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InvestmentHouse Weekend Update:

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

- NASDAQ sells below January lows then market covers ahead of the weekend.
- Jobs report continues the string of bad economic data.
- Fed sense of timing second only to.
- Looking for a few good stocks . . . to hold the line.

Bad news provides a platform to sell, and stocks do, but it is not the rout needed.

The jobs report was weaker than expected but in line with what should have been expected given the weekly jobless claims and flagging economic data the past two months. That was a surprise to investors, yet not; the market was getting used to worse than expected data during its lateral range; thus more bad news is not really surprising even though of late it has started to break the camel's back as the indices sell lower.

As if that was not enough, the Fed announced it was raising its TAF (a.k.a. Taffy) auction amounts to $100B and is taking a lot more different kinds of securities with a 28-day turn versus overnight. I have a few obsolete computers and printers I want to unload; wonder if the Fed would take them now? After all they seem to be bent on doing anything in the hope that it will somewhat help alleviate the once again increasing spreads in corporate bonds and the lack of interest in commercial paper. If I could get rid of those old computers I know the markets would start to calm down.

What the Fed is doing is not a bad idea; it cannot continue running rates down at 50 to 75BP pops and expect to end the credit issues on its own. As discussed last week, the last time this scenario started to unfold the response that worked involved fiscal stimulus in the right places and some higher interest rates. If the Fed had some real help instead of the $600 handouts that worried consumers will save instead of spend (or they spend it on $3/gallon gasoline) it could concentrate on its TAF-like programs that don't fuel inflation as directly as tax cuts yet get money into the system. It worked initially, but the need for more rate cuts worked to undo the narrower spreads and lower LIBOR rates initially achieved. Without the real help it needs from the fiscal side (as evident by the way the market responded to the fiscal stimulus, i.e. selling further) the Fed is locked into its course of action as it has to promote economic growth and stabile prices. It can sit and do nothing or it can try to use the tools it has and Bernanke's speeches pre-Fed indicate that he will act versus sit.

Timing is everything, however, and this action, as the 75BP cut on the heels of the market dive in January, looks to be reactionary as opposed to calculated. Thus over the past couple of weeks the talk has switched to how the ECB is more in control and resolute in its plan of action than the US Fed. As with professional sports fans, monetary policy is a 'what have you done for me lately' game. Friday it looked once more as if the Fed was chasing a bus. Not very dignified considering all of the academic firepower on the committee.

Nonetheless, after a weaker open stocks rebounded in the first hour, turning from negative to positive across the board. We didn't think that would last. The early downside should have been worse but it was not. There was no real spike in fear and the early selling was not ferocious. After that initial rebound a 4 hour selloff ensued that took the indices to new session lows. The Dow came within 200 points of its January low, SP500 just 12 points, while NASDAQ undercut its January low by 15 points. We watched the indices rollover, but anticipated a bounce on some short covering ahead of the weekend given two big back to back downside sessions. When we saw the Russell 2000 hold its early session lows after the other industries undercut, we figured the short covering bounce was read to start. We issued some alerts to take some gain on the downside positions and then watched the market rebound. NASDAQ turned positive; an undercut of support to green. It did not completely stick, but the indices did bounce off the lows.

TECHNICALLY it was not the blowout downside session we were looking for. The market started lower then recovered with relative ease, turning positive midmorning. It did not hold the gains and sold off to new session lows, but it bounced again in the last hour. Did not turn positive but the short covering move ahead of the weekend took some of the downside pressure off. In short, no downside blow off, just more selling that did not provide the catharsis the market needed to put in a bottom.

INTERNALS: The internals were not at the massively negative levels of Thursday with breadth at a more palatable -1.8:1 on NYSE, -1.6:1 on NASDAQ. Volume was up and back above average on both NYSE and NASDAQ. Makes sense that the volume was up on the sorry jobs report, but it was more distribution as the market sold lower. That indicates more selling to come with SP500 and DJ30 heading down toward the January intraday lows.

CHARTS: The big move of the session was NASDAQ undercutting its January intraday lows, then rebounding to hold over those levels. Some will calls this a 'successful' test of the January lows and it may turn out to be that. With SP500 and DJ30 still above those lows, however, NASDAQ is likely going to at a minimum have to wait for them before it can try a sustained upside move.

