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InvestHouse Weekend Update:

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

- Half session continues the same themes from the week, more or less.
- Unemployment rate holds at higher rate, indicating last month was no fluke.
- Jobless claims top 400K
- Service sector falls into contraction just as manufacturing heads higher.
- Energy takes hits even as oil climbs: short-term reallocation or a sign oil has hit the choke point for world economies?

Market slips into the holiday weekend without a bang.

The awaited oversold bounce set up a couple of times over the past week and both times the news swept it away, pushing the indices lower. Most of that news had an underlying theme of higher oil prices though the headlines cover different items: with oil topping $145 Thursday ($145.29, +1.72/bbl) it is impacting everything.

That showed up in the news of the day. The ECB bumped rates up 25BP as expected with the interesting notation that the central bank has 'no bias going forward.' Even with that the dollar held up well though by the end of the session it was back to flat. The jobs report came in a bit less than expected (-62K versus -60K) but the unemployment rate held at 5.5%, indicating the May reading was not an outrider. Jobless claims moved above 400K for the first time in this downturn. The services sector turned to contraction even as the manufacturing sector rebounded.

Lots of information for a short session, but even with the information overload there was not much change. The large caps in the NYSE and NASDAQ were the leaders, but they were not strong leaders as SP500 and NASDAQ 100 squeaked out gains. The Dow led with a 0.65% gain, but that was after a slaughter over the prior 6 weeks. It is trying to bottom and put in a bounce after that hammering, but we have seen that before in this leg lower.

Stocks started higher, but as we said in our early alert, the problem with upside recently is stamina. Sure enough the early rise could have used some Viagra to keep its end up because after the open the selling sent the indices negative. Then a sharp rebound to session highs followed by a lackluster drift lower into the shortened close with the large caps modestly positive, the smaller caps sporting uncomfortable losses. With oil surging, even lower gold and a better dollar could not pave the way for upside for stocks, and consequently they did basically nothing on the session.

TECHNICAL: High to low to so-so on the session. Nothing really new Thursday. The action for the week was bearish: high to low sessions all week outside of a rebound off the lows Tuesday that looked promising, but was washed away Wednesday with renewed selling.

INTERNALS: The large cap indices were higher but that didn't offset the weakness in the small and mid-caps. With those lower, breadth was close to -2:1 on NYSE and -1.7:1 on NASDAQ. Volume was lower; half a session will do that. Cannot glean much from volume, but the breadth tells you there is still weakness in the smaller stocks and that means continued weakness for the economy.

CHARTS: Some dojis on the candlestick charts for SP500 and NASDAQ, and with the Dow's hold at the early week lows the large caps look ready to try a bounce . . . just as they looked ready in mid-June, late June, and even on Tuesday. With the Dow down 1750 points from the May peak there is definitely enough oversold pressure ready to release upside, but each time it starts oil jumps or another financial story hits, sending stocks lower once more. SP600 and SP400 (small caps, mid-caps) are in a full-fledged 'catch-up' dive; after holding solidly in the last rally while DJ30 started to roll over (and indicating there was still a continuing economic expansion attempt) they are plummeting toward their 2008 lows as well.

LEADERSHIP: Definitely taking on a defensive flavor, at least for those stocks left standing. Medical, healthcare, and biotech stocks perked up; they did not surge, but they are perking up as the old standby leadership flags. Last week saw the agriculture and coal names taken out, and indeed some oil and gas stocks as well. This indicates that oil is at a point where the world economies seize up: if oil exploration and production stocks cannot climb as oil climbs, that implies prices at a point where demand stalls and turns lower. Maybe. Each time oil hits new highs on this run oil stocks lag only to come back. There was some allocation out of energy stocks this past week but it has the look of tossing everything out 'just in case' ahead of a long weekend. We are looking for them to rebound this coming week.

THE ECONOMY

May's jump in unemployment rate not so fluky after all.

Unemployment screamed higher to 5.5% from 5.1% in April, and the data indicated that the reason was teens hit the market a bit earlier than usual due to a shakeup as to the date of the end of the spring school semester. Easily explained. Then in June the rate stayed the same, 5.5%. Gee, where was the retrenchment?

Non-farm jobs lost another 62K, same as May. April and May were revised down another 52K, basically leaving jobs creation at zero thus far in 2008. Professionals lost 51K, manufacturing 31K; on the upside education and government gained 29K each, leisure/hospitality gained 24K, while services posted a low 7K gain.

