The Dow lost -120 points on Thursday and most of that in a major sell program at the close. That was the second of the last three trading days to implode in the last 30 minutes.

Market Statistics

The window dressers were unable to hold the line on Thursday and keep the averages pinned at their highs for year-end. With father time looming in the background as the clock wound down a major sell program hit the tape and in the thin market the result was instantaneous.

It was the lightest volume day of the week and most of that volume was at the open. At least until the last 25 minutes when the sell program triggered stops and produced the highest volume since the first five minutes of the day.

You have to wonder if this was not a calculated play to trigger a major sell program in the last 30 minutes of trading on New Year's Eve. I doubt they were just exiting positions but instead they were trying to drive the market lower knowing there was going to be almost no volume 30 minutes before the close. Had they built up some large short positions going into January and were trying to poison sentiment for Monday morning? Time will tell but it appears very suspicious.

The beauty of having 12 years of market wrap history on Option Investor is that you can go back and review prior years and events. It is like writing a history book on the market one page at a time. I went back to the prior two year-end commentaries and pulled the information for the following graphics.

The headline you will see in the newspapers will look something like "Markets post best yearly gains since 2003." If you only looked at the headline you would think the markets had a banner year. In fact it was the best year for the markets since 2003, which also sounds very bullish when mentioned by itself.

There were some spectacular full year gains in 2009 but as we all know this is not the entire story. In the graphic below the Dow is showing a +19% rally in 2009. However, look at the drop from 2007 to 2008 and compare it to the gain for the Dow in 2009. There is a BIG difference in the numbers suggesting the Dow has a long way to go to catch up and that would be correct. But again, that is not the entire story. It was a good year, best since 2003 if you believe the headlines but it was far better than the official calendar year statistics indicate.

Market Stats 2007 to 2009 by Calendar Year

I know these graphics look a lot alike but bear with me. In the graphic below I took the same 2007/2008/2009 numbers and added two more columns with the change based on the 2007 close compared to the 2009 close. As you can see in the last two columns everything with the exception of the biotech index and gold is still well below the 2007 close. Again, this is only one way of looking at the statistics and it does not represent the real story.

Market Stats 2009 VS 2007 Close

Here is the real story! The next graphic eliminates the artificial limits of the year end calendar closes in 2007/2008 and simply shows the drop from the 2007 highs to the bear market lows and the subsequent rebound in 2009. This is the real deal and it may be the epitaph on the market tombstone for early 2010.

This graphic shows the massive market drops over the last two years and the true rebound percentages for each index. The number in the far right column is the rebound from the bear market bottom, mostly in 2009 but a couple were late 2008. Any market that rises +140%, 123%, even +80% in the space of less than a year would be construed by most as very overbought. Given the depth of our drop that may be true but not necessarily as badly overbought as it appears.

If you look at the drop from the 2007 highs using the Dow for an example it was down nearly 8,000 points in less than two years and has rebounded nearly 4,000 points in less than a year. Is that overbought or just a healthy rebound? I would say both.

It was a healthy rebound and is still well below its three-year highs but it is over extended in the short term. Same with the Nasdaq, S&P, etc. I believe nearly everyone, except maybe subscriber Rodney, expects the markets to end significantly higher in 2010. The only factor influencing the short-term performance is the outstanding rebound in 2009. The rally far out paced the economic fundamentals and I believe the market will pause soon to allow those fundamentals to catch up with expectations.

Note that gold rallied +103% from the 2007 lows as the financial crisis worsened and the dollar declined.

Rebound Statistics from Bear Market Lows

Just to refresh your minds on how bad 2008 really was I pulled this graphic from my New Years commentary in 2009. The two that really stand out for me are the average daily point range for the Dow for the year (280.8) points and the average daily point range for the last four months of the year. (421.01) I had already forgotten how bad the markets had become. I heard an announcer on Thursday bemoaning the fact that the Dow lost -120 and it was the biggest one day point loss in two months. I think the announcer was wrong but it was very close with only a few points difference. I think we would all agree that we don't want to live 2008 over again in the near future without prior specific knowledge it was coming.

2008 Market Records

For 2010 I expect some volatility early but then a bullish trend to higher levels by year-end. The economy is not rebounding as fast as the markets and I believe we will have to reconcile that fact over the next six months. The biggest problem that will come back haunt us over and over is the unemployment.