LEADERSHIP: There was not a whole lot of leadership, at least in terms of stocks posting solid upside gains. There were stocks that showed relative strength, i.e. holding position above near support, weathering the selling, hunkered down and waiting for the test to end and trying to hold support all the while. Indeed those are the stocks we are looking for at the end of this selling; if they are still holding up or are at key support and in buy positions after SP500 and DJ30 test their January lows, then we can look at them to at least play to the upside when the market makes the bounce off of that test. There will likely indeed be a bounce off that move even if the market ultimately sells further, something that is hardly out of the question given the continued weakening economic data and the market's resumption of the downside.

THE ECONOMY

February jobs report posts first back to back declines since early 2003.

The last time the jobs report posted its first 2 consecutive months of declines the US economy was in recession. It was not officially known at the time, but recession was upon us when that report hit. Thus just as then, we are likely in recession given the varied issues facing the economy (housing, credit issues, $100+/bbl oil), the train of falling economic data, and the selling in the market that is forecasting the recession.

The numbers: non-farm payrolls fell 63K, a swing of 88K from expectations at 25K. Hourly earnings were in line at 0.3%, matching the 0.3% rise in January. Private payrolls fell 101K while government added 38K. Services fell 12K well down from the 100K average in Q4. Construction fell 39K and manufacturing fell 52K.

The unemployment rate actually fell to 4.8% from 4.9%. Now when the economy was turning up, the unemployment rate, also known as the household survey (are you working or are you not?) was falling even as non-farm jobs were falling. In other words, the household survey showed more people were working despite what non-farm payrolls said because after the implosion in tech, many people started their own businesses because the big companies were laying off all through the recession and the start of the recovery. Thus in order to put food on the table a lot of former employees turned entrepreneur. Thus the falling unemployment rate was an indication of a recovery in progress.

Does it mean the same this month? No. What pushed the rate lower was an exodus from the jobs pool. The labor force contracted 450K in January. If enough workers give up and leave the work force, i.e. more than the number of lost jobs, then it can look as if the unemployment rate is improving. In that situation, however, all it means is that people are giving up for now and collecting unemployment. Look at the weekly jobless claims trend; it tells that tale.

Earnings versus unemployment rate show an interesting trend. When you chart hourly earnings versus the unemployment rate over the past 20 years you see they move inversely. When hourly rates peak unemployment rates trough. Over the past two quarters hourly earnings growth matched the rates hit in 2001. At the same time the unemployment rate hit its lows both then and now. Hourly earnings are starting a decline the past three months and the unemployment rate has started to creep higher. The recovery starts in earnest soon after the unemployment rate peaks and the hourly rates drop sharply. While both are starting to move in that direction they have not made definitive moves. Thus we are likely to see more of the same movement in these numbers over the next few months before they make the turn. As discussed all last week, however, the market will turn before. Thus after a run lower once more that has the DJ30 and SP500 test the January lows and likely a bit lower.

THE MARKET

MARKET SENTIMENT

VIX: 27.49; -0.06. Rose to 29.29 on the intraday high and some were saying that was enough to turn the market. News flash. It hit this level in early February and the market put together a very modest, mediocre move that led to this current selloff. It is not nearly high enough to indicate a turn from this kind of selling that is preceded by a steadily worsening economic climate that has not seen a change in trend. In short, it will take more than a move to thirty or en the 37.5 hit in the January selling to put in a real bottom.
VXN: 29.25; -0.74
VXO: 30.35; -0.15

Put/Call Ratio (CBOE): 1.24; -0.03. Eight sessions straight of 1.0 or better closes. As noted last week, the ratio is easily at a level to foster a turn.

Bulls: 41.9%. Modest decline from 42.0%, but still holding the line as the market moved basically laterally. That will likely change now that the market has broken its trading range and is heading for the test. The bulls and bears were eye to eye three weeks back, and that was enough to set a bottom. Hit 36.7% three weeks back, the low for this selling round. That put the bulls and the bears eye to eye. Didn't quite make the 35% range considered to be bullish for the market, but was down 20 points from the 56.5 three months back. 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. Bears surged over 35%, making that 'kiss' that is quite bullish (even more so if they cross over one another). 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: 36.6%. Bears continue to rise, albeit much more modestly now, up from 36.4%. Up from 33.7% the prior week when the bulls and bears stared at each other. Bears are chasing the bulls right now; with the current dip they may cross, a very bullish indication. Up sharply from a low of 19.6% on the last rally. It is over 30% and indeed over 35% the prior week, 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).

NASDAQ

Stats: -8.01 points (-0.36%) to close at 2212.49
Volume: 2.393B (+8.8%). Not surprisingly with the weak jobs data volume moved back above average. Just barely, however, and that indicates there was no major, cathartic selloff, and that indicates there is likely more to come.