Big picture: the jobs market is not great but it is also not at levels seen in recessions. Doesn't mean it won't go there: as we have said the past month, the market is showing weaker economic data to come, and as the economy was skating just over negative GDP in the first half of 2008, it is likely to turn negative given the stock market is a leading indicator and is diving. That means jobs, the most lagging indicator, still have a ways to go to find bottom and we are likely to see recession levels there before this is over.

Jobless claims top 400K.

404K topped the 385K expected, pushing the weekly claims number over 400K for the first time in this economic slowdown. As a refresher, back in 2001, weekly claims topped 400K in mid-April, and the subsequent data showed the recession started in late 2000. Continuing claims edged lower, but held over 3.1M, as no one is finding jobs out there. No surprise as the increase in data the first part of the year is fading, following the market lower.

ISM Services head back into the hole.

After two months back above 50.0 after slumping into contraction in February and March, services followed the rest of the economic numbers and fell to 48.2, well off expectations of 51.0. Pretty much every category tracked lower, notably employment at 43.8, down from 48.7, except for prices. Prices posted a 67.9 reading in February. They exploded to 84.5 in June, a 24% surge.

Stagflation with a little 's.'

That is a microcosm of the economy as a whole. Prices are surging even as economic activity flags. Just as in the 1970's, energy prices have exploded with gasoline up 24% in just a couple of months. As crude broke out over 80 and almost doubled from May to June, the stock market broke down and the economic data started to turn back down as well. Higher prices have choked the economy, and we have activity declining toward negative even as prices continue to rise.

Very similar to the 1970's, but vastly different in magnitude. Fortunately our free enterprise system is much more free enterprise now than it was in the 1970's. At that point we had gone through a decade of massive, massive regulation of everything from the way we could think to how we could water our lawns. We took a major turn toward European socialism, and our economy acted in kind. It took a revitalization of our capitalistic roots in the 1980's to turn us back on to the path that made us great in the first place.

Right now we don't have that kind of regulation. The federal courts have tried to step in and take up where Congress from the 1970's left off, but even that movement has been truncated by the Supreme Court. The last thing we want is judges making our laws. The Constitution is pretty clear on that: Congress passes the laws; all the judiciary is supposed to do is say 'constitutional' or 'not constitutional' and then shut up. Instead, judges go past that and dictate what the law should be. With unelected officials making the rules, entrepreneurship withers as seen with the 1970's Warren Court. Money moved into tax shelters by the billions and the economy had no new blood.

Right now there is still incentive to invest, but that is all changing as there is a lot of talk of changing tax structures, etc. in a need for change. Ironically, much of what we are hearing are the failed policies of the 1970's that the younger generation was not alive to experience. They sound great with words such as 'change,' 'fairness,' etc. The problem is they try to dictate where we spend our money or who gets to spend it, and in economic terms that means redistribution and removing the reward for risk taking. That always chills the desire to invest and create; why do so if you create and then someone takes it from you. As usual, we reward bad behavior and penalize good behavior.

That is the legacy of the 1960's and 1970's that even the boom of the 1980's and 1990's could not unseat. Then when times get tough and every one suffers (though to differing relative degrees just as they prosper at differing degrees in good times) these ideas of fairness come out and we try to strangle ourselves with regulation to make things fair. What we should focus on is what it takes to give everyone the opportunity to succeed and become rich. That means encouraging risk taking with incentives and then letting those that do reap the reward without then coming with the money police to help themselves to your wallet.

I remember back in the early 1990's during that slowdown and political campaign Al Gore speaking about the need to re-educate yourself so you could find a new job and contribute to the economy. Many people did that, myself included. Then after spending tens of thousands of dollars on a higher degree and just starting to reap the reward, the Clinton/Gore administration jacks up my taxes, saying I make too much money and they need to spread it around to others and pay for a bunch of programs that I wouldn't get any benefit from. Of course then when they took in vastly more revenue than they said was needed thanks to the tech boom that had its roots in the early 1980's investment as a result of massive tax incentives (that ultimately turned into huge surpluses thanks to the end of the Cold War and the total lack of defense spending in the 1990's), did they give it back? Of course not. They hoarded it, and the money that the economy needed to keep moving forward was taken and ultimately that combined with imbecilic Federal Reserve policies crashed the tech boom for good.

I digress, but this is why I emphasize looking back at history so we don't forget the economic mistakes made in the past and can advocate through our senators, House representatives, and presidential choices.

THE MARKET

MARKET SENTIMENT

VIX: 24.78; -1.14. Reached to 26 on the high for the week but for a real bottom it will take more than that. As we are looking just for a relief bounce at this point, no big deal.
VXN: 29.85; -1.07
VXO: 26.37; -0.58

Put/Call Ratio (CBOE): 1.2; +0.12. Six consecutive sessions above 1.0 on the close demonstrates there is sufficient pessimism to help spark a bounce.

