just short covering. Small caps like the prospect of aggressive stimulus leading to a renewed economic expansion, and they surged as a result. Volume was a different story. It was lower on NYSE, indicating all of that surge in the small caps was not backed by a lot of new buyers; that suggests short covering in those beaten up stocks as well. NASDAQ volume spiked over 3B shares, giving the impression of a surge in buying. It was, but just with respect to one stock: YHOO. Its average trade is 28M; Friday it traded 438M, over 15 times average. At best volume would have matched Thursday levels. Setting aside the extra YHOO trade, volume did not pull in as much as on NYSE, but it was not the powerful surge it looked to be at first blush.

CHARTS: More gains across the board as the indices moved through near resistance last week, moving up to the next level Friday. Friday was interesting in that regard: the indices rallied early to that resistance and then sold off even as good ISM data hit. Then it recovered over the entire rest of the session but could not surpass the early highs that stalled at that resistance. We heard comments about a knifepoint turn that made a bottom in the market. No doubt there was a knifepoint turn, but that are never bottoms in and of themselves. There has to be some sort of basing attempt, either double bottom as in traditional bottoms such as 2002, or something like a reverse head and shoulders as in August 2007. It has been a heck of a bounce, but history says there will be a test off of this rebound from such harsh selling.

LEADERSHIP: The leadership for the day was again in the retailers and financials as the big funds and institutions push money into these beaten down areas now that the Fed has moved its rate down more in line (though still behind) market rates. These areas tend to perform quickly after cuts; we picked up HD and TJX because of this. As discussed all week, however, most of what we are seeing are trend reversal moves though there are a few good patterns emerging. Outside of these moves the action is mostly just rebounds from wicked selling. They were technically ripped open and are making a reflex bounce back up. That is not how you have new, sustained bull rally moves. As with the indices they need to a test of some form as part of a new base (double bottom, reverse head and shoulders, cup with handle) to set the foundation for a sustained run higher. That means some more downside and lateral movement still to come. The knifepoint turn might market the bottom more or less, but it still has to be proved up with some kind of base that either tests that level again either fully or as part of a larger basing pattern.

THE ECONOMY

January jobs turn net negative.

The 301K weekly jobless claims the first three weeks of January were, in light of the January jobs report, grossly off. Thursday saw a surge in jobless claims to 375K. From 300K to 375K in a week. Something was wrong, and it turns out it was the seasonal adjustments skewing the results.

How do you know? The January jobs report fell by a net 17K jobs. If weekly claims were truly 300K, jobs would have been much stronger. So, can't trust the weekly numbers now either.

The 17K was well off the 70K expected and the 82K from December. December was written sharply higher from the 18K originally reported. That was good, but then November was written down sharply, basically washing out the December revision. That left January still looking crappy.

It is clear that the declines in jobs is not something anybody wants to see, but there is a historical point to make. The last two recessions occurred at the time the jobs market showed its first back to back decline in jobs. In other words, the economy was already in recession when the monthly jobs reports showed two consecutive declines. January chalked up the first, and as jobs lag the rest of the economy, another negative month is highly likely given the Fed's stimulus has not even hit the economy yet in a manner that would induce companies to hire. Even though Q4 GDP scratched out a modestly positive reading (0.6%) there are still two revisions to come and we could see it negative by the final revision.

Of course if we are in the textbook definition of recession right now, as we discussed last week, that means the cycle is already well along its way and there is a lot of stimulus in the pipeline and more to come from Uncle Sam. As the market looks ahead many months down the road, this low hit two weeks back could be the bottom for this selling, just waiting for the next leg lower to confirm. That will have to play out in the normal course of these bottoming events, but the odds are moving closer to even money that it could be the bottom versus selling off to a significant new low.

National ISM rebounds back above 50 . . . assisted by a change in the calculation.

The rebound was a surprise, moving up to 50.7 from a one-month dip below the breakeven point at 50 (48.4 in December). The move was assisted by a new weighting where five key components are now equally weighted. That takes out some of the volatility injected by the formerly heavily weighted new orders.