Up Volume: 85.81M (-225.764M)
Down Volume: 1.511B (-366.721M)

A/D and Hi/Lo: Decliners led 1.62 to 1. Much milder than Thursday when the selling was quite ugly.
Previous Session: Decliners led 4.05 to 1

New Highs: 33 (-8)
New Lows: 448 (+111). Now it is getting interesting. Over 500 would be downright poignant.

NASDAQ CHART: Click to view the chart

Gapped lower on the jobs number, hitting the January low (2202) on the open and then breaking through that by 15 points on the session low. It did not give up, roll over and pee itself like a whipped dog. It came back right after the open, rolled over to a session low, but then came back. Sure the last hour was short covering, but it kept it above the January intraday low on the close. That keeps it in the game to bounce from here, but with SP500 and DJ30 still in the hunt for their January lows NASDAQ is not likely to take off form here until they get to their lows. Then we get a bounce in response, and that is when we find out if this is a bottom anticipating better economic times or it gives way and, like the groundhog, sees its shadow and goes underground for another 6 weeks or more.

SOX (+0.60%) was a relative strength leader and it held the lows in its now 8 week trading range. Chips are trying to set up to move higher but not a lot of great patterns in the sector.

NASDAQ 100 CHART: Click to view the chart

SOX CHART: Click to view the chart

SP500/NYSE

Stats: -10.97 points (-0.84%) to close at 1293.37
NYSE Volume: 1.704B (+5.47%). Volume was up and above average and it showed a bit more strength than NASDAQ on the selling. Distribution yes but it did bounce back also.

Up Volume: 561.733M (+473.844M)
Down Volume: 1.116B (-408.476M)

A/D and Hi/Lo: Decliners led 1.82 to 1. After the gutting on Thursday breadth showed in the -2+:1 range intraday but recovered to respectability. Thursday was extreme.
Previous Session: Decliners led 7.55 to 1

New Highs: 29 (-7)
New Lows: 396 (+89). Getting there but no there.

SP500 CHART: Click to view the chart

SP500 came within 12 points of its January low (1270) before rebounding to cut the losses in the afternoon short covering move. Still looking for SP500 to make a full test of the January lows along the lines of NASDAQ. Then we start to see if there is any terra firma at this point or if it is just a shelf before more selling. The economic issues seem to be getting worse, picking up speed to the downside once more. The suggests further market downside, but the market is the leading indicator, not the economic data. Thus we see how the test holds and what SP500 can do with it. As with NASDAQ, we expect a bounce attempt after SP500 and DJ30 make their tests.

SP600 (-0.51%) is still well above its January low while Russell 2000 is much closer, showing a hammer doji Friday just above that level. As with the other NYSE indices, we are still looking for more selling form SP600 before it bottoms.

SP600 CHART: Click to view the chart

DJ30

Cutting significantly lower, leading the downside as the only indices that closed with a loss over 1% and by quite a margin at that. It bounced off the lows but not much. Volume was up. It is 257 points off its January intraday low (11,634) on the close, coming within 200 points of that point intraday. Still looking for the Dow to fully test those lows as well. With NASDAQ already there, a full test by SP500 and DJ30 will likely set off some short covering that lasts more than just the afternoon session. Getting close to the next big test for the market, one that many are watching. You know what they say about watched pot. Have to get the fear up, and if every one is expecting it is there a lot of fear? Needs something unexpected to jack up the worry and it is not there yet.

DJ30 CHART: Click to view the chart

MONDAY

Friday afternoon saw a bounce back up after NASDAQ fully tested its January lows. Some will call for a bottom with that move but there was not enough fear as VIX was mild and volume was ho hum. Sometimes a bottom just comes about with no fanfare; this is not really that type of decline right now. Thus it is looking for more fireworks. Again, Friday was not the fireworks.

They may arise if DJ30 and company rip lower very hard once more with more violence than anticipated. That would start jacking up VIX which is still much too low to indicate a bottom of significance. Many are watching for a bottom at the January lows, and when the indices get there you can almost make book on a rebound unless something very serious and very ugly hits the wires. Selling comes in spurts just as upside runs. When a resistance point is hit after a run upside a stock pauses. Same on the downside; after a hard fall that hits near support, a bounce, even if just a relief bounce, occurs.

