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Market Wrap

It's All in the Numbers

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That would be the jobs numbers tomorrow. Apparently that's what the market is waiting for. Once we have the numbers then maybe the market will move again. The past three days have seen a relatively tight consolidation and as we've seen time and again these tight little consolidations are typically followed by a large quick move. If only we could figure out which way that quick move is going to go.

For the past many months we've seen consolidations followed by another ramp higher and I think that's what most traders are expecting again. As I'll review in the charts there's a very good possibility that we'll see this relentless rally press higher again but the charts are also screaming for bulls to at least take some money off the table.

On the bulls' side we've got the calendar--the months of November and December are typically the two best months to be long the market. But those two months usually follow two rough months of September and October. This year we had a great September and October so that has many questioning whether the "end-of-year-rally" crowd is already in. If yes then where is the extra fuel going to come from to continue to drive the market higher? At least that's what the bears are wondering as they sit on the sidelines and take swipes at the bulls as they run by, only to get gorged and kicked back to the curb.

Because we've seen these tight consolidation days followed by more buying we could also have a lot of traders leaning towards the long side in anticipation that we'll get another shot higher again. For this reason we're probably not seeing a whole lot of selling in the market. Yes the market was down a little (more so for the techs) today but relatively speaking there's just not much interest in selling. That could change in a hurry if too many traders are caught on the long side but that's just speculation at the moment.

Countering the observation that there are a lot of people expecting another move up is what the VIX did today.

VIX chart, Daily

For what was a relatively minor pullback in SPX today (down 5.6 points, -0.39%) the VIX was up huge, +11.8%. That's a lot of fear suddenly entering the market and the big question tonight is whether or not that's bearish for stocks. Typically the answer to that question is yes. But from a contrarian viewpoint today's rally in the VIX is bullish for stocks. There could be a lot of worry as we head into tomorrow's payroll numbers. The market appears to be very concerned about this number and of course that's because the market is very concerned about the Fed's FOMC meeting next week and what tomorrow's numbers might mean to the Fed.

If there's fear of a bad number tomorrow (and that's subject to interpretation) and many market participants were snapping up put protection today then we could see a sudden unwinding of that protection tomorrow morning if the news is considered market friendly (again, subject to interpretation). That unwinding, by selling the puts, would give a lift to the market. Therefore don't immediately assume that today's rise in VIX means bearish things for the market. It could very well be exactly the opposite.

Dragging the market lower today were the home builders (DJUSHB), semiconductors (SOX), retailers (RLX), software (GSO) and computer hardware. The big cap techs, NDX, was the hardest hit today, down 1.2% vs. a fraction of 1% for the others. Even small caps, as measured by the Russell 2000 (RUT), was only down -0.45% today. Apple (AAPL 87.04 -2.79) got much of the blame for the tech bust today after CIBC said the company would not be releasing its latest multimedia device, the iPhone, until late in the 1st quarter or early in the 2nd quarter. That of course means lower sales revenue for at least 3 months. Investors had expected to see the device hit stores by the end of January and this is the expected next big thing for AAPL.

There were only a couple of green sectors today, led by the gold stocks which was interesting because the yellow metal itself was down today. The Transports were up marginally and the banks were flat. Both helped the DOW put in a slightly stronger performance, although still down, than the S&P 500.


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Unemployment Claims
After a big increase the week before the latest week's claims removed the spike up by dropping 34K, back down to 324K. Averaging just the past two weeks shows a steady unemployment picture. The holiday period is known for wild swings in this number and doesn't really steady back out until well into January. The 4-week average rose 3,500 to 328,750. Continuing claims rose by 57K to 2.52M and the 4-week average was up 20,250 to 2.47M.

Some economists noted a softening in the data, suggesting the unemployment situation is getting slightly worse. The average of 329K over the past 4 weeks is higher than the 312K average over the previous 4 weeks. Tomorrow's job numbers are expected to show the unemployment rate ticked higher to 4.5% from 4.4% but economists expect nonfarm payrolls to grow by about 112,000 in November, close to October's 92,000 gain.

This is when we get into the guessing game about how the Fed might react to the number and therefore how the market will react tomorrow morning. The goldilocks number is right around 100K. If it's too high then the Fed will be more than happy to sit tight on rates and the market won't like that (so what's good for our economy is bad for the stock market, which of course makes no sense). If the number is too low then it will show a slowing of the economy is more real. Bad for the economy, good for stocks (since the thinking is that the Fed will be more inclined to lower rates).

