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InvestmentHouse Weekend Update 2/8/08

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

- Large cap tech dead cat bounce ends a down week.
- Only OPEC, and Congress, would consider raising taxes heading into a recession.
- Wholesale inventories piling up in another indication of an economy in trouble.
- Market firmed at the end of the week but that is not likely going to change the downtrend.

Techs try to lead a Friday rebound from a big down week.

Friday morning the futures were lower to flat as the market, after a Thursday bounce, struggled to advance the gain. There were the usual suspects once more to mull over. Earnings and the stragglers with same store sales were not bad; TIF raised its 2008 guidance, GLW affirmed its guidance, MCD reported solid sales in Europe, ATVI beat, and BRCM beat as well on the back of strong overseas sales. On the downside, De Beers, the diamond monopoly boys, reported a 2% sales decline on lower demand; gee, might be time to go buy some stones. AMZN helped spur the large cap techs with a $1B stock buy back announcement. MBI (mortgage insurer) increased its stock offering to $1B from $750M in what will likely be a futile attempt to raise enough cash to keep its debt rating.

The market summed up all of this data with a shoulder shrug; 'sluggardly' we called it in an afternoon alert. It started soft then moved positive and then rolled over and looked as if there was going to be blood at the close. After lunch, however, some shorts started to cover and stocks 'rallied' in the afternoon. A half-hearted effort at best, but it was enough to close the market mixed on the day but still down sharply for the week thanks to that early week dive lower.

TECHNICALLY it was another volatile day though the Dow only swings 175 points or so high to low. The action was up and down with that mixed close in what was really a nothing session. Sure some look at the bounces in the tech big names and find hope, inspiration, salvation - - the usual misleading emotions - - but the big names have been slaughtered. Any bounce is just that, a bounce. That short covering did, however, salvage what was shaping up to be a very ugly day.

INTERNALS: Volume and breadth matched the ho-hum performance in the indices with volume fading back below average on both NASDAQ and NYSE. Whatever bounce NASDAQ mustered, it was on low trade as the large cap techs bounced from their selling on some short covering and traders looking to play that move higher. Breadth matched the lack of enthusiasm, coming in negative on both NASDAQ (-1.3:1) and NYSE (-1.5:1). Very narrow gains in those sectors and indices that did move higher. The shorts were covering on the big techs while some other sectors found some buyers (e.g. metals, energy); most of the upside action was not due to a new influx of buyers.

CHARTS: The week was a down one, a big down one for the Dow, enough to draw comparisons on the financial stations to bad weeks in years past. The losses were at the start of the week with Thursday and Friday spent trying to bounce or turn the tide, but it was a half-hearted effort at best with not all indices participating. There was some bouncing late in the week, but none of the indices could even make it to near resistance at the 10 day EMA. Maybe they can put up some better numbers to start next week and try the 10 day EMA, but, as said all too often last week, we are still looking for a further test lower on this the third leg of the initial selloff in this recession-driven downdraft. The question remains if this third leg will be just a test of the January low or continue on down, indicating much more economic weakness.

LEADERSHIP: There was again some leadership Friday just as there was all week. There was a twist, however. Earlier in the week the airlines were up on the declining oil prices and the speculation of consolidation in the sector. Metals were stronger, and not just gold; steel picked up the ball to end the week. Energy was stronger again, picking up from some of the strength on Thursday when those stocks reversed from some intraday selling. With the OPEC nonsense regarding production cuts ahead, energy had its reason to rebound. Large cap technology, as noted above, bounced back from getting body slammed. Even with this false hope in techs, all week saw some interesting patterns trying to shape up as a decent number of stocks are trying to form up bases during this market weakness, i.e. not plunging lower at a 45 degree death plunge, but working in an orderly manner and constructing a good foundation for another move. In addition, some of the old leaders are emerging once more into good patterns. MA, POT, CLF, ISRG are forming up well. With this improvement in some patterns that leaves the test of the January lows as the important inflection point as indicated last week.

THE ECONOMY

What do OPEC, Congress, and the Fed all have in common? They talk a good game but cannot play a good game.

