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Prosperity Breaking Out All Over

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        WE 10-03        WE 9-26         WE 9-19         WE 9-12 
DOW     9572.31 +259.23 9313.08 -331.74 9644.82 +173.27 - 31.79 
Nasdaq  1880.57 + 88.50 1792.07 -113.63 1905.70 + 50.67 -  3.21 
S&P-100  515.17 + 15.56  499.61 - 21.01  520.62 +  8.32 -  0.19 
S&P-500 1029.85 + 33.00  996.85 - 39.45 1036.30 + 17.67 -  2.76 
W5000   9990.30 +343.82 9646.48 -407.5910054.07 +176.76 - 29.38 
RUT      512.28 + 27.00  485.28 - 34.92  520.20 + 11.14 +  0.19 
TRAN    2784.85 +121.02 2663.83 -130.88 2794.71 + 59.11 - 11.69 
VIX       19.50 -  2.73   22.23 +  3.16   19.07 -  1.18 +  0.88 
VXN       29.20 -  1.68   30.88 +  1.14   29.74 -  2.94 + 11.98 
TRIN       0.60            1.42            1.35            1.11   
Put/Call   0.75            0.98            0.68            0.90   



Prosperity Breaking Out All Over
By Jim Brown
Click here to email Jim

To the surprise of everyone the jobs number was positive instead of negative and the resulting explosion caught the bears completely off guard. The Dow gapped up to near its 52-week highs as broadcasters tripped all over themselves trying to explain why the consensus estimates were so wrong.

Dow Chart

Nasdaq Chart

S&P Chart

The Jobs Report showed a gain of +57,000 jobs in September and the -93,000 loss in August was revised up to -41,000. This is a net increase of +109,000 jobs and the markets were caught completely unprepared. The gains were driven by stronger hiring in services and construction. The unemployment rate remained at 6.1% due to a drop in the labor force participation rate to 66.1%. That means many workers gave up looking for a job and are no longer in the census. The number of workers that have been out of work for more than 27 weeks rose to 23.2% and levels not seen since 1992. Hourly earnings fell by a penny and the first time they have fallen since 1989.

While jobs have been the missing piece of the puzzle the positive report did have some negative implications. The drop in hourly wages imply that consumer spending could slow and that deflation concerns may be increasing. Also reversing estimates was the news that the state survey adjustment was projecting a loss of -145,000 jobs instead of the +200,000 gain analysts were expecting. The chief economist for Banc One was expecting a gain of +300,000. This is the book balancing between the state and federal numbers each June. The September jobs report is the first look at the numbers and they will be revised as we move forward.

Temporary workers increased and produced a bullish spin to the news. Companies tend to put on temporaries to test the water before adding permanent employees. If this is the case then the coming trend could be improving. This was the fifth straight month that temporary jobs were added.

The only other economic report was the ISM Services which came in at 63.3 compared to consensus at 62.8. While slightly higher than consensus it was still a drop from the 65.1 we saw last month. As I said on Thursday this was a throw away number as long as it was over 60 and the 63.3 was icing on the cake. With the jobs bounce already underway when this number was released at 10:AM there was only a slight move from the markets. Last months number was an index high so a slight pullback was anticipated. The employment component did fall -1.9% so there is still trouble in employment even in the booming services sector. New orders fell -7.7% to 59.9 in September.

Individual stock news was pretty much ignored with the race to cover shorts but there were some significant events. HPQ announced it would give $25,000 in free services to any company that switched to HPQ from SUNW for its servers. While this makes great headlines in a week where SUNW has been the tech scapegoat it will have little or no impact on SUNW or HPQ. HPQ would have easily discounted their servers on any quote for much more than the $25K they are offering. The switch from SUNW to HPQ would likely be a multi hundred thousand dollar effort with hundreds if not thousands of man hours and not something that $25K will impact. Great marketing ploy and HPQ got much more than $250K worth of advertising just from the announcement. It would be interesting to know six months from now how many companies actually collected on the offer.

BVF was a highlight on Friday and did not open for trading until 1:45 and closed down -$6.67 or -18% on news that a truck carrying up to $20 million in drugs was involved in a multi car accident. The drugs will have to be returned to the plant and re-certified as saleable before being put back into the pipeline. BVF said it would impact earnings for the quarter.

