Replies to post #2318 on Your Economy (No Politics) (YE1)

[FinancialAdvisor]

Great round-up there Bullwinkle, I must say we agree on a lot of things, Happy New Year!

[orion.colorado]

Hi BW--Hope your Holidays went well, looks like some of the "mountain" is beginning show through the fog.

CO

[Bullwinkle]

>>>CYCLE/TREND Update for the Week Ahead>>>



Overview:
Well it's that time once again to review the past week and look into the next. As mentioned in last weeks update with which this post replies; While SO many people are expecting a January Effect to take place, could it be that we have already had one? Think about it for a minute... Instead of rallying into the New Year as we did last year, caution seems to be in the air. The indices have managed to print new highs on poor volume and diverging indicators. I could be wrong, but it seems to me like this move is running out of steam and a classic case of realignment is/has taken place prior to a turning point. BINGO! The talking heads are spinning this weeks action as late tax loss selling, but the truth of the matter is that reality is finally beginning to sink in. As for a catalyst, no catalyst is the catalyst. There is just nothing out there to get excited about... If anything, the mountain of worry is starting to seep into the investors' psyche. Then with everyone's favorite Uncle, Big Al, passing along a little tidbit called the "FOMC Minutes" it just reinforces the issues that I have been harping on for months. I love this nation, but this economy is built on a foundation of sand and mirrors. Strong words, I know, but it is what I am seeing and hope people take defensive measures to protect themselves from the fallout to come this year.

Economic #'s:
The numbers released this week were miserable and while you may disagree because of the attention grabbing headlines, let me make my case: Construction Spending fell -0.4%, the lowest in 2 years and from a previous months reading of 0.3%. ISM Services rose to 63.1 from 61.3 in the prior month and ISM Manufacturing Index rose to 58.6 from 57.8 while Factory Orders saw a 1.2% increase, a .3% rise over the prior months reading. While these numbers were respectable, they were recorded during the strongest of seasonal measures, Christmas. Speaking of Christmas, we finally got our sales numbers. While 3-4% was initially expected, these numbers came in at 1.7% for Nov-Dec (includes day after Thanksgiving) and 0.7% YoY. Now you know why the ISM #'s and Factory Orders were not stronger. Also Retail Chain Store Sales were up 0.2% for the week ending Jan. 1st, but comparatively lower than the previously reported 2.7%. Auto and Truck Sales were up as well, 8% and 1% respectively for the month while for the year cars were down 2% and Trucks were up 3%. The Big 3 combined were down 3% for the month and down 2% for the year. Initial Joblesss Claims came in at at 364K or 45K higher than previously reported. Challenger, Gray & Christmas reported 109K layoffs for Dec, the first time in over a year that 4 consecutive months of 100K+ layoffs were reported. Average Workweek ticked up 0.1 to 33.8 while Hourly Earnings remained flat at 0.1% and equates to a rise of .02c. Hourly Wages rose 2.7% for the year although prices rose by 3.5% (inflation, what inflation?). Nonfarm Payrolls came in at 157K, 18K less than expected but 20K more than the prior month (which was revised from 112K to 137K). Supposed 2.2Mln jobs were created in 2004 and comparisons are being made to 1999's 3.2Mln. Well there is no comparison and here's why; 2.2Mln created in 2004 with 1.0+Mln job cuts and 2.84Mln collecting Unemployment benefits. This is not to mention the millions that are either no longer collecting Unemployment and/or are no longer looking for work. In 1999 3.2Mln jobs created with 561K job cuts. Nuff said... The Unemployment rate was flat at 5.4%, sure if they say so... Then there were Crude Oil Inventories which fell by 3.3Mln bbls and Distillates grew by 2.0Mln bbls.

Last but not least let's review some housing numbers. Mortgage Apps declined 10.6% after falling 1.7% in the previous month. MBA's Purchase Index declined 13.7%, the lowest readiing in almost a year. Re-Fi Apps dropped 5.7% following a 7.9% decline the prior week while 1-Yrs ARM's averaged 4.17%, up 12 basis points from the prior week. NOTE: Re-Fi's make up 48% of all Mortgage Apps while ARM's make up 32.6% of all Mortgage Apps. One last note. The delinquency rate on a composite of Consumer Loans and Home Loans rose 1.9% in the 3rd Qtr, the highest in a year.

I would like to spend a minute on some issues that may or may not be inter-related. First of all, the Fed Minutes. It has now been made perfectly clear that the Fed intends to raise rates and possibly at an accelerated rate, yet the talking heads would have you believe differently. Today was a perfect example with the Nonfarm Payrolls. The talking heads would have you believe that the 157K reported was just right, not too hot and not too cool. Therefore the Fed will not do as he is saying. I have news for you, remember 1999? Nuff said. When the Fed says they are going to do something and are in the midst of actually doing it, you can bet a dollar to a doughnut hole that it will happen. As for the CES or Consumer Trade Show this week, I don't know about you but I did not see or hear about any exciting "must have" technology out there. Maybe it's just me, but looked like more of the same at a little better price and a little more horsepower. Defense Budget Cuts? You have got to be kidding me. We go out and start a war and now the administration wants to cut defense? This goes to show you just how clueless our present administration is. Soul For Sale? It sure seems that way to me. First we ship out all of our high paying jobs, create new low paying jobs and now sell our companies and technology to our competitors. That's exactly what is happening. As if outsourcing and illegal immigration weren't enough, we are now selling our companies to our global partners. The one that sticks out in my mind the most is IBM selling their PC division to China and now there are talks of UNOCAL? Where does it end? It doesn't, as a matter of fact this is just the beginning of our U$D coming home in the form of foreign competitors buying up our US corporations. I will never get use to it, it's gonna be ugly...

What can we expect now?:
Well we got the pullback I was looking for and mentioned last week; All of the majors show a rising wedge into diverging RSI and MACD's with Money Flow drying up and a weakening ADX (DMI). Volume has been pathetic and I continue to watch for a high volume pull back, once the momentum starts in that direction it will be tough to stop. That is exactly what we saw and the big question now is will it continue? I believe the answer is yes, but not before we get a lift from today's employment report. Probably just enough to sucker in those that believe in a "new" Bull Market before the take down occurs. Then again we may just go on to new highs or the floor could fall out, but being that forthright is highly unlikely. This window may provide a good opportunity to make some quick trades or just to get clear altogether. There are small descending flags on the major indices which are riding the lower BBand which I believe will provide a bounce. Of the majors, the $RUT is just getting clobbered. The Bullish Advisors are still too high at 62.9% with Bearish Advisors at 20.6%, VIX/VXN spiked up, but have a small downward tick and the Equity P/C Ratio is .671. The RSI 5-Days are Oversold on INDU, SPX and COMP while RSI 5-Wks are Neutral. Also there is a Bradley Turn on/around the 10th which may play a part in all of this. We seem to be ripe for a bounce and then a continued decline. This all seems like a set up for a perfect storm so to speak.

NOTE: I continue to hold a USPIX position which I will continue flip when the time feels right. LT Holds: HSGFX, PCRDX, PRPFX, QRAAX, RSNRX and TAVIX

Disclaimer: This disclosure is not a recommendation to buy or sell or to do as I do. It is to let people know what I am doing and give my thoughts on current market conditions. I am not a day trader and only attempt to identify up/down trends and play the swings.