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InvestmentHouse Weekend Update 3/14/08:

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

- Futures are down, no up, no down. Market whipsaws on every news story but the sellers win out another session.
- It's a bird, it's a plane, no it's the Fed rushing in to make some more history and bail out a brokerage.
- CPI is not bad, showing no increase, but again you have to wonder where this data is coming from.
- Michigan sentiment improves, showing more resiliency than investor sentiment.
- Many are talking about a bottom, and while there are definitely positives, VIX, $110 oil are standing in the way.
- Worries about the next shoe to fall after BSC slaps the pavement. Maybe the market can finally test the lows and try a bottom.

Market sells off to end the week, but it started out Friday as a tennis match.

We were up early to get a fix on just how the market was going to react to the up and down week and the Thursday reversal. Futures were down 10 points plus on S&P, not chicken feed. Then the CPI pulled off a pair of flat readings for the overall and the core, and that reversed the losses and futures were solidly higher, indeed higher than they were lower before the inflation number.

Then a story hit about the Fed authorizing BSC to go to the discount window via member bank JPM. That has not been done since the 1960's and before that in the 1930's. The story is that so many rumors were flying about BSC's solvency that no one wanted to do business with it. From solvent to teetering on bankruptcy in 48 hours. Thus the Fed action to backstop it just so it could do business. Similar to allow the primary lenders to come to the discount window, the Fed authorized BSC, a broker/dealer, to do the same. History making week for sure.

That story did not initially impact the positive reaction to futures, and indeed at the open NASDAQ was looking at a 20+ point gain and DJ30 over 50 points. They did not open that strong, however. As the Dow stocks opened, things did not improve. Indeed they started to turn south. The BSC news and the implications of what the Fed had to do weighed heavily, and within 20 minutes the market was negative and it was going negative in a big way.

The indices did not plow any new ground, but DJ30 was down over 300 points in a quick 15 minute run lower. The indices were all red and sporting 2+% losses. There was a rather quick bounce that suggested maybe the quick selloff was too much. Stocks rallied back sharply with DJ30 cutting its losses in half. Not bad. Then the sellers came back, however, and that was it. The indices resumed selling and started a long, steady decline into the last hour, surpassing the early session lows.

It was Friday, however, and a 300 point loss begs some short covering, particularly when the feds told major banks and brokerages to huddle over the weekend and fix the BSC problem. In short, there may be no BSC on Monday. The concern over potential good brought the shorts back to cover, worried that some good news might come out over the weekend. Again DJ30 and company cut the losses in half in a short but strong 40 minute surge. Even that was not immune to sellers. They came back to smack the indices around a bit before the close keeping the losses significant in the 2% range though still well off their lows. Even with a rebound the indices lost a lot of ground. Pretty tough selling.

TECHNICALLY the action was the bearish high to low as the early buyers were overrun. The late bounce was not much, just some covering ahead of the weekend and some potential good news (and of course, some potential bad news). Definitely a negative session.

INTERNALS: Not surprisingly the internals were skewed to the downside. Stronger, above average volume on NASDAQ. NYSE volume was lower, but just a hair so and still well above average on both. There was plenty of selling as financial stocks again took the brunt of the investor angst. -5:1 breadth on NYSE and -3.5:1 on NASDAQ speak for themselves. New lows did not ratchet much higher, however, on this next test lower. They didn't explode higher earlier in the week either, at least not to the extent in mid-January. A silver lining hiding in there.

CHARTS: SP500 touched down close to the prior lows, but NASDAQ and DJ30 didn't really test those levels. That doesn't mean the losses weren't significant, they just didn't have enough time before the weekend to really get ugly. That is not totally true; they sold hard early and bounced. Some are calling this action a bottom of some sort, and it may turn out that way. Each time the market tried to get there last week to make that full test and perhaps set a bottom the feds, either the Fed itself or Congress, issued a statement or held a conference about what needed to be done. The Fed upped its Taffy to $200B; selloff reversed. Barney Frank proposed the feds being the backstop for mortgages; another selloff reversed just in the nick of time, i.e. before it finally made its test. If no one comes out to save them and just let them sell maybe then we get the VIX spiking, the January lows tested, and enough capitulation to turn the market, at least for now.