The government only reports the employment based on those still on unemployment and based on the household survey. Both are not accurate because they don't report the real facts. The government has another statistic called the U6 unemployment and counts everyone including those who have fallen off the rolls, those who have become discouraged in looking for work and are no longer actively searching and those who have taken a part time job to pay the bills while looking for full time work in their field. The U6 unemployment rate is now over 20%.

The current labor force participation rate is at a record low for this cycle at 65%. That means only 65% of all people able to work are actually working. Of course not everyone "able to work" is actually looking for jobs. Some are homemakers, housewives, retired or simply have no financial need to work. Still this is the lowest participation rate since 1988 and is indicative of the overall employment situation.

Employment appears to be improving in the U.S. and it is the lightning rod by which all other economic indicators are judged. In the weekly jobless claims released on Thursday the number of new claims fell to 432,000 and the lowest level since August 2008. However, I don't give that number much credence since only the most financially destitute would have gone immediately to the unemployment office if they were laid off during the holiday week. Weekly jobless claims need to fall to 350,000 or lower before we see any meaningful rise in employment numbers.

I expect we will see a major spike in claims over the next two weeks as those recently terminated and those being let go from seasonal employment line up to file claims again. However, there was a minor positive data point in the Thursday report. The continuing claims (orange line) continue to decline with a drop of 57,000 in the prior week. These are people who have been on unemployment for some time, approximately 4.981 million, and have either found jobs or have exhausted benefits and fell off the rolls.

Weekly Jobless Claims

Next Friday is the Non-Farm Payroll report for December and the consensus estimate is for a GAIN of +25,000 jobs. I don't have to tell you this would be a major press event even if it were simply a blip in the data stream from seasonal hiring in December. A positive number will draw politicians to a microphone like moths to a flame. Since the U6 unemployment number is still rising I seriously doubt a positive number will be more than a one-month wonder and back to job losses in the February report.

Non-Farm Payroll Chart with expected +25,000 gain

Other economic reports for next week include the FOMC minutes on Wednesday and Non-Farm Payrolls on Friday.

The ISM Index fell -2 points in November to 53.6 but still in expansion territory. Another decline could be problematic and indicate the bounce from the last eight months had peaked. The estimate is for a minor gain to 54.0 but there is no confidence in that number. This could be a leading indicator for the week. ISM services will be released on Wednesday.

The FOMC minutes on Wednesday are the second most important economic event of the week. This will be the inside look at what the Fed was really thinking when they met in December. Since rate decisions are on everyone's mind this will be a closely watched event.

With the expected gain of +25,000 jobs in the Friday report this could be a very volatile event. Anything is possible and it is sure to be a market-moving report. We are also getting very close to the major benchmark revisions in the payroll report in February. We could see a revision of more than 800,000 jobs and that may not sit well with traders.

Economic Calendar

TrimTabs CEO Charles Biderman said there were positive inflows into stock funds over the last five days of the year but that was normal for retirement funds. He said by far the biggest move for the year was money leaving stock funds for the safety of bonds. Despite the massive gains in the equity markets there was a constant flow of funds out of stocks and into bonds.

He said there were record lows for stock buybacks, record lows for insider buying and record levels of new offerings. Over $1.1 trillion dollars of new offerings were absorbed by the markets and they still moved higher. Most of the new offerings were secondary offerings by banks and financials and that was the worst performing sector for the year.

Biderman also said take home pay for all U.S. taxpayers fell -12% in 2009 to $5.8 trillion. The $800 billion drop came from layoffs, downsizing and pay cuts. At the same time the market value of all U.S. stocks rose +$3.5 trillion or +12% to $16 trillion. He said the stimulus did nothing to restart economic growth compared to the $3 trillion that was taken out of home equities between 2003-2007. He said cutting taxes would have been far better in restarting the economy because it gives real money to those trying to spend and start new businesses.

Competing with equities was the record sales of government debt of $2.1 trillion in 2009. That will rise to $2.5 trillion in 2010 and that continues to be a huge worry for economists and institutional investors. To date there have been no problems in the monthly treasury auctions but the worry is growing. The government was able to sell the $2.1 trillion in 2009 because it weighted the offerings heavily into the 3-6 month notes and 2-3 yr treasuries.