ADTN jumped +9.15 (+14%) on raised guidance to 42 cents when analysts were only expecting 36 cents per share. Revenue was expected to be up +6%. This telecom equipment maker exploded on the good news while TLAB barely broke even after warning that it was cutting another 10% of its work force and close a development center in Canada. The company has already suffered seven rounds of job cuts in the past two years and five straight quarters of losses. ADTN said the improvement was in market share gains and an improved business climate. Maybe TLAB should start tailing the ADTN salesmen.

Emcor (EME) fell -8.66 to $34.79 after warning that their second half guidance was dropping by -50%. The construction services company said small task projects were dropping due to competitive pressures. The company said the small jobs were the first to be cut when cost savings were needed and the last to return. Their outlook is still good once the economy returns to prior levels. Sounds like a familiar story.

Another Grasso story made the rounds on Friday. A Wall Street Journal story said a NYSE specialist firm said Grasso pressured them to buy more AIG stock to prevent a drop in price. No big deal since the market makers are supposed to provide a liquid market and try to avoid big swings in the stock prices. The problem was that Grasso did it after receiving complaints from the chairman of AIG. Still no big deal until you hear that AIG Chairman Hank Greenberg was a NYSE director and a member of the compensation committee that approved Grasso's pay package. This will see more press only because of the relationship and the assumption Grasso is an easy target now.

With any jump in the market or in the perception of the economy you would expect a corresponding decline in bonds. What you would not expect is the magnitude of the decline. The ten-year yield jumped to near 4.22% when it was trading at only 3.91% at Wednesday's close. Traders claim this is the worst volatility in 40 years in the bond market. The 100-year storm that FNM CEO Franklin Rains has claimed is far from over. The on again off again bond market rally is playing havoc with mortgage rates. A full 273 BP jump in two days on the ten-year is literally unheard of. Builders took it on the chin in early trading but rallied back in the afternoon on speculation that more jobs meant more buyers.

If you are a bond junkie how do you hedge yourself against this huge change in yields in a 48 hr period? When changes in yields are normally measured in 10-15 basis points and not +186 basis points as on Friday there has got to be pain. How that pain filters back through the markets next week will be the key. Obviously it was a knee jerk reaction and will probably equalize but those forced out of positions today for big losses will not appreciate that fact.

Another financial instrument got hammered on Friday. The gold bugs woke up to a major move that knocked -13.70 off the price of gold to close at $370. This knocked off all the gains from September and put the metal back at Aug-27 levels. This is well off the 394.80 high just seven days ago.

Going in the opposite direction was oil, which closed over $30 once again on fears that Saudi Arabia was going to cut production to offset rising Iraqi output. Also adding to the confusion was strike worries from Nigeria and comments from Venezuela that they wanted to see prices several dollars higher. Just when you thought prices were going to settle back down after soaring to over $2 a gallon in many areas it appears supply is dwindling again. This undeclared tax on the U.S. consumer and corporations alike will act to slow any future recovery. When added to the hike in interest rates this is a serious problem that most people fail to consider.

Depending on whom you listen to there were either outflows from funds in the week ended on Thursday or at best a drop in the amount of money deposited. TrimTabs said inflows to all funds fell -50% last week to only $2.39 billion but the numbers are vague. It appears more than $3 billion flowed out of the funds that are under investigation for illegal trading. Janus supposedly lost -$2.6 billion over the last week after they said they uncovered 12 arrangements for improper trading of its funds. If that money actually left Janus then there was some serious selling to raise it and that could have been one of the major reasons for the drop last week. That money is probably already sloshing around in some other funds coffers and is either already back in the market over the last three days or will be put back in next week.

Fed Rant Ahead

Ok, I admit it. It was a perfect setup. The perfect sting to benefit the greater good. Thursday night I mentioned that it was very coincidental that five different Fed heads all took it upon them selves to say how concerned the Fed was about jobs on the very same day. The day before the actual jobs report. Very coincidental and questionable I said at the time. What I and obviously many other traders thought was we were going to have a disaster of a Jobs report and they were setting us up for it in advance to ease the blow. After all they were really concerned and they were really feeling our pain. Considering the Fed gets a 24-48 hour advance notice of all the economic reports they obviously knew in advance how bad it was. BINGO! They knew in advance exactly how good it was and they orchestrated the perfect short squeeze. Set everybody up to lean to the downside and then knock them out of the ring with the sucker punch. The perfect sting for active traders.