I've mentioned many times before that I think it's a pipe dream to think the Fed will lower rates any time soon. If anything they'll be forced to raise rates. If the US dollar continues to decline and inflation continues to remain higher than the Fed's target rate of 1%-2% then the Fed will have painted itself into a corner. They are much more interested in fighting inflation than a recession. To them a recession can be a good thing because it cleanses the system. I don't argue with them about that point either as I think they're right. But logic has nothing to do with how the market will react here--it wants lower rates and it wants them now and if the market doesn't think lower rates are coming soon then it could throw a hissy fit.

Consumer Credit
The only other economic report today was the level of debt we Americans are carrying. The good news is that we're trimming the amount of debt we have on the books. The bad news is that we're trimming our debt because that means we're spending less. A consumer who spends less is not doing his/her patriotic duty in supporting our country. So get out there and spend. We want to see people in hock up to their eyeballs. Outstanding consumer credit fell by -$1.2B or an annual decrease of -0.6%. This was from a revised number of +$4B in October which was originally reported as -$1.2B so it looks like funny numbers. But the drop from the revised number was the biggest decline in both absolute and percentage terms since 1992. That's a rapid slowing of spending.

Non-revolving credit, such as auto loans, fell by -$4.2B or -3.3% annualized. That's the biggest drop since 1993. Revolving credit, such as credit cards, was up +$2.9B or +2.9% but that's a slower pace of growth than September's +4.9%. Household borrowing slowed to its weakest level since 1998. Mortgage debt also grew at its slowest pace since 1998. Home-equity borrowing slowed to its slowest pace in more than two years.

Yesterday people were all excited because mortgage applications were up +1.9% vs. a year ago but in the larger picture that was just a blip. The fact that mortgage debt grew the slowest in 8 years made people rethink what's going on in housing. The home builders got slapped back down today, down -2.2%, after a nice rally the past week.

Overall it was a quiet day in the markets today. Currencies, commodities, equities and bonds all seemed to be consolidating as everyone waits for the payroll numbers tomorrow and then see how the market reacts. A review of the charts today leaves me with a bit of a mixed feeling as to what to expect tomorrow. My first reaction was that the market looks ready to roll over but looking a little closer and I'm not so sure about that.

DOW chart, Daily

When I look at this chart I want to short it in the worst way. This is back-up-two-trucks short if I ever saw one. The only trouble? We've had repeated failures of these kinds of setups. So instead I nibble around the edges and slowly build up a longer term short position since I'm pretty sure this is going to let go soon and when it lets go it could be swift. After breaking its uptrend line the best the DOW can do is walk up underneath its broken trend line. It can even make a new high doing this but its bearish price action. And then when I look at the oscillators I'm even further convinced that this puppy is about to fall. Not even Ace Venture will be able to save him.

As mentioned in the past RSI found its own broken uptrend line to be resistance long before price did. It was the first heads up that the rally was weakening. It didn't stop the DOW from making a new high in November but that new price high was not matched by RSI. And now a test of the November high is leaving another bearish divergence on RSI. This a major warning to bulls and those who didn't get short this market will look back in a month and wonder what were they thinking to ignore that setup.

We could also look back in a month and wonder how the market continued to rally in the face of such bearish divergences. Talk to any bear who has been trying to short this market since October and you'll understand why they look dumb struck. But this is a game of odds and the odds say this rally is toast very soon if not already.

But now we head into tomorrow and we don't know how the market will react. I've got a short term price pattern that supports the idea that we'll see another run higher. The DOW may not be able to get back above its broken uptrend line but that doesn't prevent it form rallying nearly 100 points tomorrow and park itself right underneath its trend line. If it were to do that by the way, I'd be able to comfortably call the short term Elliott Wave (EW) pattern complete and would be willing to more aggressively short the market.

SPX chart, Daily

SPX remains relatively stronger than the DOW--it beat its November high and has not yet broken its uptrend line. But RSI gives us the same exact picture and says this rally is nearly done if not done at this morning's pop-n-drop high. I see the same potential for another run higher tomorrow and it would actually make the short term pattern from the low at the end of November look more complete. A rally up to 1420-1425 would not be at all unusual here.