Getting investors who are afraid of the market to invest in treasuries for the short term is not nearly as difficult in selling them long term notes. Unfortunately that is where the government wants to go in 2010. They are moving up the term ladder to the longer term multiple year notes. Reselling billions in securities every 3-6 months is weighing on the government and they want to lock in some long-term money while the rates are still low. Hopefully if they offer long term notes the buyers will come but that remains to be seen and is still the biggest risk for the markets in 2010. The Fed has said it will quit buying treasuries as of February 1st and that could be the straw that breaks the auctions back. Does anyone else think it is strange that a quasi government agency, the Fed, buys government debt? I know the reason was to provide a market and keep rates low but every time I hear it that question pops up again.

There was roughly $50 billion in net cash going into U.S. stock funds, $65 billion into emerging market funds and just over $400 billion into bond funds. I actually view this as a positive for the equity markets. If equities don't implode in early 2010 then those cautious investors in bond funds should start to become more comfortable with equities and start moving money back into the market. I would look for that to happen later in the year once the markets start hitting new highs again on stronger economics.

There were no banks closed this week but there were six the prior week bringing the final total for the year to 140. The FDIC said the banking sector was improving but they still expect a large number of closures in 2010 and a continued drain on the FDIC fund. That is also a weight on consumer sentiment to see their neighborhood banks change hands overnight.

The banking sector remains under pressure and some of that pressure is coming from the massive new offerings. People expecting a banking rebound when they bought those new shares are becoming discouraged and those without lockup periods are probably going to exit if a bullish trend does not appear soon. Many are just waiting until the calendar rolls over to 2010 so they can take profits and move on to something that is not dead money.

Banking Index Chart

Oil prices rose to $80 on Thursday for an $8 gain over the last three weeks. The better than expected jobless claims helped push prices higher on Thursday along with a falling dollar early in the morning. When the dollar rebounded late in the day oil prices declined to nearly $79 before firming. This was the best year for crude oil since 1999. That may be surprising since oil hit $147 in 2008 but remember it also crashed to close at $45 before the year was over. I am planning on shorting oil next week assuming the Iran problem does not heat up.

Chart of Crude Oil

Oil had the best year since 1999 but oil stocks were the fourth worst performing sector. Technology was the leader with banking the worst. I continue to find it strange that airlines are doing so well when they constantly whine about falling passenger traffic and oil prices are rising.

Best - Worst Sectors

Q4 earnings begin in about two weeks when Dow component Alcoa reports on the January 11th. This will begin the Q4 earnings cycle but they really won't begin to flow in quantity until the week of the 18th and don't get heavy until the week of the 25th. January normally gets off to a slow start because of the holiday confusion and vacations.

The key here is the expected quality of earnings. Rather than earnings from cost cutting most analysts are expecting to see an uptick in earnings from rising revenue. This will be a sticking point for the market. If revenue numbers disappoint and companies are still reporting cost savings then this earnings cycle could end badly. The markets are priced to perfection and it will take some stellar results to keep the rally moving otherwise we could have a rocky summer. Since earnings in Q4 2008 were dismal the easy comparisons should produce a blowout quarter.

Market breadth is lousy and getting worse. However, we really can't apply much weight to the last two weeks because of the holidays. Most institutional traders were done weeks ago with their bonuses locked in and no reason to put any money on the line. Starting next week they will have to earn their bonus all over again for 2010. You can bet they are not going to come back from the holidays and go long everything in sight. This is going to be a wait and see market and it should not take long to tell which way we are going.

Institutional traders are going to be looking for a dip, probably a sizeable dip before committing too much money. With the rally very long overdue for a decent correction it may appear relatively quickly and be powered by a buyer boycott rather than a sudden urge to raise cash.

I am sure there is going to be a fair amount of tax selling now that the calendar has turned over to a new year. Whether that is in the first couple weeks before earnings or in the weeks following the earnings surge remains to be seen.

One thing for sure, it will depend a lot on the banking sector. The financial sector is oil for the market and a collapse in bank stocks could keep any equity rally on hold until banks begin to recover.

Dow 10,265. Keep that number firmly planted in your memory. That is the number to watch over the coming weeks. This has been support since early November and odds are very good it will be tested again soon. If that level fails the next test I believe we could see Dow 9500 again. The Dow high close last week was 10,544. A 10% correction from that level would take us to 9489 and right above the 38% fib retracement from the March lows. This should be an area where traders would gain confidence about reentering the market and beginning to build positions for 2010.

