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InvestmentHouse Weekend Market Summary 5/9/08

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

- Market logs its first down week in four so the rally must be over, right?
- Trade deficit shrinks. Trade deficit hawks better watch out for getting what they wish for.
- Oil explodes higher, gasoline follows, but oil stocks don't: oil is too far ahead of itself for now.
- Fedex tries the old 'Friday afternoon' warning, and the market is going to feel its pain on Monday.
- Techs are going to have to hold the line.

A down week after indices fail to take out next resistance.

There was not a lot going for the market heading into Friday. Financials were under pressure thanks to AIG and its earnings miss. C added to the financial worries as it is set to cut $400B in assets over the next 3 or 4 years. That is more long range planning than we have heard from many a financial in the past six months, but it didn't seem to help Citi or the rest of the financials. Oil was out of control once more closing at $125.88 and trading at $126 (+2.40) after hours. The run in oil the past week was a spectacle in itself, and not the kind investors and economists like to see.

On top of all of that there were the continued voiced concerns that the rally had failed given the test of resistance and the inability to break through. Interesting given that DJ30 did in fact break resistance two weeks back and NASDAQ followed on strong volume. SP500 did as well, but its break was a no volume snoozer, and thus the slide back to test is no wonder. Even with the selling on the week, however, there was no breakdown Friday.

Stocks started soft but didn't give in as NASDAQ and SP500 made a run for the roses midmorning, making it to positive. There wasn't any power there as volume was very low. Couldn't hold the rebound and faded back, but as noted, no real selloff on those two. DJ30 was dragged down by its financials. AIG is on the 30 so it was a drag. As was C, BAC and GE. All have a financial component, some more than others. DJ30 looks intent on seeing its 50 day EMA thanks to those boys and a few consumer stocks performing quite weakly, but again, NASDAQ and even SP500 with its financials don't have those issues, at least judging from the action last week.

TECHNICAL. The intraday action had promise with a low to positive move, but once again the midmorning proved to be the fulcrum, the lynchpin, the turning point, the (insert clich of choice). A strong, surging move on the indices just ran out of gas and slipped into a quiet, three martini lunch. Juiced up from lunch the market tried an afternoon recovery and did a decent job but could not recover session highs, slipping back in the last half hour, closing all but the mid-caps lower.

INTERNALS: Volume was the key. It was very light on an already low volume NYSE. It was the lowest in about a month on NASDAQ. No selling volume, just no interest. The flat breadth shows the same.

CHARTS: DJ30, after leading the market with the first breakout above the February highs, is now the index fading the most. It has given up its near support at the 18 day EMA and even the 12,750 key level, and is intent on heading to the 50 day EMA. Overall volume is lower on this selling than on the upside move, though volume overall remains woefully light. SP500 was not a pillar of strength on the week, but it checked up at its 18 day EMA Thursday and managed to hold there Friday with a modest rebound off the lows. Right at its February high and not bad considering the financials on the index. NASDAQ was the strong one, or one of them; it gapped lower, held above the 18 day EMA and recovered to hold the 10 day EMA on the close. Outside of that Wednesday distribution session it was a rather nice, orderly pullback. SP400, the mid-cap index, was the best performer as it moved laterally after clearing the 200 day SMA, pausing and preparing for its next move higher. The first index to clear the 200 day SMA, and though not the small caps, an important barometer of economic activity.

LEADERSHIP: Interesting. Energy, despite the gains in oil, pulled back. Metals were up but reversed the Friday gains. With those leaders struggling as the did on Wednesday, the market struggled because financials were nowhere near the lead after AGI and C, and techs were not ready to move higher with AAPL resting after a big move. Transports were modestly lower, but they were just in a routine pullback; will have to see how they respond to the FDX late afternoon warning. It was Friday, and after many leaders rallied into the week, no one wanted to take the point ahead of the weekend. Still many solid leaders in shape to move and hence the just modest pullback in the indices even with the gloom about a failed rally.

SUM: Anyway you describe it, the week was weaker. After three upside weeks any down week would be weaker. Many are saying that the rally has failed because it hit resistance and recoiled. Well, it also broke key resistance and has not clearly given it up. There was some distribution, but most of the selling was on light trade. Financials are still a problem and they raised their heads last week, giving rise to the bucking we saw. It did not, however, result in a clear reversal and high volume selloff. There is reason for concern given the failure at next resistance and some higher volume, but NASDAQ and NASDAQ 100 actually look very good as does SP400. Even SP600 and SP500 look solid despite the financial components on the latter.

THE ECONOMY

The March trade balance fell to -$58.2B from -$61.7B, much better than the -$61.3B expected. Lots of billions in any event.