The last low on December 1st needs to be violated before we can declare that an important high has been made, so bears need to see a break below 1385. But keep an eye on the RSI--if it drops below the 50 line (thin red horizontal line) then we'll probably see price breaking its uptrend line and its 20-dma. That would be a strong heads up that something more bearish has already started. If you're in a long position and pulling your stops up behind this rally, and you want to aggressively protect your position now (which I recommend), then a close below 1400 would have me closing long positions and taking money off the table.

One thing to remember as we head into the end of the year is that many fund managers will now be more interested in protecting their gains rather than worrying about capturing additional gains. While it's always possible to see the market rally another 5% I think most people understand this market is beyond stretched to the upside. Many are going to be more worried about getting caught in a 5% decline. Therefore if profit taking hits the market it could happen quickly since many people are doing the same thing--they're tucking their stops up tight right under support and once they start getting hit it could drop the market quickly. Remember, a lot of funds are in ETFs (Exchange Traded Fund) now and they're a lot easier to sell--no uptick requirement and the plethora of ETFs actually makes the market more vulnerable to a wicked sell off.

Nasdaq chart, Daily

Like the SPX there's nothing particularly bearish about this chart--price is still in its up-channel and its 20-dma is still holding (price closed on it today). RSI is holding above 50. When I look at this chart I think you should try buying it considering support is so close and your risk can be kept tight. I'm not recommending a long play here because I don't like the risk:reward. I think surprises will now be to the downside and I just don't see the value of being long this market. If I miss another 5% rally that's OK. I'm willing to give up that kind of potential (which I don't see by the way) to eliminate the risk. I just wish there was a better effort to ring the bell at the top so that I could get short.

SOX semiconductor index, Daily chart

The semis were a big reason for the poor performance of the techs in general today. Other than the home builders this was the leading index to the downside today. This move down follows a retest of its high at the 62% retracement of the decline from January. Again, a glaring bearish divergence at a double-top will have you wondering why you didn't load up on SHM puts here. If you take a look at the SMH chart (semiconductor holders) you will see that it's even more bearish in that it has been held down by the downtrend line from January. It pulled back to its 50 and 200-dma's today, co-located just above 34.30. I would think that should be good for at least a bounce tomorrow but if not then I think the writing's on the wall for bulls here.

BIX banking index, Daily chart

If you're a bear what's not to love about this chart? We have a double-top with bearish divergence, a big shooting star doji candlestick and stochastics nearing overbought. But the warning, which has been true for months now, is that bearish setups like this have been routinely busted by the bears. It almost seems the market manipulators know exactly how to set up the charts to look mega bearish, suck in the bears and then jam the market higher with buy programs and use all that bear fuel to reach orbit. I don't discount that possibility here especially since the short term pattern looks questionable--it looks like it could use a pullback and then another new high. But I sure wouldn't want to be long this index here.

U.S. Home Construction Index chart, DJUSHB, Daily

The home builders got a bigger bounce than I had been expecting. After breaking above its 200-dma and then above the top of what looked like a clean bear flag I began to wonder if I've got the price pattern all wrong. That is of course a distinct possibility but I think it's still an excellent short play here. What I don't like about the short side here is that there's no bearish divergences at the last high. I really prefer to see a test of the high or a new high with negative divergences. We don't have that. But I like the fact that price stalled near 765 which is the 38% retracement of the decline from July 2005 and the final leg up within the choppy bounce from this past July had two equal legs up at the same 765. With that kind of Fibonacci alignment it gives me greater confidence in calling a top for the bounce in the home builders. This should fall right back through its 200-dma and if it doesn't then something more bullish is going on and I'd step aside and wait to see where this might be headed.

Oil chart, December contract, Daily

We're getting a little pullback over the past few days but this should lead to another push higher before a larger pullback sets up. I don't see anything yet that negates the depiction I have on the chart for price action over the next month or so. We should see a choppy rise higher for oil.

Oil Index chart, Daily

The oil stock index also pushed higher than I had expected it to and it has me wondering if it's headed for the top of its short term and longer term up-channels, currently near 690 now. Price is currently stalled around a Fib projection at 659 and looks ready to roll over so this could be it for the rally. We won't know that until the uptrend line from October is broken.