Not too long ago Congress was talking of the need to raise taxes even as it was clear to those paying attention that there was serious trouble ahead. As we noted in the second half of 2005, the housing market peaked in May of that year, and there was already trouble showing up as lenders were using some insane tactics such as no money down, no credit checks, etc. Even as the first sub-prime issues started to surface and there were definite signs the economy was slowing (no recession worries, but definitely slowing), many in Congress were talking tax hikes. Fortunately that movement was shouted down before it gathered any strength. Many pointed out only Congress would talk of tax hikes just as the economic cycle peaked. Out of touch, foolhardy, downright stupid; all were used in describing the idea. Even Congress was able to get over the itch for more dollars before it repeated the mistakes of the past.

OPEC may not be so clever. Friday OPEC announced that it was likely to cut production in March in order to prop up oil prices above $80/bbl. Above $80. Back in 2006 OPEC worried that prices at $50/bbl would cause a recession. When oil moved to $60 it was still worried. Then $70, $80 and on to a brief tryst with $100. Along the way, blinded by all of the dollars pouring in making all kinds of capital and political moves possible (e.g. the marked increase in bravado of Venezuela's Chavez with each $10 rise in oil, the recalcitrance of Iran as oil prices climbed), OPEC is forgetting what happens when oil gets too high. Yes while many economies are no longer as oil dependent and have shown resilience as prices climbed, OPEC has forgotten the lesson clearly pointed out in 'The Matrix Reloaded,' i.e. cause and effect. At some point, even with improved efficiency and less reliance on oil, prices become too high and cap economic activity.

Every time OPEC forgets this link between price and world economies and gets too greedy, economic activity declines and along with it the amount of oil used, oil prices, and ergo oil profits. When the west slides into recession, OPEC suffers as well. And while the US may be more efficient with oil use there are developing nations in the position we were in back in the 1940's and thereafter when we used a lot of oil for our industrial development. Just look what is happening now: the US is basically in recession, the UK is about six months behind us, and Europe is heading there as well. It is not only oil of course, but oil is a key player in the story because prices have been so high for so long that the cumulative impact is adding to the other negatives. Consumer sentiment polls put nearly $3/gallon gasoline as a big albatross around consumers' necks. Prices have been high enough for long enough and they are taking their toll.

This latest gambit for more green shows OPEC's clouded memory. It is addicted to high prices as much as we are addicted to the oil it sells, the foreign goods we buy, and the foreign currency needed each month to support our habit. The money, as noted above, provides the means for capital improvements in their countries, and it allows those so desiring to make things more difficult for the west as the profits help fund nefarious activities.

OPEC is beguiled by the huge dollar train rolling in, and that is luring OPEC into making bad economic decisions such as this proposed production cut that jumped oil prices that were about to hit $80 up to 91.69, +3.58, on the Friday close. In short, OPEC is trying to curtail a slide in prices caused by the fear and the reality of slowing world economies by raising prices. That is the same as Congress raising taxes in a recession in order to increase declining tax revenues due to slower economic activity: it only drives revenues lower. Cutting production to drive prices higher will ultimately only drive prices lower as world economies suffer further under the increased burden.

In this sense OPEC is very much like the Fed. The Fed always starts out a rate hiking campaign saying it has learned from the mistakes of the past, of hiking and hiking without really considering what the economy is showing, hiking the economy into recession. They start carefully and thoughtfully, but toward the end of the campaign they become impatient at the lack of apparent impact (even though they know it takes a long time for hikes to hit the economy) and start hiking faster and harder. Finally the market knuckles under all at once and things collapse even as the Fed is ready to hike again (see Greenspan Fed, first half of 2000). OPEC talked a good talk of worry about prices moving higher, but now it has them mainlining into its veins and it likes it. It has forgotten there are no endless spigots, that the well, so to speak, can run dry. The last thing the world economy needs is oil spiking higher to $100 even as these credit issues in the US and now Europe spread across the globe.

Wholesale inventories rise. That will boost Q4 GDP revisions, but it is not a good thing.

In the weird world of government calculations, a build up of inventories is considered a good thing and is added to GDP calculations. Sure inventories represent economic activity in the sense they were made, but as is often the case, rising inventories also mean something is wrong.

December, not January, but back in December, inventories rose 1.1% versus the 0.3% expected and 0.8% in November. That can mean that companies are ramping up production as the economy improves, but we know that is not the case. We are on the backside of an expansion, and inventories are rising because buying is falling, leaving more 'stuff' left sitting around. The proof is in the sales: they fell 0.7%; when you don't sell what you make, inventories rise if there is no corresponding decrease in production. Now up until recently sales were pushing past inventories. That trend appears to be ending with sales now declining, leaving more inventory looking for a home.

