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Market Wrap

"The Labor Market Could Grind to a Halt"

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Anyone watching CNBC today was treated to bullet points from President Bush's press conference and Fed Chairman Bernanke's testimony before the Senate Banking Committee. Buried in a Conference Board report on the help-wanted index today was a bullet point that had a grimmer sound, at least for those who hope that consumers will pick up the slack left by the housing market's slump. "The latest data on job advertising in print suggests there's virtually no chance that labor market activity will improve over the next few months," said Ken Goldstein, labor economist at The Conference Board.

His quoted words in the Board's report continued. "To the contrary," he said, "there is a chance that the labor market could grind to a halt." Not all believe that The Conference Board's index, obtained from surveying Help-Wanted print advertising volume in 51 major newspapers, is as relevant or predictive as it once was, of course. Placing help-wanted ads in a newspaper may no longer be the primary way companies advertise for new help. Still the pattern of initial and continuing claims supports some concern about employment.

CNBC was quick to trot out CEO's to combat the perception that the labor market might be slumping. Citrix's president appeared on CNBC this afternoon, asserting that his company plans to hire about a thousand people by year's end, with the message being that high tech and some other industries still planned to hire.

Other bullet points today countered the grim statements from The Conference Board's labor economist. President Bush asserted that the economy would not go into recession, something that some economic pundits believe has already occurred. Federal Reserve Chairman Bernanke offered that he didn't "anticipate stagflation," addressing the worry that the dual hits of rising inflation and stagnant economic growth would send the U.S. economy into a period of stagflation like that seen in the 1970s. If crude prices decrease, Chairman Bernanke asserted, inflation should abate.

Crude and other commodity prices showed little signs yet of decreasing. As the U.S. dollar dove, dollar-denominated commodities soared.

By the day's end, some of the bullet points from today were still echoing. The statement that the labor market could grind to a stop might not have been read by many, but many did hear Federal Reserve Chairman Bernanke's bald statement that banks could yet fail. With Moody's talking about lower ratings on some regional and community banks, that specter seemed all too real. Equities dropped, with some indices completing three-day reversal signals known as evening-star formations.

Let's look at charts and see what damage was done, if any.


Annotated Daily Chart of the SPX:

Taken on balance--the potential reversal signal included--I wouldn't be surprised to see the SPX drop down to test that 30-sma near 1352.70. However, whether that happens or doesn't happen may depend to a great degree on tomorrow morning's pre-market release of the Chicago PMI.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

The ultimate reaction to Dell's post-market earnings report may determine whether the Nasdaq dives below that triangle support tomorrow or rises to test the resistance. As I type, the reaction has been negative, but that can change by tomorrow's open.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

No discussion of the markets' action today would be complete without a discussion of what was going on in currencies. Over the course of the last year, I've been pointing out the correspondences in what happens with the USDJPY (the U.S. dollar when compared to the Japanese yen) and U.S. equities. As the dollar drops against the yen, U.S. equities have tended to drop, too, and vice versa. The intermarket relationship is not always exact and is certainly not always a good market-timing tool, but it's been important to remain aware of what's happening with that currency pair.

A dropping dollar also impacts the costs of dollar-denominated commodities such as crude and gold, of course. I'm going to employ a nested Keltner chart to show what I see with respect to the USDJPY. I'm using the Keltner channel because it's better at providing potential targets.

Annotated Daily Chart of the USDJPY:

About RSI and the USDJPY: Currencies tend to respond better to oversold or overbought levels as signaled by the RSI. As can be observed on this chart, however, USDJPY bounces are often accompanied by bullish price/RSI divergences after RSI hits below-30 levels and the USDJPY bounces but then rolls down again, creating a bullish price/RSI divergence.

What's my conclusion? The USDJPY may be approaching a bounce zone, but it could have further vulnerability to 103.50 or so, too. If there's a bounce in the USDJPY and an attendant bounce in U.S. equities, be careful of the possibility of a second rollover to create that bullish divergence. That bullish price/RSI divergence isn't always a necessary adjunct to a sustainable bounce, but it does happen often enough that you should be aware of the possibility.

The USDJPY could also just head straight down to 103.50-104.25. The Keltner channels present strong potential for that to happen.

Today's Developments

Today's 8:30 am ET release slot included the weekly initial and continuing jobless claims and the update on the fourth quarter's GDP. In previous times, we might have glossed over the initial and continuing claims figures to go straight to the perceived-as-more-important GDP. However, these weekly jobless figures have assumed more importance these days when the housing market is no longer supporting the economy. An employed and high-spending consumer must be relied upon to do so.

