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IvestmentHouse Weekend Market Summary 4/4/08

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

- Bad news takes its shot, market holds its gains.
- A long time coming, but market finally shows some rotation.
- Jobs report tries to upset the market with more recession speculation.
- Earnings are coming as the market sets up for more gains.

Another round of bad news, another nice consolidation to set up the next run.

Friday it was the jobs report with the 80K loss topping expectations, downgrades, and some earnings misses. All week, however, it has been one less than cheery economic story after another. Jobless claims spike over 400K, manufacturing continues to contract, the service sector posts a third month of contraction, factory orders nearly double their downside expectations. All week it was one weak report then another.

Nonetheless, the market held up. Indeed, it started the week with a big bang as stocks exploded higher Tuesday, launching back to the upside after a week of testing the move off the March low. It could not keep the pace up after 3.5% gains that session, but it did something it has not done in the past: it held its gains. Further, it held its gains in the face of bad news, finishing out the week flat and on low volume. It is a very good sign of health when the market can weather blows that would have cratered it before.

Another sign of strength: rotation. In the selloff from the October peaks the only stocks moving higher were those feasting on the dollar's decline: energy, gold, other metals, commodities in general, and agriculture. Everything else fell while they rose, getting all of the money invested in the market. Now there are other good stocks that have set up nice patterns, forming up for the breakout or indeed already breaking out. They started showing up on the move off the March low, and again on the Monday and Tuesday upside moves. As the market moved laterally the rest of the week, the energy, commodity and agriculture stocks started moving higher once more as the new emerging leaders took a break.

That is the kind of action you really like to see, and it shows that this rally, whether 'the' bottom or just an interim one in a further selloff, has underlying strength. Stocks from many different sectors are forming up and breaking higher, e.g. tech, telecom, transports, and other appear to have bottomed for now (housing, financials). Again, this is a sign of new health in the market.

TECHNICALLY the Friday action was more of the same we have since Wednesday. There was no real gain, just some up and down action in a narrow range, but in the end the refused to give up their gains. That is another change in character: after strong moves this year the market has given them up rather quickly. This week the gains were held and the lateral movement is setting up the next break higher.

INTERNALS: Friday the breadth was basically flat and volume was once again very low, matching Thursdays slow trade. Flat breadth, light volume; just no strength . . . but in a good way. When the market is consolidating low volume and flat breadth are fine. That shows no strength from the sellers even as the buyers take a respite after a strong move. Basically taking a rest and the numbers show it.

CHARTS: Another day of the same thing Wednesday and Thursday showed: a very flat lateral move after the Tuesday surge. SP500 and DJ30 are just below the 90 day SMA; NASDAQ is not there yet, but it showing that same lateral action. The big test for the move is still the 12,750 level for the Dow, but this lateral rest stop after strong gains is putting it in good shape to make a run at that level.

LEADERSHIP: Friday once again saw energy, agriculture and commodities (particularly metals) lead the way. As the dollar weakened once more to end the week these stocks tied to the dollar took off again. They were in trouble in March, but they have recovered nicely and are breaking out once more. The other leaders that are starting to show up were not dumped; they just held their gains and consolidated. That keeps a lot more stocks in the game for the week ahead, something the market hasn't had thus far in 2008.

THE ECONOMY

Jobs fall more than expected, ramp up recession talk.

The Thursday jobless claims topping 400K was the latest warning the jobs market was down and had not yet recovered. Sure Friday's 80K drop was more than the 50K expected, but the monthly report lags the more contemporaneous weekly claims data. Thus that Friday decline in non-farm payrolls is likely not the worst of it given that it lags what the weekly numbers show.

That wasn't discussed much in the aftermath of Fridays report, however. Seems the report and the revisions to prior reports occupied all of the gloomy thoughts. January and February were rewritten and the net was an additional 67K jobs lost. That makes three straight months of declines, four months for private payrolls (less government). Manufacturing has lost jobs for 21 consecutive months. Construction is down 9 in a row.

The unemployment rate, the household survey, rose to 5.1% from 4.8% in March and topped the 5.0% expected. More households are answering the question 'are you working' with 'no.' For what it is worth, NAIRU considers 5% inflation neutral. Whatever. It also means we are losing jobs, but in a recession that is no surprise.

When recovering from the last recession the upturn in jobs in the household survey was the clue that the economy was starting to recover even with the low non-farms number. Greenspan swore it was the latter that mattered, but when you have a recession where there are massive job losses and the large companies are not hiring individuals had to do what they had to do, and that meant a lot of startup businesses. If this is the bottom of this recession then we are not going to see the same thing because there has not been the massive turnover as large corporations trimmed the fat. They have done the cutting and did not do much hiring during the good times. Thus this is not going to be the indicator it was in 2002 unless . . . it gets really ugly from here, i.e. the market rolls over after this run higher.