Bulls versus Bears:

For the second time this year bears are crossing above bulls, doing so basically where they did in March on their way to much more extreme readings just about the time the market made the March low and started the last rally. Positive for the market and if SP500 is going to hold the long term trendline is the place to do it.

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: 31.9%. Down again with another healthy drop from 33.7%. Below the 35% level and now a bullish indicator and getting close to the lows hit in March at 30.9%. Down from a rebound high at close to 50% on the run through May. In March the indicator did its job with the dive below 35% and the crossover with the bears. They are crossing over again now even before the prior lows are hit. 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: 44.7%. Strong surge higher once more, up from 39.3%. Well above the bullish level. Again, that is one of the best indications that sentiment is getting extreme on the negative side. It is again past 35%, the level that historically indicates too much pessimism. 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. 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: -6.08 points (-0.27%) to close at 2245.38
Volume: 1.424B (-42.24%)

Up Volume: 491.637M (-9.85M)
Down Volume: 930.381M (-975.62M)

A/D and Hi/Lo: Decliners led 1.59 to 1
Previous Session: Decliners led 2.78 to 1

New Highs: 28 (-11)
New Lows: 399 (-6). Moved over 500 during the week, and that gets it more in the range you can start looking for reversals.

Reached lower and then reversed . . . to still close negative. The early gap higher just did not have the strength behind it, but there was no further collapse. NASDAQ is at the February and late March interim lows that represent some support before the January low (2200) and the March low (2155). Good point to try a bounce but as with the other indices, it has been here before as well.

NASDAQ 100 (+0.01%) was one of the three large cap indices positive on Thursday. It tapped some support at 1800 on the low and bounced to close flat. Still not a very pretty pattern, not one suggesting it is about to make a bounce higher.

NASDAQ CHART: Click to view the chart

NASDAQ 100 CHART: Click to view the chart

SOX CHART: Click to view the chart

SP500/NYSE

Stats: +1.38 points (+0.11%) to close at 1262.9
NYSE Volume: 841.9M (-44.61%)

Up Volume: 0 (-260.264M)
Down Volume: 0 (-1.255B)

A/D and Hi/Lo: Decliners led 1.91 to 1
Previous Session: Decliners led 2.74 to 1

New Highs: 16 (-51)
New Lows: 501 (+89). Topped 600 during the week and held over 500 even on the Thursday 'bounce.' The weakness in the small and mid-caps told the story here.

SP500 CHART: Click to view the chart

SP500 reached lower, down below the 2008 low (1257; hit 1252 on the low) and that sparked a 'rebound.' Well, at least a rebound off the lows. SP500 closed flat at that prior low, a logical place for it to bounce but it has yet to make that move after a parabolic move up from the March low to the May high and then back down.

SP600 (-0.95%) sold sharply, continuing to play catch-up to the large cap indices, and continuing to indicate that an economic recovery is a pipedream for now; not surprising given the rebate checks never, ever work. SP600 bottomed Thursday at the January closing lows near 350 and bounced modestly. As with SP500, it is now close to its 2008 lows and reaching a logical point to bounce.

SP600 Chart: Click to view the chart

SP400 CHART: Click to view the chart

DJ30

Up three days of a four day week and it was still down. Wednesday was a bear of a downside session. Thursday DJ30 reached a bit lower then rebounded positive for a market leading 0.65% gain. Wow. At this juncture DJ30 has undercut its prior bottom in this bear market, and it should now be ready to rebound to test the prior 2008 lows and likely fail there, firming them up as serious resistance that will take some more selling and a good base to move back through. When it gets up there and starts to fail, we will look at the downside here again.

Stats: +73.03 points (+0.65%) to close at 11288.54
VOLUME: 146M shares Thursday (half session) versus 230M shares Wednesday.

DJ30 CHART: Click to view the chart

MONDAY

The market will, in theory, get back to serious business this coming week after a short 3.5 day holiday week. There will still likely be many fund managers on vacation, but volume has been no slouch thus far this summer. Unfortunately, it has accompanied the downside of late.

That selling included leaders such as energy (coal and even oil/gas), as well as metals such as steel. Agriculture failed to sprout new gains and sold as well. The leaders are getting knocked back as well, the leaders that have prospered as demand for fundamental products such as food and energy grows worldwide.

Now there is the question of whether this is just a pullback, a periodic retrenchment as needed from time to time, or has energy hit the point where world economies can no longer prosper. In other words, the cost is too high and thus demand will fall, pushing the price of the stocks lower now in anticipation of declining demand.