In any event, the revisions make comparisons harder, but if you apply the revisions backward, the past five months show a very tight 48 to 51 range with the index hugging the 50 level month after month. Very flat, indicating little growth. One thing to note from January: prices paid surged to 76.0 from 68.0 in December.

You need to keep in mind that the ISM is just another survey; it is not based on any hard data other than what the purchasing managers surveyed have in their possession. What the range over the past six months tells us (the revised range, that is) is that companies are not greatly enthuses about the future as their spending plans are just barely keeping the manufacturing sector expanding.

Finally, one new question was added to the survey in January: is your company finding it difficult to obtain financing it needs to conduct business? Nearly 90% said they had not trouble finding the financing they needed. While the commercial paper market has dried up to a certain extent, companies have shifted to borrowing from financial institutions, making use of the lower rates available.

THE MARKET

MARKET SENTIMENT

VIX: 24.02; -2.18
VXN: 28.25; -2.83
VXO: 25.64; -2.69

Put/Call Ratio (CBOE): 0.82; -0.13. Four straight sessions below 1.0 on the close. That is okay. The put/call ratio did its initial work the past month with weeks of closes above 1.0.

Bulls: 40.2%. Down yes, but the steep drop seen the previous weeks slowed (41.6% last week). Before this past week there were sharp decline from 45.6% the week before and 56.50 on the high (48.4%, 52.2%, 54.9% and 56.50%). Has surpassed 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: 32.2%. Up, but as with bulls, the strength slowed some as it managed less than a point gain from 31.5% after the massive jump higher from 26.7% the prior week. It is over 30%, meaning it is in 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: +23.5 points (+0.98%) to close at 2413.36
Volume: 3.104B (+8.04%). Volume exploded over 3B but the entire increase was due to the volume surge related to GOOG and YHOO and the takeover bid. Volume did accelerate to the end of the week after very low trade on the initial gains, but a lot of that dealt with end of month shuffling given the harsh selling and rebound and then the new month getting underway.

Up Volume: 2.258B (+65.125M)
Down Volume: 823.961M (+190.338M)

A/D and Hi/Lo: Advancers led 2.07 to 1. Some nice breadth Thursday and Friday on the upside for a change shows a bit more than just typical short covering.
Previous Session: Advancers led 2.15 to 1

New Highs: 62 (+9)
New Lows: 92 (-55)

NASDAQ CHART: Click to view the chart

Another gap higher, but the index was still under pressure even with the MSFT/YHOO potential buyout. It tested and held the 10 day EMA on the low and then moved through 2400 and the 18 day EMA (2407). Next resistance is 2440 from the early January lows and 2451 from the August closing low. After that you pretty much have to get to 2500 for next resistance. NASDAQ rallied 200 points in the November to December bounce from the initial leg lower, and it has put in 200 points on this bounce now. Looks as if it still has a bit more upside in it toward that 2440-50 level, but it could reverse quickly off this bounce now that the end of month/beginning of month transition is over.

NASDAQ 100 (+0.75%) was up but it tapped the 18 day EMA and backed off. Right at resistance and struggling as the large cap techs appreciably lagged the market.

SOX (5.77%) finally made its move, breaking sharply higher from its 3 week lateral, tight consolidation. Strong move with several chips forming reverse head and shoulders bases over the past three weeks and ready to break higher. After a long, long drought, some money is moving in here in very much the same way it is moving into the beaten down retailers.

NASDAQ 100 CHART: Click to view the chart

SOX CHART: Click to view the chart

SP500/NYSE

Stats: +16.87 points (+1.22%) to close at 2413.36
NYSE Volume: 1.788B (-16.62%). Volume fell back sharply from the Thursday end of month shuffling volume. Still above average and matching the Wednesday reversal trade, but we note that most of the volume for the week was not positive. That leaves question marks re sustainability of the move as it reaches this next resistance.