Initial jobless claims climbed 19,000 to 373,000. By my calculations, the rise was actually 24,000 above the previously reported 349,000 for last week, so last week's number has obviously been revised higher. Consistent readings above 350,000 are believed to be indicative of a weakening labor market.

The four-week moving average fell 1,250 to 360,500. Continuing claims rose 21,000 to 2.81 million, the highest level in more than two years, during the post Hurricane Katrina period. The four-week moving average of those claims rose 24,250 to 2.78 million. The seasonally adjusted insured unemployment rate steadied again at 2.1 percent.

While one source said economists had predicted a revision to 0.7 percent growth in the fourth quarter, many had feared that the GDP revision would result in a negative number, showing a contraction of the economy. Those fears weren't realized.

GDP for the fourth quarter of last year was unrevised at 0.6 percent growth. Adjusted for inflation, the economy grew 2.2 percent in 2007. However, some components of the revision did trouble markets, sending futures lower in the pre-market session and contributing to the lower open and morning swoon. The Bureau of Economic Analysis reported that consumer spending, business investment, residential investment and inventory building were all revised lower. The Bureau of Economic Analysis also revised lower its figures for government spending.

Moreover, although core inflation remained unrevised at 2.7 percent, consumer inflation including food and energy was revised higher to a 4.1 percent annualized rate. Consumer prices rose 3.4 percent. Core prices, excluding food and energy, rose 2.1 percent, just above the perceived comfort level for the Fed. Those higher inflation figures pushed inflation-adjusted after-tax incomes 0.3 percent lower.

An upward revision in the trade balance helped to prevent a downward revision to the fourth-quarter GDP. Exports were revised higher, and imports, lower. The revision lower in inventories, noted earlier, subtracted from the GDP, but some economists see that as a positive for future GDP numbers. When businesses build inventories again, the GDP will rise, they argue. Housing subtracted 1.25 percentage points from growth.

Those who would like to read the report in its entirety and puzzle over the numbers can find the report at this link.

President Bush scheduled a 10:00 am ET press conference to discuss housing, the war in Iraq and other matters. Could this have been a deliberate attempt to upstage a second day of grim testimony by Fed Chairman Ben Bernanke? Was it an attempt to deflect attention from the doom and gloom of the question-and-answer session? With a renewed push to convince Congress to pass legislation granting legal immunity for telecommunications companies that help the government spy on suspected terrorists' phone calls and emails, it appears that his agenda may have been a different one.

One press conference can accomplish more than one goal, however. President Bush did spend some time painting a more optimistic portrait of the economy than that we've heard lately. He also detailed the soon-to-be felt benefits of the stimulus package, with recipients due to receive their checks the second week of May, he said. This pro-growth package will be enough, he believes, and he wants government groups and citizens to wait to realize its benefits before further stimulus packages are sought. He made these points about the same time as Federal Reserve Chairman Bernanke was being grilled about the help that might be offered to struggling homeowners. A bill to help those homeowners is currently being moved toward the Senate floor. President Bush has threatened to veto the bill.

At 10:00, FOMC Chairman Bernanke had begun his second day of testimony, with today's appearance before the Senate Banking Committee. Most have read or heard his prepared comments since those were released yesterday. Attention instead centered on the question-and-answer session.

He was asked about stagflation, as noted in the introduction. While denying that he anticipated stagflation, noting the differences in our economy and that of the 1970s when we did experience stagflation, he did acknowledge simultaneous slowdowns in the economy and inflationary pressures. In addition, we have the documented problems in the financial markets. Although Chairman Bernanke asserted that no large financial institution was now in danger of collapse, he thought there could be bank failures.

As if to emphasize that possibility, Moody's was almost simultaneously announcing that potential losses in the commercial real estate portfolios of some regional and community banks had resulted in negative ratings actions on those banks. Goldman Sachs and Merrill Lynch have cut their 2008 earnings estimates for JP Morgan Chase (JPM). As many subscribers may already know, JPM's CEO revealed during the bank's analyst day yesterday that losses due to its home equity loan portfolio could be more than double previous estimates.

Federal Reserve Chairman Bernanke was of course asked about the measures being considered in Senate panels to help struggling homeowners. Those measures might include allowing judges in bankruptcy hearings to change the terms of mortgages, among other measures. Lawmakers have not been successful in their attempts to get Chairman Bernanke to offer an opinion on the particulars of those measures. He repeated yesterday's message that other recommendations or contingency plans might be needed in the future, but that he didn't have any additional recommendations at this time. He wants mortgage services to move beyond "temporary palliatives" and find solutions that are both permanent and sustainable.