LEADERSHIP: It didn't really matter where you were Friday, you got dinged a bit. Stocks tried to come back after that initial plunge lower, but they couldn't make it stick. Nonetheless, though down, energy, commodities and agriculture were still solid as they tested back but roundly held near support. There is, however, still a dearth of new leadership needed to come to the fore. A lot of these ag and commodities stocks have run for months and months and months; sure they are in a bull run, but even bull runs need to retrench from time to time. While they do that a new crop needs to show up. There are some possibilities in tech as one example, but a lot more work has to be done. Many tries at rebounds in the 2000 to 2002 selloff flared out and crashed because no leaders stepped up. And there is an old adage, when energy leads the market for any length of time, trouble tends to follow. That was underscored in red this past week as oil moved above $110/bbl (closed just under $110 Friday). That is an awful burden on the consumer and businesses, and it is only getting worse after a year of pressure already.

THE ECONOMY

CPI takes a respite, but with oil and gasoline showing declines, you have to wonder about the data.

Both the overall and core CPI were flat for February, a nice respite from the monthly increases and the 0.3% and 0.2% expected. It was the first reading below 0.3% since August 2007 and its flat reading. That lowered the annual core to 2.3% from 2.4% in January. After big gains in January, February basically offset them. Apparel fell 0.3% after rising 0.4%; transportation -0.7%. Gasoline was reported as a 2% decline.

After showing a 2% year over year gain in August, the overall rate of increase has doubled thanks to energy costs and rising food prices. We won't go into the whys and what for's; we have done that before. The question is, with prices doubling it is hard to believe that gasoline costs fell that much during the month.

Maybe they did, but that does not break the trend in higher prices a trend that is driven more by the decline in the dollar and our poor choices for use of our food supply than with any shortage of supply. Indeed, as seen Thursday, business inventories are on the rise as sales fall. No the issues for prices are poor policy decisions relating to the dollar and using food for fuel, and I don't mean fueling your body.

Thus while the pause in the overall rise in prices is welcome, it is dubious in fact and deceptive in practice. We are going to have to address the dollar and wasting our food supply in order to get prices, that were relatively nicely in control, back in control. Every time the dollar falls against other currencies our prices rise because we buy less and less with each dollar and thus the prices are raised by those controlling the products to make up for the loss.

Michigan Sentiment tops expectations but no barn burner.

Michigan sentiment for March was 70.5 and that topped the 69.5 expected. Moral victory. It did not reverse the trend as it slid in still lower than Februarys 70.8, and that was a substantial break from 78.4 the month prior. Getting to the point where it can become an issue, particularly with jobless claims rising the past two months, the jobs report falling, and those in the work pool shrinking. Worries about the paycheck are the biggest catalysts when the consumer pulls back. The sentiment reports show how worried, and while not at a panic stage they are not growing in strength.

THE MARKET

A week that saw more lop-sided put action and a crossover between the bulls and the bears with more bears than bulls. That is an unusual and important development. If we could get a volatility spike to complement them we would be looking for a serious spark higher. Then it would be up to leadership to come to the fore.

MARKET SENTIMENT

VIX: 31.16; +3.87. There was a lot of babble from the financial station journalism majors about the VIX hitting over 30. At one point in the last hour one proclaimed that if it closed above 31.09 that would be the highest close since March 2003. Oh my. Lions and tigers and bears. It hit 37.5 in August and matched that in January. While those are getting there, they are also still relatively low as far as significant bottoms go.

Sure they can set up a bounce higher from your average correction in an ongoing bull market, but when the economy moves into recession and the stock market is a bear market, it takes more than an average correction VIX. VIX needs to get into the 40's to really mean anything, and a move into the 50's is really cool.

It is trending higher over the past 8 months; no doubt about the higher and higher lows. Indeed, this move on Friday was a breakout of sorts. In short, we could see VIX explode higher into the mid-forties on another violent selloff over a couple of sessions. That would indicate a rebound though you would then have the issue of the indices exploding below the January lows and needing to bounce and then test them again. Bummer.

VXN: 32.01; +2.15
VXO: 34.14; +4.46

Put/Call Ratio (CBOE): 1.4; +0.18. Getting impressive with a 13 session streak above 1.0 and at 1.4 really blowing out the downside bets. Lots of protection being bought by the big institutions and a lot of options players betting on the downside. This part of the sentiment equation is more than enough for a bottom.

Bulls: 31.1%. Massive decline from 41.9%, one of the largest declines we have ever seen. The bulls and bears were eye to eye in mid-February. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. 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: 43.3%. Another massive move, up from an already high 36.6%. 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 has blown past 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: -51.12 points (-2.26%) to close at 2212.49
Volume: 2.555B (+10.09%). Another big volume session as the techs rallied to the 18 day EMA and rolled over. Distribution is what that is, and after an indices tries to mount a rally, distribution is not what you want to see for a rebound. Doesn't rule it out, just makes the road tougher.