Fortunately, inventories are still much lower than the prior recession that was truly painful as literally hundreds of billions of dollars of inventories was written off as worthless junk. The inventory to sales ration remains very low, meaning inventories are lean heading into the slowdown. We cannot say enough about what a positive that is as it really helps in the recovery as companies were not burned by the inventory overhang. That along with the overall low P/E ratios, relatively quick Fed action bodes better for this recession than the last.

THE MARKET

MARKET SENTIMENT

VIX: 28.01; +0.35. Even with the dump lower Tuesday, VIX never crossed over 30 on the week. It came close on the weak Thursday open, but it never made it. We are expecting another big spike in VIX on another selloff in the market. After that, then we can look for the market to make its bottom several weeks down the road.
VXN: 30.08; -1.48
VXO: 30.42; +0.81

Put/Call Ratio (CBOE): 1.15; +0.02. Four consecutive sessions above 1.0 on the close. Racking up the 1.0 closes again. If we get a couple of weeks of closes above 1.0 and the other indicators line up with it (e.g. VIX, bulls/bears) then we can start seeing a bottom set up.

Bulls: 41.6%. Up from 40.2% as the rebound last week buoyed spirits some. Down from 56.5 seven weeks back. Fell below the 40.6% hit on the last significant round of selling but has bounced. A move into the lower 40's is a decline of significance, but it needs 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: 32.6%. Bears continued to rise, albeit modestly from 32.2%. Up from 31.5% three weeks back 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: +11.82 points (+0.52%) to close at 2304.85
Volume: 2.26B (-24.13%). No trade on the move higher; there was no accumulation, just bouncing.

Up Volume: 1.463B (-480.925M)
Down Volume: 734.159M (-257.347M)

A/D and Hi/Lo: Decliners led 1.33 to 1. Breadth negative despite the gain. Dead cat bounce by some large cap techs that were previously gutted and left on the sun-baked dock.
Previous Session: Advancers led 1.36 to 1

New Highs: 46 (+6)
New Lows: 129 (-54)

NASDAQ CHART: Click to view the chart

NASDAQ posted its second consecutive gain after gapping lower Tuesday and selling more Wednesday. It is trying to make a higher low off of the old 2004/2006 trendline, but it is well below the 10 day EMA still and while it can bounce some more after the start of this next leg lower, it likely won't break through any significant resistance before turning back down.

NASDAQ 100 (1.17%) led the move higher in techs, trying something of a double bottom already, but with the dismantling of the large cap tech patterns during the past month, there is a lot of basing needed to heal the wounds and set up the foundation for a new sustained run higher.

NASDAQ 100 CHART: Click to view the chart

SOX CHART: Click to view the chart

SP500/NYSE

Stats: -5.52 points (-0.42%) to close at 1331.29
NYSE Volume: 1.453B (-16.3%). Volume plopped down well below average on a loss. No heavy selling, just not a whole lot of interest. Volume was overall down for the week of losses, indicating no dumping, just no buyers.

Up Volume: 517.924M (-591.615M)
Down Volume: 923.095M (+303.844M)

A/D and Hi/Lo: Decliners led 1.5 to 1. Down more than the modest point losses would suggest.
Previous Session: Advancers led 1.73 to 1

New Highs: 31 (+15)
New Lows: 96 (-4)

SP500 CHART: Click to view the chart

Hard selloff for the week, at least in terms of point losses; as noted, volume was not that bad. After that 78 point drop on the week it slowed the selling and moved laterally, trying to set up a bounce. As with NASDAQ, it may bounce back up to the 10 day EMA or so, but it certainly looks weak still.

SP600 (-0.36%) tried to move higher through near resistance at the 10 and 18 day EMA, but failed, showing a doji at that level. After strength on Thursday, it gave it up on Friday though not without a head fake early that, unfortunately, got us out of our IWM positions due to nervous feet. Still looks ready to roll back down, and so we will play it down again if it does.

SP600 CHART: Click to view the chart

DJ30

The Dow had the worst week of the lot though it too tried to slow the decline by the weekend, holding a tighter range, at least on the close, Wednesday through Friday. Still very weak and well below the 10 day EMA as it trends lower. May bounce a bit more but there is more to go here.

Stats: -64.87 points (-0.53%) to close at 12182.13
Volume: 262M shares Friday versus 326M shares Thursday. Low volume heading into the weekend so no distribution even with the downside close.