Today's report on mortgage rates, showing another week-over-week rise, further emphasizes the plight of those homeowners attempting to roll out of ARMs into 30-year fixed-rate mortgages. Those 30-year fixed-rate mortgages rose to 6.24 percent last week, higher than its year-ago level, Freddie Mac reported. Despite the Fed's efforts at easing its own target rate, the drop in mortgage rates proved only temporary. Those who sought to benefit from the decline in mortgage rates after the recent Fed easings appeared to have about thirty minutes to do so before rates began rising again. That is, of course, an exaggeration, but I meant to emphasize how ephemeral those declines in mortgage rates were.

Other bullet points from Federal Reserve Chairman Bernanke showed him agreeing with others' assessments that the unemployment rate is likely to rise and that an economic slowdown is currently a bigger risk than inflation. Most market watchers and economists concluded that the Fed Chairman signaled that the Fed will ease rates as often and as much as is needed to prop up the economy. His prepared statements did not appear, to me, to be as dovish as the tenor that some attributed to his Q&A sessions.

At about the same time that President Bush began his conference and Fed Chairman Bernanke his testimony, The Conference Board released its Help-Wanted Index for January. January's figure slipped to 21 from December's 22, with five out of nine regions showing declines. The Conference Board surveys major newspapers across the country to obtain its index.

Although President Bush asserted today that he didn't believe the country would fall into a recession--something some economists believe has already happened--the Conference Board's labor economist said, "What's more important is that people are behaving as if a recession is already here." He was not replying to President Bush's statement but rather addressing the broader argument about whether we are in a recession or on the verge of one. He went on to offer the quotes included in the introduction to this article, offering the "virtually no chance" prediction of any improvement in the labor market over the next few months. The complete report can be found at this link.

At 10:30, the EIA released weekly natural gas inventories figures. Natural gas inventories fell 151 billion cubic feet. Natural gas climbed, but nothing in the energy complex needed the help of a bullish drawdown to send prices higher. The declining dollar was doing all that was needed to send commodities higher.

Today the Federal Reserve released figures on outstanding commercial paper. For the first time in four weeks, outstanding commercial paper rose. The jump was significant, by $23.6 billion, with all categories rising in the seasonally adjusted figures. This was a welcome sign to those worried about a freezing up of the markets for corporations trying to place short-term paper to fund their needs.

Company-related news included Apple Inc.'s (AAPL) affirmation of its 2008 targets for iPhone sales. Some financial news sources credited AAPL with single-handedly propping up the large-cap tech stocks during the morning's stock market swoon, but Dell (DELL) also held up relatively well ahead of its earnings report.

Dell was due to report after the close, but with the subprime mess, mortgage woes and credit concerns so prominent, Freddie Mac's earnings report was drawing plenty of attention during the day. Freddie Mac reported a greater-than-expected loss of $2.5 billion for the fourth quarter. Backing out an accounting change, that loss would have been $3.7 billion. The EPS loss had been expected to be $2.34 a share but was instead $3.97. Freddie Mac's CFO Buddy Piszel asserted that Freddie Mac would not need to raise cash unless a dramatic deterioration resulted. Yesterday, Freddie Mac and Fannie Mae revealed that their investment-portfolio caps would be raised. Piszel also noted that the company had been discussing a reduction of the required 30 percent capital cushion that the Office of Federal Housing Enterprise Oversight has been requiring Freddie and Fannie to maintain.

Thornburg Mortgage announced today that it had received margin calls on a portfolio of securities that had dropped 10-15 percent since the end of January. These securities were backed by alt-A loans. The margin calls were apparently related to the Valentine's Day revelation by UBS that it had $26.6 billion in exposure to securities backed by Alt-A mortgages. That revelation pressured those holding those mortgage securities because it spooked potential buyers, ultimately resulting in a marking down of those securities and margin calls for Thornburg Mortgage and others.

Excluding a goodwill charge and other items, Sprint Nextel (S) reported earnings of $0.21 a share on revenue of $9.85 billion. Analysts had expected $0.18 on revenue of $9.92 billion. Not excluding those charges, the company reported a loss of $10.36 a share, hurt by a decline in wireless post-paid subscribers. The company did not price its new unlimited wireless plan as low as some analysts and investors had feared.