But why go to all the trouble? Because it is easier to manipulate the markets when the opportunity presents itself than cut rates again. It costs them nothing and to 99.9% of the public it is totally secret. Another reason is to pump up taxes. Not only does the Fed want to pump up the market long term to reflate tax collection but they need to stimulate tax collection short term as well. Causing wild gyrations in the market will promote trading and trigger tax consequences short term. How many traders were either stopped out of positions Friday or closed them for unexpectedly large profits? Maybe millions. They accomplished multiple goals at once. They took a period where everybody was coiled up tight worried about an October drop and blew them out of the water and completely turned the market around to bring the bulls back to thinking about new highs. Those hoping to buy the October dip are much less certain that a dip will appear. Now they are nervous that they might miss the train. Bullish emails were flying Friday afternoon. Dow 10,000 was mentioned numerous times. The normal October tribulation period has been completely discounted after Friday's bounce.

If a company CEO did this to his stock he would go to jail. The Fed can do it because they don't own the stocks. They are operating in our best interest or at least in the best interest of the country. My shorts that were stopped out on Friday did not benefit from the Fed help. When you are dealing with banker barons who have a federal "get out of jail free" card it brings an entirely new meaning to "don't fight the Fed." What I would have given to be a fly on the wall when Bernanke called Alan at the close. "Well, Al, how did I do? We really put the screws to those those traders today. What have you got planned for next week? This is more fun than printing money!"

Obviously I have no evidence to support any of the above scenario and I am only speculating. I do know that the Fed gets 24-48 hour advance notice of reports. We also know for a fact that five Fed guys hit on Jobs in public speeches after they got that advance information. You connect the dots.

The markets exploded out of the gate on the jobs news with the Dow gapping up to 9631 (+150) and completely bypassed two critical resistance levels at 9500 and 9600. After an initial but brief pullback the Dow moved to a high of 9666 at 1:PM, +185 points. The Nasdaq surged to a high of 1891 and +56 points. While the Dow traded briefly over its prior 52-week closing high of 9659 the Nasdaq could not make repeat the feat. At 2:45 the sell programs began to fire and the Dow dropped back to up only +84 and 100 points off its high. Still a very nice gain. The Nasdaq pulled back to 1878 and +44 for the day. Despite the afternoon selling this was a very strong performance for October. This stretched the October winning streak to three consecutive days. The Dow is up over +300 points already for Oct and the Nasdaq +90.

This puts the bulls, bears and traders on exactly opposite sides of the fence. The bulls have completely written off the possibility of an October decline. I get tons of hate mail if I even mention the historical trends. (That should be a strong contrarian indicator on its own.) The bears, while expecting the mother of all October dips are scared to pull the trigger and attempt to short the market even at these levels. Being convinced there is a dip in our future and being brave enough to put money on the line and fight the Fed requires vastly different levels of commitment. Traders don't care which way we go and have no clue which way we are going. I published a chart on Thursday showing the almost daily reversals of sentiment over the last month. Friday's action did not help change that picture.

Technically speaking, and that is what I am doing when I talk about the market levels, we are at a critical point in the market and in time. It seems almost daily since the rebound began three days ago that I get numerous emails calling me to task for mentioning a potential October dip. I got no emails for the prior week when we were slipping but now they are flying fast with all the reasons why we should be bullish. I have no argument with being bullish. I agree we should be long term bullish but that is not the point. The point is not being bullish or bearish but being careful as traders. It is simply ridiculous to go blindly through October as though historical trends did not exist. The trends MAY not repeat this October but that does not mean we should not be wary. You would not try to cross a busy street without first looking both ways before you stepped off the curb. Be bullish all you want but at least be aware of the potential land mines in your path.

Technically speaking the Dow is better off where it closed than at the highs of the day. Closing at 9650 would have been an open invitation for shorts to take a free shot at the open on Monday. Closing at 9575 is just far enough below several resistance levels to make them think twice before taking the leap. On the long side the bulls do not have to grit their teeth and hold their nose to buy at the 52-week high. They can calmly look at the market action on Monday and decide where to make their buys. With support at every 50 point increment below us there are plenty of potential dip buying entry points. Closing 100 points off the highs took all the pressure off the bulls and put the worry back on the side of the bears. Still the odds of a gap fill in our future are really strong.