There is a continuing angst among lawmakers, some economists, and the general populace that a trade deficit implies we are somehow not pulling our weight in the trade game, that we are overspending, that we are basically spendthrifts. Never mind that our citizens invest more than any others; we just don't put our money into savings accounts earning 1% or less. We are, as we always have been, risk takers and thus we put our money into stocks, bonds, new businesses, etc. That is why we are accused each month of not saving based upon the income and spending figures, but that does not take into account our investments. And let's face it, ALL FINANCIAL PLANNERS, EVEN THE GOVERNMENT tell us you have to invest for the future, not stick it in the mattress. Of course you cannot really believe the government; it says a 1% return on our social security 'investment' is an investment. Aside from that, however, ask anyone and you get the response you need to invest versus just save.

These same angst-ridden officials and scholars will argue that if we import more than we export by too great a margin our economy will not prosper. They fear no one will lend to us and that someday the debts are called and we go under. Wow. That is a really, really pessimistic view of our economy and our strength. It is also just flat out wrong when you look at history.

Historically the US imports more and more goods when the economy is strong and citizens feel prosperous. When that is the case we buy a lot of US goods and a lot of foreign goods. When consumers are worried about the future and the economy is weaker, we buy fewer imports.

There is no doubt the economy is weaker. All the data points to it even if there are some signs of some bottoming recently. On top of that the dollar's decline (PC for plummet) is making foreign goods from countries with currencies not tied to the dollar more expensive, e.g. French wine, foreign autos, etc. Even with commodities and goods priced in dollars the decline is killing us. Just look at oil; it is priced in dollars and in order for the producers to maintain their profit margins with a falling dollar, it costs more dollars to buy a barrel. As we all know, that unavoidable expense is killing us here in the US and thus even less dollars to spend on imports or domestic goods and services.

With this one-two punch backdrop, imports fell to their lowest level in 6 years. Is that good? Or put another way, is it better to have imports hit a 6 year low, reduce the trade deficit AND have a weak economy, or would we rather have higher imports, a higher trade deficit, and a strong economy? Of course everyone would prefer the latter; history shows that is a sign of a healthy US. We have ingenuity, we are cutting edge, we have a high standard of living, and we spend money as a result. Gee, sounds just horrible. It is what every other country seeks and yet we are into self-flagellation because we have achieved it.

Of course, the policies of the current 'market economy' administration has fostered the opposite. It did some things right (e.g. tax cuts that stimulated an economic recovery) but then undercut them with other policies (e.g. weak dollar, ethanol boondoggle) that have created the recession out of the expansion it previously created. Talk about giving a helping hand with one hand and then punching you in the face with the other.

Even without the help of the administration the dollar has bottomed for the time being and is going to rally for the time being. May be a few months, may be a year; it was stomped hard and the rebound rally will be more than just a blip. Maybe, just maybe the right policies will be put back in place to turn that bounce into a full blow recovery. With an election year and the politics related thereto, that is not likely.

Oil and gasoline explode higher on the week.

Oil was already up, but speculation took it sharply higher last week with an official close at 125.88. That is pushing gasoline higher and higher as there are not enough refineries, the feedstock is shooting through the roof, and summer is fast approaching (in the 90's here in southeast Texas this week; balmy). Wholesale gasoline was already up to $3.06 Tuesday and hit $3.20 by Friday. Ridiculous.

It is, thankfully, too far ahead of itself for the moment. Oil made its second big run the past week after breaking out, again, in early April. It is nearing the peak of this run because the energy stocks balked, twice last week, as it made the run higher. Wednesday they sold as oil rallied sharply. Thursday they recovered. Friday they balked again as oil surged once more. Oil is moving up but oil stocks are hesitating, not able to match it tick for tick.

That is an indication the move is getting done for now. It may still rally further to start the week, but we can look for oil to make a test as it did in late April/early May shortly. Doesn't mean it is going to break its trend; that is very strong. All we can say it is overdone or very close to being overdone for now.

THE MARKET

MARKET SENTIMENT

Now that the Fed has entered the game with its credit facilities that actually work, the correlation with VIX that set up during the correction is broken. Volatility and hence VIX can decline and hold at low levels for a very long time and have no bearing on any continued rally.

VIX: 19.41; +0.01
VXN: 23.48; +0.3
VXO: 19.83; +0.74

Put/Call Ratio (CBOE): 0.93; +0.04. Spent most of the week below the 1.0 level on the close despite some selling in the market. That shows a little bit more complacency than in the past, and that gives the bears a bit more ammunition but not a whole lot given the ratio stayed above 1.0 for the better part of a month leading up to and through the early stages of this rally.

