Good economic news and a tame day in Egypt combined to cause a bullish stampede that powered the Dow and S&P to critical new highs.

Market Statistics

The revolution in Egypt appears to be winding down after President Mubarak announced he would bow to the will of the public and not run for reelection in September. That was not exactly what the public wanted but it was an acknowledgment of defeat.

Now the focus will turn to the other countries where protests are starting to be seen. Jordan's King Abdullah dissolved his government and appointed a new prime minister and giving him a mandate to "enact effective, real and tangible political reform." Protests in Jordan were increasing in intensity. In Yemen, President Ali Abdullah Saleh increased wages and cut income taxes. He took these actions in an effort to head off a "day of rage" protest scheduled for Thursday. Syria is also bracing for an identical day of rage protest scheduled for this week.

Fortunately there appears to be no credible move to ramp up protests in Saudi Arabia. That would be a major risk factor for oil over $100.

In the U.S. the economic news was outstanding. The ISM Manufacturing Index surged fro 57.0 to 60.8 and well over the 58.0 consensus. That headline number of the highest since 2004. New orders surged by 5.8 points to 67.8 for the second month of gains over 5 points. The employment component rose +2.8 points to 61.7. Order backlogs spiked +11 points to 58 in the largest monthly increase since the inception of this series in 1997. New export orders rose to 62 from 54.5 and a huge surprise. This was a very strong report and suggests future GDP numbers over 4%.

ISM Manufacturing Chart

Coming after the blowout Chicago ISM (formerly Chicago PMI) on Monday this was a one-two punch for the bears. The Chicago ISM surged to 68.8 and new orders spiked from 71.3 to 75.7. The employment index rose +5.7 points to 64.1 and the highest level since the early 1980s.

These reports would normally be very positive for the Nonfarm Payroll report due out on Friday. However, there were back-to-back blizzards during the survey period for January. This could mean a dramatic drop in the actual numbers reported on Friday. It would also suggest a potential explosion of jobs in the February report as the pent-up hiring occurs in February.

The calendar for the rest of the week includes some important events. The ADP report on Wednesday will attempt to predict the nonfarm payroll number for Friday. The ADP report has not done very well with its predictions lately but it is still heavily watched by analysts.

Economic Calendar

On the earnings front UPS spiked to a two-year high after posting profits of $1.08 and beating the analyst estimate by three cents. Revenue surged by +8.4% to $13.42 billion. UPS said it handled 440 million packages between Thanksgiving and Christmas. That was 10 million more than it expected. UPS also raised guidance for all of 2011 to $4.12 to $3.35 per share. Analysts were only expecting $4.17. The company also said it would buyback $2 billion in shares. The CFO said UPS is seeing volume return at an accelerated rate.

UPS Chart

Novellus rallied +6% after reporting profits of $1.03 compared to estimates of 93-cents. Profits more than doubled! Novellus said demand for personal computers remained strong thanks to the Windows 7 operating system from Microsoft. The company guided higher and helped power the Semiconductor Index to a new three-year high.

Novellus Chart

Semiconductor Index Chart

Pfizer reported earnings that beat the street by a penny but still managed to set a new 52-week high. The company said it was making plans for the cash drain next year when Lipitor goes off patent. That is an $11 billion a year drug for Pfizer. Some of those plans included cutting R&D research from $9.4 billion in 2010 to $6.5 billion in 2012. Pfizer also announced a $5 billion share buyback.

Pfizer Chart

Chinese search firm Baidu rallied +9% to $118.73 after beating the street with earnings and painting a rosy outlook for the future. The company said it would target social networking for additional advertising opportunities. With only one third of China's population connected to the Internet Baidu has a bright future. Baidu has a 70% market share in search in China. Baidu split 10:1 back in May and at its current rate there is probably another split in its future.

Baidu Chart

Electronic Arts (ERTS) posted a loss after the close but it was smaller than analysts expected and the stock rallied +10% in after hours trading. The adjusted earnings less one time items were 59-cents. This was slightly better than the 58-cents analysts expected.

Borders Group (BGP) may be preparing a bankruptcy filing despite the recent loan from GE. Borders operates 500 stores and will likely close at least 150 according to Bloomberg. The company said last weekend it would preserve cash by delaying payments to vendors and landlords as it continues to try to restructure debt. Borders got a $550 million loan from GE Capital last week under conditions that will force it to close stores, work out deals with landlords and seek financing from vendors. Borders also warned it may have to file for chapter 11 bankruptcy. Shares fell to a new two-year low on the news.