Transportation Index chart, TRAN, Daily

After breaking its uptrend line from September it looks like the Trannies tried to retest the line but couldn't quite get there. But the short term pattern has me thinking this could bounce a little higher still and might even get back up to test the top of its wedge pattern. The alternative to that possibility is that we'll see a small sideways consolidation before heading down to its 200-dma. That kind of move would tell me we've probably seen the top to its rally.

U.S. Dollar chart, Daily

After breaking support at its May low the US dollar appears it will form a small sideways consolidation which should be followed by another move lower. The move lower should set up a larger bounce but so far it's looking like the dollar has already started its next big decline into next year. A move down in the dollar over the next year should be supportive of a rally in gold.

Gold chart, December contract, Daily

The broken uptrend line from August 2005 continues to act as resistance and I'm expecting to see gold pull back to its 50-dma to set up another rally leg. So far I'm not seeing anything to change that expectation. The rally off the October low looks impulsive (5-wave move) and that suggests we'll see a corrective pullback and then a continuation higher.

Results of today's economic reports and tomorrow's reports include the following:

As mentioned above the big report tomorrow is the nonfarm payroll number. It needs to be a goldilocks number around 100K otherwise the market could be unhappy on either side of that number. Assuming the number is right there then we could see a relief rally. If the market is initially disappointed and sells off we still need to be worried about the Fed coming in and stuffing the channels with more money. That could be especially true if the number comes in abysmally low.

Speaking of Fed money, as this chart of calculated M3 shows, the Fed has been no slouch when it comes to producing prodigious amounts of the greenback.

Calculated M3 Money Supply, courtesy of nowandfutures.com

The darker black line shows the continuing escalation in the amount of money being created. This money typically makes it into the monetary system through the primary dealer banks who now have their own proprietary trading teams. These investment banks trade their own capital with the Fed's money (and are making literally billions of dollars doing all their "risk-free" trading). The newly created money is helping support the stock market (and I bet you thought we had a free market that is not manipulated by our government).

The rate of change, the light blue line, continues to increase as well. The Fed is clearly worried about something and they feel a lot of new money is needed to continue priming the economic pump which must be cavitating big time. Ignore what the Fed says about interest rates and instead watch what they do with the money supply as it's much more effective. The trouble here is that what they're doing is hyperinflationary and they'll be forced to raise interest rates if they keep this up. It's also a reason we're seeing a drop in the value of the dollar. This won't end well.

There's very little change in the weekly SPX chart--it refuses to come down off the roof.

SPX chart, Weekly, More Immediately Bearish

The bearish doji candlesticks of the past two weeks were negated by not getting a red candle to follow. I don't see anything bullish here but obviously there are not enough sellers to start this back down. It might even have to wait until January. But the daily bearish divergences and overbought weekly oscillators tell me I should be looking for a short entry rather than even thinking about the long side. It's just a matter of when. Don't force it and be patient. It will happen.

What can I say about tomorrow except be careful and expect whipsaws and head fakes in the morning. The initial direction out of the gates seems to be the head fake direction, or at least traders who jump on the initial move tend to get whipped out of their trades even if the market then turns back around and heads in the original direction anyway. But trying to figure out how the market will react to the numbers tomorrow is never an easy task. If we get a decent bounce in the morning that's followed by a move below today's lows then I'd be inclined to sell into it (or sell the bounces).

Because I see the possibility for new highs on the short term charts I'm reluctant to suggest shorts tomorrow. One thing to keep in mind, and I have no idea if the pattern will continue, is the head fake move on the Thursday prior to opex. For the past several months we've seen a move down on Thursday followed by a jam higher into opex week. It seems as though that's been the favorite tactic of the mega banks' trading teams as they load up on cheap front-month puts on the early push lower. Watch for that possibility again.

At this point I can only recommend to those who can watch the market all day long to just make hit and run trades. I don't see a good signal yet for either side and therefore make slashing attacks and get out of the way. You need to be a gorilla fighter right now. For those in long positions please have your stops tucked up tight right now. Protection with put options has never been cheaper. Sell some covered calls (January) although that won't help you much if we start a serious decline. If you're waiting to get into some longer term short positions, keep waiting. I'm slowly legging into some positions but will only get aggressive after we see some serious support breaking.

Good luck tomorrow and then have a great weekend. I'll see some of you on the Market Monitor and be back here next Thursday.

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