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 44.4%. Bulls continue to rise, posting the sharpest increase in a month, rising from 40.9%. The rally is having its impact, pushing bulls higher, up from 39.1% and 37.8% where it held for a few weeks. Crossed back above bears last week, the usual positioning of the two. Fell to 30.9% in mid-March as the low. The indicator did its job with the dive below 35% and the crossover with the 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: 32.3%. Interestingly, bears rose from 31.8% even with the market rising overall. Down from 35.6% the prior week and 38.9% the weeks before. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March 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: -5.72 points (-0.23%) to close at 2445.52
Volume: 1.704B (-17.23%)

Up Volume: 735.403M (-525.69M)
Down Volume: 939.944M (+169.306M)

A/D and Hi/Lo: Decliners led 1.09 to 1
Previous Session: Advancers led 1.13 to 1

New Highs: 62 (+34)
New Lows: 86 (-28)

NASDAQ CHART: Click to view the chart

As noted, NASDAQ faded back on the week, falling from 2500 resistance, but it held above the 18 day EMA on the week, closing at near support at the 10 day EMA. Some accumulation, some distribution on the week, but in the bigger picture it is still in good shape even with the pullback from 2500. And you know what? That is exactly what we expected to do, and this weeklong pullback to near support sets it up nicely to take on that level.

NASDAQ 100 (-0.33%) faded as well, but it held the 200 day SMA on the Friday close holding the breakout from early May. Excellent positioning for a new break higher and we are going to look to play that as it starts.

SOX (-0.32%) performed exceptionally, working laterally this week over the 10 day EMA in a flat range. It is just below some resistance from the November low, and this lateral move is measuring that resistance for the breakout. Nice.

SP500/NYSE

Stats: -9.4 points (-0.67%) to close at 1388.28
NYSE Volume: 1.099B (-9.27%). Low volume all week. Low volume. Very low volume.

Up Volume: 393.601M (-257.265M)
Down Volume: 691.779M (+140.497M)

A/D and Hi/Lo: Decliners led 1.14 to 1
Previous Session: Advancers led 1.38 to 1

New Highs: 61 (-19)
New Lows: 36 (-54)

SP500 CHART: Click to view the chart

The large caps struggled on the week given the large financial contingency. Wednesday it suffered a bit of distribution, but it was mild. Friday it had the AIG issues, but it held the 18 day EMA on the close after undercutting that level intraday. It is just below the February peak, but holding up well. It broke through the February peak on low volume, made it up to an old 2003/2004 trendline, then faded back. As with NASDAQ, it is in position to make a break toward that resistance and take it out if it can get the volume.

SP400 (-0.01%) is the mid-cap index. It is one of the top performers in the rally, and last week when the large cap NYSE indices struggled it simply worked laterally over the 10 day EMA, resting after clearing the 200 day SMA to start the month. While everyone is focusing on SP500, NASDAQ, SOX, and SP400 are looking very strong.

SP400 CHART: Click to view the chart

DJ30

The blue chips are now the anchor, taking that mantle from SP500 that it wore on Wednesday. The Dow gave up the 18 day EMA, the only index to do that, and it closed right at key support at 12,750. Could easily tap the 50 day EMA (12,653) on this test. We would love to see it hold 12,750, but anywhere in this range on the continued low volume is okay. Friday was tough; it had both AIG and C to deal with and that was a drag because they pulled down BAC as well. Hard to recover from that. Down but not out, and after a test of the 50 day EMA we will see how the Dow can bounce.

Stats: -120.9 points (-0.94%) to close at 12745.88
Volume: 180M shares Friday versus 195M shares Thursday. Higher selling volume Wednesday showed some distribution, but it backed off Friday on that decline. Livable.

DJ30 CHART: Click to view the chart

MONDAY

The old 'maybe they won't notice if we warn on Friday' still doesn't work.

Friday afternoon volume was lower but that doesn't mean no one was watching. FDX, blaming a nasty spike in oil, guided lower by 20 cents with respect to its earnings to come. Looks as if the news was know ahead of time as it was already down on the session, gapping lower and closing at the 200 day SMA. It will open lower than that Monday.

Question is, how many other stocks will it take with it. Transports have been solid and they even survived when UPS left a brown streak on its earnings early in the season. Now with a second warning can this leadership group still hang in there? They pulled back to near support to end the week and were ready to bounce. A good test of strength coming.

It is never good news when a big company tries to slip in a warning on a Friday afternoon. It is admitting things are bad and it doesn't see them getting better or it would face the music early in the week and say yes things are bad but we are getting it under control. With FDX it was admitting that with oil spiking higher and higher it cannot predict what the heck is going to happen.

Thus we see oil beginning to exact its toll on companies and thus the economy. We are going to see more and more companies do the same whether or not energy is really hitting them. As with a weak economy, it is just too good an excuse to pass up and thus companies can pile all of their garbage assets they want to get rid of, take out all of the trash and the skeletons in the closets, and use the cover of higher oil prices to do it. So, expect more such warnings. A sign of things to come and a company such as FDX is a logical one to start the parade.

