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ISM Services, have service sectors finding buyers

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Stocks have firmed off their lows of the session and the market does seem to be weighing some of the recent ISM data and casting votes in different directions.

On Monday, the ISM manufacturing numbers improved from October's levels, but still remained below the 50.0 level at 49.2, which depicts marginal contraction still taking place.

However, today's ISM Services numbers showed an upside surprise to economists forecast with a reading of 57.4, which was up from October's 53.1 reading and well ahead of economist's forecast for a 54.0 reading.

Sector action today shows weakness in technology sectors for a second straight session with the CBOE Internet (INX.X) 99.13 -7% trying to firm near the psychologically round 100 level, while the Fiber Optic Index (FOP.X) 52.23 -7.3% sliced sharply back below its 200-day SMA of 55.00, but holds above the rising short- term 21-day SMA, which may have seller looking for a rebound from shorter-term support after a 14% decline in just two days.

I get the distinct feeling the equity bears are tentative right here as we're seeing upward trends from the lows serving support as are many of the shorter-term 21-day SMA's. I think this is wise and perhaps fits in with commentary regarding how bears should look to leg in gradually to bearish positions in areas where the bullish % charts are "overbought" above 70% and threaten reversals into "bear alert" status. It's been our observation over the years that even an institutional bull holding handsome gains will sell partial positions to a level, then stop and let a short-term rally take place, before liquidating further bullish holdings into the rally. Eventually over a week or so, lower highs begin to develop on this type of liquidation. At the same time, bears look to mimic this action and will short to a level, stop, look for a rally and consolidation, then apply leverage on breaks below consolidation where risk can be managed as they build a short position.

On the top of "rotation" toward services areas, we've seen the financials hold near unchanged levels for the bulk of the session and I consider this group of stocks VERY service oriented.

Sector gainers have the healthcare groups like the HMO Index (HMO.X) 506.43 +3.81% and Health Providers Index (RXH.X) 287.53 +4.13% leading today's sector advanced. Reversing earlier losses is the Retail HOLDRS (AMEX:RTH) 75.81 +1.18% shrugging off Federated Department Stores (NYSE:FD) $31.68 -1% news from this morning. I consider all of these sectors service related.

Treasuries see higher price action, which has YIELDS lower, but not decidedly so in the longer-dated maturities. The December 30-year Treasury futures (us02z) 112'250 +0.41% finds its YIELD ($TYX.X) falling to 5.012%, but the stronger buying comes in the shorter-dated maturities hinting that money is looking for some shorter-term "safety" and looking to sit things out.

After testing a rising 21-day SMA, the Dow Industrials (INDU) 8,713 -0.34% is down just 24 points, after a morning low of 8,653. Again, support found at the 21-day SMA hints that sellers aren't overly aggressive at this point, and may looking toward labor reports tomorrow and Friday and perhaps some upside rally potential as labor data has been showing more stability and may give some strength toward stocks in the next couple of sessions.

It would be at that point that bears that have partially legged into some bearish positions in SECTORS or INDEXES with ABOVE 70% levels of bullish percent then look for additional entry points. I will give some examples of this trade/account management technique in a later update, but something that has been discussed in recent updates.

One stock on my list I look to leg further into puts is Dow Component Procter & Gamble (NYSE:PG) $85.87 +1.63%. After bearish profile near $87, the stock fell to an intra-day low yesterday of $82.00 and at today's $86.00 level is nearing overhead supply once again. With bearish vertical count of $77 and risk to stop of $90, the stock has shown weakness in a more bullish market environment and show leadership to the downside. I'm looking for that to continue and would currently allow the stock to play its rebound out, and look for a $1 reversal from a daily high as an opportunity to leg further from previous bearish profile of $87.

Jeff Bailey

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