Of course, even as the market rallies off the double bottom the lagging (i.e. lagging) jobs report spawned talk of recession, as in 'this confirms the recession,' or 'if there was any doubt, we are in a recession.' There is no doubt. Even though GDP was not negative in Q4, the decline from 4+% growth to flat is basically recession material. Even if there is technically no recession it really doesn't matter because all of the indicia of recession is present: job losses, foreclosures, bankruptcies - all of the things that we try hard to avoid but seem to inevitably find.

Why have a Fed, at least a meddling Fed?

It is a normal part of the economy to go through a downturn. What we have to avoid is the kind of bonehead moves the Fed makes such as lowering interest rates to 1% for over a year and creating economic bubbles on top of bubbles. Then the Fed tries to rescue the economy the next time the bubble starts to deflate in a continuing effort to thwart recessions that want to occur to clean out the excesses, i.e. get the trade balances more back in line, get the dollar firmed up, get Congress thinking really hard about actually trimming spending, etc.

The problem is the Fed's mandate. It has to promote the highest possible growth while maintaining price stability. In Europe it is just price stability. Which is better? Neither. What we have learned about the Fed is that its mandate promotes economic meddling, i.e. trying to fine tune growth using the caveman club of interest rates to perform brain surgery. Effective if you are trying to terminate the patient.

What the Fed needs to do, what its mandate should be, is simply acting as the lender of last resort, i.e. the backstop, in order to forestall major collapse if things go awry. No trying to slow things down to stay within a perceived 'speed limit' or trying to goose things along. The Fed should set interest rates, if at all, by following the market of interest rates. Then when things get really bad such as in the Russian currency crisis, it can step in and make sure that kind of panic doesn't get out of hand by making funds readily available. That is it. Simple, understandable, no guessing about when a bunch of guys and girls in the ivory tower are going to decide it is time to mess up your retirement plans as in 2000.

THE MARKET

MARKET SENTIMENT

VIX: 22.45; -0.76
VXN: 25.6; -1.33
VXO: 23.75; -1.02

Put/Call Ratio (CBOE): 1.2; +0.15. Back above 1.0 Thursday and Friday, making something in the neighborhood of 25 to 2 over the past month. Still a lot of downside bets and that is a good contrary indicator.

Bulls: 36.4%. Slight drop from 36.7% after the big jump from a very low 30.9% two weeks back. Not really worried about it; the indicator did its job with the dive below 35% and the crossover with the bears. They are still in crossover mode even with the rise in bulls and the decline in bears. The bulls and bears were eye to eye in mid-February and have crossed. 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: 37.5%. Substantial decline from 41.1%, but you knew that was going to come with the recovery. As with the bulls the jump in bears did its job after hitting 44.7% that was up from an already freakishly strong 43.3% the week before. That was a surge from an already high 36.6% the prior week. 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). This is a huge turn, unlike any seen in recent history.

NASDAQ

Stats: +7.68 points (+0.32%) to close at 2370.98
Volume: 1.962B (-0.99%). Volume flat-lined, holding well below average as NASDAQ continued testing the strong Tuesday move. Great action.

Up Volume: 1.086B (-101.447M)
Down Volume: 809.324M (+29.474M)

A/D and Hi/Lo: Advancers led 1.07 to 1
Previous Session: Decliners led 1.09 to 1

New Highs: 59 (+21)
New Lows: 67 (-29)

NASDAQ CHART: Click to view the chart

Rallied Friday but with no volume it could not hold the move and slid back to basically flat on the session. Flat breadth, flat volume as NASDAQ moves laterally over its 50 day EMA (2333) after clearing that resistance Tuesday. Very nice test, very nice set up for the next break higher.

NASDAQ 100 (+0.58%) tapped the 90 day SMA on the high and slid back, basically to flat. Led the NASDAQ overall this past week and looking for a break once more to the upside to move to test the 200 day SMA (1966) on the next move.

NASDAQ 100 CHART: Click to view the chart

SOX (-0.38%) stalled at the 90 day SMA after the strong surge through Thursday. Very solid, almost matching the early February peak on the move. A pause here and it is ready to move to next resistance at 400. Looks like an upside play here.

SOX CHART: Click to view the chart

SP500/NYSE

Stats: +1.09 points (+0.08%) to close at 1370.4
NYSE Volume: 1.24B (-1.07%). Another flat session of volume well below the average line. Very good price/volume action as the NYSE indices move laterally after that strong Tuesday surge.

Up Volume: 620.806M (-124.417M)
Down Volume: 607.627M (+118.552M)

A/D and Hi/Lo: Advancers led 1.23 to 1
Previous Session: Advancers led 1.44 to 1

New Highs: 66 (+19)
New Lows: 19 (-4)

SP500 CHART: Click to view the chart

Big move Tuesday on decent volume, then a tight lateral move to end the week, tapping near the 90 day SMA (1386) on the high and fading back. An excellent lateral consolidation has SP500 set up to continue higher though it might test back just a bit before it makes a run at the early February high at 1400.