The last six weeks of sideways movement has been a topping process where the desire to add to longs faded once bonus levels were decided. Because I believe the economy will improve in 2010 along with earnings I believe the markets will go higher. We had a once in a decade buying opportunity in March. That is over once the market corrects from the monster rebound. That correction will clear the decks for the next move higher. For the Dow I believe that means a dip to around 9500. I would be thrilled if it did not go that deep but I believe a shorter dip would not be met with the quantity of buying we need to move higher.

Dow Chart

On the S&P that same 10% correction level from the 1128 closing high equates to 1015. Since the 38% fib retracement is roughly 1010 that would be an excellent target for a correction dip. The S&P has decent support at 1085 and that would be the decision point between just a profit taking dip and the possibility of a real correction. A decline below Thursday's close at 1115 is another break of uptrend support that would immediately target 1085.

S&P-500 Chart

A 10% dip on the Nasdaq would take it from the 2291 high close to 2061. That is only two points away from the 2063 50% fib retracement so it is definitely a target. The Nasdaq broke out of its bearish wedge and surged the week before Christmas but found absolutely zero follow through last week. The window dressers did an admirable job in keeping it pinned to the 2280 level until Friday's close. Uptrend support comes back into play around 2225 and horizontal support around 2150. If 2150 breaks it should be a straight shot to 2060.

Nasdaq Chart

The Russell 2000 chart pattern is a little easier to see with the 10% correction a dip to 570. That just happens to be decent support from late November and not as dramatic a breakdown in chart as we saw in the other indexes. Russell 538 and 550 are pretty decent support points. As with any new trading year rebound we should watch the Russell for signs of strength. Funds like to buy small caps early in the year and then move extra cash to liquid large caps as the year comes to a close. A strong rebound from 550-570 would be a huge buy signal.

Russell 2000 Chart

The first thing to remember about January market moves is that corrections don't always appear on schedule and they don't always go in a straight line. I posted the chart below several weeks ago showing the similarity between Nov-Dec 2008 and what we were seeing in 2009. Same Thanksgiving drop, same December range. I suggested that we could see the false breakout to a new high early next week then a similar decline on profit taking into earnings.

I think we may have already seen that false breakout with the new highs last week. The sharp drop on Friday, a planned jam job by somebody, helped to convince me further that we might have seen the short-term high.

Dec08- Jan09 false breakout chart

Dow December 2009 Chart

Just because the market may rest in early January does not mean it is an immediate correction. If it decides to correct it could take a matter of days, weeks or even a couple months. Retail traders will be buying every dip and it could produce some erratic patterns.

The key point for traders is not to put all your eggs in one basket. Just because quite a few analysts are expecting a correction is no reason to go short your entire bankroll. Be patient, pick a few opportunities and concentrate on looking for that opportunity to go long ahead of the rally that should come later in the year.

If we have a strong jobs report on Friday we could be off to the races again with all thoughts of a correction discarded like last week's newspaper. Plan for a potential decline but also plan for an unexpected rally. The market exists to make fools out of the most people at any given time.

While reading the various end of year tidbits in the newspaper I jotted down some interesting factoids. I am a fact collector and I thought these were odd enough to be interesting.

100 years ago in 1909 women washed their hair an average of once a month.

In 1909 the average life expectancy was 47 years.

Only 6% of U.S. citizens graduated from high school.

Only 6% of people were born in a hospital.

Only 30 people lived in Las Vegas Nevada.

Quote from Warren Buffett:
"The great bull market from 1982 to 2000 was due primarily to four things. Those were low interest rates, low inflation, lower taxes and less government intrusion into business."

Ten years ago in 1999 there were less than a dozen ETFs. The QQQQ, SPY, DIA and a couple others. Today there are hundreds of ETFs for every conceivable trading strategy. My ETF tip for the next decade is buy a platinum or palladium ETF whenever it is created. The gold ETF (GLD) now owns $43 billion in gold and I believe it has positively impacted the price of gold. Platinum is much more rare than gold and should an ETF ever make it to market I believe it should be a long term holding.

I want to thank everyone who took advantage of our end of year renewal special. It is always gratifying to see how many people return year after year to support the newsletter.

We are going to leave the subscription page up for a couple more days because I know some people were waiting for 2010 to subscribe because they already used up all their tax deductions for 2009. Some people are still on vacation and won't really get serious about the market again until late next week. We have about 70 DVD sets left and that will be the deciding factor. When those are gone we will cut off subscriptions. Thank you again for your support.

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Jim Brown