The Nasdaq has very strong resistance at 1900 and equally strong support at 1800. 1865 is probably the price magnet in the middle. The Nasdaq was the strongest index Friday and was up +4.7% for the week. The networkers were up +6.8%. While the Friday close represents exactly a 50% gain for the Nasdaq since the March lows many individual stocks have huge gains for the year. INTC +89%, EBAY +128%, SAMN +131%, AMZN +170%. Fundamentally speaking this is a huge reason why getting over 1900 could be a challenge over the next two weeks.

Everybody knows earnings start next week. The first Dow component announces on Tuesday with Alcoa taking the plunge. Tuesday heats up with YHOO, DNA, SONS, COST. The number of companies increases daily with GE leading the list on Friday. The earnings really heat up the week of the 13th with the biggest accumulation of big caps including IBM and INTC. Earnings expectations have ratcheted up over the last two weeks to nearly +20% for the S&P. Considering the strength of the recovery this is huge. The rally has been huge and many think the expectations are already priced into the market and leave us nowhere to go if companies just hit these numbers. I have no opinion about the potential earnings other than I do not expect a lot of better than expected results. The warnings have been especially light and that has helped ramp up expectations. We all know what happens when companies just meet expectations. The result is normally not pleasant. With expectations so high it is going to be tough to exceed them enough to please most bullish investors.

What we have is a critical point in the markets. Not a bullish or bearish point but simply a collection of related items all rushing together over the next two weeks. It is small wonder these are the most volatile two weeks of the year. Other than the small dip that ended on Tuesday we have not really seen any fund selling yet. As I stated earlier that bout of weakness could have been Janus flight more than any generic portfolio shuffling. That leaves the fund portfolios packed full of profits and racing toward their October fiscal year end. The most likely scenario would be some spark over the next two weeks that triggers some profit taking. Whether that spark is earnings or just a point on the calendar is anybody's guess.

Just because there is a good chance of profit taking in our future does not mean we should not be bullish. The jobs report was the first really positive sign that the employment is starting to cycle up again. That is very bullish but it is just a sign and not a major event. With 140 million jobs in the country an addition of +57,000 is not statistically significant. It is significant only to the sentiment and to investor confidence. Traders might remember that despite the positive jobs report the PMI, Personal Income, Chain Store Sales, Consumer Confidence, Construction Spending, ISM, Jobless Claims and Factory Orders were all worse than expected. But who is counting? While they were weaker than expected nothing goes straight up and there were extenuating circumstances. We had a blackout and a hurricane in the reporting period. I am only trying to paint the entire picture and get you to step back from the microscopic focus on the jobs report.

I am bullish long term but I still expect some profit taking in October. What you expect depends on your point of view and your time horizon. If you are a long term stock investor then the short term fluctuations are just a nuisance factor. You probably are hoping for a dip to buy. If your time frame is 2-3 weeks then you should revisit your stop loss plan. If your timeframe is only 2-3 days then you already have an opinion about immediate market direction and I am not going to influence you.

Monday is Yom Kippur and many traders will not be at work. Normally this would be a low volume day. After three days of gains I would expect another consolidation day due to the low volume. It takes strong volume to move the markets upward and that volume could be lacking on Monday. Use it as a day to research individual stocks to see which ones have better than average relative strength and which ones report earnings late in the cycle. For example with JNPR reporting earnings next week any positive results would be reflected in expectations for other networkers that report a week or two later. Playing JNPR, which reports on the 9th, does not give you much time and I never recommend holding over an earnings event. By taking a position in FDRY or CSCO, only an example, both of which report much later you could profit from the reaction to the JNPR news with much less risk.

The next two weeks are one of the most enjoyable "trading" periods of the year. Moves tend to be quick, volume high and reversals frequent. I can't wait. I spent many long hours last week studying chart setups and playing with different indicators. I suggest you do the same. I suggest you prepare an October game plan. Decide where you want to enter new trades both bullish and bearish and decide where you want to exit those trades once entered. Plan for bounces and plan for dips. If you plan your trades in advance then the emotion of things like the jobs report spike will not cause a knee jerk reaction that costs you money. There were a lot of traders that went long at the top of the bounce on Friday because they thought the market was going to run away from them. If that is your game plan then go for it. My game plan is still the same as it was last Sunday. I am going to buy dips at support and sell spikes to resistance. I am going to let October play out any way it wants and just follow along for the ride. Once you form a hard opinion about market direction you may find yourself humbled. I know from many years of experience.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor



 
 



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