If everyone is watching for it, however, then the bounce tends to be modest, contained, almost orchestrated. If nothing changes then you are right back down for the real selling. Either way you need to see the kind of action that makes the longs feel the need to step outside and blow. A high volume, wicked selloff that doesn't look as if it is going to stop. When you see it you can buy some upside positions in anticipation of at least a short term bounce. If there is a follow through about a week later, a strong upside move on strong volume, then you add to positions of stocks that held up well and are leaders of the pack. Those are going to be the best movers in the recovery.

Ah leaders. There are still leaders even after the end of the week selling. The recent leaders in energy, commodities, and some newcomer areas such as medical, biotech, and defense are holding up and setting up as well. If they do a decent job of weathering any further selling they will definitely be in position to carry the torch when the selling exhausts itself.

We are going to watch strong stocks we like on the pullback to see if they hold key levels and thus will at least provide a nice bounce we can play on the move back up. Stocks that use the selling to set up bases are primo. We home in on those and when they break higher after the selling they are buys. This may or may not be the bottom, but that is how you grab the leaders out of the lows just as we grabbled EBAY, TSCO, AMZN and other early runners out of the 2003 test of the late 2002 double bottom. Chips gave us huge gains off the October bottom into February 2003. Then they faded but others that worked on their bases during that period surged out of bases. EBAY more than tripled for us, TSCO doubled, and AMZN almost tripled.

Thus it is definitely worth watching for good bases even during the selling. That is what we are going to do even if we have our reservations as to whether a bounce here ends the overall decline. Again, if we see strong stocks in good patterns moving higher we have to go with them because the market, despite our gut feelings and the 'been here before' knowledge can always put a new wrinkle in things as it tries to hide what it is doing and keep investors confused. As with tackling a shifty running back, you watch what matters, i.e. his core; legs, heads and arms can go all different directions, but the core cannot makes those deceptive moves. Same with leading stocks: despite all of the noise with respect to the indices, sentiment, financial station commentators, etc., if you see good stocks setting up good patterns, you have to tune out all of the stations talking over each other and watch the basics and look for a few good stocks to carry you to big gains out of a selloff.

Support and Resistance

NASDAQ: Closed at 2212.49
Resistance:
2221 is March low
2252 is the early February low
The 10 day EMA at 2269
2286 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2340 from the March 2007 low
2370 from the April 2006 peak
2378 is the mid-February peak
2379 from the October 2006 peak
The 50 day EMA at 2380
2386 is the August intraday low
2419 is the January 2008 peak
2451 is the August closing low
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
2578 is the August 2004/April 2005/October 2005/March 2007 up trendline

Support:
2216 from August 2005 peak
2202 is the January intraday low
2175 from the December 2004 peak

S&P 500: Closed at 1293.37
Resistance:
1305 to 1302 from an August 2006 peak and matches a range of support from March and April 2006.
1317 is an ancient trendline
1317 is the early February low
1325 from May 2006 peak prior to the summer 2006 correction
The 10 day EMA at 1330
1368 is the high in this recent lateral consolidation
1370 is the August 2007 intraday low
The 50 day EMA at 1372
1374 is the March 2007 closing low
1396 is the January 2008 peak
1406 is the August and November 2007 closing low
1417 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
The 200 day SMA at 1466
1475 is the June/July 2006 up trendline
1475 from peaks in December 1999 and January 2000

Support:
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 11,893.69
Resistance:
12,070 from the early February 2008 lows
12,050 from the March 2007
12,250 from late March 2007 lows is stretching
12,232 is the 10 day EMA
12,518 is the August intraday low
The 50 day EMA at 12,542
12,573 is the mid-February high
12,743 is the November low
12,768 is the February 2008 peak
12,786 is the February 2007 peak
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
13,264 is the 200 day SMA

Support:
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.

March 10
- Wholesale inventories, January (10:00): 0.5% expected, 1.1% prior

March 11
- Trade balance, January (8:30): -$59.5B expected, -$58.8B prior

March 12
- Crude oil inventories (10:30): -3.05M prior
- Treasury budget, February (2:00): -$140.0B expected, -$120.0B prior

March 13
- Retail sales, February (8:30): 0.1%expected, 0.3% prior
- Retail ex-auto, February (8:30): 0.2% expected, 0.3% prior
- Initial jobless claims (8:30): 351K prior
- Export prices, February (8:30): 0.8% prior
- Import prices, February (8:30): 0.6% prior
- Business inventories, January (10:00): 0.3% expected, 0.6% prior

March 14
- CPI, February (8:30): 0.3% expected, 0.4% prior
- Core CPI, February (8:30): 0.2% expected, 0.3% prior
- Michigan Sentiment, preliminary March (10:00): 70.5 expected, 70.8 prior