Up Volume: 1.498B (-295.396M)
Down Volume: 283.795M (-92.954M)

A/D and Hi/Lo: Advancers led 3.96 to 1. Really strong breadth as the small caps surged higher yet again, relishing the Fed rate cuts.
Previous Session: Advancers led 2.79 to 1

New Highs: 49 (+18)
New Lows: 57 (-35)

SP500 CHART: Click to view the chart

SP500 rallied on through the 18 day EMA and is just below next resistance at 1400 to 1407 (August closing low, November closing low). As noted above, volume was not that powerful on the move outside of Thursday and its end of month action. Friday was decent, but it was even lower than the Wednesday level. Moving higher driven by the reversal and the added Fed rate cuts. It has put in 125 points off the low on this run, a bit more than in the November/December rebound from the first down leg. With this next level of resistance at hand and the questionable price/volume action on the week, this coming week likely will see another pullback begin, though the ferocity likely won't have the intensity of the second leg given the Fed action in the mix now.

SP600 (2.43%) really screamed again with another 2+% session. It moved through the 50 day EMA on the close as the small caps are blowing the other indices out of the water in terms of percentage gains on the week. It has bounced more than the bounce after the first leg and it has cracked key resistance at 382. Lots of momentum as these heavily beaten up stocks rebound sharply.

SP600 CHART: Click to view the chart

DJ30

A big week for the blues as well as they continued the rally, moving through 12,500 that almost stalled it out again, climbing to 12,750 and resistance from the August and November closing lows. This is the next major checkpoint for the Dow on this rebound, the point we thought would cap it if it could make it through the 12,500 resistance. It did and it is here now with similar volume to NYSE, i.e. not 100% convincing it is all long buying. Strip out the MSFT volume on Friday (291M) and trade was pretty darn light. It can coast a bit higher toward the 50 day EMA (12,880), but we are looking for a rollover in this range.

Stats: +92.83 points (+0.73%) to close at 12743.19
Volume: 379M shares Friday versus 394M shares Thursday. Again, if you take out MSFT's 291M shares you have very low trade on the session.

DJ30 CHART: Click to view the chart

MONDAY

A boatload of earnings next week; it is not just a January event as you know. In addition a lot of economic data as well, but with the Fed in the bank and the jobs and ISM reports out as well, the data won't keep the market hanging on each report.

This past week the market had substantial reasons to move higher, and it did just that, while also overcoming some news that would have left it crumpled earlier in the month. That does not mean there won't be another test; there will be. When you have these kind of reversals off some really ugly selling, as the rally continues investors and pundits get more and more attached to the move and view it as the bottom. A strong rip off the bottom and continued momentum dulls the memories of the selling. There is always, however, some form of a test and basing before the real bottom is hit. It is a familiar cycle: sharp selloff on high spikes in fear indicators, recovery that has more momentum than expected, fear turns to hope, rug yanked out again in a move that really gets the fear levels to where they need to be. This occurs with our without the Fed overlay.

Remember: the actual recovery comes well after volatility spikes sharply higher for a period of time. For a major bottom it spikes over a period of weeks. The market can jump higher near term off of those, but it does not make the big turn until several weeks later. With the kind of selling seen here and the major economic slowdown this time versus say the interim selloff in the summer of 2007 that was actually the start of the decline in this bear market, there will likely be another spike in VIX that will be more sustained in the neighborhood of a week or so. Then the market bases after that selling and makes the move higher from there.

As noted during the week, this action seen in response to the FOMC cuts may mean that the bottom will indeed come sooner versus another deeper selloff after the next leg lower. The Fed is on the game earlier, P/E ratios are already at good levels, the economy has already turned lower and stock prices are not split wide open and falling to pieces. Many more positives than in 2000-2001.

Nonetheless, there is still work to be done before this is over, and a big part of that work is a test of some sort of the January low, either a test in a double bottom form that holds near the prior low, or something lower that will require a bit more time to complete the basing process as it requires another bounce and test.