Up Volume: 239.469M (-1.347B)
Down Volume: 2.271B (+1.417B)

A/D and Hi/Lo: Decliners led 3.49 to 1. Once more when the going gets tough the breadth gets ugly, much more so than the advancers on an upside session.
Previous Session: Advancers led 1.54 to 1

New Highs: 43 (-2)
New Lows: 278 (-5)

NASDAQ CHART: Click to view the chart

NASDAQ gapped higher on the reversal following the CPI data, but after just a small move over the 18 day EMA (2274) it turned over and sold off. It undercut the January low on the low (2192) then rebounded modestly to finish off the lows but in the bottom quarter of the range. NASDAQ failed at the 18 day EMA earlier in the week as it bounced from the early selling. As noted last week, this is setting up to be the fourth failure at this level since it cracked in December. It is trying its hand at putting in a bottom here but that is a very iffy proposition right now.

SOX (-3.02%) dove right back down to the bottom of the range. It did not blow out the bottom, but it put in a new closing low in the range, still rising above some of the intraday reaches to the downside. Looks as if it could break down from this consolidation attempt.

NASDAQ 100 CHART: Click to view the chart

SOX CHART: Click to view the chart

SP500/NYSE

Stats: -27.34 points (-2.08%) to close at 1288.14
NYSE Volume: 1.857B (-4.43%). Volume faded modestly but was right on par with Thursday and still well above average. As with NASDAQ, it was high on some selling. Not the end of the road; there was some good upside volume last week as well.

Up Volume: 144.884M (-982.732M)
Down Volume: 1.702B (+998.268M). Over 10 to 1 downside to upside.

A/D and Hi/Lo: Decliners led 5.25 to 1. Very strong downside once more as the financials were gutted..
Previous Session: Advancers led 1.39 to 1

New Highs: 48 (+9)
New Lows: 233 (+15)

SP500 CHART: Click to view the chart

Failed at the 18 day EMA as well in what was a very up and down week. Sold further to start things off then a big rebound on the FOMC $200B backstop. Then a stall at the 18 day EMA and the Friday selling thanks to financials. It sold hard but on the lows it still held above the January low; it has come close enough to basically say it tested, but an undercut similar to NASDAQ would be a nice touch. It is still trying to make a bottom here along with the other indices, but it is up and down on a daily basis. That is typically not the stuff of bottoms. It has fought hard to put one in, but thus far each attempt has failed.

SP600 (-2.27%), despite its loss, finished the week in decent position. It failed at the 18 day EMA as well and sold back Friday, but it is well above the January low and indeed the March low. Showing a bit more relative strength, but relative to indices at or near their January lows. Nonetheless, the way the small caps break will tell a lot of the story for the large caps simply because small caps are so economically sensitive.

SP600 CHART: Click to view the chart

DJ30

Again, a pattern more similar to SP600 than the large cap indices. Irony indeed. The blue chips found resistance at the 18 day EMA as well and faded, but it is not going down easily with a series of intraday reversals. It tried it again on Friday in the last short covering, and that is what closed it up off its -300 level. It has never threatened the January low and it is well above the March low. If the other indices fully test the January low as NASDAQ already has, then the Dow could get by without making that test though a triumvirate of indices making that test is more significant.

Stats: -194.65 points (-1.6%) to close at 11951.09
Volume: 380M shares Friday versus 336M shares Thursday. Surging volume in the financials shot Dow volume to the upside.

DJ30 CHART: Click to view the chart

MONDAY

No respite from the news. Already warnings for the Q1 earnings season are popping up as earnings season is so stretched now that it resembles the major league baseball and NBA seasons. The economic news ticker continues with regional manufacturing, production, housing starts, PPI, leading indicators, and the next rendition of Fed policy.

As for the Fed it will be most interesting to see which way it heads. Fed funds futures have priced over a 50% probability of a 75BP rate cut. Ouch. That won't do much good for the dollar or anything else. The other train of thought involves the Fed weaning the market from rate cuts, pulling back to 'just' 50 BP and saying something to the effect it is going to utilize more of the tools it announced last Tuesday.