Several Asian countries have or are in the process of removing gas and energy subsidies and we hear China is figuring out how to do the same as it simply cannot afford to keep them in place despite its still impressive economic growth. Its stock market is down 50% of late as it factors in the added cost of energy and the resulting demand destruction when the controls are removed. No wonder there is some retrenching in the energy stocks this past week.

There may be some more in the coming week though many are at key support levels, and if they are going to hold that will be the place to do it. We are looking for bounces from them but if those bounces don't have much strength then we can anticipate more downside from them to come. Thus on a weak-kneed rebound from this selling we don't want to hang around.

Once more the indices, particularly DJ30, SP500, NASDAQ, are in position to bounce from a very oversold condition. With oil at $145/bbl we are still looking at just a bounce. DJ30 still has to come back up and test its 2008 lows it broke, and the question is whether SP500 breaks its 2008 lows first or if it bounces from here. It takes a certain amount of intestinal fortitude to step in here and play a bounce, but we are going to look at doing just that, and then play the downside when the Dow gets up to its prior March lows and shows signs, as it is likely to do, of failing and heading back lower.

The market is a full fledged bear now, and while we caught some of the downside on the initial decline, we could have caught more. When a bounce sets up some more downside we are going to take advantage of that turn back down as well. At the same time we see what upside leadership, stocks in truly good position, sets up. We will see some in good patterns such as healthcare and other good stocks ready to bounce after getting sold back. In a bear market you need to move in when the selling gets overdone and key levels are breached and ready to be tested. That looks to be the situation now, especially given that the oil and gas, coal, and agriculture stocks came under heavy fire last week. When they take down the leaders they will try to bounce back at first. Again we will look to play the bounce, get reasonable gains, then get out and see what kind of strength it has at resistance. Then we move into the downside if it was a weak move. Once more we change to take what the market gives.

Support and Resistance

NASDAQ: Closed at 2245.38
Resistance:
2261 is a March 2008 interim low
2286 is the first April 2008 gap up point.
2335 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 90 day SMA at 2379
2386 is the August 2007 intraday low
2388 is the June 2008 low
2392 is the April 2008 peak
The 50 day EMA at 2403
2419 is the January 2008 peak and the early February peak
2451 is the August closing low
The 200 day SMA at 2495
2500 from interim August lows.

Support:
2202 is the January 2008 low
2155 is the March 2008 low

S&P 500: Closed at 1262.90
Resistance:
1270 is the January low
The 10 day EMA at 1291
The 18 day EMA at 1311
1317 from the February low
1324 is the April low
1331 is the June low
1344 is an ancient trendline
The 50 day EMA at 1346
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1387 is the April 2008 intraday high
1396 is the February 2008 peak
1406 is the August and November 2007 closing low
The 200 day SMA at 1410

Support:
1257 is the March low
1237 is the July 2006 low
1224 is the June 2006 low

Dow: Closed at 11,288.54
Resistance:
11,317 from March 2006
The 10 day EMA at 11,523
11,634 is the January intraday low
11,670 is the May 2006 intraday high; 11,642 closing
11,731 is the March 2008 low
The 18 day EMA at 11,746
12,050 from the March 2007
12,070 from the early February 2008 lows
12,250 from late March 2007 lows
The 50 day EMA at 12,172
The 90 day SMA at 12,400
12,518 is the August intraday low
12,573 is the mid-February high
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
The 200 day SMA at 12,829
12,845 is the August closing low
13,092 is the December 2007 intraday low
13,133 is the May 2008 high

Support:
11,061 from February 2006
10,912 peak from March 2005
10,854 from December 2004
10,701-10,705 from July 2006, July 2005

Economic Calendar

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

July 8 - Tuesday
- Pending home sales, May (10:00): -3.0% expected, 6.3% prior
- Wholesale inventories, May 910:00): 0.7% expected, 1.3% prior
- Consumer credit, May (3:00): $7.0B expected, $8.9B prior

July 9 - Wednesday
- Crude oil inventories (10:30): -1.98M prior

July 10 - Thursday
- Initial jobless claims (8:30): 404K prior

July 11 - Friday
- Export prices, June (8:30): 0.4% prior
- Import prices, June (8:30): 0.5% prior
- Trade balance, May (8:30): -$62.1B expected, -$60.9B prior
- Michigan preliminary sentiment, July (10:00): 56.0 expected, 56.4 prior
- Treasury budget, June (2:00): $36.5B expected, $27.5B prior