Sears Holding Corp., owner of Kmart and Sears chains, reported net income of $426 million or $3.17 a share. Excluding items, earnings were $3.04 a share on revenue of $15.1 billion, below the anticipated $3.10 a share on revenue of $15.3 billion. That was well below the year-ago $5.27 a share. Increased competition, higher energy costs and the declining housing market resulted in lower demand for home appliances and apparel, the company said.

Dell (DELL) reported after hours. As this report was prepared, soon after the close, DELL was trading at $20.42, down from the $20.87 close. Early reports mentioned a 6-percent drop in earnings and an EPS of $0.31 a share rather than the expected $0.36 a share. Guidance mentioned more potential negative impacts on the company's near-term performance due to most costs the company expects to incur as it realigns its business. It's important to remember that early reactions during the illiquid after-hours period is not always indicative of what will happen the next day.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic releases include the important February Chicago PMI, offering the last look at the manufacturing sector before next week's ISM report. That will be released at 9:15 am ET. The Chicago PMI could prove market moving. As of last weekend, economists estimated that the number could ease to 50.0 from the previous 51.5.

Other releases for tomorrow could impact the markets, too. Those include the 9:00 release of February's NAPM-NY and the 10:00 release of February's Consumer Sentiment. Other releases include January's Personal Income, to be released at 8:30 am ET, the ECRI Weekly Leading Index at 10:30, and February's Agricultural Prices at 3:00.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

Since there's fairly good correspondence of black-channel support and resistance with trendline support and resistance, breakouts or breakdowns could be considered to have occurred when the SPX breaks above or below those trendlines, confirmed by 30-minute closes above or below the black-channel lines. Note that in the case of an upside break, the SPX would soon slam right into potential Keltner resistance at the widest Keltner channel line. Those who were in bullish trades would need profit-protecting plans in place for a test of that zone. The Dow's chart, shown next, suggests that the upside breakout is the less likely interpretation, but if you watched markets through the rally that began in 2003, you know that less likely interpretations can be fulfilled. As always, false breakouts or breakdowns sometimes occur, too.

The hope would be that a recognizable pattern would be established without a broadening channel breakout or breakdown needed. Some will insist that there's already such a pattern, a potential H&S pattern, but which version would you choose? Would it be the version that has a left shoulder at Monday's early morning high, a double head at Tuesday's and Wednesday's highs and a right shoulder just beginning this afternoon? Or would it be the version that has a descending neckline at the broadening formation's lower trendline?


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Others will say, no, this pullback is a bull flag pullback. When bulls and bears can find equal amounts of confirmation, then it's likely that neither opinion is truly valid. Bulls and bears are fighting it out, with equal conviction or equal amounts of confusion on both sides.

Broadening formations are the visual depiction of emotion-based trading. Emotion-based trading is not particularly amenable to technical analysis. If you expect choppy, unpredictable trading conditions inside that formation, you'll be better prepared to deal with them rather. You'll be less likely to believe every little jit and jot of the markets means that your trade is either validated or invalidated. You'll be less likely to jump into trades with both feet, overextending your account, taking on more risk than market conditions warrant. Perhaps tomorrow morning's releases will move markets in a way that clarifies the action.

However, if the action is "clarified" in such a way that the SPX is sent roaring up toward the upper trendline of this formation, I would absolutely be aware of the potential for a reversal back through the formation. If the action is clarified so that the SPX is sent down toward lower-channel support, I would also absolutely be aware of the potential for a reversal back through the formation.

Annotated 30-Minute Chart of the Dow:

Annotated 30-Minute Chart of the Nasdaq:

Annotated 15-Minute Chart of the Russell 2000:

Here's something else to watch for short-term guidance:

Annotated 30-Minute Chart of the VIX:

Okay, so what's my best guess? There's absolutely nothing on these intraday charts to tell me what that should be, and I typically use to them to give some guidance to early action, at least. With the Chicago PMI tomorrow morning likely to prove market moving, I need that guidance from these short-term charts. Those broadening formations tell me that I shouldn't even be guessing because anything happening now is just chopping around within those formations. Right now, I personally would not touch a scalping or day trade with a ten-foot pole.

However, if I have to chose something, if my feet were being held to the fire, I'd have to say that for the SPX and Dow at least, a test of the daily 30-sma would be my best guess. That's due to the potential reversal signal produced today on the daily chart. However, after that test, if it does occur, I don't have a clue. I'll have to see how it sets up, how the day finishes if the test occurs. I will not yet be counting on a reversal signal, confirmed though it might be, producing a strong reversal while remaining aware that it could do so. I feel that we'll get a stronger downdraft at some point, but I'm just not sure it's yet.


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