Either way there is no good to come of it near term, and I do not envy the Fed and the mess it is trying to clean up. The best choice to us is the latter, but the Fed is in a no-win situation. It has cut rates enough to do the job; indeed commodities, gold and just about everything else says inflation is going to be a problem. The real disappointing issue for the Fed is that the feds didn't provide the right kind of supply side incentives to jumpstart the economy to help soak up the excess money. With gasoline at $3.24/gallon average and heading to $4 and jobless claims rising, do you think the people receiving the money are going to rush out and spend it or do what they did last time, i.e. spend some where necessary and save the rest? They have to pay for gas, and that is where a lot of it will go, and that does not add to the economy.

Now the weekend may bring about a deal in the financial sector that again instills some positives to start the week. Sadly there may not be a Bear Stearns as a result. That likely won't change the game at this point. There is still the FOMC decision, and while the Fed will stay very accommodative it also may have to start curtailing expectations of rate cut after rate cut. Again, if it had help from the other side it could be more effective in crafting a statement that says it can slow the rate of cutting as the problems are being attacked from both sides. Pipe dream. That is not the case.

So that leaves us with harsh reality. Weakening economic data, the Fed still having to cut and debase the dollar and thus push prices for energy and everything else higher. The indices are gamely hanging in, thus far holding above the January lows. Regardless of the weekend news, however, unless it is extraordinary, we believe there will be a test of those lows by SP500 and DJ30, and whether they pass the test is problematical.

The lack of new developing leadership is a concern, though even that is holding out some possibilities as transport stocks improve, and they are hardly stocks that perform well in an oncoming major recession. Thus we continue looking at developing patterns, ready to move in if they show solid breaks upside. There are also many current leaders that were touched by some selling to end the week but remain in excellent shape above near support. We are looking at those as good areas to focus money as they are already showing their strength.

As for the downside, we took some positions last week as the market waffled on its rebound, and at this stage it is hard to initiate more for the indices. There are still stocks, however, that are in position to fall rapidly in the event the market makes another dive lower to test the January lows. The downside game is typically faster, and thus we can still take advantage of some downside that is in position to fall when the market decides it is going ahead and making that test.

Support and Resistance

NASDAQ: Closed at 2212.49
Resistance:
2216 from August 2005 peak
2221 is March low
The 10 day EMA at 2246
2252 is the early February low
The 18 day EMA at 2273
2282 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2340 from the March 2007 low
The 50 day EMA at 2353
2370 from the April 2006 peak
2378 is the mid-February peak
2379 from the October 2006 peak
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.

Support:
2202 is the January intraday low
2175 from the December 2004 peak
2168 is the March 2008 low
2158 from May 2006
2164 From August 2006
2134 from August, September 2006
2100 from June 2006

S&P 500: Closed at 1288.14
Resistance:
1294 from the January 2006 peak
1305 to 1302 from an August 2006 peak and matches a range of support from March and April 2006.
1317 is the early February low
The 10 day EMA at 1312
1320 is an ancient trendline
The 18 day EMA at 1324
1325 from May 2006 peak prior to the summer 2006 correction
The 50 day EMA at 1359
1368 is the high in this recent lateral consolidation
1370 is the August 2007 intraday low
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

Support:
1288 from June 2006
1280 from June and August 2006
1272.66 is the March 2008 low
1270 is the January intraday low
1260 from July 2006
1258 to 1255 from May and June 2006 lows

Dow: Closed at 11,951.09
Resistance:
12,050 from the March 2007
12,070 from the early February 2008 lows
The 10 day EMA at 12,106
The 18 day EMA at 12,190
The 50 day EMA at 12,448
12,250 from late March 2007 lows is stretching
12,518 is the August intraday low
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

Support:
11,731 is the March 2008 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.

March 17
- New York Empire Index, March (8:30): -5.0 expected, -11.7 prior
- Net Foreign Purchases, January (9:00): $56.5B
- Industrial production, February (9:15): -0.1% expected, 0.1% prior
- Capacity utilization, February (9:15): 81.3% expected, 81.5% prior

March 18
- Housing starts, February (8:30): 995K expected, 1.012M prior
- Building permits, February (8:30): 1.02M expected, 1.06M prior
- PPI, February (8:30): 0.3% expected, 1.0% prior
- Core PPI (8:30): 0.2% expected, 0.4% prior
- FOMC policy statement (2:15)

March 19
- Crude oil inventories (10:30): 6.177M prior

March 20
- Initial jobless claims (8:30): 353K prior
- Leading economic indicators, February (10:00): -0.3% expected, -0.1% prior
- Philly Fed, March (12:00): -18.0 expected, -24.0 prior