DJ30 CHART: Click to view the chart

MONDAY

Earnings are winding down but economic data ratchets back up this week with retail sales, regional PMI action, production and capacity, and Michigan sentiment. We will also hear more from the Fed and there will be the signing of the economic stimulus plan that puts out $20B more than the House bill. And who knows, we may get more dropouts from the presidential race; maybe all will drop out.

As for the market, it ended the week trying to firm after another sharp dump lower, but still holding a very weak hand heading into the new week. As noted above, the indices tried to bounce toward their near resistance at the 10 day EMA but didn't have much success. Another bounce to test that level, particularly after the gutting the market took on Tuesday, wouldn't be too far out of normal.

Unless the market gets something else going for it, however, overall it will have trouble moving further upside and will start looking at a test of the January low. Retailers improved after the FOMC cuts; they usually benefit faster from Fed action. Financials, however, are already back in the struggle mode even with the Fed slashing up rates. There are some hopeful signs in industrial metals, and many overseas stocks are perking up again. Indeed, we took some upside positions Friday on stocks enjoying strong patterns (showing they were being accumulated) and good breaks higher, but they are still the exception at this juncture. We are willing to accumulate shares in these stocks because the bases and the breaks higher show they are being bought despite the slowing economy. The market looks ahead, not just the here and now, and thus we will see stocks set up and break higher ahead of the economic data. Right now, however, many are still in very weak position and will need quite a bit more work before they are ready to move in the next sustained move higher.

As for the nearer term we will continue to look at those stocks forming up nice patterns amid the carnage such as last week. We may not make 25% on the stock or 150% on the options, but we can grab a nice gain. With a bit more upside on the indices that stalls at resistance at the 10 day EMA, the downside will be ripe once again and we will look to add to positions and pick up new plays. The downside dam for the third leg did not break last week, it just got the move going. When it moves toward the January lows it will likely be rather fast.

Support and Resistance

NASDAQ: Closed at 2304.95
Resistance:
2315 to 2300 is a range of support from old peaks
The 10 day EMA at 2333
2340 from the March 2007 low
The 18 day EMA at 2367
2370 from the April 2006 peak
2379 from the October 2006 peak
2386 is the August intraday low
2451 is the August closing low
The 50 day EMA at 2477
Some modest resistance at 2500 from interim August lows.
2540 is the November closing low
2550 to 2540 from May/June consolidation and the November lows 2554 is the August 2004/April 2005/October 2005/March 2007 up trendline

Support:
2275 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2216 from August 2005 peak
2202 is the January intraday low
2175 from the December 2004 peak

S&P 500: Closed at 1336.91
Resistance:
1349 is the 10 day EMA
1361 is the 18 day EMA.
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
The 50 day EMA at 1404
1406 is the August and November 2007 closing low
1412 is a longer term trendline from the August 2003/September 2004 lows
1430 from the August interim lows
1440 - 1437 from January and March peaks
1459 is the February peak
1467 is the June/July 2006 up trendline
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1480

Support:
1325 from May 2006 peak prior to the summer 2006 correction
1313 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
1270 is the January intraday low
1255 from June 2006 lows

Dow: Closed at 12,182.13
Resistance:
12,250 from late March 2007 lows
The 10 day EMA at 12,355
12,518 is the August intraday low
12,743 is the November low
12,786 is the February 2007 peak
The 50 day EMA at 12,775
12,845 is the August closing low
13,050 to 13,000 range
13,092 is the December low
13,250 from price points from June through December 2007
13,347 is the 200 day SMA

Support:
12,050 from the March 2007 low is trying to hold.
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 12
- Treasury Budget, January (2:00): $30.0B expected, $38.2B prior

February 13
- Retail sales, January (8:30): 0.0% expected, -0.4% prior
- Retail ex-Auto (8:30): 0.2% expected, -0.4% prior
- Business Inventories, December (10:00): 0.4% expected, 0.4% prior
- Crude inventories (10:30): 7.05M prior

February 14
- Weekly jobless claims (8:30): 356K prior
- Trade balance, December (8:30): -$61.0B expected, -$63.1B prior

February 15
- New York PMI, February (8:30): 7.5 expected, 9.0 prior
- Net foreign purchases, December (9:00): $90.0B
- Industrial production, January (9:15): 0.1% expected, 0.0% prior
- Capacity utilization, January (9:15): 81.4% expected, 81.4% prior
- Michigan sentiment, preliminary, February (10:00): 76.5 expected, 78.4 prior.