How do we play this? First, we see some very interesting upside patterns still; money is moving into areas in a big way and we bought some of that Thursday and Friday, and we see some more that have set up bases unlike much of the market. Outside of that rather narrow range we use the ride higher on this rebound as an entry point for what will be a longer drop now even if it holds at the January lows in a more traditional double bottom. As noted above, the indices are at next resistance and we are watching to see if they roll over at that level. That will give us a good ride lower, and if it goes further, even more so. After that ride to the January low, however, the market will really try to put in a bottom to this selloff based on the Fed action, fiscal stimulus, P/E's, etc. We will watch to see if stocks can set up good bases and thus shape up for some good buys when the test of that first low is over. Strong stocks should hold the line somewhat on the next leg lower, using that to work on their bases, i.e. slow accumulation as money moves back in off the sidelines in anticipation of a break higher. If they set up some nice patterns they will be ready to surge when the market does put in the bottom. They will be the early leaders and we want to be in them.

Thus even now we are scanning the market for bases that are forming up though in reality it is a bit early for that without seeing how they hold up on the next leg lower. In any event, this is how each selling episode comes to an end, and we want to indentify the stocks that have set up the foundations for strong runs when the market recovers, as they will be the leaders and provide large and sustained moves when this market selling runs its course.

Support and Resistance

NASDAQ: Closed at 2413.36
Resistance:
2451 is the August closing low
Some modest resistance at 2500 from interim August lows.
The 50 day EMA at 2513
2540 is the November closing low
2547 is the August 2004/April 2005/October 2005/March 2007 up trendline
2550 to 2540 from May/June consolidation and the November lows

Support:
The 18 day EMA at 2407
2386 is the August intraday low
2379 from the October 2006 peak
The 10 day EMA at 2377
2370 from the April 2006 peak
2340 from the March 2007 low
2315 to 2300 is a range of support from old peaks
2278 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 1395.42
Resistance:
1406 is the August and November 2007 closing low
1409 is a longer term trendline from the August 2003/September 2004 lows
The 50 day EMA at 1418
1430 from the August interim lows
1440 - 1437 from January and March peaks
1459 is the February peak
1466 is the June/July 2006 up trendline
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1484

Support:
1376 is the 18 day EMA
1374 is the March 2007 closing low
1370 is the August 2007 intraday low
1366 is the 10 day EMA
1325 from May 2006 peak prior to the summer 2006 correction
1315 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 12,743.19
Resistance:
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 12,881
13,050 to 13,000 range
13,092 is the December low
13,250 from price points from June through December 2007
13,362 is the 200 day SMA

Support:
The 18 day EMA at 12,556
12,518 is the August intraday low
The 10 day EMA at 12,498
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
11,634 is the January intraday low
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.

February 1


- Non-farm payrolls, January (8:30): -17K actual, 70K expected, 82K prior (revised from 18K)
- Unemployment rate, January (8:30): 4.9% actual versus 5.0% expected, 5.0% prior
- Hourly earnings (8:30): 0.2% actual versus 0.3% expected, 0.4% prior
- Average workweek, January (8:30): 33.7 actual versus 33.8 expected, 33.8 prior
- Construction spending, December (10:00): -1.1% actual versus -0.5% expected, 0.1% prior
- ISM Index, January (10:00): 50.7 actual versus 48.4 expected, 48.4 prior (revised from 47.7)
- Michigan sentiment, January revised (10:00): 78.4 actual versus 79.0 expected, 80.5 prior

February 4
- Factory Orders, December (10:00): 2.0% expected, 1.5% prior

February 5
- ISM Services, January (10:00): 53.0 expected, 54.4 prior

February 6
- Productivity, Q4 preliminary (8:30): 1.0% expected, 6.3% prior
- Crude oil inventories (10:30)

February 7
- Initial jobless claims (8:30): 375K prior
- Pending home sales, December (10:00): -2.6% prior
- Consumer Credit, December (3:00): $8.0B expected, $15.4B prior

February 8
- Wholesale inventories, December (10:00): 0.4% expected, 0.6% prior