With this kind of news we can expect the week to start on a rocky note. DJ30 can go ahead and make the test of the 50 day EMA. SP500 may go ahead and join it given its 50 day EMA is just 16 points away. They need to hold there.

NASDAQ, SP400, and SOX will be the keys to start the week. They possess the best patterns and still see buying support. They were relatively immune to the pullback last week. They did not forge ahead, but they did not recoil as the large cap NYSE indices did. With the weaker start to the week their strength will be the key for the market overall; if they continue to hold the line and even get some breakouts, the large cap NYSE indices can tag along after their tests.

Don't want to seem overly optimistic. There are divergent tensions in the market given that oil is surging to ridiculous levels and is crimping businesses and consumers. That could be the elephant that stomps out any signs attempted economic recovery showing up of late. That leaves technology as a key, however, because technology is historically viewed as less energy dependent. Of course if its customers are, well, do the math. Even with surging oil prices, however, NASDAQ and SOX are performing admirably.

We trimmed some nonperformers last week even as they held up well; just lightening up for caution's sake and to be ready to take advantage of new opportunities developing. Early this week we are going to look at plays that held up during the past week, and if they continue to hold well we will e ready to move in as they bounce, particularly if NASDAQ, SOX, and SP400 start to rebound and the large cap indices can bounce off the 50 day EMA. Again, it is a time to be patient, let the indices make their moves, and let the plays come to us by showing us solid breaks higher.

Seems counterintuitive that stocks would sustain the rally with oil surging as it has, but the market makes the final decisions, and while it was lower last week, after three upside weeks a pullback to retrench is normal, just don't want it to get out of hand and want to see stocks hold near support and then continue higher. No big deal, huh?

Support and Resistance

NASDAQ: Closed at 2445.52
Resistance:
2451 is the August closing low
Some modest resistance at 2500 from interim August lows.
The 200 day SMA at 2518
2604 is an old trendline from summer 2004/summer 2005

Support:
The 10 day EMA at 2443
The 18 day EMA at 2422
2419 is the January 2008 peak and the early February peak
2392 is the April 2008 peak
2386 is the August intraday low
The 50 day EMA at 2381
2378 is the mid-February peak; 2379 from the October 2006 peak
2370 from the April 2006 peak
The 90 day SMA at 2352
2340 from the March 2007 low
2302 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2261 is late March higher low
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 1388.28
Resistance:
The 10 day EMA at 1396
1406 is the August and November 2007 closing low
1427 is a longer term trendline from the August 2003/September 2004 lows
1433 from a pair of August 2007 lows and December mid-month intraday low
The 200 day SMA at 1429
1446 from the December low

Support:
The 18 day EMA at 1389 held Thursday and Friday
1396 is the February 2008 peak
1387 is the April 2008 intraday high
The 50 day EMA at 1372
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
The 90 day SMA at 1360
1335 is an ancient trendline
1325 from May 2006 peak prior to the summer 2006 correction
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

Dow: Closed at 12,745.88
Resistance:
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
The 18 day EMA at 12,808
12,845 is the August closing low
The 10 day EMA at 12,860
The 200 day SMA at 13,025
13,092 is the December 2007 intraday low
13,250 from price points in second half of 2007
13,563 is the late December peak
13,780 is the early December 2007 peak

Support:
12,743 is the November low
The 50 day EMA at 12,654
12,573 is the mid-February high
12,518 is the August intraday low
The 90 day SMA at 12,495
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.

May 12
- Treasury Budget, April (2:00): $157.5B expected, $177.7B prior

May 13
- Export prices, April (8:30): 1.2% prior
- Import prices, April (8:30): 1.1% prior
- Retail sales, April (8:30): 0.0% expected, 0.2% prior
- Retail ex-autos, April (8:30): 0.2% expected, 0.1% prior
- Business inventories, March (10:00): 0.5% expected, 0.6% prior

May 14
- CPI, April (8:30): 0.3% expected, 0.3% prior
- Core CPI (8:30): 0.2% expected, 0.1% prior
- Crude oil inventories (10:30): +5.6M prior

May 15
- Initial jobless claims (8:30): 365K prior
- NY Empire State Index, May (8:30): 1.0 expected, 0.6% prior
- Net foreign purchases, March (9:00): $72.5B prior
- Capacity utilization, April (9:15): 80.2% expected, 80.3% prior
- Industrial production, April (9:15): -0.2% expected, 0.3% prior
- Philly Fed, May (10:00): -20.0 expected, -24.9 prior

May 16
- Building permits, April (8:30): 912K expected, 927K prior
- Housing starts, April (8:30): 940K expected, 947K prior
- Michigan sentiment, preliminary May (10:00): 63.0 expected