SP600 (-0.13%). If SP500 has a good pattern, SP600 has a really nice pattern. It broke over the 90 day SMA (375.72) Tuesday, then slid laterally over that level in a tight range - a very tight range - through Friday. It is just below resistance at 382 to 385, but is in perfect position to make the break and run to 400. Very nice.

SP600 CHART: Click to view the chart

DJ30

Very similar to SP500, and that means not bad at all. A three day move below the 90 day SMA (12,665) on very low volume, just below key resistance at 12,750. This lateral move that refuses to give up the gains is a solid set up for a break higher to test that level, and from the way the market is acting, a move through that level. That frees up a run to 13,250ish. Need to see that break over 12,750; that is the gateway for the Dow.

Stats: -16.61 points (-0.13%) to close at 12609.42
Volume: 181M Friday versus 183M shares Thursday. Very low, weakly pathetic volume. In short, just what you want to see on a lateral move that consolidates a strong move higher.

DJ30 CHART: Click to view the chart

MONDAY

A lot more economic data next week; not like the old days when you would get a report about one a month because it took that long to compile the data using a yellow legal pad and a box of number 2 lead pencils. These days you get 10 to 12 data points a week. Then you have the odd Fed speaker (or more accurately, it would be odd not to have a Fed speaker) sprinkle three to four times during the week. Data overload. No wonder the market is finally ignoring the bad news or any news for that matter, and rallying higher.

The big event to come, however, is earnings. They have already started with RIMM's excellent results, MON's big numbers, and MOS' results on Friday. They are all in nice growth areas, so their gains are not representative, at least for the run of the mill stock. For the leaders they are. We can expect a lot of 'blame the economy' results this time from run of the mill companies. That is always the case as CEO's use the available cover to excuse poor performance.

The point: no one is expecting decent earnings, and look what happened to companies that report better than decent. Bing, bang, boom. This is prime time for big moves on earnings just because no one expects anything good. Of course, the market is expecting some good things as it has moved off the lows, tested, and is moving again. It is ready for the next break higher right now. That is why we have started accumulating the upside again and will continue to do so when the opportunity shows itself.

Thus this weekend we are looking at more stocks that are in position to make the next break higher and make us some strong money. Recession? May still come. May get worse. Market may turn back down after this rally. Until then, however, as long as we see this kind of nice set up in more and more stocks ready to make the breakout, we are going to participate in the move as the opportunity presents itself. The market is the final decision maker despite all of the pundit talk about recession. Remember, PE ratios remain very solid as we entered this slowdown; a shallow market pullback is one of the possibilities in that situation.

Support and Resistance

NASDAQ: Closed at 2370.98
Resistance:
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.
The 200 day SMA at 2550

Support:
2340 from the March 2007 low
The 50 day EMA at 2333
The 18 day EMA at 2307
2292 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2252 is the early February low
2221 is March low
2216 from August 2005 peak
2202 is the January intraday low
2175 from the December 2004 peak
2168 is the March 2008 low

S&P 500: Closed at 1370.40
Resistance:
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
The 90 day SMA at 1386
1396 is the January 2008 peak
1406 is the August and November 2007 closing low
1420 is a longer term trendline from the August 2003/September 2004 lows

Support:
The 50 day EMA at 1351
The 18 day EMA at 1341
1325 from May 2006 peak prior to the summer 2006 correction
1324 is an ancient trendline
1317 is the early February low
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
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 12,609.42
Resistance:
The 90 day SMA at 12,685
12,743 is the November low
12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 2007
12,786 is the February 2007 peak
12,845 is the August closing low
The 200 day SMA at 13,139

Support:
12,573 is the mid-February high
12,518 is the August intraday low
The 50 day EMA at 12,438
The 18 day EMA at 12,401
12,250 from late March 2007 lows
12,070 from the early February 2008 lows
12,050 from the March 2007
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

Economic Calendar

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

April 7
- Consumer Credit, February (3:00): $6.0B expected, $6.9B prior

April 8
- Pending home sales, February (10:00): -0.5% expected
- FOMC Minutes, March (2:00)

April 9
- Wholesale inventories, February (10:00): 0.5% expected. 1.0% prior
- Crude oil inventories (10:30): 7.3M prior

April 10
- Initial jobless claims (8:30): 407K prior
- Trade balance, February (8:30): -$57.4B expected, -$58.2B prior
- Treasury Budget, March (2:00): -$80.0B expected, -$96.3B prior

April 11
- Export prices, March (8:30): 0.5% prior
- Import prices, March (8:30): 0.6% prior
- Michigan sentiment, preliminary, April (10:00): 69.4 expected, 69.5 prior