The rally today was very bullish. The close over Dow 12000 and S&P 1300 will attract new retail investors and convince those already in the market to part with some more cash. Good economic news is breaking out all over and the bears are in complete denial. I am actually surprised how many bears are refusing to capitulate. They still see a market top in every higher high and promise a significant dip in the near future. Obviously they will eventually be right and there will be a dip but they have been wrong for so long they have lost all credibility.

Traders have to face facts. Those facts are a Fed that is committed to five more months of QE2. Another fact is the sudden explosion of economic activity now that the taxes are fixed for another two years. Add in the 100% accelerated depreciation and companies are going to be buying equipment and adding infrastructure at a breakneck pace.

Liz Ann Sonders, chief market strategist at Charles Schwab said, "We are at a new stage in the economy. There is a tremendous amount of pent-up demand for business capital spending." These same sentiments are being echoed by numerous high profile analysts.

Non-financial corporations have a near record of $1.845 T in cash. They have to find something to do with that money because they are definitely not making any money in interest.

Congress is exploring ways to let corporations bring home cash from overseas to spend at home. A "tax holiday" is one suggestion making the rounds and it has been done in the past. There is by one estimate nearly $1 trillion in cash overseas held by U.S. corporations. A tax-free return would create a nearly instant wave of spending in the USA.

In our markets the valuation of stocks is still relatively low. The combined Dow stocks are trading at a trailing PE of 14.7 and normal is 17. A move to a normal ratio would put the Dow at 13,877.

Investors pulled out $245 billion out of equity funds since June 2008. Normal inflows are $145 billion a year. Investors put $2.5 billion in equity funds in the last three weeks of January. With every new high on the major indexes there will be a greater sense of urgency to move money back into stocks.

Morgan Stanley said retail investors are coming back to the market and they are expressing confidence in the economy.

I am surprised at the strength of the rebound since Friday but of course quite a few people probably shorted the Egypt event thinking it was going to produce a severe market decline. Several prominent bears were feeding that paranoia. When it did not happen all those shorts were caught on the wrong side of the market. The strong economic news in the U.S. and China and the U.K. this week was fuel to the fire.

The S&P closed at 1307 and a new two-year high. The S&P has not closed there since June 2008. That is a +2.5% spike since the 1275 low on Friday. The rally was supported by techs, financials, biotech, healthcare and energy. The test now will be to see if the 1300 level acts as support on the next bout of market weakness. Initial overhead resistance is still 1310. A break through that level would be even more bullish.

S&P-500 Chart

The Dow is clearly leading the charge higher. It pulled back to exactly where it should have found support on Friday and then rebounded to close over resistance today. This is a very strong move and a strong bullish signal. The close over resistance where it had so much trouble last week is very bullish. Support remains 11,800.

Dow Chart

The Nasdaq had a good day but failed to breakout to a new high. The major momentum stocks all contributed to the Nasdaq gains with the exception of NetFlix. We had a good test of initial support on Fri/Mon and a good rebound. The Nasdaq needs to break above the 2766 closing high from Jan-18th in order to join the new high celebration. That is the current resistance to watch.

Nasdaq Chart

The Russell gained the most of the major indexes at +2.25% but stopped dead on resistance from last week. In order for the rally to continue the Russell needs to breakout to a new high as well.

Russell Chart

I always say the Russell is the sentiment indicator for the market. Fund managers will not invest in the less liquid small caps if they believe there is trouble ahead. Watching the Russell for a breakout is a key market indicator. However, the TSM (formerly the Wilshire 5000) has already confirmed the rising bullish sentiment by breaking out to a new high. Hedge funds can't game the TSM. With 5,000 stocks in the index they don't have enough money. They can push the S&P, Dow or Russell around by hammering individual names or shorting the ETFs but they can't push the TSM around. It is what it is and today it is bullish.

Total Stock Market Index Chart

In summary, we could have a dip at any time but I still believe it will be a buying opportunity. On any day after a +148 point Dow gain we should start off with some minor profit taking but I think the fix is in. The rapid rebound from the Egypt event and breaking out to close over 12000/1300 is pretty convincing the bulls are in charge and they are not giving up any ground. We have been in buy the dip mode for weeks and what you just saw was a classic dip buy on good volume. Anyone waiting on the sidelines for a buying opportunity has got to move pretty quickly in this market because they only last a short time. This should keep the bears confused for weeks to come as they try to find a top. In theory we should see a top now that earnings are winding down but theory and reality rarely seem to occupy the same space and time in my universe. As the saying goes, "the market can remain irrational far longer than we can remain liquid." Don't bet against the bulls if you want to remain liquid in this market. Any dip remains a buying opportunity.

Jim Brown

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